UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 1999
OR
TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 1-9566
FirstFed Financial Corp.
(Exact name of registrant as specified in its charter)
Delaware 95-4087449
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
401 Wilshire Boulevard
Santa Monica, California 90401-1490
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(310)319-6000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes x No _____
As of August 10, 1999, 18,457,961 shares of the Registrant's $.01 par value
common stock were outstanding.
1
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FirstFed Financial Corp.
Index
Page
Part I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Financial Condition
as of June 30, 1999, December 31, 1998
and June 30, 1998 3
Consolidated Statements of Operations and Comprehensive
Earnings for the three months and six months
ended June 30, 1999 and 1998 4
Consolidated Statements of Cash Flows for the six
months ended June 30, 1999 and 1998 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Part II. Other Information (omitted items are inapplicable)
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
2
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<TABLE>
<CAPTION>
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)
(Unaudited)
June 30, December 31, June 30,
1999 1998 1998
<S> <C> <C> <C>
Assets
Cash and cash equivalents $ 141,806 $ 126,280 $ 213,257
Investment securities, available-for-sale
(at fair value) 121,956 64,333 43,001
Mortgage-backed securities, available-for-sale
(at fair value) 480,727 556,679 630,881
Loans receivable, held-for-sale (fair value of
$6,038, $16,602 and $113,082) 6,038 16,450 112,315
Loans receivable, net 2,762,208 2,791,771 2,882,672
Accrued interest and dividends receivable 21,719 23,476 26,102
Real estate 4,017 4,791 5,992
Office properties and equipment, net 12,261 11,819 11,516
Investment in Federal Home Loan Bank
(FHLB) stock, at cost 69,830 72,700 70,613
Other assets 8,022 8,829 14,032
$ 3,628,584 $3,677,128 $ 4,010,381
Liabilities
Deposits $2,012,504 $2,135,909 $ 2,139,018
FHLB advances and other borrowings 963,300 764,000 1,028,500
Securities sold under agreements to repurchase 376,800 471,172 555,719
Accrued expenses and other liabilities 39,875 49,047 46,849
3,392,479 3,420,128 3,770,086
Commitments and Contingent Liabilities
Stockholders' Equity
Common stock, par value $.01 per share;
authorized 100,000,000 shares; issued 23,266,501
23,075,266, and 23,062,120 shares, outstanding
19,326,761, 21,127,426 and 21,215,080 shares 233 231 231
Additional paid-in capital 31,048 29,965 29,841
Retained earnings - substantially restricted 259,712 241,694 223,845
Loan to employee stock ownership plan (1,859) (833) (1,789)
Treasury stock, at cost, 3,939,740, 1,947,840
and 1,847,040 shares (45,650) (13,354) (11,885)
Accumulated other comprehensive earnings (loss),
net of taxes (7,379) (703) 52
236,105 257,000 240,295
$3,628,584 $3,677,128 $ 4,010,381
</TABLE>
See accompanying notes to consolidated financial statements.
3
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<TABLE>
<CAPTION>
FirstFed Financial Corp. and Subsidiary
Consolidated Statements of Operations and Comprehensive Earnings (Loss)
(Dollars in thousands, except per share data)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Interest income:
Interest on loans $ 53,324 $ 59,901 $107,331 $ 121,577
Interest on mortgage-backed securities 7,043 10,907 14,652 22,439
Interest and dividends on investments 3,330 2,779 6,451 5,526
Total interest income 63,697 73,587 128,434 149,542
Interest expense:
Interest on deposits 21,268 25,060 43,932 49,082
Interest on borrowings 17,210 22,613 34,118 48,095
Total interest expense 38,478 47,673 78,050 97,177
Net interest income 25,219 25,914 50,384 52,365
Provision for loan losses - 2,100 - 4,600
Net interest income
after provision for loan losses 25,219 23,814 50,384 47,765
Non-interest income:
Loan and other fees 1,099 1,567 2,384 1,607
Gain on sale of loans 504 1,204 1,087 1,863
Real estate operations, net 1,526 133 1,828 665
Other operating income 1,028 1,070 1,991 2,094
Total non-interest income 4,157 3,974 7,290 6,229
Non-interest expense 13,113 12,684 25,701 24,674
Earnings before income taxes 16,263 15,104 31,973 29,320
Income tax provision 7,160 6,467 13,955 12,540
Net earnings $ 9,103 $ 8,637 $ 18,018 $ 16,780
Other comprehensive earnings (loss),
net of taxes (7,302) (1,082) (6,676) 444
Comprehensive earnings $ 1,801 $ 7,555 $ 11,342 $ 17,224
Earnings per share:
Basic $ 0.47 $ 0.41 $ 0.90 $ 0.79
Diluted $ 0.47 $ 0.40 $ 0.90 $ 0.78
Weighted average shares outstanding:
Basic 19,331,157 21,206,104 19,939,106 21,193,532
Diluted 19,529,207 21,677,810 20,118,593 21,642,628
</TABLE>
See accompanying notes to consolidated financial statements.
