<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 1998
OR
TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 1-9566
FIRSTFED FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 95-4087449
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
401 WILSHIRE BOULEVARD
SANTA MONICA, CALIFORNIA 90401-1490
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 319-6000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [x] No [ ]
AS OF AUGUST 1, 1998, 21,215,080 SHARES OF THE REGISTRANT'S $.01 PAR VALUE
COMMON STOCK WERE OUTSTANDING.
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<PAGE> 2
FIRSTFED FINANCIAL CORP.
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Financial Condition 3
as of June 30, 1998, December 31, 1997
and June 30, 1997
Consolidated Statements of Operations and Comprehensive 4
Earnings for the three months and six months ended
June 30, 1998 and 1997
Consolidated Statements of Cash Flows for the six 5
months ended June 30, 1998 and 1997
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 7
Condition and Results of Operations
PART II. Other Information (omitted items are inapplicable) 17
Item 4. Submission of Matters to a Vote of Securities Holders
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES 19
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL STATEMENTS
ITEM 1. FINANCIAL STATEMENTS
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
June 30, December 31, June 30,
1998 1997 1997
----------- ------------ -----------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 213,257 $ 163,135 $ 187,978
Investment securities, available-for-sale
(at fair value) 43,001 48,910 67,159
Mortgage-backed securities, available-for-sale
(at fair value) 630,881 676,058 696,530
Loans receivable, held-for-sale (fair value of
$113,082, $40,800, and $11,482) 112,315 40,382 11,335
Loans receivable, net 2,882,672 3,104,782 3,101,564
Accrued interest and dividends receivable 26,102 26,990 27,366
Real estate 5,992 10,257 13,031
Office properties and equipment, net 11,516 9,868 9,498
Investment in Federal Home Loan Bank
(FHLB) stock, at cost 70,613 68,592 66,004
Other assets 14,032 11,141 12,738
----------- ----------- -----------
$ 4,010,381 $ 4,160,115 $ 4,193,203
=========== =========== ===========
LIABILITIES
Deposits $ 2,139,018 $ 1,943,647 $ 1,960,394
FHLB advances and other borrowings 1,028,500 1,364,000 1,382,500
Securities sold under agreements to repurchase 555,719 577,670 601,849
Accrued expenses and other liabilities 46,849 52,011 46,004
----------- ----------- -----------
3,770,086 3,937,328 3,990,747
----------- ----------- -----------
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share;
authorized 25,000,000 shares; issued 23,062,120
23,022,276, and 22,997,788 shares, outstanding
21,215,080, 21,175,236, and 21,150,748 shares(1) 231 230 230
Additional paid-in capital 29,841 29,513 29,295
Retained earnings - substantially restricted 223,845 207,065 194,481
Loan to employee stock ownership plan (1,789) (1,744) (2,187)
Treasury stock, at cost, 1,847,040 shares(1) (11,885) (11,885) (11,885)
Accumulated other comprehensive earnings -
unrealized gain (loss) on securities
available-for-sale, net of taxes 52 (392) (7,478)
----------- ----------- -----------
240,295 222,787 202,456
----------- ----------- -----------
$ 4,010,381 $ 4,160,115 $ 4,193,203
=========== =========== ===========
</TABLE>
- -----------
(1) All per share amounts have been adjusted to reflect the two-for-one stock
split declared June 25, 1998 to shareholders of record as of July 15, 1998.
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE EARNINGS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ -------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest on loans $ 59,901 $ 58,409 $ 121,577 $ 116,222
Interest on mortgage-backed securities 10,907 12,268 22,439 24,904
Interest and dividends on investments 2,779 3,268 5,526 6,505
------------ ------------ ------------ ------------
Total interest income 73,587 73,945 149,542 147,631
------------ ------------ ------------ ------------
INTEREST EXPENSE:
Interest on deposits 25,060 23,968 49,082 46,866
Interest on borrowings 22,613 26,949 48,095 53,704
------------ ------------ ------------ ------------
Total interest expense 47,673 50,917 97,177 100,570
------------ ------------ ------------ ------------
Net interest income 25,914 23,028 52,365 47,061
Provision for loan losses 2,100 5,500 4,600 11,500
------------ ------------ ------------ ------------
Net interest income
after provision for loan losses 23,814 17,528 47,765 35,561
------------ ------------ ------------ ------------
NON-INTEREST INCOME:
Loan and other fees 1,567 1,509 1,607 3,005
Gain on sale of loans 1,204 25 1,863 30
Real estate operations, net 133 467 665 1,098
Other operating income 1,070 889 2,094 1,659
------------ ------------ ------------ ------------
Total non-interest income 3,974 2,890 6,229 5,792
------------ ------------ ------------ ------------
Non-interest expense 12,684 10,996 24,674 22,908
------------ ------------ ------------ ------------
Earnings before income taxes 15,104 9,422 29,320 18,445
Income tax provision 6,467 4,074 12,540 7,929
------------ ------------ ------------ ------------
Net earnings $ 8,637 $ 5,348 $ 16,780 $ 10,516
============ ============ ============ ============
Other comprehensive earnings - unrealized
gain (loss) on securities available-for-sale,
net of taxes (1,082) 1,723 444 (3,288)
------------ ------------ ------------ ------------
Comprehensive earnings $ 7,555 $ 7,071 $ 17,224 $ 7,228
============ ============ ============ ============
Earnings per share:
Basic $ 0.41 $ 0.25 $ 0.79 $ 0.50
============ ============ ============ ============
Diluted $ 0.40 $ 0.25 $ 0.78 $ 0.49
============ ============ ============ ============
Weighted average shares outstanding:
Basic 21,206,104 21,132,438 21,193,532 21,109,014
============ ============ ============ ============
Diluted 21,677,810 21,438,692 21,642,628 21,401,888
============ ============ ============ ============
</TABLE>
- -----------
(1) All per share amounts have been adjusted to reflect the two-for-one stock
split declared June 25, 1998 to shareholders of record as of July 15, 1998.
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------------
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 16,780 $ 10,516
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Net change in loans-held-for-sale (71,933) (5,140)
Provision for loan losses 4,600 11,500
Provision for REO losses 484 581
Valuation adjustments on real estate sold (1,686) (2,984)
Amortization of fees and discounts 40 (613)
Negative amortization on loans (678) (1,319)
(Increase) decrease in interest and
dividends receivable 888 (456)
Increase in interest payable 4,761 631
Other (8,576) (517)
--------- ---------
Total adjustments (72,100) 1,683
--------- ---------
Net cash provided by operating activities (55,320) 12,199
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans made to customers net of principal
collection on loans 208,270 (91,117)
Loans repurchased under recourse arrangements (439) (5,468)
Proceeds from sales of real estate 15,920 35,525
Principal reductions on mortgage-backed securities
available-for-sale 45,930 33,629
Purchase of investment securities available-for-sale (11,045) (28,300)
Proceeds from maturities and principal payments
on investment securities available-for-sale 17,071 30,166
Purchase of FHLB stock -- (1,666)
Other (1,946) (491)
--------- ---------
Net cash provided by (used in) investing activities 273,761 (27,722)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in savings deposits 195,371 2,946
Net increase (decrease) in short term borrowings (747,451) 93,867
Increase in long term borrowings 390,000 --
Repayment of long term borrowings -- (50,000)
Payment of prior period taxes and interest to IRS (2,295) (9,812)
Other (3,944) 4,098
--------- ---------
Net cash provided by (used in) financing activities (168,319) 41,099
--------- ---------
Net increase in cash and cash equivalents 50,122 25,576
Cash and cash equivalents at beginning of period 163,135 162,402
--------- ---------
Cash and cash equivalents at end of period $ 213,257 $ 187,978
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The unaudited financial statements included herein have been prepared by the
Registrant pursuant to the rules and regulations of the Securities and Exchange
Commission. In the opinion of the Registrant, all adjustments (which include
only normal recurring adjustments) necessary to present fairly the results of
operations for the periods covered have been made. Certain information and note
disclosures normally included in financial statements presented in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. The Registrant believes that the
disclosures are adequate so as not to make the information presented misleading.
