UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 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) (ZipCode)
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 April 30, 1999, 19,321,619 shares of the Registrant's $.01 par value
common stock were outstanding.
<PAGE>
FirstFed Financial Corp.
Index
Page
Part I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Financial Condition
as of March 31, 1999, December 31, 1998
and March 31, 1998 3
Consolidated Statements of Operations and Comprehensive
Earnings for the three months ended March 31, 1999 and
1998 4
Consolidated Statements of Cash Flows for the three
months ended March 31, 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 18
Signatures 19
2
<PAGE>
<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)
March 31, December 31, March 31,
1999 1998 1998
<S> <C> <C> <C>
Assets
Cash and cash equivalents $ 424,253 $ 126,280 $ 107,601
Investment securities, available-for-sale
(at fair value) 106,831 64,333 49,218
Mortgage-backed securities, available-for-sale
(at fair value) 525,937 556,679 658,598
Loans receivable, held-for-sale (fair value of
$24,354, $16,602 and $70,936) 24,251 16,450 70,349
Loans receivable, net 2,760,907 2,791,771 3,057,735
Accrued interest and dividends receivable 22,381 23,476 26,968
Real estate 5,754 4,791 6,469
Office properties and equipment, net 11,957 11,819 10,715
Investment in Federal Home Loan Bank
(FHLB) stock, at cost 73,694 72,700 69,605
Other assets 8,926 8,829 10,086
$3,964,891 $3,677,128 $ 4,067,344
Liabilities
Deposits $2,155,879 $2,135,909 $ 2,157,502
FHLB advances and other borrowings 1,074,000 764,000 1,050,500
Securities sold under agreements to repurchase 453,531 471,172 570,794
Accrued expenses and other liabilities 45,687 49,047 56,009
3,729,097 3,420,128 3,834,805
Commitments and Contingent Liabilities
Stockholders' Equity
Common stock, par value $.01 per share;
authorized 25,000,000 shares; issued 23,261,359
23,075,266, and 23,031,676 shares, outstanding
19,418,919, 21,127,426 and 21,184,636 shares(1) 233 231 230
Additional paid-in capital 31,004 29,965 29,611
Retained earnings - substantially restricted 250,611 241,694 215,208
Loan to employee stock ownership plan (1,827) (833) (1,766)
Treasury stock, at cost, 3,842,440, 1,947,840
and 1,847,040 shares(1) (44,150) (13,354) (11,885)
Accumulated other comprehensive gain(loss),
net of taxes (77) (703) 1,141
235,794 257,000 232,539
$3,964,891 $3,677,128 $ 4,067,344
</TABLE>
(1) All per share amounts have been adjusted to reflect the two-for-one stock
split declared June 25, 1998.
See accompanying notes to consolidated financial statements.
3
<PAGE>
FirstFed Financial Corp. and Subsidiary
Consolidated Statements of Operations and Comprehensive Earnings
(Dollars in thousands, except per share data)
(Unaudited)
Three Months Ended
March 31,
1999 1998
Interest income:
Interest on loans $ 54,007 $ 61,676
Interest on mortgage-backed securities 7,609 11,532
Interest and dividends on investments 3,121 2,747
Total interest income 64,737 75,955
Interest expense:
Interest on deposits 22,664 24,022
Interest on borrowings 16,908 25,482
Total interest expense 39,572 49,504
Net interest income 25,165 26,451
Provision for loan losses - 2,500
Net interest income
after provision for losses 25,165 23,951
Non-interest income:
Loan and other fees 1,285 40
Gain on sale of loans 583 659
Real estate operations, net 302 532
Other operating income 963 1,024
Total non-interest income 3,133 2,255
Non-interest expense 12,588 11,990
Earnings before income taxes 15,710 14,216
Income tax provision 6,795 6,073
Net earnings $ 8,915 $ 8,143
Other comprehensive earnings - unrealized gain
on securities available-for-sale, net of taxes 626 1,533
Comprehensive earnings $ 9,541 $ 9,676
Earnings per share:
Basic $ 0.43 $ 0.38
Diluted $ 0.43 $ 0.38
Weighted average shares outstanding:
Basic 20,553,809 21,180,912
Diluted 20,715,099 21,598,224
(1) All per share amount have been adjusted to reflect the two-for-one stock
split declared June 25, 1998.
