<PAGE>
=====================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 1998
OR
TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 1-9566
FirstFed Financial Corp.
(Exact name of registrant as specified in its charter)
Delaware 95-4087449
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
401 Wilshire Boulevard
Santa Monica, California 90401-1490
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 319-6000
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No
----- -----
As of May 1, 1998, 10,602,845 shares of the Registrant's $.01 par
value common stock were outstanding.
==================================================================
<PAGE>
FirstFed Financial Corp.
Index
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Part I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Financial Condition 3
as of March 31, 1998, December 31, 1997
and March 31, 1997
Consolidated Statements of Operations and Comprehensive 4
Earnings for the three months ended March 31, 1998 and 1997
Consolidated Statements of Cash Flows for the three 5
months ended March 31, 1998 and 1997
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 7
Condition and Results of Operations
Part II. Other Information (omitted items are inapplicable)
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
</TABLE>
2
<PAGE>
PART I - FINANCIAL STATEMENTS
Item 1. Financial Statements
FirstFed Financial Corp. and Subsidiary
Consolidated Statements of Financial Condition
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
March 31, December 31, March 31,
1998 1997 1997
----------- ------------ ------------
<S> <C> <C> <C>
Assets
Cash and cash equivalents $ 107,601 $ 163,135 $ 135,623
Investment securities, available-for-sale
(at fair value) 49,218 48,910 84,780
Mortgage-backed securities, available-for-sale
(at fair value) 658,598 676,058 711,286
Loans receivable, held-for-sale (market value of
$70,936, $40,800, and $6,959) 70,349 40,382 6,949
Loans receivable, net 3,057,735 3,104,782 3,063,345
Accrued interest and dividends receivable 26,968 26,990 27,280
Real estate 6,469 10,257 13,223
Office properties and equipment, net 10,715 9,868 9,384
Investment in Federal Home Loan Bank
(FHLB) stock, at cost 69,605 68,592 63,408
Other assets 10,086 11,141 14,459
----------- ------------ ------------
$ 4,067,344 $ 4,160,115 $ 4,129,737
=========== ============ ============
Liabilities
Deposits $ 2,157,502 $ 1,943,647 $ 2,033,787
FHLB advances and other borrowings 1,050,500 1,364,000 1,223,000
Securities sold under agreements to repurchase 570,794 577,670 628,921
Accrued expenses and other liabilities 56,009 52,011 48,879
----------- ------------ ------------
3,834,805 3,937,328 3,934,587
=========== ============ ============
Commitments and Contingent Liabilities
Stockholders' Equity
Common stock, par value $.01 per share;
authorized 25,000,000 shares; issued 11,515,838,
11,511,138, and 11,483,922 shares, outstanding
10,592,414, 10,587,618, and 10,560,402 shares 115 115 115
Additional paid-in capital 29,726 29,628 29,147
Retained earnings - substantially restricted 215,208 207,065 189,133
Loan to employee stock ownership plan (1,766) (1,744) (2,159)
Treasury stock, at cost, 923,520 shares (11,885) (11,885) (11,885)
Accumulated other comprehensive earnings -
unrealized gain (loss) on securities
available-for-sale, net of taxes 1,141 (392) (9,201)
----------- ------------ ------------
232,539 222,787 195,150
----------- ------------ ------------
$ 4,067,344 $ 4,160,115 $ 4,129,737
=========== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
FirstFed Financial Corp. and Subsidiary
Consolidated Statements of Operations and Comprehensive Earnings
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
1998 1997
---- ----
<S> <C> <C>
Interest income:
Interest on loans $ 61,676 $ 57,813
Interest on mortgage-backed securities 11,532 12,636
Interest and dividends on investments 2,747 3,236
---------- ---------
Total interest income 75,955 73,685
---------- ---------
Interest expense:
Interest on deposits 24,022 22,898
Interest on borrowings 25,482 26,755
---------- ----------
Total interest expense 49,504 49,653
---------- ----------
Net interest income 26,451 24,032
Provision for loan losses 2,500 6,000
---------- ----------
Net interest income
after provision for losses 23,951 18,032
---------- ----------
Non-interest income:
Loan and other fees 40 1,496
Gain on sale of loans 659 5
Real estate operations, net 532 631
Other operating income 1,024 770
---------- ----------
Total non-interest income 2,255 2,902
---------- ----------
Non-interest expense 11,990 11,911
---------- ----------
Earnings before income taxes 14,216 9,023
Income tax provision 6,073 3,855
---------- ----------
Net earnings $ 8,143 $ 5,168
========== ==========
Other comprehensive earnings - unrealized gain
(loss) on securities available-for-sale, net of taxes 1,533 (5,011)
---------- ----------
Comprehensive earnings $ 9,676 $ 157
========== ==========
Earnings per share:
Basic $ 0.77 $ 0.49
========== ==========
Diluted $ 0.75 $ 0.48
========== ==========
Weighted average shares outstanding:
Basic 10,590,456 10,542,665
========== ==========
Diluted 10,799,112 10,681,821
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
FirstFed Financial Corp. and Subsidiary
Consolidated Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 8,143 $ 5,168
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Net change in loans-held-for-sale (29,967) (754)
