UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from N/A to
Commission File Number: 1-9566
FirstFed Financial Corp.
(Exact name of registrant as specified in its charter)
Delaware 95-4087449
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
401 Wilshire Boulevard
Santa Monica, California 90401-1490
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 319-6000
Securities registered pursuant to Section 12(b) of the Act:
Common Stock $0.01 par value
(Title of Class)
Securities registered pursuant to Section 12(g) of theAct: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
The approximate aggregate market value of the voting stock held by
non-affiliates of the Registrant as of February 11 , 2000: $195,035,678.
The number of shares of Registrant's $0.01 par value common stock outstanding
as of February 11, 2000: 17,910,873
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for Annual Meeting of Stockholders, April 26,
2000 (Parts III & IV).
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (sub-section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of Registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of the Form 10-K or any amendment to this Form 10-K. [X]
1
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FirstFed Financial Corp.
Index
Page
Part I Item 1. Business.......................................... 3
Item 2. Properties........................................ 23
Item 3. Legal Proceedings................................. 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Part II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters............................... 23
Item 6. Selected Financial Data........................... 24
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............... 25
Item 8. Financial Statements and Supplementary Data....... 47
Notes to Consolidated Financial Statements........ 51
Independent Auditors' Report...................... 82
Item 9. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure............... 83
Part III
Item 10. Directors and Executive Officers of the Registrant 83
Item 11. Executive Compensation............................ 83
Item 12. Security Ownership of Certain Beneficial Owners and
Management........................................ 83
Item 13. Certain Relationships and Related Transactions.... 83
Part IV
Item 14 Exhibits, Consolidated Financial Statement
Schedules, and Reports on Form 8K................. 83
Signatures......................................................... 85
Power of Attorney.................................................. 86
2
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PART I
ITEM 1--BUSINESS
General Description
FirstFed Financial Corp., a Delaware corporation ["FFC," and
collectively with its sole and wholly-owned subsidiary, First Federal Bank of
California (the "Bank"), the "Company"], was incorporated on February 3,
1987. Since September 22, 1987, FFC has operated as a savings and loan
holding company engaged primarily in the business of owning the Bank. Because
the Company does not presently engage in any significant independent business
operations, substantially all earnings and performance figures herein reflect
the operations of the Bank.
The Bank was organized in 1929 as a state-chartered savings and loan
association, and, in 1935, converted to a federal mutual charter. In February
1983 the Bank obtained a federal savings bank charter, and, in December 1983,
converted from mutual to stock ownership.
The principal business of the Bank is attracting savings and checking
deposits from the general public, and using such deposits, together with
borrowings and other funds, to make real estate, business and consumer loans.
At December 31, 1999, the Company had assets totaling $3.9 billion,
compared to $3.7 billion at December 31, 1998 and $4.2 billion at December
31, 1997. The Company recorded net earnings of $33.3 million for the year
ended December 31, 1999, after an extraordinary item of $2.2 million from a
loss recorded on the early extinguishment of debt. Net earnings before
extraordinary items totaled $35.4 million for the year ended December 31,
1999. Net earnings before extraordinary items are comparable to net earnings
of $34.6 million for the year ended December 31, 1998 and net earnings of
$23.1 million for the year ended December 31, 1997.
The Bank derives its revenues principally from interest on loans and
investments, loan origination fees and servicing fees on loans sold. Its
major items of expense are interest on deposits and borrowings, and general
and administrative expense.
As of February 11, 2000, the Bank operated 24 retail savings branches,
all located in Southern California. Permission to operate all full-service
branches must be granted by the Office of Thrift Supervision ("OTS"). In
addition to the retail branches, the Bank has a retail call center which
conducts transactions with deposit customers by telephone, four retail loan
offices, a wholesale loan office and "LENDFFB", a loan origination group
which operates primarily by telephone.
The Bank's principal loan market is Southern California. During 1999,
loans originated by the LENDFFB unit were originated primarily for sale. As
of the beginning of the year 2000, LENDFFB will originate portfolio loans as
well as loans for sale.