See accompanying notes to consolidated financial statements.
4
<PAGE>
FirstFed Financial Corp. and Subsidiary
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 8,915 $ 8,143
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Net change in loans-held-for-sale (7,801) (29,967)
Provision for loan losses - 2,500
Provision for REO losses 4 277
Valuation adjustments on real estate sold (786) 276
Amortization of fees and discounts (243) (243)
Decrease in deferred premium on sale of loans 65 1,495
Decrease in interest and dividends receivable 1,095 22
Increase (decrease)in interest payable (2,835) 3,903
Increase in other assets (537) (1,226)
Decrease in accrued expenses and other liabilities (7,442) (6,109)
Total adjustments (18,480) (29,072)
Net cash used in operating activities (9,565) (20,929)
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans made to customers net of principal
collection on loans 28,662 40,639
Loans repurchased (1,042) (126)
Proceeds from sales of real estate 4,958 8,185
Principal reductions on mortgage-backed securities
Held for sale 32,024 20,076
Proceeds from maturities and principal payments
on investment securities 1,338 10,870
Purchase of investment securities (43,795) (11,045)
Other (2,946) (1,146)
Net cash provided by investing activities 19,199 67,453
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in savings deposits 19,970 213,855
Net increase (decrease) in short term borrowings 292,359 (660,376)
Increase in long term borrowings - 340,000
Treasury stock purchases (30,790) -
Other 6,800 4,463
Net cash provided by (used) in financing activities 288,339 (102,058)
Net increase (decrease) in cash and cash equivalents 297,973 (55,534)
Cash and cash equivalents at beginning of period 126,280 163,135
Cash and cash equivalents at end of period $ 424,253 $ 107,601
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
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.
The Board of Directors of FirstFed Financial Corp. declared a two-for-one
stock split on June 25, 1998 to shareholders of record on July 15, 1998. The
additional shares were distributed on July 30, 1998. All per share
computations have been adjusted for the stock split.
3. For purposes of reporting cash flows on the "Consolidated Statement of
Cash Flows", cash and cash equivalents include cash, overnight investments
and securities purchased under agreements to resell which mature within 90
days of the date of purchase.
4. 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 is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. 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 134 No. was
effective the first quarter of 1999. The implementation of this statement
did not have a material affect on the Company's financial condition or
results of operations.
6
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Financial Condition
At March 31, 1999, FirstFed Financial Corp. (the "Company"), holding company
for First Federal Bank of California and its subsidiaries (the "Bank"), had
consolidated assets totaling $4.0 billion, compared to $3.7 billion at
December 31, 1998 and $4.1 billion at March 31, 1998. The growth in total
assets during the first quarter of 1999 is attributable to an increase in
short term investments as borrowed funds grew faster than necessary to fund
the Bank's loan portfolio. Over the next three quarters, the Company will
monitor the level of liquidity that could be required due to the Year 2000
issue, and will make appropriate changes in the level of borrowings needed
through the end of 1999.
The Bank's primary market area is Southern California, which remains strong
economically. According to UCLA Anderson Forecast for California, March 1999
Report, home prices in the Los Angeles County area are expected to increase by
5.7% during 1999. The improved economy and real estate market positively
impacted several areas of the Bank's operations during the first quarter of
1999. The ratio of non-performing assets to total assets decreased to 0.55%
as of March 31, 1999 from 0.84% as of December 31, 1998 and 0.89% as of
March 31, 1998. (See "Non-performing Assets" for further discussion.)
Net loan charge-offs decreased to $449 thousand during the first three months
of 1999 compared to $465 thousand during the same period of 1998. The Bank's
general valuation allowance was $69.1 million or 2.34% of total loans and
real estate owned with loss exposure at March 31, 1999. This compares with
$68.1 million or 2.26% as of December 31, 1998 and $63.9 million or 1.92% at
March 31, 1998. The Bank also maintains valuation allowances for impaired
loans, which totaled $5.9 million at March 31, 1999, $7.6 million at December
31, 1998 and $9.6 million at March 31, 1998.
The Bank's portfolio of loans, including mortgage-backed securities,
decreased to $3.3 billion as of March 31, 1999 from $3.4 billion at December
31, 1998 and $3.8 billion at March 31, 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. No new mortgage-backed securities were created with the
Bank's loans during the first quarter of 1999 or 1998.
