<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1997
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 13, 1998:
$366,084,000.
The number of shares of Registrant's $0.01 par value common stock
outstanding as of February 13, 1998: 10,592,318.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for Annual Meeting of
Stockholders, April 22, 1998 (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. [ ]
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<PAGE>
FirstFed Financial Corp.
Index
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Part I Item 1. Business 3
Item 2. Properties 27
Item 3. Legal Proceedings 27
Item 4. Submission of Matters to a Vote of
Security Holders 27
Part II Item 5. Market for Registrant's Common
Equity and Related Stockholder Matters 27
Item 6. Selected Financial Data 28
Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 29
Item 8. Financial Statements and
Supplementary Data 49
Notes to Consolidated Financial
Statements 53
Independent Auditors' Report 83
Item 9. Changes In and Disagreements with
Accountants on Accounting and
Financial Disclosure 84
Part III Item 10. Directors and Executive Officers
of the Registrant 84
Item 11. Executive Compensation 84
Item 12. Security Ownership of Certain
Beneficial Owners and Management 84
Item 13. Certain Relationships and Related
Transactions 84
Part IV Item 14. Exhibits, Consolidated Financial
Statement Schedules, and Reports
on Form 8K 84
Signatures and Power of Attorney 86
</TABLE>
2
<PAGE>
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, 1997, the Company had assets totaling $4.2
billion, a slight increase from $4.1 billion at December 31,
1996. The Company recorded net earnings of $23.1 million for the
year ended December 31, 1997, net earnings of $8.2 million for
the year ended December 31, 1996, and net earnings of $6.5
million for the year ended December 31, 1995.
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 13, 1998, the Bank operated 24 retail savings
branches, all located in Southern California. Permission to
operate all full-service branches must be granted by the Office
of Thrift Supervision ("OTS"). In addition to the retail
branches, the Bank has a retail call center which conducts
transactions with deposit customers by telephone, a retail loan
office, a wholesale loan office and "Lend FFB," a loan
origination group which operates primarily by telephone.
The Bank's principal market continues to be Southern
California. Lend FFB solicits loans from areas outside of
Southern California, including certain areas in Northern
California. Loans originated by the Lend FFB unit are originated
primarily for sale.
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."
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 continues to recover from the
economic recession which hit the area earlier this decade. The
economic recovery in Southern California is being driven by
strength in the entertainment, manufacturing and tourist
3
<PAGE>
industries. Consumer confidence remains high due to strong
growth in employment and increases in personal income. According
to the UCLA Anderson Forecast for December, 1997 ("UCLA
Forecast"), California has created 343,000 new jobs over the last
twelve months and 47% of these jobs occurred in the Greater Los
Angeles region.
According to the UCLA Forecast, the region's economic
expansion could be adversely impacted in the near future by the
Asian international economic crisis. This crisis may impact the
region's ability to export its goods and may also impact the
level of Asian tourists who visit the area.
Home values in the Los Angeles County area increased 2.8%
during 1997 and are expected to increase 4% in 1998 according to
the UCLA Forecast. The affordability of housing in Southern
California has improved substantially over the last year due to
the combination of a favorable interest rate climate and home
prices resulting from the recession. Also, demand for housing by
immigrants in the Los Angeles area has helped strengthen home
sales in the region.
Consistent with the improved real estate climate in the
greater Los Angeles area, the Bank's non-performing assets
declined to 0.96% of total assets at the end of 1997 from 1.78%
at the end of 1996 and 2.33% at the end of 1995.
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 adjusts its general allowance for anticipated loan losses as
a result of these evaluations. The provision for loan losses was
$20.5 million in 1997 compared to $35.2 million in 1996 and $28.4
million in 1995.
The ratio of general valuation allowance to the Bank's
assets with loss exposure (the Bank's loan portfolio plus real
estate owned) was 1.86% at the end of 1997 compared to 1.73% at
the end of 1996 and 1.35% at the end of 1995. The general
valuation allowance at December 31, 1997 increased because the
provision for loan losses exceeded net 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") did not change interest rates during 1997 and decreased
interest rates only once during 1996 which resulted in key
interest rates remaining flat for the last two years. There has
been downward pressure on interest rates for the last few months
due to deflationary concerns resulting from economic weakness on
the international level. In a declining interest rate
environment, the Bank's interest rate spread typically increases
(savings and borrowing costs decrease immediately while the loan
portfolio yield stays approximately the same.) 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. Due to the stable interest rate environment during
1997 and 1996, the 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.
4
<PAGE>
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 environmental
underwriting requirements when considering loans secured by
properties which appear to have environmentally high risk
characteristics (e.g. commercial, industrial and construction 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.
Lending Activities
General. The Bank's primary lending activity has been 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, direct
telephone sales and clients from its retail banking branches.
5
<PAGE>
Loan originations were $481.3 million in 1997, $302.8
million in 1996 and $299.3 million in 1995. Loan origination
volume increased in 1997 due to the increase in real estate
activity in the Bank's market areas. $46.6 million in loans were
originated by Lend FFB during 1997.
Loans sold totaled $52.4 million in 1997, $24.1 million in
1996 and $36.5 million in 1995. For the year ended December 31,
1997, $86.6 million in loans were originated for sale compared to
$22.9 million in 1996 and $34.6 million during 1995. Loans
originated for resale totaled 18%, 8% and 12% of loan
originations during 1997, 1996 and 1995, respectively. The
increase is due to fixed rate loans originated by Lend FFB which
are originated typically for resale.
Loans held-for-sale at December 31, 1997, 1996 and 1995 were
$40.4 million, $6.2 million and $7.4 million, respectively,
constituting 1.30%, 0.20% and 0.24%, 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 administrative requirements. During this
time period the Bank will 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 1997 and 1996.
However, $59.7 million in loans were converted into
mortgage-backed securities during 1995. 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.
In accordance with SFAS No. 115, the portfolio of mortgage-
backed securities was recorded at fair value as of December 31,
1997, 1996 and 1995. Negative fair value adjustments of $0.4
million and $4.1 million, net of taxes, were recorded in
stockholders' equity at December 31, 1997 and December 31, 1996.
A positive fair value adjustment of $4.9 million, net of taxes,
was recorded in stockholder's equity at December 31, 1995.
The Bank serviced $519.4 million in loans for other
investors as of December 31, 1997. $218.1 million of these loans
were sold under recourse arrangements. The Bank has an additional
$18.9 million in loans that were formed into mortgage-backed
securities with recourse features, but were still owned by the
Bank as of December 31, 1997. 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 a change in the 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 $218.1 million at the end
of 1997 from $230.8 million at the end of 1996 and $247.6 million
at the end of 1995 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 adjusts annually, the maximum annual
change in the payment is limited to 7.5%. Any additional
6
<PAGE>
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 person assuming the loan meets the
Bank's credit standards and enters into a separate written
agreement with the Bank. 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. 79% of the
Bank's AML loan origination volume in 1997 was comprised of these
two products. The Bank also originates adjustable rate loans
based on the one year treasury and LIBOR rates.
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 loans originated for the portfolio,
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
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, 1997 and 1996, loans which had co-
insurance totaled $219.9 million and $258.9 million,
respectively. Loans over 80% loan-to-value, for which there was
no private mortgage insurance, totaled $163.8 million at December
31, 1997 compared to $122.5 million at December 31, 1996 and
$132.5 million at December 31, 1995.
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, 1997,
negative amortization on all loans serviced by the Bank totaled
$13.9 million, compared to $11.0 million at December 31, 1996.
The increase in negative amortization during 1997 is due to an
increase in adjustable rate loans originated.
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. Loans with 40-year terms constituted 11% and 14% of loan
originations during 1997 and 1996, respectively.
7
<PAGE>
The following table shows the contractual remaining
maturities of the Bank's loans at December 31, 1997:
<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 $3,102,438 $44,894 $210,294 $386,217 $1,278,855 $1,077,454 $104,724
Fixed-rate loans:
1st mortgages 36,758 2,869 7,437 7,919 8,140 10,393 -
2nd mortgages 1,459 122 447 344 546 - -
Consumer and other loans 4,509 2,428 2,081 - - - -
---------- ------- -------- -------- ---------- --------- --------
Total $3,145,164 $50,313 $220,259 $394,480 $1,287,541 $1,087,847 $104,724
========== ======= ======== ======== ========== ========== ========
</TABLE>
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
1997 Total 1996 Total 1995 Total 1994 Total 1993 Total
------- ----- ------- ----- ------- ----- ------- ----- ------ -----
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Non-accrual Loans:
Single family $16,799 49% $25,602 35% $25,991 26% $13,041 14% $25,317 24%
Multi-family 15,785 46 44,754 62 69,579 70 60,213 64 70,207 66
Commercial 1,533 5 2,223 3 3,313 4 20,986 22 10,307 10
Other - - - - 220 - 245 - 245 -
------- ----- ------- ----- ------- ----- ------ ----- -------- -----
Total Non-accrual
Loans $34,117 100% $72,579 100% $99,103 100% $94,485 100% $106,076 100%
======= ===== ======= ===== ======= ===== ======= ===== ======== =====
</TABLE>
The allowance for delinquent interest, based on loans past
due more than 90 days or in foreclosure, totaled $1.8 million,
$4.2 million, $5.6 million, $5.2 million and $5.7 million at
December 31, 1997, 1996, 1995, 1994 and 1993, respectively.
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
December 31, 1997, the Bank had modified loans totaling $16.7
million, net of loan loss allowances of $4.1 million. This
compares with $19.0 million, net of loan loss allowances of $5.5
million as of December 31, 1996. 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,
1997 or December 31, 1995.
Statement of Financial Accounting Standards No. 114,
"Accounting by Creditors for Impairment of a Loan" ("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
8
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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 any
material additions to the Bank's provision for loan losses.
Prior to the adoption of SFAS No. 114, the Bank considered
the transfer of specific allowances from general valuation
allowances to be "charge-offs." Pursuant to SFAS No. 114, the
Bank now considers allowances on impaired loans to be charge-offs
only if 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 $9.8 million as
of December 31, 1997 and $12.4 million as of December 31, 1996.
The following is a summary of impaired loans, net of valuation
allowances for impairment, for the periods indicated:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------ ------------
(Dollars In Thousands)
<S> <C> <C>
Non-accrual loans $ 8,260 $ 20,052
Modified loans 8,090 9,728
Other impaired loans 9,335 7,854
------------ ------------
$ 25,685 $ 37,634
============ ============
</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 $2.5 million and $4.1 million as
of December 31, 1997 and December 31, 1996, 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,
1997 1996
------------ ------------
(Dollars In Thousands)
<S> <C> <C>
Present value method $ 1,067 $ 2,992
Fair value method 24,618 34,642
------------ ------------
Total impaired loans $ 25,685 $ 37,634
============ ============
</TABLE>
9
<PAGE>
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
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>
<CAPTION>
<S> <C>
Balance at December 31, 1994 $ 23,887
Provision for loan losses 21,418
Net charge-offs (19,204)
--------
Balance at December 31, 1995 26,101
Provision for loan losses 11,387
Net charge-offs (25,138)
--------
Balance at December 31, 1996 12,350
Provision for loan losses 7,345
Net charge-offs (9,920)
--------
Balance at December 31, 1997 $ 9,775
========
</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, 1997 and 1996 was $24.5 million and $52.7 million,
respectively. The amount of interest income recognized from
impaired loans during the years ended December 31, 1997 and 1996
was $1.9 million and $2.7 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, 1997 and 1996 totaled $1.9 million and $2.5 million,
respectively.
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,
1997 1996
------------ ------------
(Dollars In Thousands)
<S> <C> <C>
Single family $ 856 $ 2,002
Multi-family 6,893 17,417
Commercial 511 633
------- ----------
$ 8,260 $ 20,052
======= ==========
</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>
The following is an analysis of the activity in the Bank's
general loan valuation allowance for the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
1997 1996 1995 1994 1993
------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Beginning General Loan Valuation
Allowance $54,900 $42,876 $55,353 $46,900 $27,854
Provision for Loan Losses 13,155 23,768 6,958 53,172 67,679
Charge-Offs, Net of Recoveries:
Single Family (5,633) (8,845) (6,040) (16,127) (8,605)
Multi-Family 2,341 (2,448) (13,676) (19,800) (38,178)
Commercial 482 240 851 (664) (1,574)
Non-Real Estate 226 9 (67) (180) (276)
------- ------- ------- ------- -------
Total Net Charge-Offs (2,584) (11,044) (18,932) (36,771) (48,633)
------- ------- ------- ------- -------
Transfer to Liability Account for
Loans Sold with Recourse (4,234) - (503) (7,948) -
Transfer to Real Estate General
Valuation Allowance. - (700) - - -
------- ------- ------- ------- -------
Ending General Loan Valuation
Allowance $61,237 $54,900 $42,876 $55,353 $46,900
======= ======= ======= ======= =======
</TABLE>
The general valuation allowance for loans sold with recourse
was included in the total general valuation allowance balance for
the overall loan portfolio in years prior to 1994. The amount of
such recourse general valuation allowance was $6.2 million at
December 31, 1993. The activity in the general valuation
allowance for loans sold with recourse for 1997, 1996 and 1995 is
presented below (dollars in thousands):
<TABLE>
<CAPTION>
<S> <C>
Balance at December 31, 1994 $ 7,948
Provision for losses 2,123
Transfer from general valuation allowance 503
Net charge-offs (1,524)
----------
Balance at December 31, 1995 9,050
Net charge-offs (652)
----------
Balance at December 31, 1996 8,398
Transfer from general valuation allowance 4,234
Net recoveries 397
----------
Balance at December 31, 1997 $ 13,029
==========
</TABLE>
Based on the factors above, the Bank's general valuation
allowance (including general valuation allowances for loans sold
with recourse) was 2.12% of total assets with loss exposure
(including loans sold with recourse) at December 31, 1997, 1.86%
at December 31, 1996 and 1.52% at December 31, 1995. 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.
11
<PAGE>
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
1997 Total 1996 Total 1995 Total 1994 Total 1993 Total
---------------------------------------------------------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
Single Family $21,583 29% $15,355 24% $ 8,887 17% $ 6,938 11% $ 6,607 14%
Multi-Family 45,029 61 44,078 70 35,278 68 50,018 79 37,691 81
Commercial 6,658 9 3,587 6 7,529 15 6,170 10 2,551 5
Non-Real Estate Loans. 996 1 278 - 232 - 175 - 51 -
------- --- ------- --- ------- --- ------- --- ------- ---
Total $74,266 100% $63,298 100% $51,926 100% $63,301 100% $46,900 100%
======= === ======= === ======= === ======= ===
</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 $12.1
million, $37.5 million, $39.7 million, $45.4 million and $48.6
million for 1997, 1996, 1995, 1994 and 1993, respectively,
representing 0.39%, 1.21%, 1.28%, 1.58% and 1.82% of the average
loan portfolio for such periods. Charge-offs have improved over
the last two years due to the improvement in the Southern
California economy and real estate market.