It is suggested that these condensed financial statements be read in conjunction
with the financial statements and the notes thereto included in the Registrant's
latest annual report on Form 10-K. The results for the periods covered hereby
are not necessarily indicative of the operating results for a full year.
2. Earnings per share and weighted average shares outstanding for the three and
six months periods of 1997 have been restated to reflect the adoption of
Statement of Financial Accounting Standards No. 128 (SFAS No. 128.) Basic
earnings per share is based on the weighted average shares of common stock
outstanding for the period while diluted earnings per share gives effect to all
dilutive potential common shares that were outstanding during part or all of the
period.
The Board of Directors of FirstFed Financial Corp. declared a two-for-one stock
spilt on June 25, 1998 to shareholders of record on July 15, 1998. The
additional shares were distributed on July 30, 1998. All per share computations
for 1997 and 1998 have been adjusted for the stock split.
3. For purposes of reporting cash flows on the "Consolidated Statement of Cash
Flows", cash and cash equivalents include cash, overnight investments and
securities purchased under agreements to resell which mature within 90 days of
the date of purchase.
4. In 1998, the Company adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS No. 130"), which establishes
standards for reporting and display of comprehensive income and its components
in a full set of general purpose financial statements. Accordingly, for both the
1998 and 1997 periods, the Consolidated Statements of Operations have been
expanded to include other comprehensive earnings in arriving at comprehensive
earnings and, accordingly, have been renamed Consolidated Statements of
Operations and Comprehensive Earnings. Neither net earnings nor earnings per
share has been affected by the adoption of SFAS No. 130.
6
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL CONDITION
At June 30, 1998, FirstFed Financial Corp. (the "Company"), holding company for
First Federal Bank of California and its subsidiaries (the "Bank"), had
consolidated assets totaling $4.0 billion, compared to $4.2 billion at December
31, 1997 and June 30, 1997. The decrease in assets during the last six months is
due to payoffs of loans and mortgage-backed securities.
The Bank's primary market area is Southern California which is undergoing a
period of economic growth. Improvement has been noted in several areas of the
Bank's operations as it continues to recover from the economic downturn earlier
this decade. Non-performing assets have decreased significantly to 0.84% as of
June 30, 1998 from 1.39% as of June 30, 1997 and 2.52% as of June 30, 1996. Net
loan charge-offs declined to $1.8 million and $2.2 million for the second
quarter and first six months of 1998, respectively, from $5.3 million and $9.0
million for the same periods of 1997, respectively.
Loan originations increased to $162.7 million and $314.0 million for the second
quarter and first six months of 1998 from $124.1 million and $212.0 million for
the same periods of 1997, respectively. Since these were primarily fixed rate
loan products which are not maintained in the Bank's loan portfolio, loan sales
increased commensurably to $125.5 million and $186.2 million for the second
quarter and first six months of 1998 from $2.0 million and $3.2 million for the
second quarter and first six months of 1997.
The Bank's portfolio of loans, including mortgage-backed securities, decreased
to $3.6 billion at June 30, 1998 from $3.8 billion at December 31, 1997 and $3.8
billion as of June 30, 1997. The decrease in the loan portfolio is attributable
to higher than normal payoffs of adjustable rate loans due to customer
preference for fixed rate loans in the current interest rate environment.
7
<PAGE> 8
The following table shows the components of the Bank's portfolio of loans and
mortgage-backed securities by collateral type as of the dates indicated:
<TABLE>
<CAPTION>
June 30, December 31, June 30,
1998 1997 1997
---------- ------------ ----------
(Dollars in thousands)
<S> <C> <C> <C>
REAL ESTATE LOANS:
First trust deed residential loans:
One unit $1,371,602 $1,440,761 $1,366,157
Two to four units 343,470 351,175 345,852
Five or more units 1,158,859 1,217,577 1,249,930
---------- ---------- ----------
Residential loans 2,873,931 3,009,513 2,961,939
OTHER REAL ESTATE LOANS:
Commercial and industrial 187,161 196,575 205,491
Second trust deeds 13,867 15,441 17,444
Other 3,433 6,303 6,735
---------- ---------- ----------
Real estate loans 3,078,392 3,227,832 3,191,609
NON-REAL ESTATE LOANS:
Manufactured housing 1,113 1,154 1,314
Deposit accounts 1,032 1,644 1,721
Consumer 400 185 112
---------- ---------- ----------
Loans receivable 3,080,937 3,230,815 3,194,756
LESS:
General valuation allowances-
loan portfolio 65,546 61,237 53,321
Valuation allowances - impaired loans 7,829 9,775 12,019
Unrealized loan fees 12,575 14,639 16,517
---------- ---------- ----------
Net loans receivable 2,994,987 3,145,164 3,112,899
FHLMC AND FNMA MORTGAGE-
BACKED SECURITIES (at fair value):
Secured by single family dwellings 612,585 657,342 677,587
Secured by multi-family dwellings 18,296 18,716 18,943
---------- ---------- ----------
Mortgage-backed securities 630,881 676,058 696,530
---------- ---------- ----------
TOTAL $3,625,868 $3,821,222 $3,809,429
========== ========== ==========
</TABLE>
Because the Bank structures mortgage-backed securities with loans from its own
portfolio, mortgage-backed securities generally have the same experience with
respect to prepayment, repayment, delinquencies and other factors as the
remainder of the Bank's loan portfolio. No mortgage-backed securities were
created during 1998 or 1997.
The mortgage-backed securities portfolio, classified as available-for-sale, was
recorded at fair value as of June 30, 1998. A positive fair value adjustment of
$361 thousand, net of taxes, was reflected in stockholders' equity as of June
30, 1998. This adjustment represents a $436 thousand increase from the $75
thousand unrealized loss recorded as of December 31, 1997.
The investment securities portfolio, classified as available-for-sale, was
recorded at fair value as of June 30, 1998. An unrealized loss of $309 thousand,
net of taxes, was reflected in stockholders' equity as of June 30, 1998. This
adjustment represented an $8 thousand decrease from the $317 thousand unrealized
loss recorded as of December 31, 1997.
8
<PAGE> 9
Asset/Liability Management
The one year Gap ratio (the difference between rate-sensitive assets and
liabilities repricing within one year or less as a percentage of total assets)
was a positive $498 million or 12.42% of total assets at June 30, 1998. In
comparison, the one year Gap ratio was a positive $172 million or 4.14% of total
assets as of December 31, 1997 and a positive $235 million or 5.60% of total
assets as of June 30, 1997.
