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 September 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 November 1, 1999 18,359,411 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 September 30, 1999, December 31, 1998
and September 30, 1998 3
Consolidated Statements of Operations and Comprehensive
Earnings for the three months and nine months ended
September 30, 1999 and 1998 4
Consolidated Statements of Cash Flows for the nine
months ended September 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 19
Signatures 20
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)
September 30, December 31, September 30,
1999 1998 1998
<S> <C> <C> <C>
Assets
Cash and cash equivalents $73,971 $126,280 $ 143,197
Investment securities, available-for-sale
(at fair value) 153,893 64,333 42,411
Mortgage-backed securities, available-for-sale
(at fair value) 447,444 556,679 604,344
Loans receivable, held-for-sale (fair value of
$3,158, $16,602 and $37,330) 3,158 16,450 37,040
Loans receivable, net 2,970,070 2,791,771 2,877,018
Accrued interest and dividends receivable 21,634 23,476 23,807
Real estate 2,052 4,791 5,719
Office properties and equipment, net 11,948 11,819 11,824
Investment in Federal Home Loan Bank
(FHLB) stock, at cost 70,760 72,700 71,645
Other assets 7,215 8,829 9,774
$3,762,145 $3,677,128 $3,826,779
Liabilities
Deposits $2,004,212 $2,135,909 $2,106,672
FHLB advances and other borrowings 1,153,550 764,000 949,500
Securities sold under agreements to repurchase 337,733 471,172 477,239
Accrued expenses and other liabilities 38,109 49,047 43,458
3,533,604 3,420,128 3,576,869
Commitments and Contingent Liabilities
Stockholders' Equity
Common stock, par value $.01 per share;
authorized 100,000,000 shares; issued 23,269,051
23,075,266, and 23,072,539 shares, outstanding
18,409,411, 21,127,426 and 21,187,799 shares 233 231 231
Additional paid-in capital 31,063 29,965 29,946
Retained earnings - substantially restricted 268,071 241,694 232,675
Loan to employee stock ownership plan (1,880) (833) (1,811)
Treasury stock, at cost, 4,859,640, 1,947,840
and 1,884,740 shares (60,299) (13,354) (12,443)
Accumulated other comprehensive earnings (loss),
net of taxes (8,647) (703) 1,312
228,541 257,000 249,910
$3,762,145 $3,677,128 $3,826,779
</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
(Dollars in thousands, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Interest income:
Interest on loans $ 53,097 $ 58,939 $ 160,428 $180,516
Interest on mortgage-backed securities 6,443 8,965 21,095 31,404
Interest and dividends on investments 4,131 3,308 10,582 8,834
Total interest income 63,671 71,212 192,105 220,754
Interest expense:
Interest on deposits 21,141 24,667 65,073 73,749
Interest on borrowings 18,235 21,735 52,353 69,830
Total interest expense 39,376 46,402 117,426 143,579
Net interest income 24,295 24,810 74,679 77,175
Provision for loan losses - 1,600 - 6,200
Net interest income
after provision for losses 24,295 23,210 74,679 70,975
Other income:
Loan servicing and other fees 968 1,264 3,352 2,871
Gain on sale of loans 111 1,084 1,198 2,947
Real estate operations, net 685 385 2,513 1,050
Other operating income 1,049 1,135 3,040 3,229
Total other income 2,813 3,868 10,103 10,097
Non-interest expense 11,990 11,698 37,691 36,372
Earnings before income taxes and
extraordinary item 15,118 15,380 47,091 44,700
Income tax provision 6,409 6,550 20,364 19,090
Earnings before extraordinary item 8,709 8,830 26,727 25,610
Extraordinary item
Loss on early extinguishment of debt,
net of taxes (351) - (351) -
Net earnings $ 8,358 $8,830 $26,376 $25,610
Other comprehensive earnings (loss),
net of taxes (1,268) 1,260 (7,944) 1,704
Comprehensive earnings $ 7,090 $ 10,090 $ 18,432 $ 27,314
Basic EPS
EPS before extraordinary item $ 0.46 $ 0.42 $ 1.37 $ 1.21
Extraordinary item (0.02) - (0.02) -
EPS after extraordinary item $ 0.44 $ 0.42 $ 1.35 $ 1.21
Diluted EPS
EPS before extraordinary item $ 0.46 $ 0.41 $ 1.36 $ 1.18
Extraordinary item (0.02) - (0.02) -
EPS after extraordinary item $ 0.44 $ 0.41 $ 1.34 $ 1.18
</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)