Any increase in charge-offs would adversely impact the
Company's future loan loss provisions and earnings.
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 had $41.6 million in
potential problem loans as of December 31, 1997 compared with
$44.0 million as of December 31, 1996. These are loans which do
not meet the criteria 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.
The Bank's Asset Classification Committee meets at least
quarterly 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 monthly to resolve
delinquent loan situations and to initiate actions enforcing the
Bank's rights in security properties pending foreclosure and
liquidation.
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 disposing of the property. 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>
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,
---------------------------
1997 1996 1995
------- ------- -------
(Dollars In Thousands)
<S> <C> <C> <C>
Beginning Balance $ 14,331 $19,701 $16,724
Additions 49,150 74,886 64,053
Sales (53,263) (80,256) (61,076)
-------- ------- -------
Ending Balance $ 10,218 $14,331 $19,701
======== ======= =======
</TABLE>
Other Interest-Earning Assets. The Bank owned no
contractually delinquent interest-earning assets other than loans
as of December 31, 1997.
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, 1997, the regulatory liquidity
requirement was 4.00% and the Bank's liquidity percentage was
5.13%.
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.
The following table summarizes the total investment
portfolio at historical cost by type at the end of the periods
indicated:
<TABLE>
<CAPTION>
December 31,
----------------------------------------------
1997 1996 1995 1994 1993
----------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
U.S. Treasury Securities $ 300 $ 301 $ 301 $ 4,205 $ 5,111
U.S. Agency Securities 48,142 49,989 46,561 36,565 42,600
Collateralized Mortgage
Obligations 1,009 8,776 29,874 43,282 56,125
------ ------ ------ ------ ------
49,451 59,066 76,736 84,052 103,836
Unrealized loss on
securities available-for-sale (541) (157) (552) - -
------- ------- ------- ------- --------
$48,910 $58,909 $76,184 $84,052 $103,836
======= ======= ======= ======= ========
Weighted average yield on
interest-earnings invest-
ments end of period 5.17% 5.98% 5.15% 5.08% 5.16%
==== ==== ==== ==== ====
</TABLE>
13
<PAGE>
The following is a summary of the maturities of investment
securities at historical value as of December 31, 1997:
<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 $ 100 6.69% $ 200 5.97% $ 300 6.21% 2/6
U.S. Agency Securities 20,000 5.31 28,142 5.08 48,142 5.17 2/6
Collateralized Mortgage
Obligations 1,009 4.54 - - 1,009 4.54 0/4
------- ------- -------
$21,109 5.28 $28,342 5.08 $49,451 5.17 2/6
======= ======= =======
</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) 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 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 telemarketing efforts are
typically placed with the Bank by professional money managers and
represented 5%, 6% and 11% of total deposits at December 31,
1997, 1996 and 1995, 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%, 20% and 23% of total deposits at December 31,
1997, 1996 and 1995, 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. 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."
14
<PAGE>
Retail deposits were $1.5 billion at December 31, 1997, 1996
and 1995. Retail deposits comprised 75% of total deposits at
December 31, 1997, 74% of total deposits at December 31, 1996 and
66% at December 31, 1995. The level of deposits has decreased
slightly over the last three years due to increased competition
for retail savings deposits in Southern California. In order to
increase fee income at the retail branches and decrease interest
costs, the Bank's retail deposit marketing efforts have been
concentrated on obtaining demand deposit accounts over the last
two years. The Bank operated 24 retail branches at the end of
1997.
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,
----------------------------------------------------------
1997 1996 1995
-------------- --------------- -------------
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 3.36%,
2.82% and 2.52%) $156,221 8% $130,173 7% $125,352 6%
Interest-bearing checking accounts
(weighted average rate of 1.78%
1.01% and 1.20%) 130,765 7 165,616 8 145,801 7
Passbook accounts (2.04%, 2.04%
and 2.04%) 86,547 4 94,718 5 96,948 4
Non-interest bearing checking
accounts 112,373 6 40,404 2 54,876 2
-------- -- ------- -- ------- --
485,906 25 430,911 22 422,977 19
-------- -- ------- -- ------- --
Fixed term rate certificate accounts:
Under six month term (weighted
average rate of 5.07%, 5.11%
and 5.21%) 120,637 61 60,430 8 126,599 6
Six month term (weighted average
rate of 6.00%, 5.69% and 5.42%) 103,901 5 204,048 10 417,855 19
Nine month term (weighted average of
5.64%, 5.45% and 5.98%) 374,259 19 246,777 13 144,308 6
One year to 18 month term (weighted
average rate of 5.53%, 5.32% and
5.57%) 348,941 18 304,532 16 235,164 11
Two year or 30 month term (weighted
average rate of 5.23%, 5.32% and
5.55%) 30,689 2 40,498 2 239,411 11
Over 30 month term (weighted
average rate of 5.85%, 6.27%
and 6.31%) 125,971 7 202,724 10 238,742 11
Negotiable certificates of $100,000
and greater, 30 day to one year terms
(weighted average rate of 5.50%,
5.39% and 5.66%) 353,343 18 367,528 19 379,980 17
--------- -- --------- -- --------- --
1,457,741 75 1,526,537 78 1,782,059 81
--------- -- --------- -- --------- --
Total deposits (weighted average
rate of 4.66, 4.67% and 4.89%) $1,943,647 100% $1,957,448 100% $2,205,036 100%
========== === ========== === ========== ===
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
During the Year Ended December 31,
1997 1996 1995
------------------ ------------------ ------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
------------------ ------------------ ------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Passbook Accounts $ 83,958 2.06% $ 94,858 2.02% $ 103,737 2.20%
Money Market Deposit Accounts 138,764 3.16 125,722 2.61 137,099 2.59
Interest-bearing Checking Accounts 111,246 1.00 142,487 0.96 195,920 1.39
Fixed Term Certificate Accounts 1,638,892 5.22 1,772,621 5.36 1,808,422 5.56
---------- ---- ---------- ---- ---------- ----
$1,972,860 4.70% $2,135,688 4.76% $2,245,178 4.86%
========== ==== ========== ==== ========== ====
</TABLE>
The following table shows the maturity distribution of jumbo
certificates of deposit ($100,000 and greater) as of December 31,
1997 (dollars in thousands):
<TABLE>
<CAPTION>
<S> <C>
Maturing in:
1 month or less $ 93,612
Over 1 month to 3 months 90,886
Over 3 months to 6 months 81,856
Over 6 months to 12 months 86,989
---------
Total $ 353,343
=========
</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 $1.3 billion at December
31, 1997 at a weighted average rate of 5.80%. This compares with
advances of $1.2 billion at December 31, 1996 and $890.0 million
at December 31, 1995 at weighted average rates of 5.71% and
6.12%, respectively. These advances were often the most available
source of funds to the Bank during 1997 and 1996. 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, 1997.
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 $577.7 million at December 31, 1997 at a weighted average
rate of 5.66% and were secured by mortgage-backed securities with
principal balances totaling $603.6 million. Borrowings under
reverse repurchase agreements totaled $646.5 million at December
31, 1996 and $724.6 million at December 31, 1995 at weighted
average rates of 5.42% and 5.68%, respectively.
16
<PAGE>
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, $1.9
billion and $1.7 billion at weighted average rates of 5.91%,
5.77% and 6.11% at December 31, 1997, 1996 and 1995,
respectively. Due to increased competition for deposits, the
Bank increased its use of borrowings in 1997, 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
Outstanding
End of Period Balance Average Period
------------------ During the ------------------
Outstanding Rate Period Outstanding Rate
----------- ---- ----------- ----------- ----
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
1997
- ----
Short term variable rate credit advances $ - -% $ - $ 600 6.01%
Short term FHLB Advances 1,310,000 5.80 1,345,000 1,170,417 5.75
Securities sold under agreements to repurchase 577,670 5.66 634,976 603,264 5.60
Other short term borrowings 4,000 5.85 26,500 15,703 5.63
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
</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.
17
<PAGE>
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, 1997, the Bank had invested an aggregate
of $487 thousand (primarily equity) in Seaside, Oceanside and
SMCG. Revenues and operating results of these subsidiaries
accounted for less than 1% of consolidated revenues in 1997 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
several years and there are no plans for future real estate
projects. Therefore, no gains or losses on real estate
development activities were recorded during 1997, 1996 or 1995.
Seaside continues to hold one condominium unit which is
rented to the Bank for use by its employees. In 1995, a house,
previously rented to the Bank, was sold and, in 1997, a
condominium, also rented to the Bank, was sold. At December 31,
1997, Seaside's investment in the remaining unit totaled $39
thousand. There were no loans outstanding against the property
at December 31, 1997. The unit is located in Southern
California.
Trustee Activities. Seaside acts as trustee on the Bank's
deeds of trust. Trustee fees for this activity amounted to $494
thousand, $695 thousand and $462 thousand in 1997, 1996 and 1995,
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 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 1997 and 1996, Oceanside
received commission income of $462 thousand and $428 thousand,
respectively, 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, 1997, the Bank had a total of 437 full
time equivalent employees, including 107 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.
18
<PAGE>
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. 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 $68.6
million in FHLBSF stock at December 31, 1997.
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, 1997, the Bank's
advances from the FHLBSF amounted to $1.3 billion, or 34% of the
Company's total funding sources (deposits and borrowings).
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, 1997, dividends paid by the FHLBSF to the
Bank totaled approximately $4.0 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."
19
<PAGE>
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. The capital regulations of
the OTS (the "Capital 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 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, 1997. 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, 1997, $30.0 million of the Bank's $61.2 million in
general valuation allowances was 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, which occurred in 1989, the Bank has
not been active in such loan sales. At December 31, 1997 the
Bank had loans sold with recourse or subordination totaling
$218.1 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 $11.1 million.
20
<PAGE>
A savings institution which fails to meet its capital
standards must 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 Bank Insurance Fund ("BIF") insures
the deposits of commercial banks and other institutions which
were insured by the FDIC prior to the enactment of the Financial
Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") . The Savings Association Insurance Fund ("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.
The FDIC has implemented 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. 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.
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.
In addition to deposit insurance assessments, the OTS has
imposed assessments and examination fees on savings institutions.
OTS assessments for the Bank were $609 thousand in 1997, $611
thousand in 1996 and $603 thousand in 1995.
The 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 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 provided for funding of
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.
21
<PAGE>
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.
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 4% of: (i)the
average daily balance of its net withdrawable accounts and short-
term borrowings during the preceding calendar quarter or (ii)the
ending balance of its net withdrawable accounts as of the end of
the preceding calendar quarter. 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.
On November 24, 1997, the OTS reduced this liquidity requirement
to 4% from 5%. The OTS also gave institutions the option of
using a quarterly average calculation or an end of quarter
calculation of the liquidity base and removed the requirement of
maintaining a monthly average balance of short-term liquid assets
equal to at least 1% of the average daily balance of its net
withdrawable accounts and short term borrowings. Monetary
penalties may be imposed for failure to meet these liquidity
ratio requirements. The Bank's liquidity ratio for the quarter
ended December 31, 1997 was 5.13%, 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 are
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.
22
<PAGE>
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.
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.
At December 31, 1997, 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, 1997.
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. OTS regulations contain
"safety and soundness" standards covering various aspects of the
operations of savings institutions. 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.
23
<PAGE>
Federal regulations contain 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 internal control
standards and compliance with certain designated laws will be
made available in March of 1998.
Prompt Corrective Action. The "prompt corrective action"
regulations require insured depository institutions to be
classified into one of five categories based primarily upon
capital adequacy, ranging from "well capitalized" to "critically
undercapitalized." These regulations 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."
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 1997 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,
1997, with 96% 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.
24
<PAGE>
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, 1997 was 3% of the first
$44.9 million 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%.
In August 1996, the Small Business Job Protection Act (the
"Act") was signed into law. One provision of the Act repealed
the reserve method of accounting for bad debts for savings
institutions effective for taxable years beginning after 1995.
Therefore, the Bank used the specific charge-off method in filing
its 1996 federal tax return and will use this method in filing
its 1997 federal tax return.
The Bank may be required to recapture its "applicable excess
reserves", if its federal tax bad debt reserves are in excess of
its base year reserve amount described above. As of December 31,
1997, 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 has not and is not
expected to have a material impact on the Bank's operations or
financial position.
In 1995, 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 was generally able to maintain the
balance of its tax reserve at the December 31, 1987 level, even
if the result would have been less using the experience method.
If the Bank had failed the 60% qualifying asset test, it would
not have been permitted to calculate its bad debt deductions
under the reserve method.
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, 1997, the Bank's
excess bad debt reserve was zero. At December 31, 1997, the
Bank's earnings and profits (as computed for federal income tax
purposes) were approximately $170.1 million.
At December 31, 1997, the Bank had $35.9 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 $37.7 million at December 31, 1997.
25
<PAGE>
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
of tax preference. No alternative minimum taxes were applicable
to the Bank for tax years 1997, 1996 or 1995.
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 rate 2% higher than
that applicable to non-financial corporations because of
exemptions from certain state and local taxes. The tax rates for
1997, 1996 and 1995 were 10.84%, 11.30% and 11.30%, respectively.
The Franchise Tax Board ("FTB") has not yet announced a rate for
1998.
During 1997, the Internal Revenue Service ("IRS") completed
its examination of the Company's consolidated federal income tax
returns for tax years up to and including 1992. The adjustments
made by the IRS related to temporary differences as to the
recognition of certain taxable income and expense items. While
the Company had provided deferred taxes for federal and state
purposes, the changes in the period of recognition of certain
income and expense items resulted in interest due to the IRS and
FTB. As a result, the Company paid $7.4 million in interest to
the IRS and FTB during 1997 and accrued an additional $210
thousand in interest during 1997. During 1996, the Company
recorded a net reversal of $5.1 million in accrued interest.
Interest expense of $3.5 million was accrued during 1995. The
remaining $1.4 million in accrued interest as of December 31,
1997 is for interest due with amended returns which have not yet
been filed.
26
<PAGE>
ITEM 2--PROPERTIES
At December 31, 1997, 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.