The Bank has three wholly-owned subsidiaries: Seaside Financial
Corporation, Oceanside Insurance Agency, Inc. and Santa Monica Capital Group,
all of which are California corporations. See "Subsidiaries."
Current Operating Environment
The Company's operating results are significantly influenced by
national and regional economic conditions, monetary and fiscal policies of
the federal government, housing demand and affordability and general levels
of interest rates.
The Bank's primary market within Southern California is Los Angeles
County. The economic climate in Los Angeles County remains strong. However,
according to the UCLA Anderson Forecast for December, 1999 ("UCLA Forecast"),
"Though economic activity is healthy in the region, rates of growth have
generally diminished this year."
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The real estate markets in the greater Los Angeles area have continued
to improve, but at a slower rate than 1998. According to the UCLA Forecast,
home values in the Los Angeles County area increased by 7% during 1999
compared to 1998 and are expected to increase by 4% in 2000. Demand for
housing by immigrants in the Los Angeles area has helped to strengthen home
sales in the region.
Consistent with the strong real estate climate in the greater Los
Angeles area, the Bank's non-performing assets declined to 0.40% of total
assets at the end of 1999 from 0.84% at the end of 1998 and 0.95% at the end
of 1997.
The Bank monitors the sufficiency of the collateral supporting its loan
portfolio based on many factors including the property location, the date of
origination and the original loan-to-value ratio. The Bank adjusts its
general allowance for anticipated loan losses as a result of these
evaluations. There was no provision for loan losses during 1999. The
provision was $7.2 million and $20.5 million in 1998 and 1997, respectively.
The ratio of the general valuation allowance to the Bank's assets with
loss exposure (the Bank's loan portfolio, real estate owned, loan
commitments, and potential loan buybacks) was 2.15% at the end of 1999
compared to 2.26% at the end of 1998 and 1.86% at the end of 1997. The
general valuation allowance ratio, which decreased slightly as of December
31, 1999 due to asset growth, remains sufficient to cover the Banks estimated
losses. See "Business - Loan Loss Experience Summary" for additional
information.
The Bank also maintains a separate valuation allowance for impaired
loans and a repurchase liability for loans sold with recourse. See "Business
- - Loan Loss Experience Summary" for additional information regarding
valuation allowances for these loans.
Current Interest Rate Environment. The Federal Reserve Board ("FRB")
increased interest rates three times during the last half of 1999, decreased
interest rates three times during the last quarter of 1998 and did not make
any changes to interest rates during 1997. In an increasing interest rate
environment, the Bank's interest rate spread typically decreases (savings and
borrowing costs increase immediately while the loan portfolio yield stays
approximately the same or increases slowly.) The reverse is true during
periods of decreasing interest rates. Changes in interest rates have a less
severe impact on the Bank's loan portfolio due to the interest rate
adjustment features of its loans. However, changes in interest rates for the
Bank's loan portfolio have an inherent time lag resulting from operational
and regulatory constraints which do not allow the Bank to pass through
monthly changes in the primary index utilized for the majority of its
adjustable rate loan customers for a period of ninety days. Therefore, even
though interest rates were increasing during 1999, the Bank's interest rate
spread increased to 2.50% in 1999 from 2.43% in 1998 due to this time lag.
It is expected that the Bank's interest rate spread will decrease during the
first part of the year 2000 as a result of the interest rate increases at the
end of 1999. See "Asset-Liability Management" and "Components of Earnings -
Net Interest Income" in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for additional information.
Competition. The Bank experiences strong competition in attracting and
retaining deposits and originating real estate loans. It competes for
deposits with many of the nation's largest savings institutions and
commercial banks that have significant operations in Southern California.
The Bank also competes for deposits with credit unions, thrift and loan
associations, money market mutual funds, issuers of corporate debt securities
and the government. In addition to the rates of interest offered to
depositors, the Bank's ability to attract and retain deposits depends upon
the quality and variety of services offered, the convenience of the Bank's
locations and its financial strength as perceived by depositors.