Nine Months Ended
September 30,
1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $26,376 $25,610
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Net change in loans-held-for-sale 13,292 3,342
Provision for loan losses - 6,200
Provision for REO losses - 573
Valuation adjustments on real estate sold (2,370) (1,832)
Amortization of fees and discounts 322 246
Decrease in taxes payable (2,431) (5,175)
Decrease in servicing assets 220 1,687
Decrease in interest and dividends receivable 1,842 3,183
Increase (decrease) in interest payable (9,668) 3,570
(Increase) decrease in other assets 506 (1,699)
Increase (decrease) in accrued expenses and other liabilities 8,906 (8,094)
Total adjustments 10,619 2,001
Net cash provided by operating activities 36,995 27,611
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans made to customers net of principal
collection on loans (50,872) 209,052
Loans purchased (134,940) (1,585)
Proceeds from sales of real estate 14,593 20,851
Principal reductions on mortgage-backed securities held for sale 97,023 74,483
Proceeds from maturities and principal payments
on investment securities 5,112 22,820
Purchase of investment securities (96,300) (16,045)
Redemption of FHLB stock 4,823 -
Other (4,880) (2,799)
Net cash provided by (used in) investing activities (165,441) 306,777
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in savings deposits (131,697) 163,025
Net increase (decrease) in short term borrowings 266,561 (969,931)
Treasury stock purchases (46,945) (558)
Increase (decrease) in long term borrowings (10,450) 455,000
Payment of prior period taxes and interest to IRS - (2,296)
Other (1,332) 434
Net cash provided by (used in) financing activities 76,137 (354,326)
Net decrease in cash and cash equivalents (52,309) (19,938)
Cash and cash equivalents at beginning of period 126,280 163,135
Cash and cash equivalents at end of period $73,971 $143,197
</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. Weighted
average outstanding shares were as follows for the periods
indicated:
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
Basic 18,785,478 21,209,722 19,550,337 21,198,988
Diluted 18,946,508 21,611,834 19,723,254 21,632,873
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.
6
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Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Financial Condition
At September 30, 1999, FirstFed Financial Corp. (the "Company"),
holding company for First Federal Bank of California and its
subsidiaries (the "Bank"), had consolidated assets totaling $3.8
billion, compared to $3.7 billion at December 31, 1998 and $3.8
billion at September 30, 1998.
The Bank's primary market area is Southern California, which has
been undergoing a period of economic expansion over the last few
years. The improved economy and real estate market positively
impacted several areas of the Bank's operations during 1999. The
ratio of non-performing assets to total assets decreased to 0.37%
as of September 30, 1999 from 0.84% as of December 31, 1998 and
0.73% as of September 30, 1998. (See "Non-performing Assets" for
further discussion.) Also, according to the California
Association of Realtors news release dated October 25, 1999,
home prices and real estate sales activity in the Los Angeles
area increased by 9.2% and 12.8%, respectively, in September
1999, compared to the same period of 1998.
Net loan charge-offs(Including recoveries from valuation allowances
from loans sold with recourse)decreased to $898 thousand during the
first nine months of 1999 compared to $2.6 million during the
same period of 1998. The Bank's total general valuation allowances
were $69.3 million or 2.16% of total loans and real estate owned
with loss exposure at September 30, 1999. This compares with
$68.1 million or 2.26% as of December 31, 1998 and $67.3 million
or 2.14% at September 30, 1998. The Bank also maintains
valuation allowances for impaired loans, which totaled $5.3
million at September 30, 1999, $7.6 million at December 31, 1998
and $7.8 million at September 30, 1998.