Since over 94% of the Bank's loans adjust monthly based upon changes in the
Eleventh District Cost of Funds Index ("COFI Index"), the Bank's one year Gap
position varies primarily based upon the remaining terms of its savings and
borrowings. The longer the term of the Bank's liabilities, the more positive the
one year Gap. The increase in the Company's positive Gap from December 31, 1997
to June 30, 1998 is primarily due to a $390 million increase in long term
borrowings during the period.
A positive Gap normally benefits a financial institution in times of increasing
interest rates. However, because there is a three month time lag before changes
in the COFI Index can be implemented with respect to the Bank's loans, the
Bank's net interest income typically declines during periods of increasing
interest rates.
Capital
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and percentages of total capital to
risk-weighted assets. The Bank meets the standards necessary to be deemed well
capitalized under the applicable regulatory requirements . The following table
summarizes the Bank's actual capital and required capital as of June 30, 1998:
<TABLE>
<CAPTION>
Tangible Core Risk-based
Capital Capital Capital
----------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C>
Actual Capital:
Amount $ 277,247 $ 277,247 $ 305,768
Ratio 6.89% 6.89% 13.62%
Minimum required capital:
Amount $ 60,329 $ 120,659 $ 179,575
Ratio 1.50% 3.00% 8.00%
Well capitalized required capital:
Amount -- $ 201,098 $ 224,469
Ratio -- 5.00% 10.00%
</TABLE>
Pursuant to the Board of Directors' authorization in 1987, the Company may
repurchase up to 10% of its outstanding shares of common stock that were
outstanding as of December 31, 1987. No shares were repurchased during the first
six months of 1998 or during 1997. As of June 30, 1998, 274,000 shares remained
eligible for repurchase.
RESULTS OF OPERATIONS
The Company reported consolidated net earnings of $8.6 million for the second
quarter of 1998 compared to net earnings of $5.3 million for the second quarter
of 1997. The improved earnings resulted primarily from a 62% decrease in the
provision for loan losses to $2.1 million for the second quarter of 1998 from
$5.5 million for the second quarter of 1997 and a 13% increase in net interest
income to $25.9 million for the second quarter of 1998 from $23.0 million for
the second quarter of 1997.
9
<PAGE> 10
The Company reported consolidated net earnings of $16.8 million for the first
six months of 1998 compared to $10.5 million for the same period last year. The
provision for loan losses for the first six months of 1998 was $4.6 million
compared to $11.5 million for the first six months of 1997. Net interest income
increased to $52.4 million for the first six months of 1998 from $47.1 million
for the first six months of 1997.
Loan Loss Provisions
Management is unable to predict future levels of loan loss provisions. Among
other things, future loan loss provisions are based on the level of loan
charge-offs, foreclosure activity, and management's perceptions of the economic
climate in Southern California.
Listed below is a summary of the activity in the general valuation allowance and
the valuation allowance for impaired loans for the Bank's loan portfolio during
the periods indicated:
<TABLE>
<CAPTION>
Six Months Ended June 30, 1998
--------------------------------------
General Impaired
Valuation Valuation
Allowances Allowances Total
---------- ---------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Balance at December 31, 1997 $ 61,237 $ 9,775 $ 71,012
Provision for loan losses 4,024 576 4,600
Charge-offs:
Single family (1,077) (294) (1,371)
Multi-family (506) (1,614) (2,120)
Commercial (47) -- (47)
Non-real estate (1) -- (1)
-------- -------- --------
Total charge-offs (1,631) (1,908) (3,539)
Recoveries 1,302 -- 1,302
Impaired loan recoveries 614 (614) --
-------- -------- --------
Net charge-offs 285 (2,522) (2,237)
-------- -------- --------
Balance at June 30, 1998 $ 65,546 $ 7,829 $ 73,375
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30, 1997
--------------------------------------
General Impaired
Valuation Valuation
Allowances Allowances Total
---------- ---------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Balance at December 31, 1996 $ 54,900 $ 12,350 $ 67,250
Provision for loan losses 6,045 5,455 11,500
Charge-offs:
Single family (3,255) (179) (3,434)
Multi-family (1,568) (5,033) (6,601)
Commercial -- (574) (574)
-------- -------- --------
Total charge-offs (4,823) (5,786) (10,609)
Recoveries 1,433 -- 1,433
-------- -------- --------
Net charge-offs (3,390) (5,786) (9,176)
-------- -------- --------
Transfers to general valuation
allowance for real estate (4,234) -- (4,234)
-------- -------- --------
Balance at June 30, 1997 $ 53,321 $ 12,019 $ 65,340
======== ======== ========
</TABLE>
10
<PAGE> 11
The Bank also maintains a valuation allowance for loans sold with recourse,
recorded as a liability. This allowance was 6.17% of loans sold with recourse as
of June 30, 1998, compared to 5.97% as of December 31, 1997 and 5.80% as of June
30, 1997. The balance of loans sold with recourse totaled $211.1 million, $218.1
million and $221.2 million as of June 30, 1998, December 31, 1997 and June 30,
1997, respectively. The Bank has not entered into any new recourse arrangements
since 1989. Listed below is a summary of the activity in the valuation allowance
for loans sold with recourse during the periods indicated:
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1998 1997
-------- --------
(Dollars in thousands)
<S> <C> <C>
Balance at beginning of period $ 13,029 $ 8,398
Charge-offs -- (70)
Recoveries -- 268
Transfers from general loan
valuation allowance -- 4,234
-------- --------
Balance at end of period $ 13,029 $ 12,830
======== ========
</TABLE>
The following table summarizes the activity in the general valuation allowance
for real estate acquired by foreclosure for the periods indicated:
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1998 1997
-------- --------
(Dollars in thousands)
<S> <C> <C>
Balance at beginning of period $ 500 $ 520
Provision for losses 484 581
Charge-offs (484) (841)
----- -----
Balance at end of period $ 500 $ 260
===== =====
</TABLE>
Net Interest Income
The Company's interest rate margin increased to 2.41% for the second quarter of
1998 from 2.07% for the second quarter of 1997. During the first six months of
1998, the interest rate margin increased to 2.38% from 2.08% for the same period
of last year. The increases are due to a reduction in non-performing assets
compared to the prior year. Also, the Bank's cost of funds decreased slightly
compared to the prior year periods while the index which determines the yield on
the Bank's loan portfolio increased. The COFI Index (on a lagged basis)
determines the yield on over 94% of the loan portfolio. The average Index in
effect during the three months and six months ended June 30, 1998 increased by
0.12% and 0.10%, respectively, compared to the same periods of the prior year.
The Bank's cost of funds decreased by 0.13% during the three months ended June
30, 1998 over the same period of last year and decreased by 0.06% during the
first six months of 1997 compared to the same period of last year.