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 13, 1998, the Company had
10,592,318 shares of its common stock outstanding, representing
approximately 957 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 $5.9 million in dividends during 1997,
1996 and 1995. 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."
27
<PAGE>
ITEM 6--SELECTED FINANCIAL DATA
Selected financial data for the Company is presented below:
<TABLE>
<CAPTION>
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
FIVE YEAR CONSOLIDATED SUMMARY OF OPERATIONS
1997 1996 1995 1994 1993
------------------------------------------------------------------
(Dollars In Thousands, Except per Share Data)
<S> <C> <C> <C> <C> <C>
For the Year Ended December 31:
Interest income $ 299,220 $ 297,178 $ 301,735 $ 235,424 $ 229,445
Interest expense 204,226 198,031 224,077 157,655 131,616
Net interest income 94,994 99,147 77,658 77,769 97,829
Provision for loan losses 20,500 35,155 28,376 85,700 67,679
Other income 10,218 10,915 8,725 11,264 12,054
Non-interest expense 44,151 59,175 45,903 45,496 45,298
Earnings (loss) before
income taxes (benefit) 40,561 15,732 12,104 (42,163) (3,094)
Income taxes (benefit) 17,461 7,488 5,569 (17,699) (1,046)
Net earnings (loss) 23,100 8,244 6,535 (24,464) (2,048)
Basic earnings (loss)
per share 2.19 0.78 0.62 (2.32) (0.20)
Diluted earnings (loss)
per share 2.15 0.78 0.61 (2.32) (0.20)
End of Year:
Loans receivable 3,145,164 3,048,469 3,059,780 3,072,309 2,715,063
Mortgage-backed securities 676,058 746,006 843,819 830,715 717,056
Investment securities 48,910 58,909 67,813 74,654 95,063
Total assets 4,160,115 4,143,852 4,139,737 4,157,414 3,661,117
Deposits 1,943,647 1,957,448 2,205,036 2,298,914 2,305,480
Borrowings 1,941,670 1,940,482 1,666,943 1,604,821 1,093,149
Liabilities 3,937,328 3,949,302 3,943,446 3,972,727 3,452,825
Stockholders' equity 222,787 194,550 196,291 184,687 208,292
Book value per share 21.04 18.48 18.49 17.42 19.78
Selected Ratios:
Return on average assets 0.56% 0.20% 0.16% (0.64)% (0.06)%
Return on average equity 11.25% 4.22% 3.47% (12.78)% (1.01)%
Ratio of non-performing
assets to total assets 0.96% 1.78% 2.33% 2.23% 3.23%
Other Data:
Number of Bank full service
branches 24 25 25 25 24
</TABLE>
Also see summarized results of operations on a quarterly
basis for 1997, 1996 and 1995 in Note 15 of the Notes to
Consolidated Financial Statements.
28
<PAGE>
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 $23.1 million or $2.15 per share were
recorded in 1997, compared to net earnings of $8.2 million or
$0.78 per share in 1996 and $6.5 million or $0.61 per share in
1995. All per share amounts are presented on a diluted basis.
The Company's results over the last three years have continued
to improve as Southern California has recovered from the
economic recession of the early 1990's. Loan charge-offs
declined to $12.1 million in 1997 compared to $37.5 million in
1996 and $39.7 million in 1995. In addition, transfers to
valuation allowances for impaired loans declined to $7.3 million
in 1997 compared to $11.4 million in 1996 and $21.4 in 1995.
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>
1997 .56% 11.25% 4.95%
1996 .20 4.22 4.61
1995 .16 3.47 4.49
1994 (.64) (12.78) 4.97
1993 (.06) (1.01) 5.61
</TABLE>
Core earnings reflect the Company's results from basic
operations and were $60.6 million in 1997, $60.5 million in 1996
and $45.6 million in 1995. 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 1997 compared to 1996
and in 1996 compared to 1995 due to decreased levels of non-
performing assets and interest rates.
Non-performing assets (primarily loans 90 days past due or
in foreclosure plus foreclosed real estate) decreased to $40.1
million or 0.96% of total assets at December 31, 1997 compared
to $73.9 million or 1.78% of total assets at December 31, 1996
and $96.6 million or 2.33% of total assets at December 31, 1995.
The decreasing trend in non-performing assets over the last two
years is due to a lower balances of delinquent loans and
foreclosed properties of all collateral types.
At December 31, 1997, the Bank's regulatory risk-based
capital ratio was 12.29% and the tangible and core capital
ratios were 6.28%. The Bank met the regulatory capital
standards to be deemed "well-capitalized" at December 31, 1997.
The Bank's deposits are insured by the SAIF up to a maximum
of $100,000 for each insured depositor. In the third quarter of
1996, legislation was enacted by Congress which included a one-
time assessment for SAIF members such as the Bank. Accordingly,
the Bank recorded an accrual for the one-time assessment, net of
tax, of $8.7 million during the third quarter of 1996 (based on
its level of insured deposits at March 31, 1995). The one-time
assessment was paid during the fourth quarter of 1996. The
Bank's FDIC insurance premiums decreased to $1.9 million in 1997
compared to $5.4 million in 1996 due to a drop in the assessment
rate to 9.3 basis points from 23 basis points after the payment
of the special assessment.
29
<PAGE>
Risks and Uncertainties
In the normal course of business, the Company encounters
two significant types of risk: economic risk and regulatory
risk.
ECONOMIC RISK
There are two main components of economic risk: credit risk
and market risk (which includes interest rate risk.)
Credit Risk
Credit risk is the risk of default in the Company's loan
portfolio that results from a borrower's inability to make
contractually required payments. See "Loan Loss Provisions" and
"Non-performing Assets." 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, 1997 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 risks. This could create the need for
additional loan loss provisions.
Market Risk
Market risk is the risk of loss from unfavorable changes in
market prices and interest rates. The Bank's market risk arises
primarily from the interest rate risk inherent in its lending
and deposit taking activities. See "Asset Liability Management"
for additional information relating to market risk.
REGULATORY RISK
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
Year 2000 Issue
The Year 2000 issue arises because most computer hardware
and software was developed without considering the impact of the
upcoming change in the century. These computers have only a two
digit field for the date which could change to the year 00 after
1999. The 00 in this case could denote the Year 1900 causing
computer applications to create erroneous results or to fail to
make a calculation.
Early in 1997, the Bank developed a process for addressing
the Year 2000 issue for the Bank's major computer systems and
applications. An internal committee was formed to address the
issue and a formal project plan was developed.
The Bank's major computer applications are owned and
operated by third party vendors. Therefore, the Bank's
challenge is to ensure that its vendors are compliant or have
plans to become compliant before the Year 2000. Because the
Bank had plans to convert its major data processing systems to
new systems during 1997 and 1998, requirements for Year 2000
compliance have been made a part of all new contracts.
Contractual arrangements with the Bank's major data processing
vendors provide for representations and warranties regarding
Year 2000 compliance, regular monitoring of the vendors' Year
2000 project, substantial system compliance by the end of 1998,
and testing and verification in early 1999.
30
<PAGE>
Other vendors using computer-related date fields were
surveyed to determine the level of compliance with Year 2000
issues and their plans to rectify any problems. All vendors
were requested to reach compliance by the first quarter of 1999.
This should allow sufficient time for the Bank to test system
compliance and determine the appropriate action based on the
results.
The Bank is developing contingency plans to cover the
possibility that certain vendors may be unable to become
compliant within the required time frame. Depending on a
particular situation, the Bank will develop a process by which
it will determine whether to retain or discontinue the business
relationship with the vendor. This decision will be based on
the impact of the particular non-compliance on the Bank's
operations, the vendor's projected time frame for achieving
compliance, and the cost to upgrade, replace or purchase the
required software or hardware.
Because of the third party nature of its major data
processing relationships, the Bank is not expected to bear any
programming cost of making its systems Year 2000 compliant. The
Bank's major cost of Year 2000 compliance is related to staff
and management time spent planning, monitoring and testing the
systems, which is not expected to be a significant cost.
Therefore, Year 2000 issues are expected to have an immaterial
impact on the Company's results of operations, liquidity and
capital expenditures.
Inflation
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.
Pending Lawsuits
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.
31
<PAGE>
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 $109.9 million in 1997, $92.9 million in 1996
and $63.1 million in 1995. The increase over the last two years
was due to improved net earnings and a continued improvement in
asset quality.
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>
1997 1996 1995
--------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C>
Average loans and mortgage-backed
securities (1) $3,811,179 $3,806,979 $3,940,247
Average investment securities 160,224 165,710 176,131
---------- ---------- ----------
Average interest-earning assets 3,971,403 3,972,689 4,116,378
---------- ---------- ----------
Average savings deposits 1,972,860 2,135,688 2,245,178
Average borrowings 1,888,662 1,744,091 1,808,072
---------- ---------- ----------
Average interest-bearing liabilities 3,861,522 3,879,779 4,053,250
---------- ---------- ----------
Excess of interest-earning assets over
interest-bearing liabilities $ 109,881 $ 92,910 $ 63,128
========== ========== ==========
Yields earned on average interest
earning assets 7.40% 7.36% 7.23%
Rates paid on average interest-
bearing liabilities 5.27 5.25(3) 5.51
Net interest rate spread 2.13 2.11 1.72
Effective net spread 2.28 2.24 1.80
Total interest income (2) $ 293,931 $ 292,564 $ 297,683
Total interest expense (2) 203,434 203,633(3) 223,501
---------- ---------- ----------
Net interest income $ 90,497 $ 88,931(3) $ 74,182
========== ========== ==========
</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.
3Excludes the effect of the IRS accrued interest reversal.
The yield on earning assets increased slightly to 7.40% in
1997 from 7.36% in 1996 due to a decline in non-performing
assets. This was offset by an 8 basis point decrease in the
COFI Index which determines the yield on over 95% of the Bank's
loan portfolio. The Bank's cost of funds increased by 2 basis
points in 1997 compared to 1996 due to the more extensive use of
borrowings which cost more than deposits. The increase in net
interest spread from 1995 to 1996 was also due to improved asset
quality, offset by the increased cost deposits and borrowings.
32
<PAGE>
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, 1997 December 31, 1996
Versus Versus
December 31, 1996 December 31, 1995
-------------------------- ---------------------------
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 $ 1,867 $ 312 $2,179 $(9,851) $ 5,054 $(4,797)
Investments (505) (307) (812) (590) 268 (322)
------- ------ ------ ------- ------ -------
Total interest income 1,362 5 1,367 (10,441) 5,322 (5,119)
------- ------ ------ ------- ------ -------
Interest Expense:
Deposits (1,137) (7,671) (8,808) (5,245) (2,308) (7,553)
Borrowings (1) 141 8,468 8,609 (8,116) (4,199) (12,315)
------- ----- ----- ------- ------ -------
Total interest expense (996) 797 (199) (13,361) (6,507) (19,868)
------- ----- ----- ------- ------ -------
Change in net
interest income $ 2,358 $ (792) $1,566 $2,920 $11,829 $14,749
======= ====== ====== ====== ======= =======
</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.
Interest Rate Spreads and Yield on Average Interest-Earning Assets
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995 1994 1993
--------------- --------------- --------------- --------------- ---------------
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 7.49% 7.48% 7.44% 7.47% 7.31% 7.63% 6.25% 6.50% 6.64% 6.20%
Weighted average yield
on investment portfolio(1) 5.40 6.06 5.71 5.98 5.56 5.15 5.00 5.08 4.70 5.16
Weighted average yield
on all interest-earning
assets 7.40 7.42 7.36 7.45 7.23 7.59 6.20 6.47 6.56 6.17
Weighted average rate
paid on deposits 4.70 4.66 4.76 4.67 4.86 4.89 3.85 4.49 3.76 3.60
Weighted average rate
paid on borrowings and
FHLB advances 5.86 5.91 5.85(4) 5.77 6.32 6.11 4.93 6.04 4.09 3.99
Weighted average rate
paid on all interest-
bearing liabilities 5.27 5.28 5.25 5.22 5.51 5.41 4.27 5.12 3.89 3.73
Effective net spread(2) 2.28 2.24 1.80 1.99 2.77
Interest rate spread(3) 2.13 2.14 2.11% 2.23% 1.72% 2.18% 1.93% 1.35% 2.67% 2.44%
</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.
33
<PAGE>
Loss Provision
The Company recorded $20.5 million in loan loss provisions
during 1997, 42% less than the $35.2 million recorded in 1996 and
$28.4 million in 1995. The Southern California real estate
markets continued to improve during 1997.
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 $61.2 million and $54.9 million at December 31, 1997 and
December 31, 1996, respectively. The increase in general
valuation allowances from 1996 to 1997 is a result of a decrease
in loan charge-offs. In addition, the Bank provided a $7.3
million provision for losses on the impaired loan portfolio.
Loan charge-offs decreased from 0.99% of average loans
outstanding in 1996 to 0.32% of average loans outstanding in
1997. 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 $12.1 million in 1997 from $37.5
million in 1996 and $39.7 million in 1995. Charge-offs result
from declines in the value of the underlying collateral of the
non-performing loans.
Non-interest Income
Loan servicing and other fees were $6.2 million in 1997,
$6.4 million in 1996 and $6.1 million in 1995. Increased fees
earned from loans brokered to other lenders were offset by
decreased fees on loans serviced for other lenders during 1997.
The increased fees in 1996 compared to 1995 were primarily the
fees earned on loans brokered to other lenders.
Gain (loss) on sale of loans increased to $652 thousand in
1997, compared with $253 thousand in 1996 and a loss of $1.6
million in 1995. The increased gains from 1996 to 1997 were the
result of cash gains and fees recognized on sales of loans
originated by the Bank's new originaton unit, "Lend FFB." The
loss in 1995 resulted from a $2.1 million provision for losses
on loans that had been sold with recourse in prior years.
Real estate operations resulted in a net gain of $20
thousand compared to gains of $1.2 million in 1996 and $2.0
million in 1995. The amounts for 1997 and 1996 include $1.6
million and $745 thousand, respectively in provisions 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 $3.3 million in
1997 from $3.0 million in 1996 and $2.2 million in 1995 consists
primarily of fees earned for services provided in the retail
savings branches. Fees earned by retail savings branches
increased due to management's efforts to improve fee income,
commissions on the sale of alternative investments and
additional fees earned from off-site ATMs.
34
<PAGE>
Non-interest Expense
The ratio of non-interest expense to average total assets
for 1997 was 1.06%, consistent with the ratio for 1996 after
excluding the additional cost of the SAIF special assessment.