The Bank's portfolio of loans, including mortgage-backed
securities, increased by $55.8 million from December 31, 1998,
and decreased by $97.7 million from September 30, 1998. The
increase during the first nine months is primarily due to loan
originations of $745.2 million, which includes loan purchases of
$122.1 million. These increases were offset by accelerated
amortization of loans and mortgage-backed securities due to
payoffs. Mortgage-backed securities decreased to $447.4 million
as of September 30, 1999 from $556.7 million at December 31, 1998
and $604.3 million at September 30, 1998. No new mortgage-backed
securities were created during the first nine months of 1999 or
1998.
The mortgage-backed securities portfolio, classified as
available-for-sale, was recorded at fair value as of September
30, 1999. An unrealized loss of $7.5 million, net of taxes, was
reflected in stockholders' equity as of September 30, 1999. This
compares to a net, unrealized loss, net of taxes 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>
September 30, December 31, September 30,
1999 1998 1998
(Dollars in thousands)
<S> <C> <C> <C>
REAL ESTATE LOANS:
First trust deed residential loans:
One to four units $1,616,088 $1,565,105 $1,662,916
Five or more units 1,241,638 1,127,228 1,138,585
Residential loans 2,857,726 2,692,333 2,801,501
OTHER REAL ESTATE LOANS:
Commercial and industrial 181,035 181,772 180,748
Second trust deeds 13,783 15,357 14,527
Other - - 3,396
Real estate loans 3,052,544 2,889,462 3,000,172
NON-REAL ESTATE LOANS:
Manufactured housing 727 893 944
Deposit accounts 705 1,002 994
Consumer 4,448 1,167 125
Loans receivable 3,058,424 2,892,524 3,002,235
LESS:
General valuation allowances-
loan portfolio 68,802 67,638 66,827
Valuation allowances - impaired loans 5,294 7,634 7,829
Unrealized loan fees 11,100 9,031 13,521
Net loans receivable 2,973,228 2,808,221 2,914,058
FHLMC AND FNMA MORTGAGE-
BACKED SECURITIES (at fair value):
Secured by single family dwellings 431,590 539,079 584,678
Secured by multi-family dwellings 15,854 17,600 19,666
Mortgage-backed securities 447,444 556,679 604,344
TOTAL $3,420,672 $3,364,900 $3,518,402
</TABLE>
The investment securities portfolio, classified as
available-for-sale, was recorded at fair value as of September
30, 1999. An unrealized loss of $1.2 million, net of taxes, was
reflected in stockholders' equity as of September 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 composition of the Company's financial
instruments has not changed significantly 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
$171.6 million or 4.56% of total assets at September 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
$554.4 million or 14.49% of total assets as of September 30, 1998.
Over 88% 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. The decrease in the one year GAP from
the year end and prior year levels is primarily due to a $201.6
million increase in short term borrowings during the first nine
months of 1999.
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
September 30, 1999:
Tangible Core Risk-based
Capital Capital Capital
(Dollars in thousands)
Actual Capital:
Amount $268,547 $268,547 $296,594
Ratio 7.08% 7.08% 13.46%
Minimum required capital:
Amount $56,926 $151,803 $176,239
Ratio 1.50% 4.00% 8.00%
Well capitalized required capital:
Amount - $189,753 $220,298
Ratio - 5.00% 10.00%
The Company repurchased 919,900 and 2,911,800 shares of its
common stock at average prices of $15.93 and $16.12 respectively,
during the third quarter and first nine months of 1999. The
repurchases were made pursuant to repurchase authorizations made
by the Board of Directors on October 21, 1998, February 25, 1999,
April 21, 1999, and October 15, 1999. As of October 18, 1999,
1,220,068 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.
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.
9
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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 nine 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 less critical
systems continues.
The Bank developed contingency plans for its significant
processes in case of an unanticipated Year 2000 disruption.
These plans have been tested and continue to be updated and
revised.
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
have been 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 earnings before extraordinary
items of $8.7 million for the third quarter of 1999 compared to
earnings before extraordinary items of $8.8 million for the third
quarter of 1998. Quarterly earnings decreased slightly due to
reductions in gain of sale of loans and net interest income,
offset by the fact that no loan loss provision was recorded
during the third quarter of 1999.