The following table sets forth: (i) the average daily dollar amounts of and
average yields earned on loans, mortgage-backed securities and investment
securities, (ii) the average daily dollar amounts of and average rates paid on
savings and borrowings, (iii) the average daily dollar differences, (iv) the
interest rate spreads, and (v) the effective net spreads for the periods
indicated:
11
<PAGE> 12
<TABLE>
<CAPTION>
During the Six Months Ended June 30,
------------------------------------
1998 1997
---------- ----------
(Dollars In Thousands)
<S> <C> <C>
Average loans and mortgage-backed
securities $3,764,813 $3,794,458
Average investment securities 133,013 164,210
---------- ----------
Average interest-earning assets 3,897,826 3,958,668
---------- ----------
Average savings deposits 2,115,680 2,008,295
Average borrowings 1,654,986 1,846,517
---------- ----------
Average interest-bearing liabilities 3,770,666 3,854,812
---------- ----------
Excess of interest-earning assets over
interest-bearing liabilities $ 127,160 $ 103,856
========== ==========
Yields earned on average interest
earning assets 7.56% 7.32%
Rates paid on average interest-
bearing liabilities 5.18 5.24
Net interest rate spread 2.38 2.08
Effective net spread (1) 2.54 2.22
Total interest income $ 147,278 $ 144,925
Total interest expense 97,146 100,554
---------- ----------
50,132 44,371
Total other items (2) 2,233 2,690
---------- ----------
Net interest income $ 52,365 $ 47,061
========== ==========
</TABLE>
<TABLE>
<CAPTION>
During the Six Months Ended June 30,
------------------------------------
1998 1997
---------- ----------
(Dollars In Thousands)
<S> <C> <C>
Average loans and mortgage-backed
securities $3,721,550 $3,803,616
Average investment securities 126,449 161,210
---------- ----------
Average interest-earning assets 3,847,999 3,964,826
---------- ----------
Average savings deposits 2,157,953 2,030,509
Average borrowings 1,565,308 1,827,425
---------- ----------
Average interest-bearing liabilities 3,723,261 3,857,934
---------- ----------
Excess of interest-earning assets over
interest-bearing liabilities $ 124,738 $ 106,892
========== ==========
Yields earned on average interest
earning assets 7.53% 7.34%
Rates paid on average interest-
bearing liabilities 5.12 5.27
Net interest rate spread 2.41 2.07
Effective net spread (1) 2.58 2.22
Total interest income $ 72,475 $ 72,813
Total interest expense 47,671 50,908
---------- ----------
24,804 21,905
Total other items (2) 1,110 1,123
---------- ----------
Net interest income $ 25,914 $ 23,028
========== ==========
</TABLE>
- ----------
(1) The effective net spread is a fraction, the denominator of which is the
average dollar amount of interest-earning assets, and the numerator of
which is net interest income (excluding stock dividends and
miscellaneous interest income).
(2) Includes Federal Home Loan Bank Stock and other miscellaneous items,
including interest on California tax refunds at June 30, 1997.
12
<PAGE> 13
NON-INTEREST INCOME AND EXPENSE
Loan and other fees were $1.5 million and $1.6 million for the second quarter
and first six months of 1998, respectively, compared to $1.5 million and $3.0
million for the same 1997 periods, respectively. The year-to-date decrease is
due to a $1.4 million provision for impairment of the Bank's servicing assets
recognized in the first quarter of 1998. Servicing assets are normally amortized
over the expected lives of the loans being serviced. The provision, recorded as
an adjustment to loan servicing fees in the current quarter, reflects the impact
of higher expected prepayment rates on the existing mortgage portfolio due to
lower interest rates on fixed rate mortgages.
Gain on sale of loans results primarily from loan fees recognized at the time of
sale and increased to $1.2 million and $1.9 million, respectively for the second
quarter and first six months of 1998 from $25 thousand and $30 thousand,
respectively, for the second quarter and first six months of 1997. The volume of
loans sold totaled $125.5 million and $186.2 million, respectively, during the
second quarter and first six months of 1998 compared to $2.0 million and $3.2
million, respectively for the same periods of 1997. The increase in the volume
of loans sold results from borrower demand for fixed rate loans. The Bank
originates fixed rate loans only for sale in the secondary markets.
Real estate operations produced net gains of $133 thousand and $467 thousand for
the second quarter of 1998 and 1997, respectively. For the first six months of
1998 and 1997, real estate operations produced net gains of $665 thousand and
$1.1 million, respectively. The lower level of income from real estate
operations results from a decrease in the level of foreclosed properties. Gains
on sale typically result from the recovery of excess valuation allowances.
Other operating income increased to $1.1 million during the second quarter of
1998 from $889 thousand for the same quarter last year. For the first six months
of 1998 other operating income increased to $2.1 million from $1.7 million for
the prior year. The improved amounts are due to increased fees collected for
services rendered at the retail savings branches and increased ATM fees.
Non-interest expense decreased to 1.26% of average total assets during the
second quarter of 1998 compared to 1.06% for the same period of 1997. For the
first six months of 1998 non-interest expenses were 1.21% of average total
assets compared to 1.10% for the first six months of 1997. Expenses rose
primarily due to investments being made in new operating systems, the
development of new business lines and higher incentive compensation costs on
larger loan volume and deposit growth.
NON-ACCRUAL, PAST DUE, MODIFIED AND RESTRUCTURED LOANS
The Bank accrues interest earned but uncollected for every loan without regard
to its contractual delinquency status but establishes a specific interest
allowance for each loan which becomes 90 days or more past due or is in
foreclosure. Loans on which delinquent interest allowances had been established
(non-accrual loans) totaled $31.2 million at June 30, 1998 compared to $34.1
million at December 31, 1997 and $54.9 million at June 30, 1997.
The amount of interest that has been reserved for loans 90 days or more
delinquent or in foreclosure was $1.9 million at June 30, 1998, $1.8 million at
December 31, 1997 and $3.4 million at June 30, 1997.
The Bank's modified loans resulted primarily 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 proceedings are
initiated or the modification period may be extended. As of June 30, 1998, the
Bank had modified loans totaling $9.2 million, net of loan loss allowances
totaling $3.5 million, compared with $16.7 million, net of loan loss allowances
of $4.1 million, at December 31, 1997 and $8.7 million, net of loan loss
allowances of $525 thousand, at June 30, 1997.
Pursuant to Statement of Financial Accounting Standards No. 114 ("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
13
<PAGE> 14
amounts due under the contractual terms of the loan. Estimated impairment losses
are recorded as separate valuation allowances and may be subsequently adjusted
based upon changes in the measurement of impairment. Impaired loans, which are
disclosed net of valuation allowances, include non-accrual major loans (single
family loans with an outstanding principal amount greater than or equal to
$500,000 and multi-family and commercial real estate loans with an outstanding
principal amount greater than or equal to $750,000), modified loans, and major
loans less than 90 days delinquent in which full payment of principal and
interest is not expected to be received.
The following is a summary of impaired loans, net of valuation allowances for
impairment, as of the dates indicated:
<TABLE>
<CAPTION>
June 30, December 31, June 30,
1998 1997 1997
---------- ------------ ---------
(Dollars in thousands)
<S> <C> <C> <C>
Non-accrual loans $ 5,551 $ 8,260 $ 17,887
Modified loans 8,472 8,090 4,539
Other impaired loans 5,700 9,335 10,969
---------- --------- ---------
$ 19,723 $ 25,685 $ 33,395
========== ========= =========
</TABLE>
The Bank evaluates loans for impairment whenever the collectibility of
contractual principal and interest payments is questionable. Large groups of
smaller balance homogenous loans that are collectively evaluated for impairment,
including residential mortgage loans, are not subject to the application of SFAS
No. 114.