The ratio for 1995 was 1.10%. Including the SAIF assessment,
the ratio of non-interest expense to average total assets was
1.43% for 1996.
Salary and benefit costs increased 4% in 1997 compared to
1996 due to incentive costs and retirement benefits. Incentive
costs were higher due to the Bank's increase in loan
originations. Retirement benefits increased due to the
promotion of an individual who will be included in the Bank's
SERP and the establishment of a 401(k) Plan for the Bank's
employees. Salary and benefit costs decreased 5% in 1996
compared to 1995 due to decreased salary and benefit costs
primarily due to attrition.
Occupancy expense increased 9% in 1997 compared to 1996 due
primarily to the additional costs and depreciation expense
associated with the Bank's new loan origination system and call
center. Occupancy expense was substantially unchanged in 1996
compared to 1995.
Other operating expenses increased 21% during 1997 and
consist primarily of costs associated with the upcoming data
processing conversion and an increase in legal expenses. Other
operating expenses decreased 2% in 1996 compared to 1995 due
primarily to lower insurance and data processing charges.
Advertising expense increased by 18% in 1997 compared to
1996 due to additional brand advertising and increased
advertising for Lend FFB. Advertising expense increased by 29%
in 1996 compared to 1995 due to the cost of new marketing
initiatives related to retail deposit acquisition.
Federal deposit insurance decreased in 1997 compared to
1996 due to a drop in the deposit insurance rate from 0.26% to
0.093% as a result of the Economic Growth Act and a decline in
total deposits. Excluding the $15.0 million special SAIF
assessment, deposit insurance 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.
35
<PAGE>
The following table details the components of non-interest
expense for the periods indicated:
<TABLE>
<CAPTION>
Non-Interest Expense
Year Ended December 31,
-------------------------------------------------------
1997 1996 1995 1994 1993
-------------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Salaries and Employee Benefits:
Salaries $15,413 $15,749 $16,436 $16,887 $16,557
Incentive compensation 883 556 899 1,363 1,425
Payroll taxes 1,371 1,389 1,400 1,498 1,388
Employee benefit insurance 1,048 1,137 1,180 1,225 1,332
Bonus compensation 1,100 1,000 1,001 300 633
Profit sharing 501 500 500 200 200
Pension - 241 436 481 468
SERP 628 506 408 471 434
401(k) 392 - - - -
Other salaries and benefits 1,404 850 785 309 443
22,740 21,928 23,045 22,734 22,880
Occupancy:
Rent 4,351 4,270 4,250 4,246 3,898
Equipment 1,336 959 885 1,246 1,285
Maintenance costs 450 477 460 594 741
Other occupancy 741 583 663 600 892
6,878 6,289 6,258 6,686 6,816
Other Operating Expense:
Insurance 345 381 528 748 570
Goodwill 839 915 996 996 650
Data processing 1,043 945 1,012 1,094 895
Contributions 412 401 341 412 591
Professional services 1,682 832 777 732 799
Supervisory exam 610 611 603 547 531
Other operating costs 4,935 4,086 4,110 4,424 4,458
9,866 8,171 8,367 8,953 8,494
Federal Deposit Insurance:
Deposit insurance premiums 1,872 5,418 6,400 5,151 4,622
SAIF special assessment - 15,007 - - -
1,872 20,425 6,400 5,151 4,622
Advertising 2,795 2,362 1,833 1,972 2,486
Total $44,151 $59,175 $45,903 $45,496 $45,298
Non-interest expense as
% of average assets 1.06% 1.43%(1) 1.10% 1.18% 1.26%
</TABLE>
1 The ratio for 1996 includes the special SAIF assessment. Excluding
the SAIF assessment, the ratio would have been 1.06%.
36
<PAGE>
BALANCE SHEET ANALYSIS
Consolidated assets at the end of 1997 were $4.2 billion,
representing a slight increase from $4.1 billion at the end of
1996 and 1995. Asset growth during 1997 was attributable to
growth in the loan portfolio due to a 59% increase in loan
originations. Loan sales during 1997 were $52.4 million in 1997
compared to $24.1 million in 1996. Increased loan originations
during 1996 were largely offset by loan payoffs and sales during
the year.
Loan Portfolio
At the end of 1997, 96% of the Bank's loan portfolio was
adjustable based on monthly changes in the Eleventh District
Federal Home Loan Bank Cost of Funds Index. As part of its asset-
liability management strategy, the Bank has maintained the level
of adjustable loans in its portfolio at over 90% for over 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 initial 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.
In 1997 and 1996, the Bank through its lending division,
FirstFed Mortgage Services, placed $22.8 million and $19.1
million, respectively in mortgages with other lenders under fee
arrangements, which amount is not included in loan originations.
In 1997, loans made on the security of single family properties
(one to four units) comprised 89% of the dollar amount of new
loan originations; loans made on the security of multi-family
properties comprised 10% of new originations; and loans made on
the security of commercial real estate properties comprised 1%
of new originations. No construction loans and an insignificant
amount of consumer loans were originated in 1997. Adjustable
rate mortgages comprised 85% of new loan activity during 1997
compared to 94% in 1996.
The following table details loan originations by loan type
for the periods indicated:
<TABLE>
<CAPTION>
Loan Originations by Type
Year Ended December 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
-----------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Single Family (one to four units) $430,223 $239,866 $237,508 $734,438 $499,560
Multi-Family 48,033 57,414 55,832 164,788 236,211
Commercial 2,551 5,568 4,881 9,858 9,638
Other 444 - 1,031 230 419
-------- -------- -------- -------- --------
Total $481,251 $302,848 $299,252 $909,314 $745,828
======== ======== ======== ======== ========
</TABLE>
Loans originated upon the sale of the Bank's real estate
owned were $31.6 million or 7% of total originations in 1997.
$1.0 million of these loans were originated based on the
security of single family properties, $29.8 million were
originated based on the security of multi-family properties and
$759 thousand were based on the security of commercial
properties.
From time-to-time, the Bank converts loans into mortgage-
backed securities for use in securitized borrowings (reverse
repurchase agreements) No loans were converted into mortgage-
backed securities during 1997 or 1996. $59.7 million of loans
were converted into mortgage-backed securities in 1995.
Securitized loans have a lower risk weighting for regulatory
risk-based capital purposes. In exchange for the enhanced credit
risk associated with mortgage-backed securities, the Bank pays
guarantee fees to FHLMC and/or FNMA.
37
<PAGE>
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 $13.9 million at December 31, 1997 compared to
$11.0 million at December 31, 1996 and $6.7 million at December
31, 1995.
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. 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 $163.8 million at December 31, 1997
compared to $122.5 million at December 31, 1996 and $132.5
million at December 31, 1995. 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, 1997, approximately 62%
of the loan and mortgage-backed securities portfolio consisted
of first liens on single family properties. First liens on
multi-family properties comprised approximately 32% of the
portfolio, and first liens on commercial properties represented
approximately 5% 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. Approximately 10% of loan
originations in 1997 were multi-family loans compared to 19%
during both 1996 and 1995. Multi-family loans originated upon
the sale of REO were approximately 6%, 16% and 14% of total loan
originations during 1997, 1996 and 1995, respectively.
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
$218.1 million as of December 31, 1997, $230.8 million as of
December 31, 1996 and $247.6 million as of December 31, 1995.
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.
38
<PAGE>
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,
------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
REAL ESTATE LOANS:
First trust deed residential loans:
One unit $1,450,433 $1,279,267 $1,221,927 $1,192,251 $ 862,340
Two to four units 351,175 342,230 351,942 350,718 340,035
Five or more units 1,217,577 1,277,634 1,344,866 1,357,251 1,298,794
---------- ---------- ---------- ---------- ----------
Residential loans 3,019,185 2,899,131 2,918,735 2,900,220 2,501,169
OTHER REAL ESTATE LOANS:
Commercial and industrial 196,575 210,953 221,982 246,340 245,387
Second trust deeds 15,441 17,497 2,213 20,401 24,606
Other 6,303 2,137 3,157 4,793 5,861
---------- ---------- ---------- ---------- ----------
Real estate loans 3,237,504 3,129,718 3,146,087 3,171,754 2,777,023
NON-REAL ESTATE LOANS:
Manufactured housing 1,154 1,480 1,938 2,439 2,763
Deposit accounts 1,644 1,042 1,104 1,301 1,086
Consumer 185 236 359 506 964
---------- ---------- ---------- ---------- ----------
Loans receivable 3,240,487 3,132,476 3,149,488 3,176,000 2,781,836
LESS:
General valuation allowance 61,237 54,900 42,876 55,353 46,900
Valuation allowances -
impaired loans 9,775 12,350 26,101 23,887 -
Unrealized loan fees 24,311 16,757 20,731 24,451 19,273
---------- ---------- ---------- ---------- ----------
Net loans receivable 3,145,164 3,048,469 3,059,780 3,072,309 2,715,663
FHLMC AND FNMA MORT-
GAGE-BACKED SECURITIES:
Secured by single family
dwellings 657,342 715,286 810,980 794,126 678,884
Secured by multi-family
dwellings 18,716 20,189 24,468 27,191 29,399
----------- ---------- ---------- ---------- ----------
Mortgage-backed securities 676,058 735,475 835,448 821,317 708,283
----------- ---------- ---------- ---------- ----------
TOTAL $ 3,821,222 $3,783,944 $3,895,228 $3,893,626 $3,423,946
=========== ========== ========== ========== ==========
</TABLE>
39
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,
------------------------------------------
1997 1996 1995 1994 1993
------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-performing Loans to Loans Receivable(1) .91% 1.89% 2.44% 2.39% 3.28%
Non-performing Assets to Total Assets(2) .96% 1.78% 2.33% 2.23% 3.23%
Loan Loss Allowances to Non-performing
Loans(3) 193.38% 94.27% 65.62% 78.27% 52.23%
General Loss Allowances to Assets
with Loss Exposure(4) 1.86% 1.73% 1.35% 1.73% 1.46%
General Loss Allowances to Total Assets with
Loss Exposure(5) 2.12% 1.86% 1.52% 1.82% 1.48%
</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 b
efore 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>
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. Also shown is the ratio of non-performing
assets to total assets.
<TABLE>
<CAPTION>
Non-Performing Assets
December 31,
----------------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------------------------------------------------------------------------------
$ % $ % $ % $ % $ %
----------------------------------------------------------------------------------
(Dollars In Thousands)
<S>
Real Estate Owned: <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Single Family $5,806 14.48% $6,840 9.25% $7,252 7.50% $5,711 6.17% $10,052 8.50%
Multi-Family 4,034 10.06 7,339 9.93 9,827 10.17 10,647 11.50 16,015 13.55
Commercial 826 2.06 673 .91 2,544 2.63 366 0.39 327 0.28
------ ------ ------ ------ ------ ------ ------ ------ ------- ------
Other 52 13 - - 78 0.08 - - 484 0.41
Total Real Estate
Owned 10,718 26.73 14,852 20.09 19,701 20.38 16,724 18.06 26,878 22.74
------ ------ ------ ------ ------ ------ ------ ------ ------- ------
Non-Performing Loans:
Single Family 16,799 41.90 25,602 34.64 25,991 26.89 13,041 14.08 25,317 21.41
Multi-Family 15,785 39.37 44,754 60.55 69,579 72.00 60,213 65.02 70,207 59.39
Commercial 1,533 3.82 2,223 3.01 3,313 3.43 20,986 22.66 10,307 8.72
Other - - - - 220 0.23 245 0.26 245 0.20
Less Valuation
Allowances (4,738)(11.82) (13,522)(18.29) (22,159)(22.93) (18,596)(20.08) (14,732)(12.46)
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total Non-Performing
Loans 29,379 73.27 59,057 79.91 76,944 79.62 75,889 81.94 91,344 77.26
------- ------ ------- ------ ------- ------ ------- ------ -------- ------
Total $40,097 100.00% $73,909 100.00% $96,645 100.00% $92,613 100.00% $118,222 100.00%
======= ====== ======= ====== ======= ====== ======= ====== ======== ======
Ratio of Non-Performing
Assets To Total Assets: .96% 1.78% 2.33% 2.23% 3.23%
====== ====== ====== ====== ======
</TABLE>
The decrease in non-performing loans in 1997 compared to 1996
is due to reductions in delinquent loans and non-performing
loans of all asset types due to improvement in the Southern
California real estate markets. 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.
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.
Impaired loans totaled $25.7 million, $37.6 million and $86.4
million, net of related allowances of $9.8 million, $12.4
million and $26.1 million as of December 31, 1997, December 31,
1996 and 1995, respectively. See "Business - Risk Elements" for
a further discussion of impaired loans.
41
<PAGE>
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, 1997, the
Bank had modified loans totaling $16.7 million, net of loan loss
allowances. This compares with $19.0 million and $19.3 million
net of allowances as of December 31, 1996 and December 31, 1995,
respectively. Modified loans included in the impaired loan totals
above totaled $8.1 million, $9.7 million and $16.6 million, net,
as of December 31, 1997, 1996 and 1995, respectively. No modified
loans were 90 days or more delinquent as of December 31, 1997 or
December 31, 1995. Modified loans 90 days or more delinquent as
of December 31, 1996 were $472 thousand.
Allowances for Loan Losses
For an analysis of the changes in the loan loss allowances,
see "Business - Risk Elements." At December 31, 1997, the
general valuation allowance was $61.2 million or 1.86% of the
Bank's loans with loss exposure. This compares to 1.73% at the
end of 1996 and 1.35% at the end of 1995. 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 5.97%, 3.64% and
3.65% of loans sold with recourse at December 31, 1997, 1996 and
1995, 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 4% of: (i)the average daily
balance of its net withdrawable accounts and short-term
borrowings during the preceding calendar quarter or (ii)the
ending balance of its net withdrawable accounts as of the end of
the preceding calendar quarter. The 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.
On November 24, 1997, the OTS reduced this liquidity requirement
to 4% from 5%. The OTS also gave institutions the option of
using a quarterly average calculation or an end of quarter
calculation of the liquidity base and removed the requirement of
maintaining a monthly average balance of short-term liquid assets
equal to at least 1% of the average daily balance of its net
withdrawable accounts and short term borrowings. Monetary
penalties may be imposed for failure to meet these liquidity
ratio requirements. The Bank's liquidity ratio for the quarter
ended December 31, 1997 was 5.13%, 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 source used most
often during 1997 was FHLB advances.