The mortgage-backed securities portfolio, classified as available-for-sale,
was recorded at fair value as of March 31, 1999. An unrealized gain of $330
thousand, net of taxes, was reflected in stockholders equity as of March 31,
1999. This compares to a net unrealized loss of $413 thousand as of December
31, 1998.
7
<PAGE>
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>
March 31, December 31, March 31,
1999 1998 1998
(Dollars in thousands)
<S> <C> <C> <C>
REAL ESTATE LOANS:
First trust deed residential loans:
One to four units $1,552,422 $1,565,105 $ 1,801,197
Five or more units 1,111,805 1,127,228 1,199,592
Residential loans 2,664,227 2,692,333 3,000,789
OTHER REAL ESTATE LOANS:
Commercial and industrial 180,329 181,772 192,714
Second trust deeds 14,585 15,357 15,339
Other - - 4,428
Real estate loans 2,859,141 2,889,462 3,213,270
NON-REAL ESTATE LOANS:
Manufactured housing 819 893 1,086
Deposit accounts 932 1,002 1,117
Consumer 2,294 1,167 342
Loans receivable 2,863,186 2,892,524 3,215,815
LESS:
General valuation allowances-
loan portfolio 68,644 67,638 63,404
Valuation allowances - impaired loans 5,901 7,634 9,643
Unrealized loan fees 3,483 9,031 14,684
Net loans receivable 2,785,158 2,808,221 3,128,084
FHLMC AND FNMA MORTGAGE-
BACKED SECURITIES (at fair value):
Secured by single family dwellings 508,465 539,079 639,907
Secured by multi-family dwellings 17,472 17,600 18,691
Mortgage-backed securities 525,937 556,679 658,598
TOTAL $3,311,095 $3,364,900 $3,786,682
</TABLE>
The investment securities portfolio, classified as available-for-sale, was
recorded at fair value as of March 31, 1999. An unrealized loss of $407
thousand, net of taxes, was reflected in stockholders' equity as of March 31,
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. Nothing has occurred since December 31, 1998 that
materially affects the Company's market risk.
8
<PAGE>
The one year GAP (the difference between rate-sensitive assets and
liabilities repricing within one year or less) was a positive $282.8 million
or 7.13% of total assets at March 31, 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 $481.0 million or 11.83% of total assets as of March 31,
1998. Over 93% 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 December 31, 1998 to March 31, 1999 is due
to an increase in short term borrowings.
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 March
31, 1999:
<TABLE>
<CAPTION>
Tangible Core Risk-based
Capital Capital Capital
(Dollars in thousands)
<S> <C> <C> <C>
Actual Capital:
Amount $281,283 $281,283 $308,313
Ratio 7.07% 7.07% 14.50%
Minimum required capital:
Amount $ 59,644 $159,050 $170,092
Ratio 1.50% 4.00% 8.00%
Well capitalized required capital:
Amount - $198,813 $212,615
Ratio - 5.00% 10.00%
</TABLE>
During the first three months of 1999, the Company repurchased 1,894,600
shares of its common stock at an average price of $16.25 per share. The
repurchases were made pursuant to 5% repurchase authorizations made by the
Board of Directors on October 21, 1998, February 25, 1999, and April 21, 1999.
Currently 1,219,497 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 Company 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. In each case where the Bank is
vulnerable to a third party's failure to remedy its own Year 2000 issues, the
Bank is continuing to develop contingency plans to utilize other vendors or
alternative work flows if adequate response and verification is not received
from the vendor in a timely fashion.
9
<PAGE>
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 four 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 through the middle of 1999,
as system modifications are made and further testing of interfaces and less
critical systems continues.
Because of the third party nature of its major data processing relationships,
the Bank has not borne any 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 $8.9 million for the first
quarter of 1999 compared to net earnings of $8.1 million for the first
quarter of 1998. Earnings improved due to the fact that no loan loss
provision was recorded during the first quarter of 1999. Due to the moderate
level of charge-offs over the last two years, sufficient general loan loss
allowances had already been provided. Also, earnings improved because loan
and other fees increased to $1.3 million as of March 1999 from $40 thousand as
of March 1998. A $1.4 million provision for the impairment of the Bank's
servicing assets was recorded during the first quarter of 1998. Offsetting the
improved earings was a $598 thousand increase in non-interest expense for the
first quarter of 1999 compared to the first quarter of 1998. The additional
expenses resulted from an increase in compensation and related employee
benefits due to the expansion of the Bank's business lines.