4
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<TABLE>
<CAPTION>
FirstFed Financial Corp. and Subsidiary
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
Six Months Ended
June 30,
<S> <C> <C>
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 18,018 $ 16,780
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Net change in loans-held-for-sale 10,412 (71,933)
Provision for loan losses - 4,600
Provision for REO losses 4 484
Valuation adjustments on real estate sold (2,053) (1,686)
Amortization of fees and discounts (231) 40
Decrease in servicing assets 130 1,585
Decrease in interest and dividends receivable 1,757 888
Increase (decrease) in interest payable (4,682) 4,761
(Increase) decrease in other assets 221 (1,810)
Increase (decrease) in accrued expenses and other liabilities 2,784 (9,029)
Total adjustments 8,342 (72,100)
Net cash provided by (used in) operating activities 26,360 (55,320)
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans made to customers net of principal
collection on loans 36,753 208,270
Loans purchased (13,419) (439)
Proceeds from sales of real estate 11,131 15,920
Principal reductions on mortgage-backed securities
held for sale 65,435 45,930
Proceeds from maturities and principal payments
on investment securities 3,211 17,071
Purchase of investment securities (61,795) (11,045)
Redemption of FHLB stock 4,823 -
Other (4,149) (1,946)
Net cash provided by investing activities 41,990 273,761
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in savings deposits (123,405) 195,371
Net increase (decrease) in short term borrowings 105,628 (747,451)
Treasury stock purchases (32,296) -
Increase (decrease) in long term borrowings (700) 390,000
Payment of prior period taxes and interest to IRS - (2,295)
Other (2,051) (3,944)
Net cash used in financing activities (52,824) (168,319)
Net increase in cash and cash equivalents 15,526 50,122
Cash and cash equivalents at beginning of period 126,280 163,135
Cash and cash equivalents at end of period $141,806 $213,257
</TABLE>
See accompanying notes to consolidated financial statements.
5
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FirstFed Financial Corp. and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
1. The unaudited financial statements included herein have been prepared
by the Company, pursuant to the rules and regulations of the Securities and
Exchange Commission. In the opinion of the Company, 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
Company believes that the disclosures are adequate to make the information
presented not misleading.
It is suggested that these condensed financial statements be read in
conjunction with the financial statements and the notes thereto included in
the Company's latest annual report on Form 10-K. The results for the periods
covered hereby are not necessarily indicative of the operating results for a
full year.
2. Earnings per share were computed by dividing net earnings by the
weighted average number of shares of common stock outstanding for the
period, plus the effect of stock options, if dilutive.
3. For purposes of reporting cash flows on the "Consolidated Statement of
Cash Flows", cash and cash equivalents include cash, overnight investments
and securities purchased under agreements to resell which mature within 90
days of the date of purchase.
4. Recent Accounting Pronouncements
In June of 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133"), which
establishes accounting and reporting standards for derivative instruments and
for hedging activities. It requires recognition of all derivatives as either
assets or liabilities in the statement of financial condition and the
measurement of those instruments at fair value. Recognition of changes in
fair value will be recognized into income or as a component of other
comprehensive income depending upon the type of the derivative and its
related hedge, if any. SFAS No. 133, as amended by SFAS No. 137 is effective
for all fiscal quarters of fiscal years beginning after June 15, 2000.
Management has not yet determined the impact of implementing this statement
on its financial condition or results of operations.
In October of 1998, the FASB issued Statement of Financial Accounting
Standards No. 134, "Accounting for Mortgage-Backed Securities Retained after
the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise" ("SFAS No. 134".) SFAS No. 134 requires that, after the
securitization of a mortgage loan held for sale, an entity engaged in
mortgage banking activities classify the resulting mortgage-backed security
as a trading security. SFAS No. 134 further requires that, after the
securitization of mortgage loans, an entity engaged in mortgage banking
activities classify the resulting mortgage-backed securities or other related
interests based on its ability and intent to sell or hold those investments.
SFAS No. 134 conforms the subsequent accounting for securities retained after
the securitization of mortgage loans by a mortgage banking enterprise with
the subsequent accounting for securities retained after the securitization of
other types of assets by a non-mortgage banking enterprise. SFAS No. 134 was
effective the first quarter of 1999. The Company did not form any
mortgage-backed securities during the first six months of 1999. Therefore,
the implementation of SFAS No. 134 had no material affect on the Company's
financial condition or results of operations.
6
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Financial Condition
At June 30, 1999, FirstFed Financial Corp. (the "Company"), holding company
for First Federal Bank of California and its subsidiaries (the "Bank"), had
consolidated assets totaling $3.6 billion, compared to $3.7 billion at
December 31, 1998 and $4.0 billion at June 30, 1998.
The Bank's primary market area is Southern California, which remains strong
economically. The improved economy and real estate market positively impacted
several areas of the Bank's operations during the first six months of 1999.