The Company retired $10.5 million of its senior unsecured 11.75%
notes during the third quarter of 1999 at a price of 103% of the
face value of the notes. The premium and related costs of $351
thousand, net of taxes, were recorded as a loss on the early
extinguishment of debt (which is shown as an extraordinary item
in the consolidated financial statements). Net earnings after
extraordinary items were $8.4 million for the third quarter of
1999, compared to $8.8 million for the third quarter of 1998.
For the first nine months of 1999, earnings before extraordinary
items were $26.7 million, compared to $25.6 million for the first
nine months of 1998. Net earnings after extraordinary items were
$26.4 million for the first nine months of 1999, compared to
$25.6 million for the first nine months of 1998.
The increase in the year-to-date earnings results primarily from
additional earnings from real estate operations and the fact that
no loan loss provision was recorded during the period.
Reductions in net interest income and gain on sale of loans
offset the increased earnings. Also, non-interest expense
increased during the first nine months of 1999 due to increased
legal costs.
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.
10
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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:
Nine Months Ended September 30, 1999
General Impaired
Valuation Valuation
Allowances Allowances Total
(Dollars in thousands)
Balance at December 31, 1998 $ 67,638 $ 7,634 $ 75,272
Provision for loan losses - - -
Charge-offs:
Single family (308) - (308)
Multi-family (149) (1,788) (1,937)
Commercial (6) (552) (558)
Non-real estate (133) - (133)
Total charge-offs (596) (2,340) (2,936)
Recoveries 1,760 - 1,760
Net charge-offs 1,164 (2,340) (1,176)
Balance at September 30, 1999 $ 68,802 $5,294 $ 74,096
Nine Months Ended September 30, 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 5,624 576 6,200
Charge-offs:
Single family (1,030) (294) (1,324)
Multi-family (881) (1,614) (2,495)
Commercial (137) - (137)
Non-real estate (1) - (1)
Total charge-offs (2,049) (1,908) (3,957)
Recoveries 1,401 - 1,401
Adjustments and reclassifications 614 (614) -
Net charge-offs (34) (2,522) (2,556)
Balance at September 30, 1998 $ 66,827 $7,829 $ 74,656
The Bank also maintains a valuation allowance for loans sold with
recourse, recorded as a liability. This allowance was 6.83% of
loans sold with recourse as of September 30, 1999, compared to
6.18% as of December 31, 1998 and 6.26% as of September 30,
1998. The balance of loans sold with recourse totaled $187.7
million, $203.0 million and $208.0 million as of September 30,
1999, December 31, 1998 and September 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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Nine Months Ended September 30,
1999 1998
(Dollars in thousands)
Balance at beginning of period $ 12,546 $ 13,029
Charge-offs - -
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:
Nine Months Ended September 30,
1999 1998
(Dollars in thousands)
Balance at beginning of period $ 500 $ 500
Provision for losses 4 573
Charge-offs (4) (573)
Balance at end of period $ 500 $ 500
Net Interest Income
The Company's interest rate margin increased to 2.53% for the
third quarter of 1999 from 2.41% for the third quarter of last
year. During the first nine months of 1999, the interest rate
margin increased to 2.58% from 2.39% for the same period of last
year. The Index (on a lagged basis) determines the yield on
over 89% of the loan portfolio. The Index in effect during the
three months and nine months ended September 30, 1999 decreased
by 0.40% and 0.38%, respectively compared to the same periods of
the prior year. However, during the same time period, the Bank's
cost of funds decreased by 0.34% and 0.43%, respectively,
compared to the same periods of the prior year. The Company's
interest rate margin also benefited from an improvement in
delinquent loans compared to the prior year. Loans delinquent
greater than 90 days decreased to $13.1 million as of September
30, 1999 from $25.8 million as the same period one year ago.