When a loan is considered impaired, the Bank measures impairment based on the
present value of expected future cash flows (over a period not to exceed 5
years) discounted at the loan's effective interest rate. However, if the loan is
"collateral-dependent" or probable of foreclosure, impairment is measured based
on the fair value of the collateral. When the measure of an impaired loan is
less than the recorded investment in the loan, the Bank records an impairment
allowance equal to the excess of the Bank's recorded investment in the loan over
its measured value. The following summary details impaired loans measured using
the fair value method and loans measured based on the present value of expected
future cash flows discounted at the effective interest rate of the loan as of
the dates indicated:
<TABLE>
<CAPTION>
June 30, December 31, June 30,
1998 1997 1997
-------- ------------ ----------
(Dollars in thousands)
<S> <C> <C> <C>
Present value method $ 1,067 $ 1,067 $ 1,071
Fair value method 18,656 24,618 32,324
-------- -------- --------
Total impaired loans $ 19,723 $ 25,685 $ 33,395
======== ======== ========
</TABLE>
Impaired loans for which there were no valuation allowances established totaled
$2.5 million, $2.5 million and $4.2 million as of June 30, 1998, December 31,
1997, and June 30, 1997, respectively. See "Results of Operations" for an
analysis of activity in the valuation allowance for impaired loans.
The table below shows the Bank's net investment in non-performing loans
determined to be impaired, by property type, as of the dates indicated:
<TABLE>
<CAPTION>
June 30, December 31, June 30,
1998 1997 1997
-------- ------------ ----------
(Dollars in thousands)
<S> <C> <C> <C>
Single family $ -- $ 856 $ 1,879
Multi-family 5,081 6,893 15,555
Commercial 470 511 453
-------- -------- --------
$ 5,551 $ 8,260 $ 17,887
======== ======== ========
</TABLE>
14
<PAGE> 15
Cash payments received from impaired loans are recorded in accordance with the
contractual terms of the loan. The principal portion of the payment is used to
reduce the principal balance of the loan, whereas the interest portion is
recognized as interest income. On certain modified loans where the Bank does not
believe that it will receive all amounts due under the original contractual loan
terms, the Bank records an allowance for interest received.
The average recorded investment in impaired loans during the quarters ended
June 30, 1998, December 31, 1997 and June 30, 1997 was $19.8 million, $24.5
million and $30.6 million, respectively. The amount of interest income
recognized for impaired loans during the quarters ended June 30, 1998, December
31, 1997 and June 30, 1997 was $337 thousand, $433 thousand and $361 thousand,
respectively, under the cash basis method of accounting. Interest income
recognized under the accrual basis method of accounting for the quarters ended
June 30, 1998, December 31, 1997 and June 30, 1997 was $343 thousand, $433
thousand and $360 thousand, respectively.
ASSET QUALITY
The following table sets forth certain asset quality ratios of the Bank at the
dates indicated:
<TABLE>
<CAPTION>
June 30, December 31, June 30,
1998 1997 1997
-------- ------------ --------
<S> <C> <C> <C>
Non-Performing Loans to
Loans Receivable(1) 0.90% 0.91% 1.41%
Non-Performing Assets to
Total Assets(2) 0.84% 0.95% 1.39%
Loan Loss Allowances to
Non-Performing Loans (3) 220.79% 193.38% 114.99%
General Loss Allowances to
Assets with Loss Exposure(4) 2.07% 1.86% 1.65%
General Loss Allowances to
Total Assets with Loss
Exposure(5) 2.32% 2.12% 1.92%
</TABLE>
- --------------------
(1) Non-performing loans are net of valuation allowances related to those
loans. Loans receivable exclude mortgage- backed securities and are
before deducting unrealized loan fees, general valuation allowances and
valuation allowances for impaired loans.
(2) Non-performing assets are net of valuation allowances related to those
assets.
(3) The Bank's loan loss allowances, including valuation allowances for
non-performing loans and general valuation allowances but excluding
general valuation allowances for loans sold by the Bank with full or
limited recourse. Non performing loans are before deducting valuation
allowances related to those loans.
(4) The Bank's general valuation allowances, excluding general valuation
allowances for loans sold with full or limited recourse. The Bank's
assets with loss exposure include primarily loans and real estate owned,
but exclude mortgage-backed securities.
(5) The Bank's general valuation allowances, including general valuation
allowances for loans sold with full or limited recourse. Assets with
loss exposure include the Bank's portfolio plus loans sold with
recourse, but exclude Mortgage-backed securities.
15
<PAGE> 16
NON-PERFORMING ASSETS
The Bank defines non-performing assets as loans delinquent over 90 days
(non-accrual loans), loans in foreclosure and real estate acquired by
foreclosure (real estate owned). An analysis of non-performing assets follows as
of the dates indicated:
<TABLE>
<CAPTION>
June 30, December 31, June 30,
1998 1997 1997
-------- ------------ --------
(Dollars in thousands)
<S> <C> <C> <C>
Real estate owned:
Single family $ 2,899 $ 5,806 $ 5,125
Multi-family 3,021 4,034 6,550
Commercial 481 826 1,576
Other 53 52 23
Less:
General valuation allowance (500) (500) (260)
-------- -------- --------
Total real estate owned 5,954 10,218 13,014
-------- -------- --------
Non-accrual loans:
Single family 15,794 16,799 17,859
Multi-family 13,495 15,785 34,674
Commercial 2,008 1,533 2,369
Other -- -- 32
Less:
Valuation allowances (1) (3,553) (4,738) (9,850)
-------- -------- --------
Total non-accrual loans 27,744 29,379 45,084
-------- -------- --------
Total non-performing assets $ 33,698 $ 39,597 $ 58,098
======== ======== ========
</TABLE>
- -------------------
(1) Includes valuation allowances for impaired loans and loss allowances on
other non-performing loans requiring fair value adjustments.
Real estate owned at June 30, 1998 decreased 42% compared to December 31, 1997
and 54% compared to June 30, 1997 due to improvement in the Southern California
real estate market. Properties are selling faster and property values have
increased compared to the prior year.
Non-accrual loans, net of valuation allowances, at June 30, 1998 decreased 6%
compared to the level at December 31, 1997 and decreased 38% from the level one
year ago. An overall decline in loan delinquencies, resulting from improvement
in the Southern California economy, led to the current year decrease.
SOURCES OF FUNDS
External sources of funds include savings deposits from several sources,
advances from the Federal Home Loan Bank of San Francisco ("FHLB"), securitized
borrowings and unsecured term funds.
Savings deposits are accepted from retail banking offices, a telemarketing
department, and national deposit brokers. Including $21.2 million and $38.4
million in interest credits during the second quarter and first six months of
1998, respectively, total savings deposits decreased by $18.4 million and
increased by $195.4 million during the same 1998 periods, respectively.
The cost of funds, operating margins and net earnings of the Bank associated
with brokered and telemarketing deposits are generally comparable to the cost of
funds, operating margins and net earnings of the Bank associated with retail
deposits, FHLB borrowings and repurchase agreements. As the cost of each
16
<PAGE> 17
source of funds fluctuates from time to time, based on market rates of interest
generally offered by the Bank and other depository institutions, the Bank will
seek funds from the lowest cost source until the relative costs change. As the
cost of funds, operating margins and net earnings of the Bank associated with
each source of funds are generally comparable, the Bank does not deem the impact
of its use of any one of the specific sources of funds at a given time to be
material.