Provision for loan losses 2,500 6,000
Provision for REO losses 277 125
Valuation adjustments on real estate sold 276 376
Amortization of fees and discounts (243) (272)
Negative amortization on Loans (678) (701)
(Increase) decrease in interest and
dividends receivable 22 (370)
Increase in interest payable 3,903 2,494
Other (5,162) (4,938)
--------- ---------
Total adjustments (29,072) 1,960
--------- ---------
Net cash provided by (used in) operating activities (20,929) 7,128
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans made to customers net of principal
collection on loans 40,639 (32,108)
Loans repurchased under recourse arrangements (126) (4,561)
Proceeds from sales of real estate owned 8,185 14,809
Principal reduction of mortgage-backed
securities held for sale 20,076 15,936
Purchase of investment securities held for sale (11,045) (28,300)
Proceeds from maturities and principal payments
on investment securities held for sale 10,870 12,519
Other (1,146) 350
--------- ---------
Net cash provided by (used in) investing activities 67,453 (21,355)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in savings deposits 213,855 76,339
Net decrease in short term borrowings (660,376) (88,561)
Net increase in long term borrowings 340,000 -
Other 4,463 (330)
--------- ---------
Net cash used in financing activities (102,058) (12,552)
--------- ---------
Net decrease in cash and cash equivalents (55,534) (26,779)
Cash and cash equivalents at beginning of period 163,135 162,402
--------- ---------
Cash and cash equivalents at end of period $ 107,601 $ 135,623
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
FirstFed Financial Corp. and Subsidiary
Notes to Consolidated Financial Statements
1. The unaudited financial statements included herein have been
prepared by the Registrant pursuant to the rules and regulations
of the Securities and Exchange Commission. In the opinion of the
Registrant, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the results of
operations for the periods covered have been made. Certain
information and note disclosures normally included in financial
statements presented in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to
such rules and regulations. The Registrant believes that the
disclosures are adequate so as not to make the information
presented misleading.
It is suggested that these condensed financial statements be read
in conjunction with the financial statements and the notes
thereto included in the Registrant's latest annual report on Form
10-K. The results for the periods covered hereby are not
necessarily indicative of the operating results for a full year.
2. Earnings per share and weighted average shares outstanding
for the 1997 first quarter have been restated to reflect the
adoption of Statement of Financial Accounting Standards No. 128.
Basic earnings per share is based on the weighted average shares
of common stock outstanding for the period while diluted earnings
per share gives effect to all dilutive potential common shares
that were outstanding during part or all of the period.
3. For purposes of reporting cash flows on the "Consolidated
Statement of Cash Flows", cash and cash equivalents include cash,
overnight investments and securities purchased under agreements
to resell which mature within 90 days or less.
4. In 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS No. 130"), which establishes standards for reporting and
display of comprehensive income and its components in a full set
of general purpose financial statements. Accordingly, for both
the 1998 and 1997 periods, the Consolidated Statements of
Operations have been expanded to include other comprehensive
earnings in arriving at comprehensive earnings and, accordingly,
have been renamed Consolidated Statements of Operations and
Comprehensive Earnings. Neither net earnings nor earnings per
share has been affected by the adoption of SFAS No. 130.
6
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Financial Condition
At March 31, 1998, FirstFed Financial Corp. (the "Company"),
holding company for First Federal Bank of California and its
subsidiaries (the "Bank"), had consolidated assets totaling $4.1
billion, compared to $4.2 billion at December 31, 1997 and $4.1
billion at March 31, 1997.
The Bank's primary market area is Los Angeles County. The
Southern California economy has continued to improve from the
economic recession which began earlier in the decade. According
to The UCLA Anderson Forecast, March 1998 Report (the "UCLA
Report"), since 1997 California has generated jobs at a rate of
over 3% annually which should reduce the state unemployment rate
to below 6% in 1998. The UCLA Report forecasts that growth in
state employment and real personal income should continue to
support strong growth in the real estate industry over the next
three years. It also forecasts that home values in Los Angeles
County should rise between 3.3% and 6.0% through the end of 1999.
Consistent with the improvement in the real estate market, net
loan charge-offs declined to $465 thousand for the first three
months of 1998 compared to $3.7 million for the first three
months of 1997. The ratio of non-performing assets to total
assets was 0.89% as of March 31, 1998, compared to 0.95% at
December 31, 1997 and 1.73% at March 31, 1997. (See "Non-
performing Assets" for further discussion.)