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
<PAGE>
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:
<TABLE>
<CAPTION>
Three Months Ended March 31, 1999
General Impaired
Valuation Valuation
Allowances Allowances Total
(Dollars in thousands)
<S> <C> <C> <C>
Balance at December 31, 1998 $ 67,638 $ 7,634 $ 75,272
Charge-offs:
Single family (83) - (83)
Multi-family - (1,181) (1,181)
Commercial - (552) (552)
Total charge-offs (83) (1,733) (1,816)
Recoveries 1,089 - 1,089
Net charge-offs 1,006 (1,733) (727)
Balance at March 31, 1999 $ 68,644 $ 5,901 $ 74,545
Three Months Ended March 31, 1998
General Impaired
Valuation Valuation
Allowances Allowances Total
(Dollars in thousands)
<S> <C> <C> <C>
Balance at December 31, 1997 $ 61,237 $ 9,775 $ 71,012
Provision for loan losses 1,975 525 2,500
Charge-offs:
Single family (723) - (723)
Multi-family (138) (43) (181)
Commercial (29) - (29)
Non-real estate (1) - (1)
Total charge-offs (891) (43) (934)
Recoveries 469 - 469
Adjustments and reclassifications 614 (614) -
Net charge-offs 192 (657) (465)
Balance at March 31, 1998 $ 63,404 $ 9,643 $ 73,047
</TABLE>
The Bank also maintains a valuation allowance for loans sold with recourse,
recorded as a liability. This allowance was 6.44% of loans sold with
recourse as of March 31, 1999, compared to 6.18% as of December 31, 1998 and
6.06% as of March 31, 1998. The balance of loans sold with recourse totaled
$199 million, $203 million and $215 million as of March 31, 1999, December
31, 1998 and March 31, 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
<PAGE>
Three Months Ended March 31,
1999 1998
(Dollars in thousands)
Balance at beginning of period $ 12,456 $ 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:
Three Months Ended March 31,
1999 1998
(Dollars in thousands)
Balance at beginning of period $ 500 $ 500
Provision for losses 4 277
Charge-offs (4) (277)
Balance at end of period $ 500 $ 500
Net Interest Income
The Company's interest rate margin increased to 2.58% for the first quarter
of 1999 from 2.34% for the first quarter of last year. The Index (on a lagged
basis) determines the yield on over 92% of the loan portfolio. The Index in
effect during the three months ended March 31, 1999 decreased by 0.25%
compared to the same period of the prior year. However, during the same
time period, the Company's average cost of funds decreased by 0.49%. The
Company's interest rate margin also benefited from a lower level of delinquent
loans compared to the prior year. Loans delinquent greater than 90 days
decreased to $17.9 million as of March 31, 1999 from $29.3 million as of the
beginning of the year.
The following table sets forth: (i) the average daily dollar amounts of and
average yields earned on loans, mortgage-backed securities and investment
securities, (ii) the average daily dollar amounts of and average rates
paid on savings and borrowings, (iii) the average daily dollar
differences, (iv) the interest rate spreads, and (v) the effective net
spreads for the periods indicated:
During the Three Months Ended March 31,
1999 1998
(Dollars in thousands)
Average loans and mortgage-backed
securities $ 3,305,734 $3,808,076
Average investment securities 184,181 139,578
Average interest-earning assets 3,489,915 3,947,654
Average savings deposits 2,154,218 2,073,406
Average borrowings 1,219,095 1,744,666
Average interest-bearing liabilities 3,373,313 3,818,072
Excess of interest-earning assets over
interest-bearing liabilities $ 116,602 $ 129,582
12
<PAGE>
Yields earned on average interest
earning assets 7.33% 7.58%
Rates paid on average interest-
bearing liabilities 4.75 5.24
Net interest rate spread 2.58 2.34
Effective net spread(1) 2.74 2.51
Total interest income $ 63,965 $ 74,802
Total interest expense 39,572 49,504
24,393 25,298
Total other items(2) 772 1,153
Net interest income $ 25,165 $ 26,451
(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 $1.3 million for the first quarter, compared to $40
thousand for the same period of 1998. During the first quarter of 1998, the
Bank recorded a $1.4 million provision for impairment of the Bank's servicing
assets.