The ratio of non-performing assets to total assets decreased to 0.45% as of
June 30, 1999 from 0.84% as of December 31, 1998 and 0.84% as of June 30,
1998. (See "Non-performing Assets" for further discussion.) Additionally,
according to the UCLA Anderson Forecast for California, June 1999 Report,
home prices in the Los Angeles County area are expected to increase by 5.7%
during 1999.
Net loan charge-offs decreased to $1.2 million during the first six months of
1999 compared to $2.2 million during the same period of 1998. The Bank's
general valuation allowance was $68.6 million or 2.28% of total loans and
real estate owned at June 30, 1999. This compares with $68.1 million or
2.26% as of December 31, 1998 and $66.0 million or 2.07% at June 30, 1998.
The Bank also maintains valuation allowances for impaired loans, which
totaled $5.6 million at June 30, 1999, $7.6 million at December 31, 1998 and
$7.8 million at June 30, 1998.
The Bank's portfolio of loans, including mortgage-backed securities,
decreased to $3.2 billion as of June 30, 1999 from $3.4 billion at December
31, 1998 and $3.6 billion at June 30, 1998 primarily due to payoffs of the
adjustable rate loans in the current fixed rate loan environment. No new
mortgage-backed securities were created with the Bank's loans during the six
months of 1999 or 1998. 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 June 30, 1999. An unrealized loss of $6.5
million, net of taxes, was reflected in stockholders' equity as of June 30,
1999. This compares to a net unrealized loss of $413 thousand as of December
31, 1998.
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The following table shows the components of the Bank's portfolio of loans
(including loans held for sale) and mortgage-backed securities by collateral
type as of the dates indicated:
<TABLE>
<CAPTION>
June 30, December 31, June 30,
1999 1998 1998
(Dollars in thousands)
<S> <C> <C> <C>
REAL ESTATE LOANS:
First trust deed residential loans:
One to four units $1,563,094 $1,565,105 $ 1,715,072
Five or more units 1,091,402 1,127,228 1,158,859
Residential loans 2,654,496 2,692,333 2,873,931
OTHER REAL ESTATE LOANS:
Commercial and industrial 180,203 181,772 187,161
Second trust deeds 14,063 15,357 13,867
Other - - 3,433
Real estate loans 2,848,762 2,889,462 3,078,392
NON-REAL ESTATE LOANS:
Manufactured housing 759 893 1,113
Deposit accounts 908 1,002 1,032
Commercial 2,905 380 23
Consumer 468 787 377
Loans receivable 2,853,802 2,892,524 3,080,937
LESS:
General valuation allowances-
loan portfolio 68,137 67,638 65,546
Valuation allowances - impaired loans 5,644 7,634 7,829
Deferred loan fees 11,775 9,031 12,575
Net loans receivable 2,768,246 2,808,221 2,994,987
FHLMC AND FNMA MORTGAGE-
BACKED SECURITIES (at fair value):
Secured by single family dwellings 464,552 539,079 612,585
Secured by multi-family dwellings 16,175 17,600 18,296
Mortgage-backed securities 480,727 556,679 630,881
TOTAL $3,248,973 $3,364,900 $3,625,868
</TABLE>
The investment securities portfolio, classified as available-for-sale, was
recorded at fair value as of June 30, 1999. An unrealized loss of $872
thousand, net of taxes, was reflected in stockholders' equity as of June 30,
1999. This compares to an unrealized loss of $290 thousand, net of taxes, as
of December 31, 1998.
Asset/Liability Management
Market risk is the risk of loss from adverse changes in market prices and
rates. The Company's market risk arises primarily from interest rate risk
inherent in its lending and deposit taking activities. Management actively
monitors its interest rate risk exposure. The Company does not engage in
trading activities. The Company's exposure to interest rate risk resulting
from its lending and deposit taking activities has not changed since December
31, 1998.
8
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The one year GAP (the difference between rate-sensitive assets and
liabilities repricing within one year or less) was a positive $379.7 million
or 10.47% of total assets at June 30, 1999. In comparison, the one year GAP
was a positive $393.7 million or 10.71% of total assets as of December 31,
1998 and a positive $498.0 million or 12.43% of total assets as of June 30,
1998. Over 90% of the Bank's rate-sensitive assets reprice within one year.
Therefore, the Bank's one year GAP generally varies based upon the extent to
which the maturities of its deposits and borrowings exceed one year.
A positive GAP normally benefits a financial institution in times of
increasing interest rates. However, the Bank's net interest income typically
declines during periods of increasing interest rates because of a three month
time lag before changes in the FHLB Eleventh District Cost of Funds Index
(the "Index") can be implemented with respect to the Bank's loans.