The Bank's general valuation allowances for loans totaled $63.4
million at March 31, 1998 compared to $61.2 million at December
31, 1997 and $51.8 million at March 31, 1997. The Bank also
maintains valuation allowances for impaired loans which totaled
$9.6 million at March 31, 1998 compared to $9.8 million at
December 31, 1997 and $13.2 million at March 31, 1997.
Loan originations increased by 73% to $151.3 million in the 1998
first quarter compared to $87.7 million in the 1997 first
quarter. Included in the 1998 increase were $81.1 million, or
54% of the total, of fixed rate loans compared to $851 thousand,
or 1% of the total, of the 1997 increase. The 1998 increase in
fixed rate loans contributed to a large rise in loan sales. (See
"Sources of Funds" for further discussion.)
The Bank's portfolio of loans and mortgage-backed securities
remained at $3.8 billion as of March 31, 1998, the same level as
at December 31, 1997 and March 31, 1997. The loan portfolio has
remained constant during the first quarter of 1998 because loan
originations were offset by loan sales and principal reductions
on loans and mortgage-backed securities.
7
<PAGE>
The following table shows the components of the Bank's portfolio
of loans and mortgage-backed securities by collateral type for
the periods indicated:
<TABLE>
<CAPTION>
March 31, December 31, March 31,
1998 1997 1997
----------- ------------ -----------
(Dollars in thousands)
<S> <C> <C> <C>
REAL ESTATE LOANS:
First trust deed residential loans:
One unit $ 1,450,088 $ 1,440,761 $ 1,305,199
Two to four units 351,109 351,175 344,855
Five or more units 1,199,592 1,217,577 1,266,426
----------- ------------ -----------
Residential loans 3,000,789 3,009,513 2,916,480
OTHER REAL ESTATE LOANS:
Commercial and industrial 192,714 196,575 208,795
Second trust deeds 15,339 15,441 17,259
Other 4,428 6,303 6,392
----------- ------------ -----------
Real estate loans 3,213,270 3,227,832 3,148,926
NON-REAL ESTATE LOANS:
Manufactured housing 1,086 1,154 1,414
Deposit accounts 1,117 1,644 1,132
Consumer 342 185 90
----------- ------------ -----------
Loans receivable 3,215,815 3,230,815 3,151,562
LESS:
General valuation allowances-
loan portfolio 63,404 61,237 51,821
Valuation allowances - impaired loans 9,643 9,775 13,217
Unrealized loan fees 14,684 14,639 16,230
----------- ------------ -----------
Net loans receivable 3,128,084 3,145,164 3,070,294
FHLMC AND FNMA MORTGAGE-
BACKED SECURITIES:
Secured by single family dwellings 639,907 657,342 692,391
Secured by multi-family dwellings 18,691 18,716 18,895
----------- ----------- -----------
Mortgage-backed securities 658,598 676,058 711,286
----------- ----------- -----------
TOTAL $ 3,786,682 $ 3,821,222 $ 3,781,580
=========== =========== ===========
</TABLE>
Because the Bank structures mortgage-backed securities with loans
from its own portfolio, mortgage-backed securities generally have
the same experience with respect to prepayment, repayment,
delinquencies and other factors as the remainder of the Bank's
loan portfolio.
The mortgage-backed securities portfolio, classified as available-
for-sale, was recorded at fair value as of March 31, 1998. A
positive fair value adjustment of $1.4 million, net of taxes, was
reflected in stockholders' equity as of March 31, 1998. This
represents a $1.5 million increase from the negative $78 thousand
adjustment at December 31, 1997.
The investment securities portfolio, classified as available-for-
sale, was recorded at fair value as of March 31, 1998. A
negative fair value adjustment of $297 thousand, net of taxes,
was reflected in stockholders' equity as of March 31, 1998. This
represents a $17 thousand decrease from the negative $314
thousand adjustment at December 31, 1997.
8
<PAGE>
Asset/Liability Management
The one year GAP (the difference between rate-sensitive assets
and liabilities repricing within one year or less) was a positive
$481 million or 11.83% of total assets at the end of the first
quarter of 1998. In comparison, the one year GAP ratio was a
positive $172 million or 4.14% of total assets as of December 31,
1997 and a positive $215 million or 5.22% of total assets as of
March 31, 1997.
Since over 94% of the Bank's loans adjust based upon monthly
changes in the Federal Home Loan Bank Eleventh District Cost of
Funds Index ("COFI Index"), the Bank's one year GAP position
varies primarily based upon the remaining terms of its savings
and borrowings. The longer the term of the Bank's liabilities,
the more positive the one year GAP. The increased one year GAP
as of March 31, 1998 resulted from a $340 million increase in
long term borrowings.
A positive GAP normally benefits a financial institution in times
of increasing interest rates However, because there is a three
month time lag before changes in the COFI Index can be
implemented with respect to the Bank's loans, the Bank's net
interest income typically declines during periods of increasing
interest rates.