42
<PAGE>
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 these deposits, including commission costs, is
compared to other funding sources. Brokered deposits were $378.1
million at December 31, 1997. This compares to $389.4 million at
December 31, 1996 and $502.0 million at December 31, 1995.
Deposits at retail savings offices have remained steady at
approximately $1.5 billion for the last three years. Not
considering interest credited of $62.4 million, the Bank
experienced $52.0 million in deposit outflows from savings
offices during 1997 due to the availability of alternative
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, from depositors outside of the Bank's
normal service areas. Telemarketing deposits decreased by 11% to
$99.8 million at the end of 1997. This compares with $112.6
million at the end of 1996 and $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
often professional money managers. The availability of
telemarketing deposits also varies based on the investors'
perception of the Bank's creditworthiness.
Reverse repurchase agreements are short term borrowings
secured by mortgage-backed securities. These borrowings decreased
11% to $577.7 million at the end of 1997 from $646.5 million at
the end of 1996 and $724.6 million at the end of 1995.
Borrowings under reverse repurchase agreements have decreased
over the last three years due to paydowns of the underlying
collateral. The Bank did not securitize any mortgage loans in
1997 or 1996 for this purpose.
FHLB advances increased to $1.3 billion at the end of 1997
compared to $1.2 billion at the end of 1996 and $890.0 million at
the end of 1995. FHLB advances increased during 1997 and 1996
because these were often the lowest cost source of funds
available to the Bank.
Sales of loans were $52.4 million in 1997. This compares to
$24.1 million during 1996 and $36.5 million during 1995. The
volume of loans sold varies with the amount of saleable loans
originated.
Internal Sources of Funds
Internal sources of funds include scheduled loan principal
payments, loan payoffs, and positive cash flows from operations.
Principal payments were $ 289.1 million in 1997 compared to
$199.3 million in 1996 and $161.6 million in 1995. 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>
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 by management.
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, 1997
---------------------
Amount %
-------- -----
(Dollars In Thousands)
<S> <C> <C>
Core capital requirement $207,929 5.00%
Bank's core capital 261,099 6.28
-------- -----
Excess core capital $ 53,170 1.28%
======== =====
Tier 1 risk-based capital requirement $142,166 6.00%
Bank's tier 1 risk-based capital 261,099 11.02
-------- -----
Excess tier 1 risk-based capital $118,933 5.02%
======== =====
Risk-based capital requirement $236,943 10.00%
Bank's risk-based capital 291,106 12.29
-------- -----
Excess risk-based capital $ 54,163 2.29%
======== =====
</TABLE>
ASSET-LIABILITY MANAGEMENT
The Bank's primary objective in managing interest rate risk
is to minimize the adverse impact of changes in interest rates on
the Bank's net interest income and capital, while, at the same
time, adjusting the Bank's asset-liability mix to the achieve the
most favorable impact on earnings.
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 1997. 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>
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,
1997 the Company's one-year GAP was a positive $172.2 million or
4.14% of total assets. This compares with positive GAP ratios of
5.8% and 8.4% of total assets at December 31, 1996 and December
31, 1995, respectively.
The following chart shows the interest sensitivity of the
Company's assets and liabilities by repricing period at December
31, 1997 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:
Repurchase Agreements $ 115,000 $ 115,000 $ - $ - $ -
Investment Securities 48,910 10,326 38,374 210 -
Mortgage-backed Securities 676,058 666,084 1,602 6,484 1,888
Loans Receivable 3,145,164 3,030,652 32,877 37,730 43,905
----------- ----------- ------------ ---------- ----------
Total Interest-Earning
Assets $ 3,985,132 $ 3,822,062 $ 72,853 $ 44,424 $ 45,793
=========== =========== ============ ========== ==========
Interest-Bearing Liabilities:
Demand Accounts $ 485,906 $ 485,906 $ - $ - $ -
Fixed Rate Term Certificate 1,457,741 646,072 699,108 105,608 6,953
Borrowings:
FHLB Advances 1,310,000 775,000 535,000 - -
Reverse Repurchase
Agreements 577,670 412,764 164,906 - -
Other Borrowings 54,000 4,000 - - 50,000
----------- ----------- ------------- ----------- ----------
Total Interest-Bearing
Liabilities $ 3,885,317 $ 2,323,742 $ 1,399,014 $ 105,608 $ 56,953
=========== =========== ============= =========== ==========
Interest-Sensitivity Gap $ 99,815 $ 1,498,320 $ (1,326,161) $ (61,184) $ (11,160)
=========== =========== ============= =========== ==========
Interest-Sensitivity Gap as a
Percentage of Total Assets 36.02% (31.88)% (1.47)% (0.27)%
===== ===== ==== ====
Cumulative Interest-Sensitivity Gap $1,498,319 $ 172,158 $ 110,974 $ 99,814
========== ============= =========== ==========
Cumulative Interest-Sensitivity
Gap as a Percentage of Total
Assets 36.02% 4.14% 2.66% 2.40%
===== ==== ==== ====
</TABLE>
45
<PAGE>
Another measure of interest rate risk, required to be performed
by OTS-regulated institutions, is an analysis specified by OTS
Thrift Bulletin TB-13, "Interest Rate Risk Exposure: Guidelines
on Director and Officer Responsibilities". Under this
regulation, institutions are required to establish limits on the
sensitivity of their net interest income and net portfolio value
to changes in interest rates. Such changes in interest rates are
defined as instantaneous and sustained movements in interest
rates in 100 basis point increments. Following are the estimated
impact of a parallel shift in interest rates at December 31,
1997, calculated in a manner consistent with the requirements of
Thrift Bulletin No. 13:
<TABLE>
<CAPTION>
Percentage Change in
------------------------------
Change in Interest Rates Net Interest Net Portfolio
(In Basis Points) Income(1) Value(2)
------------------------ ------------ -------------
<S> <C> <C>
+200 (18)% (10)%
+100 (9)% (5)%
--100 9% 3%
--200 17% 4%
</TABLE>
________
(1) The percentage change in this column represents projected
net interest income for 12 months in a stable interest
rate environment versus the net interest income in the various
rate scenarios.
(2) The percentage change in this column represents net
portfolio value of the Bank in a stable interest rate
environment versus the net portfolio value in the various rate
scenarios. The OTS defines net portfolio value as
the present value of expected cash flows from existing assets
minus the present value of expected cash flows from existing
liabilities.
46
<PAGE>
The following table shows the fair value and contract terms of
the Bank's interest-earning assets and interest-bearing
liabilities as of December 31, 1997 categorized by type and
expected maturity for each of the next five years and thereafter:
<TABLE>
<CAPTION>
Expected Maturity Date as of December 31,
---------------------------------------------------------------------------------------------
There- Total Fair
1998 1999 2000 2001 2002 after Balance Value
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Earning Assets
Loans Receivable:
Adjustable Rate Loans:
Single family $181,106 $164,246 $148,808 $134,778 $122,048 $1,012,601 $1,763,587 $1,818,629
Average interest rate 7.73% 7.74% 7.74% 7.74% 7.74% 7.85% 7.80%
Multi-family 83,742 79,561 75,502 71,673 68,062 826,156 1,204,696 1,231,614
Average interest rate 7.53% 7.53% 7.53% 7.53% 7.53% 7.47% 7.49%
Commercial and Industrial 16,018 15,198 13,874 13,010 12,386 131,072 201,558 211,752
Average interest rate 8.01% 8.01% 7.96% 7.95% 7.95% 7.97% 7.97%
Fixed Rate Loans:
Single family 3,447 2,377 2,173 1,941 1,727 16,892 28,557 28,924
Average interest rate 8.38% 7.97% 8.02% 7.99% 7.94% 7.63% 7.82%
Multi-family 931 823 782 744 707 2,982 6,969 7,394
Average interest rate 9.19% 9.22% 9.24% 9.25% 9.26% 9.25% 9.24%
Commercial and Industrial 308 301 284 210 57 72 1,232 1,274
Average interest rate 10.53% 10.56% 10.58% 10.72% 10.42% 10.00% 10.55%
Other loans 557 564 569 577 584 2,920 5,771 5,506
Average interest rate 1.01% 1.08% 1.16% 1.23% 1.33% 7.83% 4.54%
Consumer loans 1,871 228 - - - - 2,099 2,097
Average interest rate 11.69% 18.00% 12.38%
Non-performing loans 29,379 - - - - - 29,379 29,379
Mortgage-backed
Securities:
Adjustable 73,246 66,214 59,737 53,867 48,550 363,980 665,594 665,584
Average interest rate 6.21% 6.21% 6.21% 6.21% 6.21% 6.21% 6.21%
Fixed 5,040 2,268 524 473 428 1,866 10,599 10,474
Average interest rate 6.17% 6.87% 8.50% 8.50% 8.50% 8.48% 7.04%
Repurchase Agreements 115,000 - - - - - 115,000 115,000
Average interest rate 6.44% 6.44%
Investments Securities 21,109 - 200 - 28,142 - 49,451 48,910
Average interest rate 5.31% 5.94% 5.01% 5.14%
Total Interest-Earning
-------- -------- -------- -------- -------- ---------- ---------- ----------
Assets $531,754 $331,780 $302,453 $277,273 $282,691 $2,358,541 $4,084,492 $4,176,537
======== ======== ======== ======== ======== ========== ========== ==========
Interest-Bearing Liabilities
Deposits:
Non-Term Accounts $485,906 $ - $ - $ - $ - $ - $ 485,906 $485,906
Average interest rate 0.60% 0.60%
Certificate Accounts 1,345,178 88,966 10,123 2,251 4,270 6,953 1,457,741 1,458,317
Average interest rate 5.42% 5.84% 5.53% 5.47% 5.77% 5.80% 5.45%
Borrowings:
FHLB Advances 1,310,000 - - - - - 1,310,000 1,310,335
Average interest rate 5.80% 5.80%
Reverse repurchase
agreements 577,670 - - - - - 577,670 578,088
Average interest rate 5.66% 5.66%
Senior Unsecured Notes - - - - - 50,000 50,000 50,000
Average interest rate 11.75% 11.75%
Unsecured Term Funds 4,000 - - - - - 4,000 4,004
Average interest rate 5.80% 5.80%
Total Interest Bearing ---------- -------- -------- -------- -------- ---------- ---------- ----------
Liabilities $3,722,754 $ 88,966 $ 10,123 $ 2,251 $ 4,270 $ 56,953 $3,885,317 $3,886,650
========== ======== ======== ======== ======== ========== ========== ==========
</TABLE>
(1) Expected maturities are
contractual maturities adjusted for prepayments of principal.
The Bank uses certain assumptions to
estimate fair values and expected maturities. For assets,
expected maturities are based upon contractual maturity,
projected repayments and prepayments of principal. The
prepayment experience used is based on the Bank's historical
experience. The Bank's average CPR (Constant Prepayment Rate)
is 9.2% for the single family portfolio and 5.5% for its multi-
family and commercial real estate portfolios. The Bank used
estimated deposit runoff based on available industry
information.