Deposits accepted by retail branches increased by $7.8 million and $33.0 million
during the second quarter and first six months of 1998, respectively. The Bank
continues to focus its marketing efforts on attracting liquid accounts and short
term certificates of deposits. Retail deposits comprised 70% of total savings
deposits as of June 30, 1998.
Telemarketing deposits are obtained by the Bank's employees via telephone, from
depositors outside of the Bank's normal service areas. Telemarketing deposits
decreased by $33.1 million and increased by $9.5 million during the second
quarter and first six months of 1998, respectively. The level of telemarketing
deposits varies based on the availability of higher yielding investments to
investors, who are often professional money managers. The availability of
telemarketing deposits also varies based on the investors' perception of the
Bank's creditworthiness. Telemarketing deposits comprised 5% of total deposits
at June 30, 1998.
Deposits acquired from national brokerage firms ("brokered deposits") are
considered a source of funds similar to borrowing. In evaluating brokered
deposits as a source of funds, the cost of these deposits, including commission
costs, is compared to other funding sources. Brokered deposits increased by $6.9
million and $152.9 million during the second quarter and first six months of
1998, respectively. At June 30, 1998, brokered deposits comprised 25% of total
deposits.
Total borrowings decreased by $37.1 million during the second quarter of 1998
due to net payoffs of $15.1 million in borrowings under reverse repurchase
agreements, $2.0 million in unsecured term funds and $20.0 million in advances
from the FHLB. Total borrowings decreased by $357.5 million during the first six
months of 1998 due to net payoffs of $22.0 million in borrowings under reverse
repurchase agreements, $0.5 million in additional unsecured term funds and
$335.0 million in advances from the FHLB.
Internal sources of funds include both principal payments and payoffs on loans
and mortgage-backed securities, loan sales, and positive cash flows from
operations. Principal payments include amortized principal and prepayments which
are a function of real estate activity and the general level of interest rates.
Total principal payments were $253.4 million and $384.5 million for the second
quarter and first six months of 1998, respectively. This compares with principal
payments of $79.5 million and $150.1 million for the second quarter and first
six months of 1997, respectively.
Loan sales increased to $125.5 million and $186.2 million for the second quarter
and the first six months of 1998, respectively, compared with sales of $2.0
million and $3.2 million for the second quarter and first six months of 1997.
The amount of salable product originated during 1998 increased due to borrower
preference for fixed rate loans which are generally sold by the Bank.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
On April 24, 1998 the Company held its Annual Meeting of
Stockholders for the purpose of voting on two proposals. The
following are the matters voted on at the meeting and the
votes cast for, against or withheld, and abstentions as to
each such matter. There were no broker non-votes as to these
matters.
17
<PAGE> 18
1) Election of Directors.
<TABLE>
<CAPTION>
For Against Abstain
--------- ------- -------
<S> <C> <C> <C>
Babette E. Heimbuch 9,870,198 1,903 0
William S. Mortensen 9,870,460 1,641 0
John R. Woodhull 9,844,871 27,230 0
2) Ratification of KPMG Peat Marwick LLP as independent public
auditors for the Company for 1997.
</TABLE>
<TABLE>
<S> <C>
For 9,840,627
Against 28,883
Abstain 2,591
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
(3.) Certificate of Incorporation and By Laws filed as Exhibit
(1)(a) to Form 8-A dated June 4, 1987 and incorporated by
reference.
(4.1) Amended and Restated Rights Agreement filed as Exhibit
4.1 to Form 8-A/A, dated June 25, 1998 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) Amended Supplemental Executive Retirement Plan dated May
30, 1998.
(10.3) Form of Change in Control Employment 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.
(10.4) Form of Directors Stock Incentive Plan effective January
1, 1997 filed as Appendix A to Proxy Statement dated March 18,
1997 for Annual Meeting of Stockholders and incorporated by
reference.
(11.1) Computation of earnings per share. Part I hereof is
incorporated by reference.
b) Reports on Form 8-K
No reports on Form 8-K were filed during the period ended June
30, 1998.
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRSTFED FINANCIAL CORP.
------------------------
Registrant
Date: August 13, 1998
By /s/ BABETTE E. HEIMBUCH
---------------------------------------
Babette E. Heimbuch
President and
Chief Executive Officer
By /s/ DOUGLAS J. GODDARD
---------------------------------------
Douglas J. Goddard
Chief Financial Officer and
Executive Vice President
19
<PAGE> 1
EXHIBIT 10.2
FIRST FEDERAL BANK OF CALIFORNIA
Supplemental Executive Retirement Plan
Amended and Restated as of May 30, 1998
WHEREAS, effective January 1, 1986 the Board of Directors of First
Federal Bank of California (the "Bank") adopted the Supplemental Executive
Retirement Plan, also known as the "SERP," to ensure adequate retirement income
for selected members of the management of this Bank, to facilitate attracting
and retaining highly qualified management employees and to reward past
meritorious services; and
WHEREAS, on May 30, 1998 the Board of Directors of the Company
determined that it is advisable to amend and restate the entire SERP as set
forth herein;
NOW, THEREFORE, effective immediately the terms of the SERP shall be as
follows:
ARTICLE 1
Definitions
1.1 "Bank" means First Federal Bank of California and any successor in
interest thereto.
1.2 "Board" means the Board of Directors of the Bank.
1.3 "Break in Employment" means a termination of Participant's
employment with the Bank for any reason. For purposes of this definition
absences caused by illness or disability, vacation time and leaves of
absence approved by the Board shall not constitute a Break in
Employment.
1.4 "Change in Ownership" means the following:
(a) An acquisition (other than from FirstFed Financial Corp.,
hereafter referred to as the "Company") by any person, entity or group,
within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities
Exchange Act of 1934 (the "Exchange Act"), (excluding, for this purpose,
the Company or any employee benefit plan of the Company which acquires
beneficial ownership of voting securities of the Company) of beneficial
ownership (within the meaning of Rule 13d-3 promulgated under the
Exchange Act) of 15% or more of either (i) the then outstanding shares
of the Company's common stock or (ii) the
<PAGE> 2
combined voting power of the Company's then outstanding voting
securities entitled to vote generally in the election of directors; or
(b) Individuals who, as of the date hereof, constitute the Board
of Directors of the Company (as of the date hereof, the "Incumbent
Board") cease for any reason to constitute at least a majority of the
Board of the Company, provided that any person becoming a director
subsequent to the date hereof whose election, or nomination for election
by the Company's shareholders, was approved by a vote of at least a
majority of the directors then comprising the Incumbent Board (other
than an election or nomination of an individual whose initial assumption
of office is in connection with an actual or threatened election contest
relating to the election of the Directors of the Company, as such terms
are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange
Act) shall be, for purposes of the SERP, considered as though such
person were a member of the Incumbent Board; or
(c) Approval by the stockholders fo the Company of a
reorganization, merger, consolidation (other than a reorganization,
merger or consolidation in which persons who were the stockholders of
the Company immediately prior to such reorganization, merger ot
consolidation do, immediately thereafter, own more than 50% of the
combined voting power entitled to vote generally in the election of
directors of the reorganized, merged or consolidated company's then
outstanding voting securities), or a liquidation or dissolution of the
Company or of the sale of all or substantially all of the assets of the
Company.