Capital
Capital regulations established by the OTS to ensure capital
adequacy require the Bank to maintain minimum amounts and
percentages of total capital to risk-weighted assets. The most
recent notification from the OTS indicated that the Bank was well
capitalized under the applicable regulatory requirements. The
following table summarizes the Bank's actual capital and required
capital as of March 31, 1998:
<TABLE>
<CAPTION>
Tangible Core Risk-based
Capital Capital Capital
-------- ------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
Actual Capital:
Amount $267,505 $267,505 $296,903
Ratio 6.59% 6.59% 12.81%
Minimum required capital:
Amount $ 60,932 $121,864 $186,322
Ratio 1.50% 3.00% 8.00%
Well capitalized required capital:
Amount - $203,107 $231,789
Ratio - 5.00% 10.00%
</TABLE>
Pursuant to the Board of Directors' authorization in 1987, the
Company may repurchase up to 10% of its shares of common stock
that were outstanding as of December 31, 1987. No shares were
repurchased during the first quarter of 1998 or during 1997. As
of March 31, 1998, 137,000 shares remained eligible for
repurchase.
Results of Operations
The Company reported consolidated net earnings of $8.1 million
for the first quarter of 1998 compared to net earnings of $5.2
million for the first quarter of 1997. The improved earnings
resulted primarily from a $3.5 million decrease in the loan loss
provision and a $2.4 million increase in net interest income.
9
<PAGE>
For the 1998 quarter, loan charge-offs, net of recoveries, were
$465 thousand compared to $3.7 million for the 1997 quarter. The
lower charge-off levels in 1998 resulted primarily from improved
real estate prices compared to the first quarter of 1997. (See
"Non-performing Assets" for further discussion.)
Loan Loss Allowances
Due to continuing improvement of real estate conditions in
Southern California, $2.5 million was provided for loan losses in
the first quarter of 1998 compared to $6.0 million in the first
quarter of 1997. Management is unable to predict future levels
of loan loss provisions. Among other things, future loan loss
provisions are based on the level of loan charge-offs,
foreclosure activity, and management's perceptions of economic
trends in Southern California.
Listed below is a summary of the activity in the general
valuation allowance and the valuation allowance for impaired
loans for the Bank's loan portfolio during the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended March 31, 1998
---------------------------------
General Impaired
Valuation Valuation
Allowance Allowance Total
---------- ---------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Balance at December 31, 1997 $ 61,237 $ 9,775 $ 71,012
Provision for loan losses 1,975 525 2,500
Charge-offs:
Single family (723) - (723)
Multi-family (138) (43) (181)
Commercial (29) - (29)
Non-real estate (1) - (1)
---------- ---------- --------
Total charge-offs (891) (43) (934)
Recoveries 469 - 469
Impaired loan recoveries 614 (614) -
---------- ---------- --------
Net charge-offs 192 (657) (465)
---------- ---------- --------
Balance at March 31, 1998 $ 63,404 $ 9,643 $ 73,047
========== ========== ========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended March 31, 1997
---------------------------------
General Impaired
Valuation Valuation
Allowance Allowance Total
----------- ---------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Balance at December 31, 1996 $ 54,900 $ 12,350 $ 67,250
Provision for loan losses 3,874 2,126 6,000
Charge-offs:
Single family (1,858) (3) (1,861)
Multi-family (1,705) (1,256) (2,961)
---------- ---------- --------
Total charge-offs (3,563) (1,259) (4,822)
Recoveries 844 - 844
---------- ---------- --------
Net charge-offs (2,719) (1,259) (3,978)
Transfer to valuation allowance
for loans sold with recourse (4,234) - (4,234)
---------- ---------- --------
Balance at March 31, 1997 $ 51,821 $ 13,217 $ 65,038
========== ========== ========
</TABLE>
10
<PAGE>
The Bank also maintains a valuation allowance for loans sold with
recourse, recorded as a liability. This allowance was 6.06% of
loans sold with recourse as of March 31, 1998, compared to 5.97%
as of December 31, 1997 and 5.74% as of March 31, 1997. The
balance of loans sold with recourse totaled $215.0 million,
$218.1 million and $224.7 million as of March 31, 1998, December
31, 1997 and March 31, 1997, respectively. The Bank has not
entered into any new recourse arrangements since 1989. Listed
below is a summary of the activity in the valuation allowance for
loans sold with recourse during the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1998 1997
---- ----
(Dollars in thousands)
<S> <C> <C>
Balance at beginning of period $ 13,029 $ 8,398
Charge-offs - -
Recoveries - 268
Transfers from general loan
valuation allowance - 4,234
--------- ---------
Balance at end of period $ 13,029 $ 12,900
========= =========
</TABLE>
The following table summarizes the activity in the general
valuation allowance for real estate acquired by foreclosure
during the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1998 1997
---- ----
(Dollars in thousands)
<S> <C> <C>
Balance at beginning of period $ 500 $ 520
Provision for losses 277 125
Charge-offs (277) (244)
--------- ---------
Balance at end of period $ 500 $ 401
========= =========
</TABLE>
Net Interest Income
The Company's interest rate spread increased to 2.34% for the
1998 first quarter from 2.09% for the 1997 first quarter. The
COFI Index (on a lagged basis) determines the yield on over 94%
of the Bank's loan portfolio and was 0.12% higher during the
first three months of 1998 compared to the same period of 1997.