47
<PAGE>
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 1997
or 1995. As of December 31, 1997, 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>
1997 28 21 1/2 31 1/16 22 1/2 34 7/8 30 3/4 39 1/2 35
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
</TABLE>
48
<PAGE>
ITEM 8--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1997 AND 1996
(Dollars In Thousands, Except per Share Data)
1997 1996
----------- ----------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 163,135 $ 162,402
Investment securities, available-for-sale
(at fair value ) (Note 2) 48,910 58,909
Mortgage-backed securities, available-for-sale
(at fair value) (Notes 3 and 10) 676,058 746,006
Loans receivable, held-for-sale (fair value of $40,800
and $6,238) (Note 4) 40,382 6,195
Loans receivable, net (Note 4) 3,104,782 3,042,274
Accrued interest and dividends receivable 26,990 26,910
Real estate (Note 5) 10,257 14,445
Office properties and equipment, net (Note 6) 9,868 8,944
Investment in Federal Home Loan Bank (FHLB)
stock, at cost (Note 7) 68,592 62,400
Other assets (Note 1) 11,141 15,367
---------- ----------
$4,160,115 $4,143,852
========== ==========
LIABILITIES
Deposits (Note 8) $1,943,647 $1,957,448
FHLB advances and other borrowings (Note 9) 1,364,000 1,294,000
Securities sold under agreements to repurchase
(Note 10) 577,670 646,482
Accrued expenses and other liabilities 52,011 51,372
--------- ---------
3,937,328 3,949,302
--------- ---------
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 11,511,138 and
11,453,369 shares, outstanding 10,587,618 and
10,529,849 shares 115 115
Additional paid-in capital 29,628 28,677
Retained earnings-substantially restricted 207,065 183,965
Loan to employee stock ownership plan (1,744) (2,132)
Treasury stock, at cost,
923,520 shares (11,885) (11,885)
Unrealized loss on investment securities
available-for-sale, net of taxes (392) (4,190)
---------- ----------
222,787 194,550
---------- ----------
$4,160,115 $4,143,852
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
49
<PAGE>
<TABLE>
<CAPTION>
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(Dollars In Thousands, Except per Share Data)
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Interest income:
Interest on loans. $ 237,835 $ 229,000 $ 233,648
Interest on mortgage-backed securities 48,652 54,825 54,389
Interest and dividends on investments 12,733 13,353 13,698
---------- ---------- ----------
Total interest income 299,220 297,178 301,735
---------- ---------- ----------
Interest expense:
Interest on deposits (Note 8) 92,678 101,595 109,151
Interest on borrowings (Note 9) 111,548 96,436 114,926
---------- ---------- ----------
Total interest expense 204,226 198,031 224,077
---------- ---------- ----------
Net interest income 94,994 99,147 77,658
Provision for loan losses (Note 4) 20,500 35,155 28,376
---------- ---------- ----------
Net interest income after provision for
loan losses 74,494 63,992 49,282
---------- ---------- ----------
Other income:
Loan servicing and other fees 6,233 6,402 6,126
Gain (loss) on sale of loans 652 253 (1,581)
Real estate operations, net 20 1,246 2,015
Other operating income 3,313 3,014 2,165
---------- ---------- ----------
Total other income 10,218 10,915 8,725
---------- ---------- ----------
Non-interest expense:
Salaries and employee benefits (Note 13) 22,740 21,928 23,045
Occupancy (Note 6) 6,878 6,289 6,258
Advertising 2,795 2,362 1,833
Federal deposit insurance 1,872 5,418 6,400
SAIF special assessment - 15,007 -
Other operating expense 9,866 8,171 8,367
---------- ---------- ----------
Total non-interest expense 44,151 59,175 45,903
---------- ---------- ----------
Earnings before income taxes 40,561 15,732 12,104
Income taxes (Note 11) 17,461 7,488 5,569
---------- ---------- ----------
Net earnings $ 23,100 $ 8,244 $ 6,535
========== ========== ==========
Earnings per share (Notes 12 and 15)
Basic $ 2.19 $ 0.78 $ 0.62
========== ========== ==========
Diluted $ 2.15 $ 0.78 $ 0.61
========== ========== ==========
Weighted average shares outstanding (Notes 12 & 15)
Basic 10,569,772 10,551,765 10,605,693
========== ========== ==========
Diluted 10,747,008 10,636,236 10,656,863
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
50
<PAGE>
<TABLE>
<CAPTION>
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(Dollars In Thousands)
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, 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
Exercise of employee stock options - 892 - - - - 892
Net decrease in loan to employee stock
ownership plan - - - 388 - - 388
Unrealized gain on securities
available-for-sale, net of taxes - - - - - 3,798 3,798
Benefit from stock option tax
adjustment - 59 - - - - 59
Net earnings 1997 - - 23,100 - - - 23,100
---- ------- --------- ------- ------- -------- --------
Balance, December 31, 1997 $115 $29,628 $207,065 $(1,744) $(11,885) $(392) $222,787
==== ======= ========= ======= ======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
51
<PAGE>
<TABLE>
<CAPTION>
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(Dollars In Thousands)
1997 1996 1995
---------- --------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 23,100 $ 8,244 $ 6,535
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Net change in loans held-for-sale (34,187) 1,182 23,022
Depreciation and amortization 1,775 1,722 1,735
Provision for losses on loans 20,500 35,155 28,376
Provision for losses on real estate owned 1,639 745 -
Valuation adjustments on real estate sold 3,795 291 221
Amortization of fees and discounts (1,503) (2,210) (2,749)
Decrease in deferred premium on sale of loans 387 588 865
Negative amortization on loans (2,497) (3,770) (5,044)
Change in deferred taxes 2,919 (102) 4,972
Increase (decrease) in tax interest accrual (7,182) (5,135) 3,524
(Increase) decrease in interest and dividends
receivable (80) 1,710 (4,200)
Increase (decrease) in interest payable 633 (8,685) 2,714
(Increase) decrease in other assets (1,237) (4,049) 1,573
Increase (decrease) in accrued expenses and
other liabilities 3,373 (177) (1,763)
---------- --------- --------
Total adjustments (11,665) 17,265 53,246
---------- --------- --------
Net cash provided by operating activities 11,435 25,509 59,781
---------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans made to customers and principal collections
on loans (121,095) (84,424) (129,393)
Loans purchased - - (115)
Loans repurchased under recourse arrangements (7,899) (14,806) (27,212)
Proceeds from sales of real estate owned 53,263 80,256 61,076
Proceeds from maturities and principal payments
of investment securities available-for-sale 37,912 86,329 20,267
Principal reductions of mortgage-backed
securities available-for-sale 76,923 84,544 53,973
Purchases of investment securities
available-for-sale (28,400) (79,405) (13,095)
Purchases of FHLB stock (2,186) - -
Purchases of treasury stock - (2,053) -
Other (1,288) 2,525 6,324
---------- --------- --------
Net cash provided (used) by investing activities 7,230 72,966 (28,175)
---------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in deposits (13,801) (247,588) (93,878)
Net increase in short term borrowings 51,188 282,539 327,322
Repayment of long term borrowings (50,000) (9,000) (265,200)
Other (5,319) 1,098 1,175
---------- --------- --------
Net cash provided (used) by financing activities (17,932) 27,049 (30,581)
---------- --------- --------
Net increase in cash and cash
equivalents 733 125,524 1,025
Cash and cash equivalents at beginning of year 162,402 36,878 35,853
---------- --------- --------
Cash and cash equivalents at end of year $ 163,135 $ 162,402 $ 36,878
========== ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
52
<PAGE>
(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
24 full-service savings branches 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 1996 consolidated
financial statements have been reclassified to conform to the
1997 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 his or her loan agreement,
53
<PAGE>
(1) Summary of Significant Accounting Policies (continued)
the Bank is subject to the market risk of the collateral securing
the loan. Likewise, the Bank is subject to 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 risk 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 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.
The Bank classifies its investment in securities as "held-to-
maturity" securities, "trading" securities and "available-for-
sale" securities as applicable.
The Bank classifies all of its investments and mortgage-
backed securities as "available-for-sale" based upon a
determination that such securities may be sold at a future date
or that there may be foreseeable circumstances under which the
Bank would sell such securities.
54
<PAGE>
(1) Summary of Significant Accounting Policies (continued)
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.
The Bank did not hold any trading securities at December 31,
1997 or 1996.
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). 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. These loans 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.
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 to
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.
55
<PAGE>
(1) Summary of Significant Accounting Policies (continued)
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's management believes,
based on economic and market conditions, that the general
allowance for loan losses is adequate as of December 31, 1997
and 1996. 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.
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. Under Statement of Financial Accounting Standards No. 125,
servicing assets or liabilities and other retained interests are
required to be recorded as an allocation of the carrying amount
of the loans sold based on the estimated relative fair values of
the loans sold and any retained interests, less liabilities
incurred. Servicing assets are evaluated for impairment based on
the asset's fair value. The Bank estimates fair values by
discounting servicing assets cash flows using discount and
prepayment rates that it believes market participants would use.
The Bank had no such activity in 1997.
Servicing assets arising from the sale of loans are included
in other assets and were $4,744,000 and $5,131,000 at December
31, 1997 and 1996, respectively. No additional servicing assets
were recorded in 1997, 1996 and 1995.
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.
56
<PAGE>
(1) Summary of Significant Accounting Policies (continued)
Depreciation and Amortization
Depreciation of office 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.
Earnings Per Share
Effective December 31, 1997 the Company adopted Statement of
Financial Accounting Standard No. 128, Earnings Per Share ("SFAS
No. 128"). Under SFAS No. 128, the Company is required to report
both basic and diluted net earnings per share. Basic net earnings
per share is determined by dividing net earnings by the average
number of shares of common stock outstanding, while diluted net
earnings per share is determined by dividing net earnings by the
average number of shares of common stock outstanding adjusted for
the dilutive effect of common stock equivalents. Net earnings per
share for 1996 and 1995 have been restated to conform with the
provisions of the pronouncement.
(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 $115,000,000
and $128,000,000 in agreements to resell securities at December
31, 1997 and 1996, respectively which are classified as cash and
cash equivalents in the accompanying Statements of Financial
Condition. Securities purchased under agreements to resell
averaged $91,195,000 and $68,622,000 during 1997 and 1996, and
the maximum amounts outstanding at any month end during 1997 and
1996 were $154,000,000 and $141,000,000, respectively.
57
<PAGE>
(2) Investment Securities (continued)
Investment securities, available-for-sale, are recorded at
fair value and summarized below for the periods indicated:
<TABLE>
<CAPTION>
1997
--------------------------------------------------------
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 $ 48,442 $ 1 $ (527) $ 47,916
Collateralized
Mortgage Obligations 1,009 - ( 15) 994
---------- ------- --------- --------
$ 49,451 $ 1 $ (542) $ 48,910
========== ======= ========= ========
</TABLE>
<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 8,776 3 (125) 8,654
---------- ---------- ---------- --------
$ 59,066 $ 97 $ (254) $ 58,909
========== ========== ========== ========
</TABLE>
Related maturity data for investment securities, available-
for-sale, is summarized below for the period indicated:
<TABLE>
<CAPTION>
1997
---------------------------------------------------------
Gross Gross
Historical Unrealized Unrealized Fair
Value Gains Losses Value
---------------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
Maturing within 1 year $ 21,109 $ - $ (36) $21,073
Maturing after 1 year
but within 5 years 28,342 1 (506) 27,837
---------- ---------- --------- -------
$ 49,451 $ 1 $ (542) $48,910
========== ========== ========= =======
</TABLE>
There were no sales of investment securities during 1997,
1996 or 1995.
Accrued interest on investments was $940,000 and $853,000 at
December 31, 1997 and 1996, respectively.
58
<PAGE>
(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>
1997
----------------------------------------------------------
Gross Gross
Historical Unrealized Unrealized Fair
Value Gains Losses Value
-----------------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
FNMA $ 20,934 $ 71 $ (101) $ 20,904
FHLMC 655,259 11 (116) 655,154
---------- ---------- ---------- --------
Total $ 676,193 $ 82 $ (217) $676,058
========== ========== ========== ========
</TABLE>
<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 730,321 90 (7,236) 723,175
---------- --------- ---------- --------
Total $ 753,116 $ 183 $ (7,293) $746,006
========== ========= ========== ========
</TABLE>
There were no mortgage-backed securities created with loans
originated by the Bank in 1997 or 1996. During 1995,
mortgage-backed securities created with loans originated by the
Bank totaled $59,720,000. There were no sales during 1997, 1996
or 1995.
Accrued interest receivable related to mortgage-backed
securities outstanding at December 31, 1997 and 1996 totaled
$6,737,000 and $7,042,000, respectively.
59
<PAGE>
(4) Loans Receivable
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ---------
(Dollars In Thousands)
<S> <C> <C>
Real estate loans:
First trust deed residential loans:
One unit $1,450,433 $1,279,267
Two to four units 351,175 342,230
Five or more units 1,217,577 1,277,634
---------- ---------
Residential loans 3,019,185 2,899,131
Other real estate loans:
Commercial and industrial 196,575 210,953
Second trust deeds 15,441 17,497
Other 6,303 2,137
---------- ---------
Real estate loans 3,237,504 3,129,718
Non-real estate loans:
Manufactured housing 1,154 1,480
Deposit accounts 1,644 1,042
Consumer 185 236
---------- ---------
Loans receivable 3,240,487 3,132,476
Less:
General loan valuation allowance 61,237 54,900
Valuation allowances for impaired loans 9,775 12,350
Unearned loan fees 24,311 16,757
---------- ---------
Subtotal 3,145,164 3,048,469
---------- ---------
Less:
Loans held-for-sale 40,382 6,195
---------- ----------
Loans receivable, net $3,104,782 $3,042,274
========== ==========
</TABLE>
Loans serviced for others totaled $519,353,000, $572,275,000
and $622,969,000 at December 31, 1997, 1996 and 1995,
respectively.
The Bank has loss exposure on certain loans sold with
recourse. The dollar amount of loans sold with recourse totaled
$218,149,000 and $230,836,000 at December 31, 1997 and 1996,
respectively. The maximum potential recourse liability totaled
$39,926,000 and $42,398,000 at December 31, 1997 and December 31,
1996, respectively. The Bank's allowance for losses related to
loans sold with recourse, which is recorded as a liability,
totaled $13,029,000 and $8,398,000 at December 31, 1997 and 1996,
respectively.
The Bank had outstanding commitments to fund $49,986,000 in
real estate loans at December 31, 1997, 60% of which were
adjustable rate mortgages with the balance in fixed rate
mortgages. The Bank had outstanding commitments to sell real
estate loans of $36,774,000 at December 31, 1997.
60
<PAGE>
4) Loans Receivable (continued)
Accrued interest receivable related to loans outstanding at
December 31, 1997 and 1996 totaled $20,119,000 and $22,174,000,
respectively.
Loans delinquent greater than 90 days or in foreclosure were
$34,117,000 and $72,579,000 at December 31, 1997 and 1996,
respectively, and the related allowances for delinquent interest
were $1,819,000 and $4,167,000, respectively.
Loans originated upon the sale of real estate totaled
$31,649,000, $54,227,000, and $49,303,000 during 1997, 1996 and
1995, 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, 1994 $ 55,353 $ 23,887 $ 79,240
Provision 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
Provision 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
Provision for loan losses 13,155 7,345 20,500
Charge-offs (9,419) (10,064) (19,483)
Recoveries 6,835 144 6,979
Transfer of general valuation allowance for loans
to recourse general valuation allowance (4,234) - (4,234)
-------- -------- --------
Balance at December 31, 1997 $ 61,237 $ 9,775 $ 71,012
======== ======== ========
</TABLE>
61
<PAGE>
(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, 1994 $ 7,948
Provision for losses 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
Transfer from general valuation allowance 4,234
Charge-offs, net of recoveries 397
--------
Balance at December 31, 1997 $ 13,029
========
</TABLE>
The following is a summary of impaired loans, net of
valuation allowances for impairment, for the periods indicated:
<TABLE>
<CAPTION>
1997 1996
----------------------------
(Dollars In Thousands)
<S> <C> <C>
Non-accrual loans $ 8,260 $ 20,052
Modified loans 4,186 5,996
Other impaired loans 13,239 11,586
---------- ---------
$ 25,685 $ 37,634
========== =========
</TABLE>
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,
1997, the total recorded amount of loans for which impairment had
been recognized in accordance with SFAS No. 114 was $25,685,000
(after deducting $9,775,000 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
$2,540,000 and $4,139,000 as of December 31, 1997 and 1996,
respectively.
62
<PAGE>
(4) Loans Receivable (continued)
The average recorded investment in impaired loans during the
years ended December 31, 1997, 1996 and 1995 was $24,459,000,
$52,725,000 and $91,818,000 respectively. The amount of interest
income recognized for impaired loans during the years ended
December 31, 1997, 1996 and 1995 was $1,913,000 ,$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, 1997, 1996
and 1995 totaled $1,900,000, $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>
1997 1996
-------- --------
(Dollars In Thousands)
<S> <C> <C>
Real estate acquired by
(or deed in lieu of) foreclosure ("REO") $ 10,718 $ 14,852
Real estate general valuation
allowance (500) (521)
-------- --------
10,218 14,331
Real estate held-for-investment 39 114
-------- --------
Real estate, net $ 10,257 $ 14,445
======== ========
</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 periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
<S> <C>
Balance, December 31, 1995 $ -
Provision for losses on REO 745
Net transfers from loan general valuation allowance 700
Charge-offs (924)
Balance, December 31, 1996 521
Provision for losses on REO 1,639
Charge-offs (1,660)
Balance at December 31, 1997 $ 500
</TABLE>
The Bank acquired $49,150,000, $74,886,000 and $64,053,000
of real estate in settlement of loans during 1997, 1996 and 1995,
respectively.