Gain on the sale of loans results primarily from loan fees recognized at the
time of sale and decreased to $583 thousand for the first quarter of 1999
from $659 thousand for the same period of the prior year. The volume of
loans sold totaled $57.8 million during the first quarter of 1999 compared to
$60.7 million for the same period 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 $302 thousand for the first
quarter of 1999. This compares to net gains of $532 thousand for the same
period of the prior year. Real estate operations include gains and losses on
the sale of foreclosed properties as well as operational income and expense
during the holding period. Gains on sale typically result from the recovery
of excess valuation allowances associated with foreclosed properties sold.
Non-interest expense increased to $12.6 million during the first quarter of
1999 compared to $12.0 million for the same period of the prior year. The
increase in non-interest expense was a result of increased compensation and
related employee benefits due to the expansion of the Bank's business lines.
The ratio of non-interest expense to average assets increased to 1.32% of
average assets for the first quarter of 1999 from 1.17% during the comparable
1998 period. The increased ratio was attributable to both the increase in
non-interest expense and a decrease in average assets in the first quarter of
1999 compared to the same period of last year.
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 $17.9 million at March 31, 1999
compared to $29.3 million at December 31, 1998 and $34.8 million at March
31, 1998.
13
<PAGE>
The amount of interest that has been provided for loans 90 days or more
delinquent or in foreclosure was $1.1 million at March 31, 1999, $1.9 million
at December 31, 1998 and $1.9 million at March 31, 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 March 31, 1999, the Bank had
modified loans totaling $14.3 million, net of loan loss allowances totaling
$3.4 million. Modified loans totaling $253 thousand were 90 days delinquent
as of March 31, 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.
The following is a summary of impaired loans, net of valuation allowances for
impairment, as of the dates indicated:
March 31, December 31, March 31,
1999 1998 1998
(Dollars in thousands)
Non-accrual loans $ 3,711 $ 5,934 $ 10,752
Modified loans 5,946 5,976 8,184
Other impaired loans 5,574 5,613 6,380
$ 15,231 $ 17,523 $ 25,316
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:
March 31, December 31, March 31,
1999 1998 1998
(Dollars in thousands)
Fair value method $ 14,163 $ 16,456 $ 24,248
Present value method 1,068 1,067 1,068
Total impaired loans $ 15,231 $ 17,523 $ 25,316
14
<PAGE>
All impaired loans as of March 31, 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 March 31,
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:
March 31, December 31, March 31,
1999 1998 1998
(Dollars in thousands)
Single family $ - $ - $ 847
Multi-family 1,887 5,456 9,426
Commercial 1,824 478 479
$ 3,711 $ 5,934 $ 10,752
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
March 31, 1999, December 31, 1998, and March 31, 1998 was $15.3 million,
$17.5 million and $25.3 million, respectively. The amount of interest income
recognized on the cash basis for impaired loans during the quarters ended
March 31, 1999, December 31, 1998 and March 31, 1998 was $263 thousand, $288
thousand and $367 thousand, respectively. Interest income recognized under
the accrual basis for the quarters ended March 31, 1999, December 31, 1998
and March 31, 1998 was $282 thousand, $288 thousand and $367 thousand,
respectively.
Asset Quality
The following table sets forth certain asset quality ratios of the Bank at
the dates indicated:
March 31, December 31, March 31,
1999 1998 1998
Non-Performing Loans to
Loans Receivable (1) 0.56% 0.90% 0.92%
Non-Performing Assets to
Total Assets2) 0.55% 0.84% 0.89%
Loan Loss Allowances to
Non-Performing Loans (3) 393.79% 242.09% 196.31%
General Loss Allowances to
Assets with Loss Exposure (4) 2.34% 2.26% 1.92%
General Loss Allowances to
Total Assets with Loss
Exposure (5) 2.60% 2.51% 2.18%
15
<PAGE>
_______________________
(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 loan loss allowance, excluding general valuation allowances for
loans sold with full or limited recourse. The Bank's assets with loss exposure
include primary 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.