A lower balance in non-performing loans and a higher yielding
loan portfolio more than offset the 0.04% increase in the Bank's
cost of funds in the first quarter of 1998 compared to the first
quarter of 1997.
11
<PAGE>
The following table sets forth: (i) the average daily dollar
amounts of and average yields earned on loans, mortgage-backed
securities and investment securities, (ii) the average daily
dollar amounts of and average rates paid on savings and
borrowings, (iii) the average daily dollar differences, (iv) the
interest rate spreads, and (v) the effective net spreads for the
periods indicated.
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1998 1997
---- ----
(Dollars In thousands)
<S> <C> <C>
Average loans and mortgage-backed
securities $ 3,808,076 $ 3,785,302
Average investment securities 139,578 167,209
----------- -----------
Average interest-earning assets 3,947,654 3,952,511
----------- -----------
Average savings deposits 2,073,406 1,986,081
Average borrowings 1,744,666 1,865,609
----------- -----------
Average interest-bearing liabilities 3,818,072 3,851,690
----------- -----------
Excess of interest-earning assets over
interest-bearing liabilities $ 129,582 $ 100,821
=========== ===========
Yields earned on average interest
earning assets 7.58% 7.29%
Rates paid on average interest-
bearing liabilities 5.24 5.20
Interest rate spread 2.34 2.09
Effective net spread (1) 2.51 2.23
Total interest income $ 74,802 $ 72,085
Total interest expense 49,504 49,653
----------- -----------
25,298 22,432
Total other items (2) 1,153 1,600
----------- -----------
Net interest income $ 26,451 $ 24,032
=========== ===========
</TABLE>
- -----------------------------------------
(1) The effective net spread is a fraction, the denominator
of which is the average dollar amount of interest-earning assets,
and the numerator of which is net interest income (excluding stock
dividends and miscellaneous interest income).
(2) Includes Federal Home Loan Bank Stock and other miscellaneous
items, including interest on California tax refunds at March 31, 1997.
Non-Interest Income and Expense
Loan and other fees decreased to $40 thousand for the 1998 first
quarter from $1.5 million for the 1997 first quarter primarily
due to a $1.4 million provision for impairment of the Bank's
servicing assets. The servicing assets are normally amortized
over the expected lives of the loans being serviced. The
provision, recorded as an adjustment to loan servicing fees in
the current quarter, reflects the impact of higher expected
prepayment rates on the existing mortgage portfolio due to lower
interest rates on fixed rate mortgages.
A net gain of $659 thousand and $5 thousand on sale of loans were
recognized for the first quarters of 1998 and 1997, respectively.
The volumes of loans sold during the 1998 first quarter and the
1997 first quarter were $60.7 million and $1.2 million,
respectively.
12
<PAGE>
Real estate operations produced net gains of $532 thousand and
$631 thousand for the first quarters of 1998 and 1997,
respectively. Gains result primarily from the recovery of excess
valuation allowances associated with foreclosed properties sold.
Other operating income increased 33% to $1.0 million in the 1998
first quarter compared to $770 thousand in the 1997 first
quarter, primarily due to a $301 thousand increase in fees earned
by the retail branches.
Total non-interest expense increased slightly during the first
quarter of 1998 to $12.0 million compared to $11.9 million for
the 1997 period. Expenses rose primarily due to investments
being made in new operating systems and the development of new
business lines and higher incentive compensation costs on larger
loan volume and deposit growth. The expense-to-assets ratio was
1.17% of average assets for the 1998 quarter, up from 1.15% for
the 1997 quarter.
Non-accrual, Past Due, Impaired and Restructured Loans
The Bank accrues interest earned but uncollected for every loan
without regard to its contractual delinquency status but
establishes a specific interest allowance for each loan which
becomes 90 days or more past due or is in foreclosure. Loans on
which delinquent interest allowances had been established (non-
accrual loans) totaled $34.8 million at March 31, 1998 compared
to $34.1 million at December 31, 1997 and $71.8 million at March
31, 1997.
The amount of interest that has been reserved for loans 90 days
or more delinquent or in foreclosure was $1.9 million at March
31, 1998, $1.8 million at December 31, 1997 and $4.3 million at
March 31, 1997.
The Bank's modified loans resulted primarily from temporary
modifications of principal and interest payments. Under these
arrangements, loan terms are typically reduced to no less than a
monthly interest payment required under the note. If the
borrower is unable to return to scheduled principal and interest
payments at the end of the modification period, foreclosure
proceedings are initiated or the modification period may be
extended. As of March 31, 1998, the Bank had modified loans
totaling $13.4 million, net of loan loss allowances of $3.9
million compared with $16.7, net of loan loss allowances of $4.1
million, at December 31, 1997 and $13.5 million, net of loan loss
allowances of $3.9 million, at March 31, 1997.