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 Three Months Ended September 30,
1999 1998
(Dollars in thousands)
Average loans and mortgage-backed
securities $3,270,359 $3,589,487
Average investment securities 217,901 162,493
Average interest-earning assets 3,488,260 3,751,980
Average savings deposits 2,030,290 2,126,383
Average borrowings 1,312,683 1,487,588
Average interest-bearing liabilities 3,342,973 3,613,971
Excess of interest-earning assets over
interest-bearing liabilities $ 145,287 $ 138,009
12
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Yields earned on average interest
earning assets 7.20% 7.48%
Rates paid on average interest-
bearing liabilities 4.67 5.07
Net interest rate spread 2.53 2.41
Effective net spread(1) 2.72 2.59
Total interest income $ 62,802 $ 70,170
Total interest expense 39,376 46,216
23,426 23,954
Total other items(2) 869 856
Net interest income $ 24,295 $ 24,810
During the Nine Months Ended September 30,
1999 1998
(Dollars in thousands)
Average loans and mortgage-backed
securities $3,282,975 $3,706,371
Average investment securities 194,247 142,840
Average interest-earning assets 3,477,222 3,849,211
Average savings deposits 2,082,816 2,119,247
Average borrowings 1,264,398 1,599,187
Average interest-bearing liabilities 3,347,214 3,718,434
Excess of interest-earning assets over
interest-bearing liabilities $ 130,008 $ 130,777
Yields earned on average interest
earning assets 7.27% 7.54%
Rates paid on average interest-
bearing liabilities 4.69 5.15
Net interest rate spread 2.58 2.39
Effective net spread(1) 2.75 2.56
Total interest income $ 189,526 $ 217,448
Total interest expense 117,426 143,117
72,100 74,331
Total other items(2) 2,579 2,844
Net interest income $ 74,679 $ 77,175
(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.
Non-Interest Income and Expense
Loan and other fees were $1.0 million and $3.4 million for the
third quarter and first nine months of 1999, respectively,
compared to $1.3 million and $2.9 million for the same periods of
1998. The decrease in loan fees on a quarterly basis was due to
payoffs of the underlying servicing assets. The increase in
year-to-date loan fees was due to a $1.4 million provision for
impairment of the Bank's servicing assets that was recorded
during the first quarter of 1998.
13
<PAGE>
Gain on the sale of loans results primarily from loan fees
recognized at the time of sale and decreased to $111 thousand and
$1.2 million for the third quarter and first nine months of 1999
from $1.1 million and $2.9 million for the same periods of the
prior year. The volume of loans sold totaled $13.5 million and
$128.0 million during the third quarter and first nine months of
1999 compared to $106.7 million and $292.9 million for the same
periods of the prior year. The decrease in loans sold results
from a decrease in loans originated for sale.
Real estate operations resulted in net gains of $685 thousand and
$2.5 million for the third quarter and first nine months of
1999. This compares to net gains of $385 thousand and $1.0
million for the same periods of the prior year. Real estate
operations include gains and losses on sale of foreclosed
properties as well as operational income and expenses during the
holding period.
Other operating income decreased to $1.0 million and $3.0 million
during the third quarter and first nine months of 1999 compared
to $1.1 million and $3.2 million for the same periods of 1998.
The decreases were due to a slight reduction in fees collected
for services rendered at the retail savings branches.
The ratio of non-interest expense to average assets increased to
1.30% of average assets for the third quarter of 1999 from 1.19%
during the comparable 1998 period. The ratio increased to 1.34%
for the first nine months of 1999 compared to 1.21% for the first
nine months of 1998. The increased ratios were attributable to
higher than normal legal costs and a decreased 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 $13.1 million at September 30, 1999
compared to $29.3 million at December 31, 1998 and $25.8 million
at September 30, 1998.
The amount of interest that has been provided for loans 90 days
or more delinquent or in foreclosure was $851 thousand at
September 30, 1999, $1.9 million at December 31, 1998 and $1.7
million at September 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 September 30, 1999, the Bank had modified loans totaling $5.6
million, net of loan loss allowances totaling $3.2 million. No
modified loans were 90 days or more delinquent as of September
30, 1999.
Pursuant to Statement of Financial Accounting Standards No. 114,
"Accounting by Creditors for Impairment of a Loan" ("SFAS No.
114"), the Bank considers a loan to be impaired when management
believes that it is probable that the Bank will be unable to
collect all amounts due under the contractual terms of the loan.