The Bank competes for real estate loans primarily with savings
institutions, commercial banks, mortgage banking companies and insurance
companies. The primary factors in competing for loans are interest rates,
loan fees, interest rate caps, interest rate adjustment provisions and the
quality and extent of service to borrowers and mortgage brokers.
4
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Environmental Concerns. Under certain circumstances, such as if it
actively participates in the management or operation of a property securing
its loans, the Bank could have liability for any properties found to have
pollutant or toxic features. Environmental protection laws are strict and
impose joint and several liability on numerous parties. It is possible for
the cost of cleanup of environmental problems to exceed the value of the
security property. The Bank has adopted environmental underwriting
requirements when considering loans secured by properties which appear to
have environmentally high risk characteristics (e.g. commercial, industrial
and construction of all types, which may contain friable asbestos or lead
paint hazards). These requirements are intended to minimize the risk of
environmental hazard liability. The Bank's policies are also designed to
avoid the potential for liability imposed on lenders who assume the
management of a property.
Business Concentration. The Bank has no single customer or group of
customers, either as depositors or borrowers, the loss of any one or more of
which would have a material adverse effect on the Bank's operations or
earnings prospects.
Yields Earned and Rates Paid. Net interest income, the major component
of core earnings for the Bank, depends primarily upon the difference between
the combined average yield earned on the loan and investment security
portfolios and the combined average interest rate paid on deposits and
borrowings, as well as the relative balances of interest-earning assets and
interest-bearing liabilities. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Overview and Components of
Earnings - Net Interest Income" for further analysis and discussion.
Lending Activities
General. The Bank's primary lending activity has been the origination
of loans for the purpose of enabling borrowers to purchase, refinance or
construct improvements on residential real property. The loan portfolio
primarily consists of loans made to homebuyers and homeowners on the security
of single family dwellings and multi-family dwellings. The loan portfolio
also includes loans secured by commercial and industrial properties.
For an analysis of loan portfolio composition and an analysis of the
types of loans originated, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Balance Sheet Analysis - Loan
Portfolio and Loan Composition."
Origination and Sale of Loans. The Bank employs loan officers on an
incentive compensation basis to obtain qualified applicants for loans. The
Bank also derives business from other sources such as mortgage brokers,
borrower referrals, direct telephone sales and clients from its retail
banking branches.
Loan originations were $944.1 million in 1999, $637.0 million in 1998
and $481.3 million in 1997. Loan origination volume improved in 1999 and 1998
due to an increase in real estate activity in the Bank's market areas.
Loans sold totaled $133.0 million in 1999, $379.6 million in 1998 and
$52.4 million in 1997. For the year ended December 31, 1999, $120.6 million
in loans were originated for sale compared to $382.4 million in 1998 and
$86.6 million during 1997. Loans originated for sale totaled 13%, 60% and 18%
of loan originations during 1999, 1998 and 1997, respectively. The decrease
is due to borrower preference for adjustable rate loans.
Loans held-for-sale at December 31, 1999, 1998 and 1997 were $2.3
million, $16.5 million and $40.4 million, respectively, constituting 0.08%,
0.59% and 1.30%, respectively, of the Bank's total loans at such dates.
Loans originated for sale are recorded at the lower of cost or fair
value. The time from origination to sale typically takes up to 30 days.
During this time period the Bank may be exposed to price adjustments as a
result of fluctuations in market interest rates.
5
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The Bank structures mortgage-backed securities with loans from its own
loan portfolio for use in collateralized borrowing arrangements. In exchange
for the improvement in credit risk when the mortgage-backed securities are
formed, guarantee fees are paid to the Federal Home Loan Mortgage Corporation
("FHLMC") or the Federal National Mortgage Association ("FNMA"). No loans
were converted into mortgage-backed securities in 1999, 1998 or 1997. All
loans underlying mortgage-backed securities were originated by the Bank.
Therefore, mortgage-backed securities generally have the same experience with
respect to prepayment, repayment, delinquencies and other factors as the
remainder of the Bank's portfolio.
The portfolio of mortgage-backed securities was recorded at fair value
as of December 31, 1999, 1998 and 1997. Negative fair value adjustments of
$6.6 million, $413 thousand and $78 thousand, net of taxes, were recorded in
stockholders' equity at December 31, 1999, 1998 and 1997, respectively.