Pursuant to Statement of Financial Accounting Standards No. 114
("SFAS No. 114"), a loan is considered to be impaired when
management believes that it is probable that the Bank will be
unable to collect all amounts due under the contractual terms of
the loan. Estimated impairment losses are recorded as separate
valuation allowances and may be subsequently adjusted based upon
changes in the measurement of impairment. Impaired loans, which
are disclosed net of valuation allowances, include non-accrual
major loans (single family loans with an outstanding principal
amount greater than or equal to $500,000 and multi-family and
commercial real estate loans with an outstanding principal amount
greater than or equal to $750,000), modified loans, and major
loans less than 90 days delinquent in which full payment of
principal and interest is not expected to be received.
The following is a summary of impaired loans, net of valuation
allowances for impairment, for the periods indicated:
<TABLE>
<CAPTION>
March 31, December 31, March 31,
1998 1997 1997
---------- ------------ ----------
(Dollars in thousands)
<S> <C> <C> <C>
Non-accrual loans $ 10,752 $ 8,260 $ 22,959
Modified loans 8,184 8,090 6,628
Other impaired loans 6,380 9,335 18,226
---------- ------------ ----------
$ 25,316 $ 25,685 $ 47,813
========== ============ ==========
</TABLE>
The Bank evaluates loans for impairment whenever the
collectibility of contractual principal and interest payments is
questionable. Large groups of smaller balance homogenous loans
that are collectively
13
<PAGE>
evaluated for impairment, including residential mortgage loans,
are not subject to the application of SFAS No.114.
When a loan is considered impaired, the Bank measures impairment
based on the present value of expected future cash flows (over a
period not to exceed 5 years) discounted at the loan's effective
interest rate. However, if the loan is "collateral-dependent" or
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. The
following summary details impaired loans measured using the fair
value method and loans measured based on the present value of
expected future cash flows discounted at the effective interest
rate of the loan for the periods indicated:
<TABLE>
<CAPTION>
March 31, December 31, March 31,
1998 1997 1997
---------- ------------ ----------
(Dollars in thousands)
<S> <C> <C> <C>
Present value method $ 1,068 $ 1,067 $ 4,063
Fair value method 24,248 24,618 43,750
---------- ------------ ----------
Total impaired loans $ 25,316 $ 25,685 $ 47,813
========== ============ ==========
</TABLE>
Impaired loans for which there were no valuation allowances
established totaled $2.5 million, $2.5 million and $6.7 million
as of March 31, 1998, December 31, 1997, and March 31, 1997,
respectively. See "Results of Operations" for an analysis of
activity in the valuation allowance for impaired loans.
The table below shows the Bank's net investment in non-performing
loans determined to be impaired, by property type, as of the
periods indicated:
<TABLE>
<CAPTION>
March 31, December 31, March 31,
1998 1997 1997
---------- ------------ ----------
(Dollars in thousands)
<S> <C> <C> <C>
Single family $ 847 $ 856 $ 3,272
Multi-family 9,426 6,893 18,102
Commercial 479 511 1,585
---------- ------------ ----------
$ 10,752 $ 8,260 $ 22,959
========== ============ ==========
</TABLE>
Cash payments received from impaired loans are recorded in
accordance with the contractual terms of the loan. The principal
portion of the payment is used to reduce the principal balance of
the loan, whereas the interest portion is recognized as interest
income. On certain modified loans where the Bank does not believe
that it will receive all amounts due under the original
contractual loan terms, the Bank records an allowance for
interest received.
The average recorded investment in impaired loans during the
quarters ended March 31, 1998, December 31, 1997 and March 31,
1997 was $25,342,000, $24,259,000 and $46,559,000, respectively.
The amount of interest income recognized for impaired loans
during the quarters ended March 31, 1998, December 31, 1997 and
March31, 1997 was $367,000, $433,000 and $588,000, respectively,
under the cash basis method of accounting. Interest income
recognized under the accrual basis method of accounting for the
quarters ended March 31, 1998, December 31, 1997 and March 31,
1997 totaled $367,000, $433,000 and $574,000, respectively.
There were no commitments to lend additional funds to borrowers
whose loan terms have been modified.