Capital
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and percentage of total capital
to risk-weighted assets. The Bank meets the standards necessary to be deemed
well capitalized under the applicable regulatory requirements. The following
table summarizes the Bank's actual capital and required capital as of June
30, 1999:
Tangible Core Risk-based
Capital Capital Capital
(Dollars in thousands)
Actual Capital:
Amount $287,495 $287,495 $314,429
Ratio 7.85% 7.85% 14.88%
Minimum required capital:
Amount $54,928 $146,474 $169,085
Ratio 1.50% 4.00% 8.00%
Well capitalized required capital:
Amount - $183,093 $211,356
Ratio - 5.00% 10.00%
During the first six months of 1999, the Company repurchased 1,991,900 shares
of its common stock at an average price of $16.21 per share. An additional
868,800 shares were repurchased through August 10, 1999 at an average price
of $15.88 per share. The repurchases were made pursuant to repurchase
authorizations made by the Board of Directors on October 21, 1998, February
25, 1999, and April 21, 1999. As of August 10, 1999, 350,697 additional
shares remain eligible for repurchase.
Year 2000 Issue
The Year 2000 issue arises because many computer systems identify dates using
only the last two digits of the year. These systems are unable to
distinguish between dates in the year 2000 and dates in the year 1900. If
not corrected, these systems could fail or provide incorrect information
after December 31, 1999 or when using dates after December 31, 1999. Any
such failure of the Bank's systems could have a material adverse impact on
the Company and its ability to process customer transactions or to provide
customer service.
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Over the course of the past two years, the Bank has 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 has identified and prioritized
systems, software and equipment with the potential for being affected by the
Year 2000 issue. All significant vendors have been contacted regarding their
Year 2000 readiness.
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
ready for the Year 2000 or have plans to become ready before the Year 2000.
Because the Bank had plans to convert its major data processing to new
systems during 1997 and 1998, requirements for Year 2000 compliance were
included in all major systems contracts. Contractual arrangements with the
Bank's major data processing vendors provide for regular monitoring of the
vendors' Year 2000 projects, substantial system compliance by the end of 1998
and testing and verification in early 1999.
During 1998 and the first six months of 1999, the Bank completed testing for
substantially all of the significant data processing systems deemed to be
critical to the Bank. The remediation process is complete for these systems
and no material problems have arisen during the testing process. The Bank's
process of testing and verifying the Year 2000 readiness of the systems
provided by third parties will continue throughout 1999, as system
modifications are made and further testing of interfaces and less critical
systems continues.
The Bank developed contingency plans for its significant processes in case
of an unanticipated Year 2000 disruption. These plans will be tested during
the second half of 1999.
Because of the third party nature of its major data processing relationships,
the Bank has not borne any significant programming costs of making its
systems Year 2000-ready. All of these costs will be borne by the vendors.
The Bank's major cost of becoming Year 2000-ready is related to staff and
management time spent planning, monitoring and testing the systems.
Therefore, Year 2000 issues are expected to have an immaterial impact on the
Company's results of operations, liquidity and capital expenditures.
Results of Operations
The Company reported consolidated net earnings of $9.1 million for the second
quarter of 1999 compared to net earnings of $8.6 million for the second
quarter of 1998. Improved earnings were due to the fact that no loan loss
provision was recorded during the second quarter of 1999. However, a $2.1
million loan loss provision was recorded for the second quarter of 1998.
Non-interest expense increased by $429 thousand during the second quarter of
1999 compared to the second quarter of 1998. The increase in non-interest
expenses was due to higher than normal legal costs and increased costs
related to maintaining the Company's new operating systems.
The Company reported consolidated net earnings of $18.0 million for the first
six months of 1999, compared to $16.8 million for the same period last year.
Due to the moderate level of charge-offs over the last two years, sufficient
general loan loss allowances had already been provided, therefore, no loan
loss provision was recorded during the first six months of 1999. A $4.6
million loan loss provision was recorded during the first six months of
1998. The $1.0 million increase in non-interest expenses during the first
six months of 1999 compared to the same period last year resulted from higher
than normal legal costs and increased costs related to maintaining the
Company's new operating systems.
Loan Loss Provisions
Management is unable to predict future levels of loan loss provisions. Among
other things, future loan loss provisions are based on the level of loan
charge-offs, foreclosure activity, and the economic climate in Southern
California.