Estimated impairment losses are 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:
September 30, December 31, September 30,
1999 1998 1998
(Dollars in thousands)
Non-accrual loans $ 976 $ 5,934 $ 5,609
Modified loans 4,760 5,976 5,885
Other impaired loans 5,908 5,613 5,654
$11,644 $ 17,523 $ 17,148
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:
September 30, December 31, September 30,
1999 1998 1998
(Dollars in thousands)
Fair value method $11,644 $ 16,456 $ 16,081
Present value method - 1,067 1,067
Total impaired loans $11,644 $ 17,523 $ 17,148
All impaired loans as of September 30, 1999, December 31, 1998,
and September 30, 1998 had an associated valuation allowance. 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:
September 30, December 31, September 30,
1999 1998 1998
(Dollars in thousands)
Single family $ 976 $ - $ -
Multi-family - 5,456 5,134
Commercial - 478 475
$ 976 $ 5,934 $ 5,609
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.
15
<PAGE>
The average recorded investment in impaired loans during the
quarters ended September 30, 1999, December 31, 1998, and
September 30, 1998 was $11.7 million, $17.5 million and $17.2
million, respectively. The amount of interest income recognized
on the cash basis for impaired loans during the quarters ended
September 30, 1999, December 31, 1998 and September 30, 1998 was
$254 thousand, $288 thousand and $297 thousand, respectively.
Interest income recognized under the accrual basis for the
quarters ended September 30, 1999, December 31, 1998 and
September 30, 1998 was $253 thousand, $288 thousand and $289
thousand, respectively.
Asset Quality
The following table sets forth certain asset quality ratios of
the Bank at the dates indicated:
September 30, December 31, September 30,
1999 1998 1998
Non-Performing Loans to
Loans Receivable (1) 0.39% 0.90% 0.75%
Non-Performing Assets to
Total Assets (2) 0.37% 0.84% 0.73%
Loan Loss Allowances to
Non-Performing Loans (3) 534.43% 242.09% 272.01%
General Loss Allowances to
Assets with Loss Exposure (4) 2.16% 2.26% 2.14%
General Loss Allowances to
Total Assets with Loss
Exposure (5) 2.42% 2.51% 2.39%
_______________________
(1) Non-performing loans are net of valuation allowances related to those
loans. Loans receivable exclude mortgage-backed securities and are before
deducting unrealized loan fees, general valuation allowances and valuation
allowances for impaired loans.
(2) Non-performing assets are net of valuation allowances related to those
assets.
(3) The Bank's loan loss allowances, including valuation allowances for
non-performing loans and general valuation allowances but excluding
general valuation allowances for loans sold by the Bank with full or
limited recourse. Non-performing loans are before deducting
valuation allowances related to those loans.
(4) The Bank's general valuation allowances, excluding general valuation
allowances for loans sold with full or limited recourse. The Bank's
assets with loss exposure include primarily loans and real estate
owned, but exclude mortgage-backed securities.
(5) The Bank's general valuation allowances, including general valuation
allowances for loans sold with full or limited recourse. Assets with
loss exposure include the Bank's portfolio plus loans sold with
recourse, but exclude mortgage-backed securities.
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:
September 30, December 31, September 30,
1999 1998 1998
(Dollars in thousands)
Real estate owned:
Single family $1,659 $ 3,946 $ 3,747
Multi-family 858 1,309 1,914
Commercial - - 469
Other - - 52
Less:
General valuation allowance (500) (500) (500)
Total real estate owned 2,017 4,755 5,682
Non-accrual loans:
Single family 8,506 12,270 13,305
Multi-family 3,960 13,005 10,350
Commercial 591 4,040 2,183
Less:
Valuation allowances (1) (979) (3,332) (3,456)
Total non-accrual loans 12,078 25,983 22,382
Total non-performing assets $14,095 $ 30,738 $ 28,064
_____________________________
(1) Includes valuation allowances for impaired loans and loss allowances on
other non-performing loans requiring fair value adjustments.
Real estate owned at September 30, 1999 decreased 58% compared to
the December 31, 1998 level and 65% compared to the September 30,
1998 level due to improvement in the Southern California real
estate market. Due to the improved real estate values in
Southern California, Bank foreclosures have decreased.