14
<PAGE>
Asset Quality
The following table sets forth certain asset quality ratios of
the Bank at the periods indicated:
<TABLE>
<CAPTION>
March 31, December 31, March 31,
1998 1997 1997
--------- ------------ ---------
<S> <C> <C> <C>
Non-Performing Loans to
Loans Receivable (1) 0.92% 0.91% 1.85%
Non-Performing Assets to
Total Assets (2) 0.89% 0.95% 1.73%
Loan Loss Allowances to
Non-Performing Loans (3) 196.31% 193.38% 90.78%
General Loss Allowances to
Assets with Loss Exposure (4) 1.92% 1.86% 1.63%
General Loss Allowances to
Total Assets with Loss
Exposure (5) 2.18% 2.12% 1.90%
</TABLE>
- ---------------------------------
(1) Non-performing loans are net of valuation allowances related
to those loans. Loans receivable exclude mortgage-backed
securities and are before deducting unrealized loan fees,
general valuation allowances and valuation allowances for
impaired loans.
(2) Non-performing assets are net of valuation allowances related
to those assets.
(3) The Bank's loan loss allowances, including valuation allowances
for non-performing loans and general valuation allowances but
excluding general valuation allowances for loans sold by the
Bank with full or limited recourse. Non-performing loans are
before deducting valuation allowances related to those loans.
(4) The Bank's general valuation allowances, excluding general
valuation allowances for loans sold with full or limited
recourse. The Bank's assets with loss exposure include
primarily loans and real estate owned, but exclude mortgage-
backed securities.
(5) The Bank's general valuation allowances, including general
valuation allowances for loans sold with full or limited
recourse. Assets with loss exposure include the Bank's loan
portfolio plus loans sold with recourse, but exclude mortgage-
backed securities.
15
<PAGE>
Non-performing Assets
The Bank defines non-performing assets as loans delinquent over 90
days (non-accrual loans), loans in foreclosure and real estate
acquired by foreclosure. An analysis of non-performing assets
as of the periods indicated follows:
<TABLE>
<CAPTION>
March 31, December 31, March 31,
1998 1997 1997
---------- ------------ ----------
(Dollars in thousands)
<S> <C> <C> <C>
Real estate acquired by foreclosure:
Single family $ 4,552 $ 5,806 $ 8,897
Multi-family 1,541 4,034 3,806
Commercial 785 826 809
Other 52 52 -
Less:
General valuation allowance (500) (500) (401)
--------- ----------- ----------
Total real estate acquired by foreclosure 6,430 10,218 13,111
--------- ----------- ----------
Non-accrual loans:
Single family 16,862 16,799 21,652
Multi-family 16,057 15,785 46,913
Commercial 1,867 1,533 3,246
Other - - 21
Less:
Valuation allowances (1) (4,885) (4,738) (13,385)
--------- ----------- ----------
Total non-accrual loans 29,901 29,379 58,447
--------- ----------- ----------
Total non-performing assets $ 36,331 $ 39,597 $ 71,558
========= =========== ==========
</TABLE>
- -------------------------------------
(1) Includes valuation allowances for impaired loans and loss
allowances on other non-performing loans requiring fair
value adjustments.
Real estate acquired by foreclosure at March 31, 1998 decreased
37% compared to December 31, 1997 and 51% compared to March 31,
1997 as a result of the continuing improvement in the Southern
California real estate market. Properties are selling more
quickly and property values are increasing compared to last
year.
Non-accrual loans, net of valuation allowances, at March 31, 1998,
were comparable to the December 31, 1997 level and decreased 49%
compared to the March 31, 1997 level. The decrease in non-
accrual loans since the first quarter of 1997 is primarily the
result of an overall decline in loan delinquencies due to an
improvement in the Southern California economy.
16
<PAGE>
Sources of Funds
External sources of funds include deposits from several sources,
advances from the Federal Home Loan Bank of San Francisco
("FHLB"), securitized borrowings and unsecured term funds.
Savings deposits are accepted from retail savings branches, a
telemarketing department, and national deposit brokers.
Including $17.2 million in interest credits during the 1998
first quarter, total savings deposits increased by $213.9
million during the first three months of 1998.
The cost of funds, operating margins and net earnings of the Bank
associated with brokered and telemarketing deposits are generally
comparable to the cost of funds, operating margins and net
earnings of the Bank associated with retail deposits, FHLB
borrowings and repurchase agreements. As the cost of each source
of funds fluctuates from time to time, based on market rates of
interest generally offered by the Bank and other depository
institutions, the Bank will seek funds from the lowest cost
source until the relative costs change. As the cost of funds,
operating margins and net earnings of the Bank associated with
each source of funds are generally comparable, the Bank does not
deem the impact of its use of any one of the specific sources of
funds at a given time to be material.
Deposits accepted by retail branches increased by $25.3 million
during the first three months of 1998. The Bank continues to
focus its marketing efforts on attracting liquid accounts and
short term certificates of deposits. Retail deposits comprised
69% of total savings deposits as of March 31, 1998.
Telemarketing deposits are obtained by the Bank's employees via
telephone, from depositors outside of the Bank's normal service
areas. Telemarketing deposits increased by $42.6 million during
the first quarter of 1998. The level of telemarketing deposits
varies based on the availability of higher yielding investments
to investors, who are often professional money managers. The
availability of telemarketing deposits also varies based on the
investors' perception of the Bank's creditworthiness.