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Loan Loss Allowances
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:
Six Months Ended June 30, 1999
General Impaired
Valuation Valuation
Allowances Allowances Total
(Dollars in thousands)
Balance at December 31, 1998 $ 67,638 $ 7,634 $ 75,272
Charge-offs:
Single family (308) - (308)
Multi-family (149) (1,438) (1,587)
Commercial - (552) (552)
Non-real estate (133) - (133)
Total charge-offs (590) (1,990) (2,580)
Recoveries 1,089 - 1,089
Net (charge-offs) recoveries 499 (1,990) (1,491)
Balance at June 30, 1999 $ 68,137 $ 5,644 $ 73,781
Six Months Ended June30, 1998
General Impaired
Valuation Valuation
Allowances Allowances Total
(Dollars in thousands)
Balance at December 31, 1997 $ 61,237 $ 9,775 $ 71,012
Provision for loan losses 4,024 576 4,600
Charge-offs:
Single family (1,077) (294) (1,371)
Multi-family (506) (1,614) (2,120)
Commercial (47) - (47)
Non-real estate (1) - (1)
Total charge-offs (1,631) (1,908) (3,539)
Recoveries 1,302 - 1,302
Adjustments and reclassifications 614 (614) -
Net (charge-offs) recoveries 285 (2,522) (2,237)
Balance at June 30, 1998 $ 65,546 $ 7,829 $ 73,375
The Bank also maintains a valuation allowance for loans sold with recourse,
recorded as a liability. This allowance was 6.66% of loans sold with
recourse as of June 30, 1999, compared to 6.18% as of December 31, 1998 and
6.17% as of June 30, 1998. The balance of loans sold with recourse totaled
$193 million, $203 million and $211 million as of June 30, 1999, December 31,
1998 and June 30, 1998, 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:
11
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Six Months Ended June 30,
1999 1998
(Dollars in thousands)
Balance at beginning of period $ 12,546 $ 13,029
Recoveries 278 -
Balance at end of period $ 12,824 $ 13,029
The following table summarizes the activity in the general valuation
allowance for real estate acquired by foreclosure for the periods indicated:
Six Months Ended June 30,
1999 1998
(Dollars in thousands)
Balance at beginning of period $ 500 $ 500
Provision for losses 4 484
Charge-offs (4) (484)
Balance at end of period $ 500 $ 500
Net Interest Income
During the first six months of 1999, the interest rate margin increased to
2.60% from 2.38% for the same period of the prior year. The Index (on a
lagged basis) determines the yield on 90% of the loan portfolio. The Index
in effect during the six months ended June 30, 1999 decreased by 0.40%
compared to the same period of the prior year. However, during the first six
months of 1999, the average yield on the Bank's loan portfolio decreased by
only 0.20% due to a decreased level of delinquent loans. The Bank's average
cost of funds decreased by 0.48% during the first six months of 1999 compared
to the same period last year.
The Bank's interest rate margin increased to 2.63% for the second quarter of
1999 from 2.41% for the second quarter of last year. During the second
quarter, the Bank's interest rate margin also benefited from a lower level of
delinquent loans compared to the prior year which offset a 0.14% decrease in
the Index. The Bank's average cost of funds decreased by 0.48% compared to
the same prior year period.
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:
During the Six Months Ended June 30,
1999 1998
(Dollars in thousands)
Average loans and mortgage-backed
securities $ 3,289,283 $3,764,813
Average investment securities 182,420 133,013
Average interest-earning assets 3,471,703 3,897,826
Average savings deposits 2,109,079 2,115,680
Average borrowings 1,240,162 1,654,986
Average interest-bearing liabilities 3,349,241 3,770,666
Excess of interest-earning assets over
interest-bearing liabilities $ 122,462 $ 127,160
12
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Yields earned on average interest
earning assets 7.30% 7.56%
Rates paid on average interest-
bearing liabilities 4.70 5.18
Net interest rate spread 2.60 2.38
Effective net spread(1) 2.77 2.54
Total interest income $ 126,717 $ 147,278
Total interest expense 78,043 97,146
48,674 50,132
Total other items(2) 1,710 2,233
Net interest income $ 50,384 $ 52,365
During the Three Months Ended June 30,
1999 1998
(Dollars in thousands)
Average loans and mortgage-backed
securities $ 3,272,833 $3,721,550
Average investment securities 180,659 126,449
Average interest-earning assets 3,453,492 3,847,999
Average savings deposits 2,063,939 2,157,953
Average borrowings 1,261,228 1,565,308
Average interest-bearing liabilities 3,325,167 3,723,261
Excess of interest-earning assets over
interest-bearing liabilities $ 128,325 $ 124,738
Yields earned on average interest
earning assets 7.27% 7.53%
Rates paid on average interest-
bearing liabilities 4.64 5.12
Net interest rate spread 2.63 2.41
Effective net spread(1) 2.80 2.58
Total interest income $ 62,754 $ 72,475
Total interest expense 38,474 47,671
24,280 24,804
Total other items(2) 939 1,110
Net interest income $ 25,219 $ 25,914
(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 dividends and other miscellaneous
items.
13
<PAGE>
Non-Interest Income and Expense
Loan and other fees were $1.1 million and $2.4 million for the second quarter
and first six months of 1999, respectively, compared to $1.6 million and $1.6
million for the same 1998 periods respectively. During the first quarter of
1998, the Bank recorded a $1.4 million provision for impairment of the Bank's
servicing asset.
Gain on the sale of loans results primarily from loan fees recognized at the
time of sale and decreased to $504 thousand and $1.0 million respectively,
for the second quarter and first six months of 1999 from $1.2 million and
$1.9 million, respectively for the second quarter and first six months of
1998. The volume of loans sold totaled $56.7 million and $114.5 million,
respectively, for the second quarter and first six months of 1999 compared
to $125.5 million and $186.2 million, respectively, for the same periods of
1998.