Additionally, foreclosed properties are selling more quickly
compared to the prior year.
Non-accrual loans, net of valuation allowances, at September 30,
1999 decreased 54% compared to the level at December 31, 1998 and
decreased 46% from the level one year ago. Substantial
improvement in multi-family and single family delinquencies was
noted compared to the year ago levels.
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.
17
<PAGE>
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.
Savings deposits accepted by retail banking offices increased by
$2.5 million and $21.1 million during the third quarter and first
nine months of 1999, respectively. Retail deposits comprised of
77% of total savings deposits as of September 30, 1999.
Telemarketing deposits decreased by $7.1 million and $37.7
million during the quarter and first nine 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 the rates available to investors on
alternative investments. Telemarketing deposits comprised of 4%
of total deposits at September 30, 1999.
Deposits acquired from national brokerage firms ("brokered
deposits") decreased by $3.7 million and $115.1 million during
the quarter and first nine months of 1999, respectively. 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 September 30, 1999, brokered deposits
comprised 19% of total deposits.
Total borrowings increased by $151.2 million during the third
quarter of 1999 due to net payoffs of $39.1 million in reverse
repurchase agreements offset by a net increase of $190.3 million
in advances from the FHLB and early extinguishment of a portion
of the Bank's senior unsecured notes. Total borrowings increased
by $256.1 million during the first nine months of 1999 due to net
payoffs of $133.5 million in reverse repurchase agreements and a
net increase of $389.6 million in advances from the FHLB and
early extinguishment of a portion of the Bank's senior notes.
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 $140.2 million and $542.0 million for the third quarter and
first nine months of 1999, respectively. This compares with
principal payments of $130.3 million and $514.8 million for the
third quarter and first nine months of 1998, respectively.
Loan sales were $13.5 million and $128.0 million for the third
quarter and the first nine months of 1999, respectively, compared
with sales of $106.7 million and $292.9 million for the third
quarter and first nine months of 1998. The decrease in loans
sold results from a decrease in loans originated for sale.
18
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form-8K
(1)Underwriting Agreement filed as Exhibit 1 to Amendment No. 2 to Form
S-3 dated September 7, 1994 and incorporated by reference.
(3.1)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 September 7,1999
wherein FirstFed Financial Corp. announced that it had agreed with
Professional Bancorp, Inc. (AMEX symbol "MDB"), parent company for First
Professional Bank, not to proceed with a possible acquisition of Professional
Bancorp Inc. by FirsfFed.
19
<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: November 15, 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
20
<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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 33,971
<INT-BEARING-DEPOSITS> 40,000
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 601,337
<INVESTMENTS-CARRYING> 601,337
<INVESTMENTS-MARKET> 601,337
<LOANS> 2,973,228
<ALLOWANCE> 74,096
<TOTAL-ASSETS> 3,762,145
<DEPOSITS> 2,004,212
<SHORT-TERM> 1,072,733
<LIABILITIES-OTHER> 38,109
<LONG-TERM> 418,550
0
0
<COMMON> 233
<OTHER-SE> 228,308
<TOTAL-LIABILITIES-AND-EQUITY> 3,762,145
<INTEREST-LOAN> 160,428
<INTEREST-INVEST> 31,677
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 192,105
<INTEREST-DEPOSIT> 65,073
<INTEREST-EXPENSE> 52,353
<INTEREST-INCOME-NET> 74,679
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 37,691
<INCOME-PRETAX> 47,091
<INCOME-PRE-EXTRAORDINARY> 26,727
<EXTRAORDINARY> (351)
<CHANGES> 0
<NET-INCOME> 26,376
<EPS-BASIC> 1.35
<EPS-DILUTED> 1.34
<YIELD-ACTUAL> 2.58
<LOANS-NON> 12,078
<LOANS-PAST> 0
<LOANS-TROUBLED> 976
<LOANS-PROBLEM> 7,893
<ALLOWANCE-OPEN> 87,818
<CHARGE-OFFS> 2,936
<RECOVERIES> 2,038
<ALLOWANCE-CLOSE> 86,920
<ALLOWANCE-DOMESTIC> 86,920
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