The Bank serviced $377.7 million in loans for other investors as of
December 31, 1999. $178.7 million of these loans were sold under recourse
arrangements. The Bank has an additional $15.6 million in loans that were
formed into mortgage-backed securities with recourse features, but were still
owned by the Bank as of December 31, 1999. Due to regulatory requirements,
the Bank maintains capital for loans sold with recourse as if those loans had
not been sold. The Bank had been active in these types of transactions in the
past, but has not entered into any new recourse arrangements since 1989 when
a change in the capital regulations took effect. Loans sold with recourse
are analyzed in determining the adequacy of the repurchase liability. The
decrease in the principal balance of loans sold with recourse to $178.7
million at the end of 1999 from $203.0 million at the end of 1998 and $218.1
million at the end of 1997 was due to loan amortization, payoffs and
foreclosures.
Interest Rates, Terms and Fees. The Bank makes residential adjustable
mortgage loans ("AMLs") with 30 and 40 year terms and interest rates which
adjust each month based upon the Federal Home Loan Bank's Eleventh District
Cost of Funds Index ("Index"). (See "Asset-Liability Management" in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations.") While the monthly payment adjusts annually, the maximum annual
change in the payment is limited to 7.5%. Any additional interest due as a
result of a rising Index is added to the principal balance of the loan
("negative amortization"). Payments are adjusted every five years without
regard to the 7.5% limitation to provide for full amortization during the
balance of the loan term. Although the interest rates are adjusted monthly,
these loans have maximum interest rates which can be charged ranging from 400
to 750 basis points above their initial interest rate. Generally, these loans
may be assumed at any time during their term provided that the person
assuming the loan meets the Bank's credit standards and enters into a
separate written agreement with the Bank. Additionally, the new borrower is
required to pay assumption fees customarily charged for similar transactions.
The Bank offers two primary AML products based on the Index, the "COFI
ONE" and the "COFI THREE." The initial interest rate on the COFI THREE is
below-market for the first three months of the loan term. The COFI ONE has no
below-market initial interest rate but starts with a pay rate similar to the
COFI THREE. This results in immediate negative amortization but allows the
loan to earn at the fully indexed interest rate immediately. The difference
in negative amortization on these two products is minor. The Bank also
originates adjustable rate loans based on the one year U.S. Treasury Security
and 12 month average U.S. Treasury Security rates.
Under current portfolio loan programs, the Bank normally lends no more
than 95% of a single family property's appraised value at the time of loan
origination. In addition, the Bank has special Community Reinvestment Act
loan programs in which it lends up to 95% of the property's appraised value.
The Bank generally requires that borrowers obtain private mortgage
insurance on loans in excess of 80% of the appraised property value. On
certain loans originated for the portfolio, the Bank charges premium rates
and/or fees in exchange for waiving the insurance requirement. Management
believes that the additional rates and fees charged on these loans compensate
the Bank for the additional risks associated with this type of loan.
Subsequent to the origination of a portfolio loan, the Bank may purchase
private mortgage insurance with its own funds. Under certain mortgage
insurance programs, the Bank acts as co-insurer and participates with the
insurer in absorbing any future loss. As of December 31, 1999 and 1998,
loans which had co-insurance totaled $176.7 million and $206.5 million,
respectively. Loans over 80% loan-to-value, for which there was no private
mortgage insurance, totaled $274.2 million at December 31, 1999 compared to
$265.0 million at December 31, 1998 and $163.8 million at December 31, 1997.
6
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Because AML loan-to-value ratios may increase above those established
at the time of loan origination due to negative amortization, the Bank rarely
lends in excess of 90% of the appraised value on AMLs. When the Bank does
lend in excess of 90% of the appraised value, additional fees and higher
rates are charged. The amount of negative amortization recorded by the Bank
increases during periods of rising interest rates. As of December 31, 1999,
negative amortization on all loans serviced by the Bank was immaterial.