Real estate operations resulted in net gains of $1.5 million and $133
thousand for the second quarter of 1999 and 1998 respectively. For the first
six months of 1999 and 1998, real estate operations produced net gains of
$1.8 million and $665 thousand respectively. The increased level of income
from real estate operations is primarily due to gains on sale of real estate
owned.
Non-interest expense increased to 1.38% of average total assets during the
second quarter of 1999 compared to 1.26% for the same period of the prior
year. For the first six months of 1999 non-interest expenses were 1.37% of
average total assets compared to 1.21% for the first six months of 1998.
The increased ratio was attributable to higher than normal legal costs, the
increased cost of maintaining the Company's new operating systems, and a
decrease in average assets in 1999 compared to 1998.
Non-accrual, Past Due, Modified and Restructured Loans
The Bank accrues interest earned but uncollected for every loan without
regard to its contractual delinquency status but establishes a specific
interest allowance for each loan which becomes 90 days or more past due or is
in foreclosure. Loans on which delinquent interest allowances had been
established (non-accrual loans) totaled $13.3 million at June 30, 1999
compared to $29.3 million at December 31, 1998 and $31.2 million at June 30,
1998.
The amount of interest that has been provided for loans 90 days or more
delinquent or in foreclosure was $720 thousand at June 30, 1999, compared to
$1.9 million at both December 31, 1998 and June 30, 1998.
The Bank has debt restructurings that result from temporary modifications of
principal and interest payments. Under these arrangements, loan terms are
typically reduced to no less than a monthly interest payment required under
the note. Any loss of revenues under the modified terms would be immaterial
to the Bank. Generally, if the borrower is unable to return to scheduled
principal and interest payments at the end of the modification period,
foreclosure proceedings are initiated. As of June 30, 1999, the Bank had
modified loans totaling $9.1 million, net of loan loss allowances of $3.2
million. No modified loans were 90 days delinquent as of June 30, 1999.
The Bank considers a loan to be impaired when management believes that it is
probable that the Bank will be unable to collect all amounts due under the
contractual terms of the loan. Estimated impairment losses are recorded as
separate valuation allowances and may be subsequently adjusted based upon
changes in the measurement of impairment. Impaired loans, 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.
14
<PAGE>
The following is a summary of impaired loans, net of valuation allowances for
impairment, as of the dates indicated:
June 30, December 31, June 30,
1999 1998 1998
(Dollars in thousands)
Non-accrual loans $ 959 $ 5,934 $ 5,551
Modified loans 4,796 5,976 8,472
Other impaired loans 6,520 5,613 5,700
$ 12,275 $ 17,523 $ 19,723
The Bank evaluates loans for impairment whenever the collectibility of
contractual principal and interest payments is questionable. Large groups of
smaller balance homogenous loans that are collectively evaluated for
impairment, including residential mortgage loans, are not subject to the
application of SFAS No. 114.
When a loan is considered impaired, the Bank measures impairment based on the
present value of expected future cash flows (over a period not to exceed 5
years) discounted at the loan's effective interest rate. However, if the
loan is "collateral-dependent" or probable of foreclosure, impairment is
measured based on the fair value of the collateral. When the measure of an
impaired loan is less than the recorded investment in the loan, the Bank
records an impairment allowance equal to the excess of the Bank's recorded
investment in the loan over its measured value. The following summary
details loans measured using the fair value method and loans measured based
on the present value of expected future cash flows discounted at the
effective interest rate of the loan as of the dates indicated:
June 30, December 31, June 30,
1999 1998 1998
(Dollars in thousands)
Fair value method $ 12,275 $ 16,456 $ 18,656
Present value method - 1,067 1,067
Total impaired loans $ 12,275 $ 17,523 $ 19,723
All impaired loans as of June 30, 1999 and December 31, 1998 had associated
valuation allowances. Impaired loans for which there was no valuation
allowance established totaled $2.5 million for the quarter ended June 30,
1998. 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 that
were determined to be impaired by property type, as of the dates indicated:
June 30, December 31, June 30,
1999 1998 1998
(Dollars in thousands)
Multi-family $ 959 $ 5,456 $ 5,081
Commercial - 478 470
$ 959 $ 5,934 $ 5,551
15
<PAGE>
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 during the quarters ended
June 30, 1999, December 31, 1998, and June 30, 1998 was $12.3 million, $17.5
million and $19.8 million, respectively. The amount of interest income
recognized on the cash basis for impaired loans during the quarters ended
June 30, 1999, December 31, 1998 and June 30, 1998 was $297 thousand, $288
thousand and $337 thousand, respectively. Interest income recognized under
the accrual basis for the quarters ended June 30, 1999, December 31, 1998 and
June 30, 1998 was $273 thousand, $288 thousand and $343 thousand,
respectively.