63
(6) Office Properties, Equipment and Lease Commitments
Office properties and equipment, at cost, less accumulated
depreciation and amortization, are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
--------------------------
(Dollars In Thousands)
<S> <C> <C>
Land $ 3,061 $ 3,061
Office buildings 4,519 4,508
Furniture, fixtures and equipment 12,507 10,988
Leasehold improvements 8,720 8,639
Other 44 44
-------- --------
28,851 27,240
Less accumulated depreciation and amortization 18,983 18,296
-------- --------
$ 9,868 $ 8,944
======== ========
</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, 1997
under all noncancelable leases are as follows (dollars in
thousands):
<TABLE>
<CAPTION>
<S> <C>
1998 $ 3,610
1999 3,690
2000 3,604
2001 3,434
2002 3,421
Thereafter 20,178
--------
$ 37,937
========
</TABLE>
Rent payments under these leases were $4,325,000, $4,270,000
and $4,250,000 for 1997, 1996 and 1995, 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, 1997 and
1996 was $68,592,000 and $62,400,000, 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, 1997. The Bank's investment in
FHLB stock was pledged as collateral for advances from the FHLB
at December 31, 1997 and 1996. 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.
64
<PAGE>
(8) Deposits
Deposit account balances are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
----------------- ------------------
Amount % Amount %
----------------- ------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
Variable rate non-term accounts:
Money market deposit accounts (weighted
average rate of 3.36% and 2.82%) $ 156,221 8% $ 130,173 7%
Interest-bearing checking accounts
(weighted average rate of 1.78% and
1.01%) 130,765 7 165,616 8
Passbook accounts (weighted average
rate of 2.04% and 2.04%) 86,547 4 94,718 5
Non-interest bearing checking accounts 112,373 6 40,404 2
---------- --- ---------- ---
485,906 25 430,911 22
Fixed-rate term certificate accounts: ---------- --- ---------- ---
Under six-month term (weighted average
rate of 5.07% and 5.11%) 120,637 6 160,430 8
Six-month term (weighted average rate of
6.00% and 5.69%) 103,901 5 204,048 10
Nine-month term (weighted average rate of
5.64% and 5.45%) 374,259 19 246,777 13
One year to 18 month term (weighted
average rate of 5.53% and 5.32%) 348,941 18 304,532 16
Two year or 30 month term (weighted
average rate of 5.23% and 5.32%) 30,689 2 40,498 2
Over 30-month term (weighted average rate
of 5.85% and 6.27%) 125,971 7 202,724 10
Negotiable certificates of $100,000 and
greater, 30 day to one year terms (weighted
average rate of 5.50% and 5.39%) 353,343 18 367,528 19
---------- --- ----------- ---
1,457,741 75 1,526,537 78
---------- --- ----------- ---
Total Deposits (weighted average rate of
4.66 and 4.67%) $1,943,647 100% $ 1,957,448 100%
========== === =========== ====
</TABLE>
65
<PAGE>
(8) Deposits (continued)
Certificates of deposit, placed through five major national
brokerage firms totaled $378,051,000 and $389,436,000 at
December 31, 1997 and 1996, respectively.
Cash payments for interest on deposits (including interest
credited) totaled $92,152,000, $104,269,000 and $110,357,000
during 1997, 1996 and 1995, respectively. Accrued interest on
deposits at December 31, 1997 and 1996 totaled $7,550,000 and
$7,024,000, 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,
1997:
<TABLE>
<CAPTION>
Non-Term There-
Accounts 1998 1999 2000 2001 After Total
--------------------------------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Deposits at
December 31, 1996 $485,906 $1,345,178 $88,967 $10,123 $2,251 $11,222 $1,943,647
======== ========== ======= ======= ====== ======= ==========
Weighted average
interest rates 1.93% 5.42% 5.84% 5.53% 5.47% 5.79% 4.66%
==== ==== ==== ==== ==== ==== ====
</TABLE>
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(Dollars In Thousands)
<S> <C> <C> <C>
Passbook accounts $ 1,750 $ 1,933 $ 2,289
Money market deposits and
interest-bearing checking accounts 5,705 4,869 6,272
Certificate accounts 85,223 94,793 100,590
-------- -------- --------
$ 92,678 $101,595 $109,151
======== ======== ========
</TABLE>
66
<PAGE>
(9) Federal Home Loan Bank Advances and Other Borrowings
Federal Home Loan Bank (FHLB) advances and other borrowings
consist of the following:
<TABLE>
<CONTENT>
1997 1996
---------- ----------
(Dollars In Thousands)
<S> <C> <C>
Advances from the FHLB of San Francisco with a
weighted average interest rate of 5.80% and 5.71%,
respectively, secured by FHLB stock and certain
real estate loans with unpaid principal balances of
approximately $2.2 billion at December 31, 1997,
advances mature through 1998 $1,310,000 $1,242,000
Unsecured term funds with a weighted average interest
rate of 5.85% and 5.49%, maturing within one year 4,000 2,000
10 Year Senior Unsecured Notes with an interest
rate of 11.75%, due 2004 50,000 50,000
---------- ----------
$1,364,000 $1,294,000
========== ==========
</TABLE>
At December 31, 1997 and 1996, accrued interest payable on
FHLB advances and other borrowings totaled $1,690,000 and
$2,653,000, 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 $1,664,000,000 at December 31, 1997
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.
67
<PAGE>
(9) Federal Home Loan Bank Advances and Other Borrowings
(continued)
The following is a summary of borrowing maturities at
December 31, 1997 (dollars in thousands):
<TABLE>
<CAPTION>
<S> <C>
1998 $1,314,000
2004 50,000
----------
$1,364,000
==========
</TABLE>
Cash payments for interest on borrowings (including
reverse repurchase agreements) totaled $110,991,000,
$107,559,000 and $102,611,000 during 1997, 1996 and 1995,
respectively.
Interest expense on borrowings is comprised of the
following for the years indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1997 1996 1995
--------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C>
FHLB Advances $ 70,004 $ 57,427 $ 61,591
Reverse Repurchase Agreements 34,335 37,345 43,295
10 Year Senior Unsecured Notes 5,875 5,875 5,875
Other 1,334 (4,211) 4,165
-------- ------- --------
$ 111,548 $ 96,436 $114,926
========= ======== ========
</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, 1997, $577,670,000 in reverse repurchase
agreements were collateralized by mortgage-backed securities
with principal balances totaling $603,544,000 and fair values
totaling $603,598,000. 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.
The weighted average interest rates for borrowings under
reverse repurchase agreements were 5.66% and 5.42%,
respectively, as of December 31, 1997 and December 31, 1996.
Securities sold under agreements to repurchase averaged
$607,479,000 and $678,420,000 during 1997 and 1996,
respectively, and the maximum amounts outstanding at any month-
end during 1997 and 1996 were $634,976,000 and $715,465,000,
respectively.
68
<PAGE>
(10) Securities Sold Under Agreements to Repurchase (continued)
The following is a summary of maturities at December 31,
1997 (dollars in thousands):
<TABLE>
<CAPTION>
<S> <C>
Up to 30 days $ 118,651
30 to 90 days 294,113
Over 90 to 182 days 164,906
----------
$ 577,670
==========
</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 $7,353,000 and $6,283,000 at December
31, 1997 and 1996, respectively.
(11) Income Taxes
Income taxes (benefit) consist of the following:
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------------
(Dollars In Thousands)
<S> <C> <C> <C>
Current:
Federal $ 14,311 $ 6,999 $ 42
State 231 591 555
--------- -------- --------
14,542 597 597
--------- -------- --------
Deferred:
Federal (1,502) (1,560) 3,898
State 4,421 1,458 1,074
--------- -------- --------
2,919 (102) 4,972
--------- -------- --------
Total:
Federal 12,809 5,439 3,940
State 4,652 2,049 1,629
--------- -------- --------
$ 17,461 $ 7,488 $ 5,569
========= ======== ========
</TABLE>
A reconciliation of the statutory federal corporate income
tax rate to the Company's effective income tax rate follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------------
<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 7.4 8.5 8.8
Core deposit intangibles 0.1 0.5 0.8
Provision for additional taxes due to audits - 3.3 -
Other, net 0.5 0.3 1.4
----- ----- -----
Effective rate 43.0% 47.6% 46.0%
===== ===== =====
</TABLE>
69
<PAGE>
(11) Income Taxes (continued)
Cash payments for income taxes totaled $21,310,000,
$6,754,000 and $154,000 during 1997, 1996 and 1995,
respectively. In addition, the Company received cash refunds
totaling $1,158,000, $1,000,000 and $8,267,000 during 1997,
1996 and 1995, respectively.
Current income taxes receivable at December 31, 1997 and
1996 were $507,000 and $1,113,000, respectively.
Listed below are the significant components of the net
deferred tax (asset) and liability:
<TABLE>
<CAPTION>
1997 1996
-------- --------
(Dollars In Thousands)
<S> <C> <C>
Components of the deferred tax asset:
Bad debts $(29,952) $(28,146)
Pension expense. (2,281) (1,970)
State taxes (1,276) (99)
IRS interest accrual (633) (3,965)
Tax effect of unrealized loss on
securities available-for-sale (284) (3,077)
Other (1,427) (1,337)
-------- --------
Total deferred tax asset (35,853) (38,594)
Valuation allowance - -
-------- --------
Total deferred tax asset, net of valuation allowance (35,853) (38,594)
-------- --------
Components of the deferred tax liability:
Loan fees 19,526 20,194
Loan sales 2,083 2,351
FHLB stock dividends 12,386 10,654
Other 3,712 1,905
-------- --------
Total deferred tax liability 37,707 35,104
-------- --------
Net deferred tax liability (asset) $ 1,854 $ (3,490)
======== ========
Net state deferred tax liability (asset) $ 2,256 $ (1,446)
Net federal deferred tax asset ( 402) (2,044)
-------- --------
Net deferred tax liability (asset) $ 1,854 $ (3,490)
======== ========
</TABLE>
The Company provides for recognition and measurement of
deductible temporary differences 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, 1997 and 1996, 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.
70
<PAGE>
(11) Income Taxes (continued)
During 1997, the Internal Revenue Service ("IRS")
completed its examination of the Company's consolidated federal
income tax returns for tax years up to and including 1992. The
adjustments proposed by the IRS were 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. As a result, the
Company paid $7,392,000 in interest to the IRS and FTB and
accrued an additional $210,000 in interest during 1997. In
1996, the Company recorded a $5,135,000 net reversal of accrued
tax interest. A charge of $3,524,000 was recorded in the
Consolidated Statements of Operations for 1995 as interest on
possible IRS adjustments. The total amount of accrued interest
payable for amended returns, yet to be filed, recorded as a
liability in the Consolidated Statements of Financial
Condition, was $1,381,000 as of December 31, 1997.
The Bank computes its bad debt deduction based upon actual
loan loss experience (the "experience method"). In August 1996,
the Small Business Job Protection Act (the "Act") was signed
into law. One provision of the Act repealed the reserve method
of accounting for bad debts for savings institutions effective
for taxable years beginning after 1995. The Bank, therefore,
is required to use the specific charge-off method beginning in
1996. The Consolidated Statements of Financial Condition at
December 31, 1997 and 1996 did not include a liability of
$5,356,000 and $5,342,000, respectively, related to the
adjusted base year bad debt reserve.
(12) Stockholders' Equity and Earnings Per Share
The Company's stock charter authorizes 5,000,000 shares
of serial preferred stock. As of December 31, 1997 no preferred
shares had been issued.
In 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("SFAS No.
128"), which requires the disclosure of two new earnings per
share calculations, "basic earnings per share" and, if
applicable, "diluted earnings per share." Earnings per share
for comparative years have been restated for SFAS No. 128.
Basic earnings per share is based on the weighted average
shares of common stock while diluted earnings per share gives
effect to all dilutive potential common shares that were
outstanding during part or all of the year.
71
<PAGE>
(12) Stockholders' Equity and Earnings Per Share (continued)
A reconciliation of basic earnings per share with diluted
earnings per share follows:
<TABLE>
<CAPTION>
For the Year Ended December 31.
--------------------------------------
1997
--------------------------------------
Net Earnings Shares Per-Share
<S> <C> <C> <C>
Basic EPS
Income available to common stockholders $23,100,000 10,569,772 $2.19
====
Effect of Dilutive Stock Options
Outstanding stock options - 169,594
Exercised and forfeited - 7,642
----------- ----------
Diluted EPS
Income applicable to common stockholders
and assumed conversion $23,100,000 10,747,008 $2.15
=========== ========== =====
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended December 31.
--------------------------------------
1996
--------------------------------------
Net Earnings Shares Per-Share
<S> <C> <C> <C>
Basic EPS
Income available to common stockholders $ 8,244,000 10,551,765 $0.78
====
Effect of Dilutive Stock Options
Outstanding stock options - 77,219
Exercised and forfeited - 7,252
----------- ----------
Diluted EPS
Income applicable to common stockholders
and assumed conversion $ 8,244,000 10,636,236 $0.78
=========== ========== =====
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended December 31
--------------------------------------
1995
--------------------------------------
Net Earnings Shares Per-Share
<S> <C> <C> <C>
Basic EPS
Income available to common stockholders $ 6,535,000 10,605,693 $0.62
=====
Effect of Dilutive Stock Options
Outstanding stock options - 46,979
Exercised and forfeited - 4,191
----------- ----------
Diluted EPS
Income applicable to common stockholders
and assumed conversion $ 6,535,000 10,656,863 $0.61
=========== ========== =====
</TABLE>
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). Management believes, as of December 31, 1997, that the
Bank meets all capital adequacy requirements to which it is
subject.
72
<PAGE>
12) Stockholders' Equity and Earnings Per Share (continued)
As of December 31, 1997, 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, 1997 that management
believes have changed the Bank's category.
The following table summarizes the Bank's regulatory capital and
required capital for the years indicated (dollars in thousands):
<TABLE>
<CAPTION>
December 31, 1997
-------------------------------------------------------
Tier 1
Tangible Core Risk-based Risk-based
Capital Capital Capital Capital
-------------------------------------------------------
<S> <C> <C> <C> <C>
Actual Capital:
Amount $261,099 $261,099 $261,099 $291,106
Ratio 6.28% 6.28% 11.02% 12.29%
FIRREA minimum required capital:
Amount $ 62,379 $124,757 - $189,555
Ratio 1.50% 3.00% - 8.00%
FIDICIA well capitalized required capital:
Amount - $207,929 $142,166 $236,943
Ratio - 5.00% 6.00% 10.00%
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
-------------------------------------------------------
Tier 1
Tangible Core Risk-based Risk-based
Capital Capital Capital Capital
-------------------------------------------------------
<S> <C> <C> <C> <C>
Actual Capital:
Amount $239,273 $239,273 $273,323 $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>
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 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.