Although regulations permit a maximum amortization period of 40 years
for real estate secured home loans and 30 years for other real estate loans,
the majority of the Bank's real estate loans provide for a maximum
amortization term of 30 years or less. Loans with 40-year terms constituted
8% and 4% of loan originations during 1999 and 1998, respectively.
The following table shows the contractual remaining maturities of the
Bank's loans at December 31, 1999:
<TABLE>
<CAPTION>
Loan Maturity Analysis
Maturity Period
>1 Year
Total 1 Year To 5 >5-10 >10-20 >20-30 >30
Balance or Less Years Years Years Years Years
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest rate sensitive loans:
AMLs............... $3,113,079 $56,391 $274,621 $457,928 $1,321,376 $915,057 $87,706
Fixed-rate loans... 20,696 1,636 7,132 6,577 2,674 2,673 4
Commercial loans... 8,140 3,321 4,239 580 - - -
Consumer and other loans 1,888 1,058 830 - - - -
Total.............. $3,143,803 $62,406 $286,822 $465,085 $1,324,050 $917,730 $87,710
</TABLE>
Non-accrual, Past Due, Impaired and Restructured Loans
The Bank establishes allowances for delinquent interest equal to the
amount of accrued interest on all loans 90 days or more past due or in
foreclosure. This practice effectively places such loans on non-accrual
status for financial reporting purposes.
The following is a summary of non-accrual loans for which delinquent
interest allowances had been established as of the end of each of the periods
indicated:
<TABLE>
<CAPTION>
% of % of % of % of % of
1999 Total 1998 Total 1997 Total 1996 Total 1995 Total
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Non-accrual Loans:
Single family.......... $9,626 70% $12,270 42% $16,799 49% $25,602 35% $25,991 26%
Multi-family........... 3,995 29 13,005 44 15,785 46 44,754 62 69,579 70
Commercial............. 225 1 4,040 14 1,533 5 2,223 3 3,313 4
Other.................. - - - - - - - - 220 -
Total Non-accrual
Loans.............. $13,846 100% $29,315 100% $34,117 100% $72,579 100% $99,103 100%
</TABLE>
The allowance for delinquent interest, based on loans past due more
than 90 days or in foreclosure, totaled $720 thousand, $1.9 million, $1.8
million, $4.2 million and $5.6 million at December 31, 1999, 1998, 1997, 1996
and 1995, respectively.
The Bank's modified loans result primarily from temporary modifications
of principal and interest payments. Under these arrangements, loan terms are
typically reduced to no less than a monthly interest payment required under
the note. If the borrower is unable to return to scheduled principal and
interest payments at the end of the modification period, foreclosure
proceedings are initiated or the modification period may be extended. As of
December 31, 1999, the Bank had modified loans totaling $7.4 million, net of
loan loss allowances of $2.6 million. This compares with $11.0 million, net
of loan loss allowances of $3.3 million as of December 31, 1998. No modified
loans were 90 days or more delinquent as of December 31, 1999 or December 31,
1998.
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Statement of Financial Accounting Standards No. 114, "Accounting by
Creditors for Impairment of a Loan" ("SFAS No. 114"), requires the
measurement of impaired loans based on the present value of expected future
cash flows discounted at the loan's effective interest rate, or at the loan's
observable market price or at the fair value of its collateral. SFAS No. 114
does not apply to large groups of homogeneous loans that are collectively
reviewed for impairment.
Pursuant to SFAS No. 114, a loan is considered to be impaired when
management believes that it is probable that the Bank will be unable to
collect all amounts due under the contractual terms of the loan. Estimated
impairment losses are recorded as separate valuation allowances and may be
subsequently adjusted based upon changes in the measurement of impairment.
Impaired loans, which are disclosed net of valuation allowances, include
non-accrual major loans (single family loans with an outstanding principal
amount greater than or equal to $500 thousand and multi-family and commercial
real estate loans with an outstanding principal amount greater than or equal
to $750 thousand), modified loans, and major loans less than 90 days
delinquent in which full payment of principal and interest is not expected to
be received.