Asset Quality
The following table sets forth certain asset quality ratios of the Bank at
the dates indicated:
June 30, December 31, June 30,
1999 1998 1998
Non-Performing Loans to
Loans Receivable (1) 0.43% 0.90% 0.90%
Non-Performing Assets to
Total Assets (2) 0.45% 0.84% 0.84%
Loan Loss Allowances to
Non-Performing Loans (3) 520.13% 242.09% 220.78%
General Loss Allowances to
Assets with Loss Exposure (4) 2.28% 2.26% 2.07%
General Loss Allowances to
Total Assets with Loss
Exposure (5) 2.55% 2.51% 2.32%
(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 excludes mortgage-backed securities.
(5) The Bank's general valuation allowances, including general valuation
allowances for loans sold with full or limited recourse. Assets with
loss exposure include the Bank's portfolio plus loans sold with recourse,
but exclude mortgage-backed securities.
16
<PAGE>
Non-performing Assets
The Bank defines non-performing assets as loans delinquent over 90 days
(non-accrual loans), loans in foreclosure and real estate acquired by
foreclosure (real estate owned). An analysis of non-performing assets
follows as of the dates indicated:
June 30, December 31, June 30,
1999 1998 1998
(Dollars in thousands)
Real estate owned:
Single family $ 2,981 $ 3,946 $ 2,899
Multi-family 1,500 1,309 3,021
Commercial - - 481
Other - - 53
Less:
General valuation allowance (500) (500) (500)
Total real estate owned 3,981 4,755 5,954
Non-accrual loans:
Single family 7,740 12,270 15,794
Multi-family 4,391 13,005 13,495
Commercial 1,190 4,040 2,008
Less:
Valuation allowances (1) (1,150) (3,332) (3,553)
Total non-accrual loans 12,171 25,983 27,744
Total non-performing assets $ 16,152 $ 30,738 $ 33,698
__________________________
(1) Includes valuation allowances for impaired loans and loss allowances
on other non-performing loans requiring fair value adjustments.
Real estate owned at June 30, 1999 decreased 16% compared to the December
31, 1998 level and 33% compared to the June 30, 1998 level due to
improvement in the Southern California real estate market.
Non-accrual loans, net of valuation allowances, at June 30, 1999 decreased
53% compared to the level at December 31, 1998 and 56% compared to the June
30, 1998 level.
Sources of Funds
External sources of funds include savings deposits from several sources,
advances from the Federal Home Loan Bank of San Francisco ("FHLB"),
securitized borrowings and unsecured term funds.
Savings deposits are accepted from retail banking offices, telemarketing
efforts, and national deposit brokers. 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 seeks 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.
17
<PAGE>
Deposits accepted by retail banking offices increased by $1.8 million and
$18.6 million during the second quarter and first six months of 1999,
respectively. The Bank is focusing its marketing efforts on attracting
checking accounts and short-term certificate of deposits. Retail deposits
comprised 77% of total savings deposits as of June 30, 1999.
Telemarketing deposits decreased by $31.7 million and $30.6 million during
the second quarter and first six months of 1999, respectively. These
deposits are normally large deposits from pension plans, managed trusts and
other financial institutions. These deposit levels fluctuate based on the
attractiveness of the Bank's rates compared to rates available to investors
on alternative investments. Telemarketing deposits comprised 4% of total
deposits at June 30, 1999.
Deposits acquired from national brokerage firms ("brokered deposits")
decreased by $113.5 million and $111.4 million during the second quarter
and first six months of 1999, respectively. The Bank has used brokered
deposits for over 15 years and considers these deposits a stable source of
funds. Because the Bank has sufficient capital to be deemed "well-capitalized"
under the standards established by the Office of Thrift Supervision, it may
solicit brokered funds without special regulatory approval. At June 30, 1999,
brokered deposits comprised 19% of total deposits.
Total borrowings decreased by $187.4 million during the second quarter of
1999 due net payoffs of $76.7 million in borrowings under reverse repurchase
agreements, $110.0 million in advances from the FHLB, and $700 thousand in
other borrowings. Total borrowings increased by $104.9 million during the
first six months of 1999 due to $200 million in advances from the FHLB,
offset by payoffs of $94.4 million in borrowings under reverse repurchase
agreements and $700 thousand in other borrowings.
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 that are a function of real estate activity and the general
level of interest rates.
Total principal payments on loans and mortgage-backed securities were $214.9
million and $401.8 million for the second quarter and first six months of
1999, respectively. This compares with principal payments of $253.4 million
and $384.5 million for the second quarter and first six months of 1998,
respectively.
Loan sales decreased to $56.7 million and $114.5 million for the second
quarter and first six months of 1999, respectively, compared with sales of
$125.5 million and $186.2 million for the second quarter and first six
months of 1998, respectively. The decrease is attributable to a reduction
in borrower demand for loans originated for sale to other investors.