73
<PAGE>
12) Stockholders' Equity and Earnings Per Share (continued)
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, 1997 and 1996, the loan to the ESOP totaled
$1,744,000 and $2,132,000, 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 1997 and 1996 were 5.18% and 5.16%,
respectively.
The Company has 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.
(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 during 1997. The Pension Plan's assets
exceeded its liabilities by $106,000, which reverted back to
the Bank and are included in the Company's 1997 Consolidated
Statement of Operations.
74
<PAGE>
(13) Employee Benefit Plans (continued)
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. The 401(k) Plan expense was $392,000 for 1997.
The Bank has a Supplementary Executive Retirement Plan
("SERP") which covers any individual employed by the Bank as
its Chief Executive Officer or Chief Operating Officer. The
pension expense for the SERP was $628,000, $506,000 and
$408,000 in 1997, 1996 and 1995, respectively. The SERP is
unfunded.
The discount rate and rate of increase in future
compensation levels used in determining the actuarial value of
benefit obligations were 7.0% and 5.0%, respectively, as of
December 31, 1997. The discount rate and rate of increase in
future compensation levels used in determining the pension cost
were 7.5% and 5.0%, respectively, as of December 31, 1996. The
plan had no assets at December 31, 1997.
The following table sets forth the funded status and
amounts recognized in the Company's Statements of Financial
Condition for the SERP for the years indicated:
<TABLE>
<CAPTION>
1997 1996
----------------------
(Dollars In Thousands)
<S> <C> <C>
Actuarial present value of benefits obligations:
Accumulated benefits obligation $ 3,694 $ 3,318
======== ========
Vested benefit obligation $ 2,910 $ 2,858
======== ========
Projected benefit obligation for service
rendered to date 5,052 4,157
-------- --------
Shortage of plan assets over the projected
benefit obligation (5,052) (4,157)
Unrecognized net loss (gain) from past ex-
perience different from that assumed 797 84
Prior service cost not yet recognized in
net periodic SERP cost 461 558
Additional minimum liability (150) (116)
Unrecognized net (asset) obligation at transition. 250 313
-------- --------
Accrued SERP liability $ (3,694) $ (3,318)
======== ========
Net SERP cost for the year ended December
31, 1997 and 1996 included the following
components:
Service cost-benefits earned during the period. $ 152 $ 87
Interest cost on projected benefit obligation 316 259
Net amortization 160 160
-------- --------
Net period SERP cost $ 628 $ 506
======== ========
</TABLE>
75
<PAGE>
(13) Employee Benefit Plans (continued)
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, 1997, the ESOP held 4.89%
of outstanding stock of the Company. Profit sharing expense for
the years ended December 31, 1997, 1996 and 1995 was $501,000,
$500,000 and $500,000, 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, 1997, 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.
Stock Option Programs
The Company has an employee 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 begin to vest on the second
anniversary date of the grant under both plans.
The Company also has a stock option plan for outside
directors, the 1997 Nonemployee Directors Stock Incentive Plan
(the "Directors Stock Plan"). The Directors Stock Plan provides
for the issuance of up to 200,000 shares of common stock to
nonemployee directors of the Company. 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 plus one
month. Options typically vest on the one year anniversary date
of the grant.
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
1997, 1996 and 1995, respectively: no dividend yield in any
year; expected volatility of 35, 36 and 35 percent; risk free
interest rates of 6.5, 5.8 and 6.3 percent; and expected average
lives of 6, 10 and 10 years. The weighted-average grant date
fair value of options granted during the year are $10.29, $8.50
and $9.61 for 1997, 1996 and 1995, respectively. The Company has
elected to recognize forfeitures in the year they occur.
Had compensation cost for the Company's stock-option
programs 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
76
<PAGE>
(13) Employee Benefit Plans (continued)
Company's net income and earnings per share would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------------------------
(Dollars in thousands except per share amounts)
<S> <C> <C> <C>
Net earnings:
As reported $23,100 $8,244 $6,535
Pro forma $22,910 $8,143 $6,491
Earnings per share:
Basic
As reported $2.19 $.78 $.62
Pro forma $2.16 $.77 $.61
Diluted
As reported $2.15 $.78 $.61
Pro forma $2.12 $.76 $.61
</TABLE>
Pro forma net earnings and earnings per share reflect only
options granted in 1997, 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 and compensation
cost for options granted prior to January 1, 1995 is not
considered.
Information with respect to stock options follows:
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------------
(In Shares)
<S> <C> <C> <C>
Options Outstanding
(Average option prices)
Beginning of year ($13.66, $14.04 and $13.74) 319,531 347,422 347,319
Granted ($21.75, $14.28 and $15.63) 113,350 34,133 40,789
Exercised ($15.44, $10.67 and $9.79) (57,769) (42,447) (15,430)
Canceled ($18.02 $16.17 and $14.99) (21,155) (16,230) (25,256)
Re-issued grants ($12.88) - 30,128 -
Cancellation of grants re-issued ($20.16) - (33,475) -
------- ------- -------
End of Year ($15.70, $13.66 and $14.04) 353,957 319,531 347,422
======= ======= =======
Shares exercisable at December 31
($11.77, $12.70 and $12.18) 113,600 160,457 164,252
======= ======= =======
</TABLE>
77
<PAGE>
(13) Employee Benefit Plans (continued)
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, 1997, 438,725
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 issued
under this program in 1997 and 1996 and 792 shares were granted
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,
----------------------
1997 1996
----------------------
(Dollars In Thousands)
<S> <C> <C>
Assets:
Cash $ 10,600 $ 6,570
Other assets 1,567 1,834
Investment in subsidiary 262,572 237,786
-------- --------
$274,739 $246,190
======== ========
Liabilities and Stockholders' Equity:
Notes payable $ 50,000 $ 50,000
Other liabilities 1,952 1,640
Stockholders' equity 222,787 194,550
-------- --------
$274,739 $246,190
======== ========
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
CONDENSED STATEMENTS OF OPERATIONS 1997 1996 1995
--------------------------------
(Dollars In Thousands)
<S> <C> <C> <C>
Dividends received from Bank $ 5,875 $5,875 $5,875
Equity in undistributed net
earnings of subsidiary 20,987 6,029 4,374
Other expense, net (3,762) (3,660) (3,714)
------- ------ ------
Net earnings $23,100 $8,244 $6,535
======= ====== ======
</TABLE>
78
<PAGE>
(14) Parent Company Financial Information (continued)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
CONDENSED STATEMENTS OF CASH FLOWS
1997 1996 1995
--------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C>
Net Cash Flows from Operating Activities:
Net earnings $ 23,100 $ 8,244 $ 6,535
Adjustments to reconcile net earnings to
net cash provided (used) by operating
activities:
Equity in undistributed net earnings of subsidiary (20,987) (6,029) (4,374)
Other 577 2,838 (1,521)
---------- --------- ----------
Net cash provided (used) by operating activities 2,690 5,053 (640)
---------- --------- ----------
Cash Flows from Investing Activities:
Decrease in ESOP loan 388 368 342
Purchase of treasury stock - (2,053) -
---------- --------- ----------
Net cash (used) provided by investing
activities 388 (1,685) 342
---------- --------- ----------
Cash Flows from Financing Activities:
Benefit from stock option tax adjustment 59 - -
Other 893 465 102
---------- --------- ----------
Net cash provided by financing activities 952 465 102
---------- --------- ----------
Net increase in cash 4,030 3,833 1,084
Cash at beginning of period 6,570 2,737 1,653
---------- --------- ----------
Cash at end of period $ 10,600 $ 6,570 $ 2,737
========== ========= ==========
</TABLE>
79
<PAGE>
(15) Quarterly Results of Operations: (unaudited)
Summarized below are the Company's results of operations on
a quarterly basis for 1997, 1996 and 1995:
<TABLE>
<CAPTION>
Basic Diluted
Provision Non- Net Earnings Earnings
Interest Interest For Loan Other Interest Earnings (Loss) (Loss)
Income Expense Looses Income Expense (Loss) Per Share Per Share
--------------------------------------------------------------------------------------
(Dollars In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
First quarter
1997 $ 73,685 $ 49,653 $ 6,000 $ 2,902 $ 11,911 $ 5,168 $ 0.49 $ 0.48
1996 76,097 52,952 9,000 3,273 11,466 3,368 0.32 0.32
1995 69,726 53,505 3,000 2,762 11,677 2,357 0.22 0.22
Second quarter
1997 $ 73,946 $ 50,917 $ 5,500 $ 2,890 $ 10,996 $ 5,348 $ 0.51 $ 0.50
1996 73,753 50,278 9,000 2,823 11,287 3,400 0.32 0.32
1995 76,342 57,739 8,203 3,251 11,205 1,346 0.13 0.13
Third quarter
1997 $ 75,551 $ 51,862 $ 5,000 $ 2,564 $ 10,784 $ 5,971 $ 0.56 $ 0.55
1996 73,540 50,280 8,700 2,143 25,561 (5,169) (0.49) (0.49)
1995 78,548 57,183 6,173 (255) 11,342 1,984 0.19 0.19
Fourth quarter
1997 $ 76,038 $ 51,794 $ 4,000 $ 1,862 $ 10,460 $ 6,613 $ 0.62 $ 0.61
1996 73,788 44,521 8,455 2,676 10,861 6,645 0.63 0.62
1995 77,119 55,650 11,000 2,967 11,679 848 0.08 0.08
Total year
1997 $299,220 $204,226 $20,500 $10,218 $ 44,151 $ 23,100 $ 2.19 $ 2.15
1996 297,178 198,031 35,155 10,915 59,175 8,244 0.78 0.78
1995 301,735 224,077 28,376 8,725 45,903 6,535 0.62 0.61
</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, 1997 and
1996. 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.
80
<PAGE>
(16) Fair Value of Financial Instruments (continued)
<TABLE>
<CAPTION>
1997 1996
----------------------- -------------------------
Historical Historical
Value Fair Value Value Fair Value
----------------------- -------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
Mortgage-backed Securities $676,193 $676,058 $753,116 $746,006
US Government Securities 48,442 47,916 50,290 50,255
Collateralized Mortgage Obligations 1,009 994 8,776 8,654
Loans Held-for-Sale 40,382 40,800 6,195 6,238
</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>
1997 1996
----------------------------- ----------------------------
Calculated Calculated
Carrying Fair Value Carrying Fair
Value Amount Value Amount
----------------------------- ----------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
Adjustable Loans:
Single Family $1,763,587 $1,818,629 $1,603,723 $1,615,234
Multi-Family 1,204,696 1,231,614 1,165,069 1,175,415
Commercial 201,558 211,752 188,156 192,731
Fixed Rate Loans:
Single Family 28,557 28,924 13,214 13,723
Multi-Family 6,969 7,394 10,529 10,568
Commercial 1,232 1,274 1,830 2,021
Other Real Estate Loans 5,771 5,506 696 971
Consumer Loans 2,099 2,097 - -
Non-Performing Loans 29,379 29,379 59,057 59,057
Fixed-Term Certificate Account 1,457,741 1,458,317 1,526,537 1,529,246
Non-Term Deposit Accounts 485,906 485,906 430,911 430,911
Borrowings 1,941,670 1,942,427 1,940,482 1,940,109
</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.
81
<PAGE>
(16) Fair Value of Financial Instruments (continued)
Cash and Cash Equivalents
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 $49,986,000 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 amounts
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.
82
<PAGE>
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, 1997 and
1996, 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, 1997. 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 as of December 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1997, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Los Angeles, California
January 28, 1998
83
<PAGE>
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 3 through 7 of the Proxy Statement for
the Annual Meeting of Stockholders dated April 22, 1998 is
incorporated herein by reference.
ITEM 11--EXECUTIVE COMPENSATION
Information regarding executive compensation appearing
on pages 8 through 16 of the Proxy Statement for the Annual
Meeting of Stockholders dated April 22, 1998 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 22, 1998 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 12 of the Proxy Statement for the Annual
Meeting of Stockholders dated April 22, 1998 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.
84
<PAGE>
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.
(10.5)1997 Nonemployee Directors Stock Incentive Plan filed
as Exhibit 1 to Form S-8 dated August 12, 1997
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 86).
This 1997 Annual Report on Form 10-K and the Proxy
Statement for the Annual Meeting of Stockholders dated April
22, 1998 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, 1998 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
No reports on Form 8-K were filed during the last
quarter of the period covered by this report.
85
<PAGE>
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, 1998
POWER OF ATTORNEY
Each person whose signature appears below hereby
authorizes Babette E. Heimbuch and Douglas Goddard, 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, 1998.
SIGNATURE TITLE
/s/ Babette E. Heimbuch Chief Executive Officer (Principal
--------------------------
Babette E. Heimbuch Executive Officer)
/s/ Douglas J. Goddard Executive Vice President and
--------------------------
Douglas J. Goddard Chief Financial Officer
(Principal Financial Officer)
/s/ Brenda J. Battey Senior Vice President and Controller
--------------------------
Brenda J. Battey (Principal Accounting Officer)
/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
86
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
Company's Consolidated Statements of Operations and Consolidated Statements of
Financial Condition and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 163,135
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 724,968
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 3,145,164
<ALLOWANCE> 71,012
<TOTAL-ASSETS> 4,160,115
<DEPOSITS> 1,943,643
<SHORT-TERM> 1,891,670
<LIABILITIES-OTHER> 52,011
<LONG-TERM> 50,000
0
0
<COMMON> 115
<OTHER-SE> 222,672
<TOTAL-LIABILITIES-AND-EQUITY> 4,160,115
<INTEREST-LOAN> 286,487
<INTEREST-INVEST> 12,733
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 299,220
<INTEREST-DEPOSIT> 92,678
<INTEREST-EXPENSE> 204,226
<INTEREST-INCOME-NET> 94,994
<LOAN-LOSSES> 20,500
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 44,151
<INCOME-PRETAX> 40,561
<INCOME-PRE-EXTRAORDINARY> 40,561
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,100
<EPS-PRIMARY> 2.19
<EPS-DILUTED> 2.15
<YIELD-ACTUAL> 2.28
<LOANS-NON> 8,260
<LOANS-PAST> 0
<LOANS-TROUBLED> 8,090
<LOANS-PROBLEM> 9,335
<ALLOWANCE-OPEN> 67,250
<CHARGE-OFFS> 19,483
<RECOVERIES> 6,979
<ALLOWANCE-CLOSE> 71,012
<ALLOWANCE-DOMESTIC> 71,012
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