Telemarketing deposits comprised 7% of total deposits at March
31, 1998.
Deposits acquired from national brokerage firms ("brokered
deposits") are considered a source of funds similar to
borrowing. In evaluating brokered deposits as a source of
funds, the cost of these deposits, including commission costs,
is compared to other funding sources. Brokered deposits
increased by $146.0 million during the 1998 first quarter. At
March 31, 1998, brokered deposits comprised 24% of total
deposits.
Total borrowings decreased by $320.4 million during the first
quarter of 1998 due to net payoffs of $315.0 million in FHLB
advances and $6.9 million in borrowings under reverse repurchase
agreements, partially offset by $1.5 million in additional
unsecured term funds.
Internal sources of funds include both principal payments and
payoffs on loans and mortgage-backed securities, loan sales, and
positive cash flows from operations. Principal payments include
amortized principal and prepayments which are a function of real
estate activity and the general level of interest rates. Total
principal payments were $131.1 million for the first quarter of
1998. This compares with principal payments of $70.6 million for
the first quarter of 1997.
Loan sales increased to $60.7 million for the first quarter of
1998 compared with loan sales of $1.2 million for the first
quarter of 1997 due to an increase in the amount of saleable
product originated, primarily fixed rate loans.
17
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
(3.) Certificate of Incorporation and By Laws
filed as Exhibit (1)(a) to Form 8-A dated June
4, 1987 and incorporated by reference.
(4.1) Shareholders' Rights Agreement filed as
Exhibit 1 to Form 8-A, dated November 2, 1988
and incorporated by reference.
(4.2) Indenture filed as Exhibit 4 to Amendment
No. 3 to Form S-3 dated September 20, 1994 and
incorporated by reference.
(10.1) Deferred Compensation Plan filed as Exhibit
10.3 to Form 10-K for the fiscal year ended December
31, 1983 and incorporated by reference.
(10.2) Bonus Plan filed as Exhibit 10(iii)(A)(2) to
Form 10 dated November 2, 1993 and incorporated by reference.
(10.3) Supplemental Executive Retirement Plan dated
January 16, 1986 and filed as Exhibit 10.5 to Form 10-K
for the fiscal year ended December 21, 1992 and incorporated
by reference.
(10.4) Form of Change in Control Employment Agreement
effective September 26, 1996 filed as Exhibit 10.4 to Form
10-Q for the quarter ended September 30, 1996 and incorporated
by reference.
(10.5) Form of Directors Stock Incentive Plan effective
January 1, 1997 filed as Appendix A to Proxy Statement
dated March 18, 1997 for Annual Meeting of Stockholders
and incorporated by reference.
(11.1) Computation of earnings per share. Part I hereof is
incorporated by reference.
b) Reports on Form 8-K
No reports on Form 8-K were filed during the period ended
March 31, 1998.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
FIRSTFED FINANCIAL CORP.
------------------------
Registrant
Date: May 13, 1998
By /s/ BABETTE E. HEIMBUCH
---------------------------
Babette E. Heimbuch
President and
Chief Executive Officer
By /s/ DOUGLAS J. GODDARD
---------------------------
Douglas J. Goddard
Chief Financial Officer and
Executive Vice President
19
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from
the company's Consolidated Statement of Operations and Consolidated
Statement of Financial Condition and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<CIK> 0000810536
<NAME> FIRSTFED FINANCIAL CORP.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 31,601
<INT-BEARING-DEPOSITS> 76,000
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 707,816
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 3,128,084
<ALLOWANCE> 73,047
<TOTAL-ASSETS> 4,067,344
<DEPOSITS> 2,157,502
<SHORT-TERM> 1,281,294
<LIABILITIES-OTHER> 56,009
<LONG-TERM> 340,000
0
0
<COMMON> 115
<OTHER-SE> 232,424
<TOTAL-LIABILITIES-AND-EQUITY> 4,067,344
<INTEREST-LOAN> 73,208
<INTEREST-INVEST> 2,747
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 75,955
<INTEREST-DEPOSIT> 24,022
<INTEREST-EXPENSE> 49,504
<INTEREST-INCOME-NET> 26,451
<LOAN-LOSSES> 2,500
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 11,990
<INCOME-PRETAX> 14,216
<INCOME-PRE-EXTRAORDINARY> 14,216
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,143
<EPS-PRIMARY> 0.77
<EPS-DILUTED> 0.75
<YIELD-ACTUAL> 2.51
<LOANS-NON> 29,901
<LOANS-PAST> 0
<LOANS-TROUBLED> 8,184
<LOANS-PROBLEM> 6,380
<ALLOWANCE-OPEN> 71,012
<CHARGE-OFFS> 934
<RECOVERIES> 469
<ALLOWANCE-CLOSE> 73,047
<ALLOWANCE-DOMESTIC> 73,047
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