1.5 "Commencement Date" means the first date on which payments under
this Plan are distributed to a Participant or his or her spouse.
1.6 "Committee" means the committee of the Board that is appointed by
the Board to administer this Plan, or if no committee is so appointed,
the entire Board.
1.7 "Compensation" means all W-2 Compensation paid to a Participant by
the Bank, plus any 401(k) Plan and Section 125 compensation deferrals,
but excluding all non-cash bonuses paid to such Participant (including
but not limited to the value of any bonus grants in the form of
restricted stock or stock options).
1.8 "Early Retirement Date" means the first day of the month on which a
Participant has attained the age of fifty (50) years and completed
fifteen (15) Years of Service.
1.9 "Final Average Earnings" means a Participant's highest average
monthly Compensation for the highest consecutive 60 months, divided by
60.
2
<PAGE> 3
1.10 "Normal Retirement Date" means the first day of the month on which
a Participant attains the age of sixty (60) years.
1.11 "Participant" means any person described in Article 2 hereof who is
participating in the Plan.
1.12 "Plan" means this Supplemental Executive Retirement Plan as it may
be amended from time to time.
1.13 "Plan Year" means the calendar year.
1.14 "Retirement Plan" means the First Federal Bank of California
Pension Plan and Trust, which was terminated effective August 30, 1996.
1.15 "Service" means completed years and months of service with the Bank
uninterrupted by a Break in Employment. Service includes all service
accrued by a Participant with the Bank regardless of whether an
individual was a Participant in this Plan at the time of service
accrual.
1.16 "Year of Service" means any calendar year in which a Participant
completes twelve (12) consecutive months of Service with the Bank.
ARTICLE 2
Eligibility and Participation
Babette E. Heimbuch and James P. Giraldin shall be the only individuals
eligible to participate in the Plan, unless otherwise provided by the
Committee.
ARTICLE 3
Amount of Supplemental Benefits
3.1 Subject to the succeeding provisions of this Article 3, if a
Participant in the Plan continues in his/her employment with the Bank
until he/she attains sixty (60) years of age, the Participant shall be
entitled to a supplemental retirement benefit.
3.2 The monthly normal
supplemental retirement benefit under this Plan shall equal the excess
of the amount calculated in (i) below over the sum of the amounts
calculated in (ii) and (iii) below:
(i) Seventy-five percent (75%) of the Participant's Final
Average Earnings multiplied by the fraction, of which the
numerator equals the number of
3
<PAGE> 4
consecutive Years of Service, up to twenty (20) and the
denominator is twenty (20).
(ii) The monthly annuity payment which the Participant would
receive if:
(a) The Participant had always, while employed, made the
maximum allowable pre-tax deferral to the Bank's 401(k) Plan
[reflecting any reductions required by the ADP test], and
(b) The Bank had always made the match on the amount in
(a) above [reflecting any reductions required by the ACP test]
at the end of each calendar year, and
(c) The matching contributions in (b) above were
credited with interest at a variable rate equal to the 10-year
Treasury rate as of January 1 of each year until Normal
Retirement Date, and
(d) The account balance at Normal Retirement Date
resulting from (b) and (c) above is converted to a life annuity,
using the 1983 Group Annuity Mortality Table, weighted 50% Male
and 50% Female (the "actuarial equivalent," as that term is used
below), and an interest rate equal to the rate described in (c)
above.
(iii) The monthly benefit provided under the Retirement Plan
lump sum distribution, if any, into the 401(k) Plan (the
"Rollover Distribution"). For purposes of calculating benefits
under the Rollover Distribution, the monthly benefit payable to
a Participant from the Rollover Distribution shall equal the
monthly benefit which the Participant would receive if the
actual Rollover Distribution, was credited with interest at
4.75% per year until Normal Retirement Date, and the account
balance at Normal Retirement Date resulting from the foregoing
is converted to a life annuity, using the 1983 Group Annuity
Mortality Table, weighted 50% Male and 50% Female, and an
interest rate of 4.75%.
3.3 Subject to the provisions of this Article 3, if a Participant has
completed fifteen (15) consecutive Years of Service and has attained the
age of fifty (50) years, such Participant shall be eligible to receive
an early retirement supplemental retirement benefit. The amount of the
monthly early retirement supplemental benefit shall equal the excess of
the amount calculated in (I) below over the sum of the amounts
calculated in (ii) and (iii) below:
4
<PAGE> 5
(i) Seventy-five percent (75%) of the Participant's Final
Average Earnings multiplied by the fraction, of which the numerator
equals the number of consecutive Years of Service, up to twenty (20) and
the denominator is twenty (20), reduced by one-half of one percent
(0.5%) for each of the first sixty (60) months and one-third of one
percent (0.33%) for each of the succeeding sixty (60) months by which
the Commencement Date for early supplemental retirement benefits
precedes such Participant's Normal Retirement Date.
(ii) The monthly annuity payment which the Participant would
receive if:
(a) The Participant had always, while employed, made the
maximum allowable pre-tax deferral to the Bank's 401(k) Plan
[reflecting any reductions required by the ADP test], and
(b) The Bank had always made the match on the amount in
(a) above [reflecting any reductions required by the ACP test]
at the end of each calendar year, and
(c) The matching contributions in (b) above were
credited with interest at a variable rate equal to the 10-year
Treasury rate as of January 1 of each year until Early
Retirement Date, and
(d) The account balance at Early Retirement Date
resulting from (b) and (c) above is converted to an actuarially
equivalent life annuity as provided in Section 3.2(d) above.
(iii) The monthly benefit provided under the Retirement Plan
lump sum distribution, if any, which the Participant rolled over into
the 401(k) Plan (the "Rollover Distribution"). For purposes of
calculating benefits under the Rollover Distribution, the monthly
benefit payable to a Participant from the Rollover Distribution shall
equal the monthly benefit which the Participant would receive if the
actual Rollover Distribution, if any, was credited with interest at
4.75% per year until Normal Retirement Date, and the account balance at
Normal Retirement Date resulting from the foregoing is converted to a
life annuity, using the 1983 Group Annuity Mortality Table, weighted 50%
Male and 50% Female, and an interest rate of 4.75%.
3.4 At any time prior to the commencement of payment of benefits
under the Plan, a Participant may elect to receive benefits in the form
of a ten year certain and life thereafter benefit, under which form a
reduced monthly benefit will be paid to the
5
<PAGE> 6
Participant for life, and after his or her death, if 120 monthly
payments have not been made, payments will be made to the surviving
spouse until a total of 120 monthly payments have been made.
3.5 For the purposes of this Article 3, if a Participant incurs
a Break in Employment and is subsequently re-employed by the Bank, any
Service accumulated by such Participant prior to incurring the Break of
Employment shall be disregarded. At its discretion, the Committee may
disregard any Break in Employment which is less than 90 days, or may
restore any other Break in Employment Service for purposes of
determining eligibility for benefits under the SERP.