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:
March 31, December 31, March 31,
1999 1998 1998
(Dollars in thousands)
Real estate owned:
Single family $ 2,501 $ 3,946 $ 4,552
Multi-family 3,322 1,309 1,541
Commercial 395 - 785
Other - - 52
Less:
General valuation allowance (500) (500) (500)
Total real estate owned 5,718 4,755 6,430
Non-accrual loans:
Single family 8,889 12,270 16,862
Multi-family 6,538 13,005 16,057
Commercial 2,473 4,040 1,867
Less:
Valuation allowances (1) (1,844) (3,332) (4,885)
Total non-accrual loans 16,056 25,983 29,901
Total non-performing assets $ 21,774 $ 30,738 $ 36,331
__________________________
(1) Includes valuation allowances for impaired loans and loss allowances on
other non-performing loans requiring fair value adjustments.
16
<PAGE>
Real estate owned at March 31, 1999 increased 20% compared to the December
31, 1998 level and decreased 11% compared to the March 31, 1998 level. The
increase in the first quarter of 1999 compared to the prior year ended 1998
is due to the completion of foreclosure proceedings commenced in 1998 on
three multi-family properties.
Non-accrual loans, net of valuation allowances,at March 31,1999 decreased 38%
compared to the level at December 31, 1998 due to reductions in delinquent
loans of all loan types. Non-accrual loans, decreased 46% compared to March
31, 1998 due to substantial reductions in multi-family and single family
delinquencies.
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 will seek funds from the
lowest cost source until the relative costs change. As the cost of funds,
operating margins and net earnings of the Bank associated with each source of
funds are generally comparable, the Bank does not deem the impact of its use
of any one of the specific sources of funds at a given time to be material.
Deposits accepted by retail banking offices increased by $16.8 million
during the first quarter of 1999. The Bank is focusing its marketing efforts
on attracting liquid accounts and short-term certificate of deposits.
Retail deposits comprised 72% of total savings deposits as of March 31, 1999.
Telemarketing deposits increased by $1.0 million during the first quarter of
1999. 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 5% of total deposits at March 31, 1999.
Deposits acquired from national brokerage firms ("brokered deposits")
increased by $2.1 million during the first quarter of 1999. 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 March 31,1999, brokered deposits comprised 23% of total deposits.
Total borrowings increased by $292.4 million during the first quarter of 1999
due to a $310.0 million increase in advances from the FHLB, offset by payoffs
of $17.6 million in repurchase agreements.
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 $186.9
million for the first quarter of 1999. This compares with principal payments
of $131.1 million for the first quarter of 1998.
Loan sales were $57.8 million for the first quarter of 1999, compared with
sales of $60.7 million for the first quarter of 1998. The decrease is
attributable to a reduction in loans originated for sale.
17
<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 (included at page 86).
(b) Reports on Form 8-K
The Company filed a current report on Form 8-K dated February 26, 1999
wherein the Board of Directors approved an expansion of the stock repurchase
program. The increase authorized the Company to repurchase an additional 5% of
the shares outstanding as of February 25, 1999.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRSTFED FINANCIAL CORP.
Registrant
Date: May 13, 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
<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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 172,253
<INT-BEARING-DEPOSITS> 252,000
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 632,768
<INVESTMENTS-CARRYING> 632,768
<INVESTMENTS-MARKET> 632,768
<LOANS> 2,785,158
<ALLOWANCE> 74,545
<TOTAL-ASSETS> 3,964,891
<DEPOSITS> 2,155,879
<SHORT-TERM> 1,178,531
<LIABILITIES-OTHER> 45,687
<LONG-TERM> 349,000
0
0
<COMMON> 233
<OTHER-SE> 235,561
<TOTAL-LIABILITIES-AND-EQUITY> 3,964,891
<INTEREST-LOAN> 54,007
<INTEREST-INVEST> 10,730
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 64,737
<INTEREST-DEPOSIT> 22,664
<INTEREST-EXPENSE> 39,572
<INTEREST-INCOME-NET> 25,165
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 12,588
<INCOME-PRETAX> 15,710
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,915
<EPS-PRIMARY> .43
<EPS-DILUTED> .43
<YIELD-ACTUAL> 2.74
<LOANS-NON> 16,056
<LOANS-PAST> 0
<LOANS-TROUBLED> 3,711
<LOANS-PROBLEM> 13,260
<ALLOWANCE-OPEN> 87,818
<CHARGE-OFFS> 1,816
<RECOVERIES> 1,367
<ALLOWANCE-CLOSE> 87,369
<ALLOWANCE-DOMESTIC> 87,369
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