Recent Developments
On June 28, 1998, the Company announced that it had entered into a Letter of
Intent to purchase Professional Bancorp, Inc., parent company of First
Professional Bank. First Professional Bank is a $250 million commercial bank
headquartered in Santa Monica. First Professional has developed a business
niche serving the financial needs of the healthcare industry. A condition to
consummation of the acquisition is the negotiation of an agreement whereby
FirstFed Financial Corp. will acquire Network Health Financial Services.
Network Health currently provides First Professional Bank with management and
marketing services related to the healthcare industry.
As currently contemplated, the transaction calls for the Company to pay
$23.50 in cash for each share of Professional Bancorp stock. The acquisition
is subject to several conditions including negotiation of a definitive
agreement, regulatory approval and approval of Professional Bancorp's
shareholders, and is expected to close in the fourth quarter of 1999 or the
first quarter of 2000. However, there can be no assurance that the
transaction will be consummated, or that it will be consummated within the
expected time period.
18
<PAGE>
Forward-Looking Information
The discussions contained above in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contain forward looking
statements within the meaning of the Private Securities Litigation Reform Act
(the "Act"). They are intended to provide information to facilitate the
understanding and assessment of the financial statements and footnotes and
should be read and considered in conjunction therewith. In addition, certain
statements in future filings by the Company with the Securities and Exchange
Commission, in press releases, and in oral and written statements made by or
with the approval of the Company that are not statements of historical fact
constitute forward looking statements within the meaning of the Act. Any
such forward looking statements speak only as of the date on which the
statements are made, and the Company undertakes no obligation to update any
forward looking statement to reflect events or circumstances after the date
on which such a statement is made to reflect any unanticipated events.
Forward looking statements involve risks and uncertainties that may cause
actual results to differ materially from those in such statements. Factors
that could cause actual results to differ include but are not limited to, (1)
the condition of the Southern California and U.S. economies in general, (2)
inflation, interest rate, and market fluctuations, (3) competitive
conditions, (4) the timely development and acceptance of new products and
services, (5) changes in consumer spending, borrowing and saving habits, (6)
the ability to increase market share and control expenses, (7) technological
changes, including the effects of the Year 2000 issue, and (8) the effect of
changes in laws and regulations (including laws and regulations concerning
taxes and banking) with which the Company must comply.
19
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form-8K
(1) Underwriting Agreement filed as Exhibit 1 to Amendment No.2 toForm S-3
dated September 7, 1994 and incorporated by reference.
(3.1) Restated Certificate of Incorporation
(3.2) By-Laws filed as Exhibit (1)(a) to Form 8-A dated June 4,1987 and
incorporated by reference.
(4.1) Amended and Restated Rights Agreement dated as of June 25, 1998, filed
as Exhibit 4.1 to Form 8-A/A, dated June 25, 1998 and incorporated by
reference.
(4.2) Indenture filed as Exhibit 4 to Amendment No. 3 to Form S-3 dated
September 20, 1994 and incorporated by reference.
(10.1) Deferred Compensation Plan filed as Exhibit 10.3 to Form 10-K for the
fiscal year ended December 31, 1983 and incorporated by reference.
(10.2) 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 Non-employee 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.
(b) Reports on Form 8-K
The Company filed a current report on Form 8-K dated June 28, 1999 wherein
FirstFed Financial Corp. announced that it had entered into a Letter of
Intent to purchase Professional Bancorp, Inc., parent company for First
Professional Bank.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRSTFED FINANCIAL CORP.
Registrant
Date: August 13, 1999
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
21
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from
this company's Consolidated Statement of Operations and Consolidated
Statement of Condition and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 48,806
<INT-BEARING-DEPOSITS> 93,000
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 602,683
<INVESTMENTS-CARRYING> 602,683
<INVESTMENTS-MARKET> 602,683
<LOANS> 2,768,246
<ALLOWANCE> 73,781
<TOTAL-ASSETS> 3,628,584
<DEPOSITS> 2,012,504
<SHORT-TERM> 781,800
<LIABILITIES-OTHER> 39,875
<LONG-TERM> 558,300
0
0
<COMMON> 233
<OTHER-SE> 235,872
<TOTAL-LIABILITIES-AND-EQUITY> 3,628,584
<INTEREST-LOAN> 53,324
<INTEREST-INVEST> 10,373
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 63,697
<INTEREST-DEPOSIT> 21,268
<INTEREST-EXPENSE> 17,210
<INTEREST-INCOME-NET> 25,219
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 13,113
<INCOME-PRETAX> 16,263
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,103
<EPS-BASIC> .47
<EPS-DILUTED> .47
<YIELD-ACTUAL> 2.80
<LOANS-NON> 12,171
<LOANS-PAST> 0
<LOANS-TROUBLED> 959
<LOANS-PROBLEM> 9,334
<ALLOWANCE-OPEN> 87,818
<CHARGE-OFFS> 2,580
<RECOVERIES> 1,089
<ALLOWANCE-CLOSE> 86,327
<ALLOWANCE-DOMESTIC> 86,327
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