3.6 If a Participant terminates employment within one year
following a Change in Ownership of the Bank (other than a termination by
the Company for cause, as determined by the Committee), such Participant
shall be eligible to receive the supplemental normal retirement benefit
provided under Section 3.1 of this Plan even if such Participant has not
attained the age of sixty (60) years and/or completed twenty (20)
consecutive Years of Service with the Bank. For the purposes of this
Section 3.6 the amount of the benefit shall be calculated as of the
employment termination date based upon the Participant's age and Years
of Service as of the employment termination date. For purposes of
calculating benefits under this Section, the monthly benefit payable to
a Participant from the SERP shall be the actuarial equivalent at the
termination date of the monthly payment that would be made under the
single life annuity form to which the Participant would be entitled
under the SERP commencing at the later of age 55 and the actual age at
termination of employment.
3.7 Although the Plan provides a supplemental normal retirement
benefit under Section 3.1 of this Article 3, a supplemental early
retirement benefit under Section 3.3 of this Article 3, a death benefit
under Section 3.4 of this Article 3 and a Change of Ownership
termination benefit under Section 3.6 of this Article 3, no Participant
may receive a distribution from the Plan derived from more than one of
such categories of benefits.
3.8 Anything herein contained to the contrary notwithstanding,
the Board in its discretion may increase the amount payable as a benefit
hereunder to any one or more Participants, provided that such change in
the supplemental retirement benefit is communicated in writing to the
Participant.
6
<PAGE> 7
ARTICLE 4
Vesting
4.1 Subject to the provisions of Section 3.4 and 3.6 hereof, if a
Participant terminates his/her employment with the Bank at any time
prior to his/her Normal Retirement Date or his/her Early Retirement
Date, such Participant shall cease being a Participant in the Plan as of
the date of his/her termination of employment and no benefits shall be
payable under the Plan to such Participant or to any other person on
behalf of such Participant.
ARTICLE 5
Payment of Benefits
5.1 The actual Commencement Date for and benefit payable to a
Participant pursuant to Section 3.1 or Section 3.3 of this Plan shall be
the first of the month coinciding with or next following the date of (i)
a Break in Employment and (ii) satisfaction of the eligibility
requirement specified in Section 3.1 and 3.3 respectively. The actual
Commencement Date for and benefit payable to a Participant pursuant to
Section 3.6 hereof shall be the first of the month coinciding with or
next following the date of termination of employment. The actual
Commencement Date of any death benefit payable to the surviving spouse
of a Participant under Section 3.4 hereof shall be the first of the
month coinciding with or next following the Participant's date of death.
The operation of this Section 5.1 is subject to modification by the
provisions contained in Sections 5.5, 5.6 and 6.2 hereof.
5.2 Subject to the provisions of Sections 5.3 and 5.4 hereof, the
benefit payable to a Participant shall be paid in the form of monthly
payments payable on the same date of each month as the date of the month
of the Commencement Date. Except as provided in Section 3.4, all
payments shall cease upon the Participant's death.
5.3 Subject to the provisions of Section 5.4 and 5.5 hereof, the benefit
payable to a surviving spouse pursuant to Section 3.4 hereof shall be
paid in the form of monthly payments payable on the same date of each
month as the date of the month of the
7
<PAGE> 8
Commencement Date. All payments shall cease upon the expiration of the
10 year certain period.
5.4 Subject to the approval of the Board, the Committee may authorize
the payment of benefits from the Plan in a form or time other than a
form or time specified in this Article 5.
5.5 All forms for the payment of benefits under the Plan shall be
actuarially equivalent to a theoretical annuity for the life of the
Participant determined as of the Commencement Date.
ARTICLE 6
Amendment and Termination
6.1 The Plan may be amended by the Board in whole or in part, at any
time and from time to time; provided, however, that no amendment may
reduce the present value (using the basis for actuarial equivalence as
otherwise utilized herein and calculated assuming the Participant is
fully vested) of the benefit otherwise payable to any Participant in the
Plan.
6.2 The Plan may be terminated at any time by the Board. In the event of
a termination of the Plan, each Participant as of the effective date of
the termination shall have a nonforfeitable right to one hundred percent
(100%) of his/her supplemental retirement benefit provided under Section
3.1 hereof determined as of the date of termination. Any supplemental
retirement benefit payable under this Section to a Participant who has
not commenced receiving retirement benefits under the Plan shall be paid
to such Participant in accordance with the provisions of Article 5,
unless the Committee in its discretion elects to commence distribution
at an earlier date.
6.3 In the event that the Board adopts a resolution terminating the
Plan, the Bank shall file a notice of its intention to terminate the
Plan with all applicable regulatory agencies (if required by law or
regulation) prior to the proposed termination date.
8
<PAGE> 9
ARTICLE 7
Administration
7.1 The Committee shall be the administrator of the Plan and shall be
responsible for providing all notices required under the Plan and for
furnishing or filing all reports and returns required by law with
respect to the Plan.
7.2 The books and records to be maintained for the purpose of the Plan
shall be maintained by the officers and employees of the Bank at its
expense and subject to the supervision and control of the Committee. All
expenses of administering the Plan shall be paid by the Bank.
ARTICLE 8
Miscellaneous
8.1 Nothing contained in the Plan shall be construed to create a
contract of employment with any Participant. The Bank reserves the right
to appoint, from time to time, any person to its offices and to remove
any of its officers and discharge any of its employees, without
exception, in any manner and upon any basis permitted by law.
8.2 All benefits payable under the Plan shall be paid from the general
assets of the Bank. Nothing contained in the Plan shall be deemed to
give any Participant or surviving spouse of any Participant any
ownership, proprietary, security or other right in any asset of the
Bank, whether or not earmarked for the Bank's purposes as a reserve or
fund to be used by the Bank for the discharge of its vested or
contingent obligations hereunder.
8.3 The right of any Participant or surviving spouse of any Participant
to any benefit or payment hereunder shall not be subject in any manner
to attachment or other legal process for the debts of such Participant
or surviving spouse, and any such benefit or payment shall not be
subject to anticipation, alienation, sale, transfer, assignment or
encumbrance by the Participant or any other person.
8.4 This Plan is established under and shall be construed according to
the laws of the United States, and, to the extent not inconsistent
therewith, of the State of California.
8.5 In the event of any merger, consolidation, sale of substantially all
of the assets of, or other reorganization involving the Bank, any
successor entity by reason of such
9
<PAGE> 10
reorganization shall succeed to all of the Bank's duties, obligation,
rights, and benefits hereunder.
8.6 Wherever possible, each provision of this Plan shall be interpreted
in a manner so as to be valid and effective under applicable law, but if
any provision of this Plan is found to be prohibited or invalid under
applicable law, such provision shall be ineffective to the extent of
such prohibition or invalidity without invalidating the remainder of
such provision or the remaining provisions of this Plan.
8.7 Singular words in this Plan may include the plural, the plural may
include the singular, and the masculine may include the feminine.
IN WITNESS WHEREOF, the foregoing Amended and Restated Supplemental
Executive Retirement Plan was adopted by First Federal Bank of California at a
regular meeting of its Board of Directors duly held on May 30, 1998.
FIRST FEDERAL BANK OF CALIFORNIA
By: BABETTE E. HEIMBUCH
--------------------------------------
President and Chief Executive
Officer
By: ANN E. LEDERER
--------------------------------------
Secretary
10
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