Valuation allowances for impaired loans totaled $2.6 million, $7.6
million and $9.8 million as of December 31, 1999, 1998 and 1997,
respectively. The following is a summary of impaired loans, net of valuation
allowances for impairment, for the periods indicated:
December 31,
1999 1998 1997
(Dollars In Thousands)
Non-accrual loans ..... $ 2,079 $ 5,934 $ 8,260
Modified loans......... 6,534 5,976 8,090
Other impaired loans... 2,820 5,613 9,335
$ 11,433 $ 17,523 $ 25,685
When a loan is considered impaired, the Bank measures impairment based
on the present value of expected future cash flows (over a period not to
exceed 5 years) discounted at the loan's effective interest rate. However,
if the loan is "collateral-dependent" or a probable foreclosure, impairment
is measured based on the fair value of the collateral. When the measure of
an impaired loan is less than the recorded investment in the loan, the Bank
records an impairment allowance equal to the excess of the Bank's recorded
investment in the loan over its measured value. All impaired loans as of
December 1998 had valuation allowances established. As of December 31, 1999
and December 31, 1997 impaired loans totaling $2.1 million and $2.5 million,
respectively, had no valuation allowances established. The following summary
details impaired loans measured using the present value of expected future
cash flows discounted at the effective interest rate of the loan and impaired
loans measured using the fair value method for the periods indicated:
December 31,
1999 1998 1997
(Dollars In Thousands)
Present value method. $ - $ 1,067 $ 1,067
Fair value method ... 11,433 16,456 24,618
Total impaired loans. $ 11,433 $ 17,523 $ 25,685
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The present value of an impaired loan's expected future cash flows will
change from one reporting period to the next because of the passage of time
and also may change because of revised estimates in the amount or timing of
those cash flows. The Bank records the entire change in the present value of
the expected future cash flows as an impairment valuation allowance, which
may necessitate an increase in the provision for loan losses. Similarly, the
fair value of the collateral of an impaired collateral-dependent loan may
change from one reporting period to the next. The Bank also records a change
in the measure of these impaired loans as an impairment valuation allowance,
which may necessitate an adjustment to the provision for loan losses.
The following is an analysis of the activity in the Bank's valuation
allowance for impaired loans during the periods indicated (dollars in
thousands):
Balance at December 31, 1996.. $12,350
Provision for loan losses... 7,345
Net charge-offs............. (9,920)
Balance at December 31, 1997.. 9,775
Provision for loan losses... 640
Net charge-offs............. (2,781)
Balance at December 31, 1998.. 7,634
Provision for loan losses... -
Net charge-offs............. (5,038)
Balance at December 31, 1999.. $ 2,596
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 1999, 1998 and
1997 was $11.4 million, $17.5 million and $24.5 million, respectively. The
amount of interest income recognized from impaired loans during 1999, 1998
and 1997 was $1.0 million, $1.3 million and $1.9 million, respectively, under
the cash basis method of accounting. Interest income recognized under the
accrual basis method of accounting for 1999, 1998 and 1997 totaled $997
thousand, $1.3 million and $1.9 million, respectively.
The table below shows the Bank's net investment in non-accrual loans
determined to be impaired, by property type, as of the periods indicated:
December 31,
1999 1998 1997
(Dollars In Thousands)
Single family ....... $ 987 $ - $ 856
Multi-family......... 1,092 5,456 6,893
Commercial........... - 478 511
$ 2,079 $ 5,934 $ 8,260
Loan Loss Experience Summary. The Bank maintains a general valuation
allowance to absorb possible future losses that may be realized on its loan
portfolio. The allowance is reviewed and adjusted at least quarterly based
upon a number of factors, including asset classifications, economic trends,
industry experience, industry and geographic concentrations, estimated
collateral values, management's assessment of credit risk inherent in the
portfolio, historical loss experience and the Bank's underwriting practices.
9
<PAGE>
The following is an analysis of the activity in the Bank's general loan
valuation allowance for the periods indicated:
Year Ended December 31,
1999 1998 1997 1996 1995
(Dollars In Thousands)
Beginning General Loan Valuation
Allowance................ $67,638 $61,237 $54,900 $42,876 $55,353
Provision for Loan Losses.. - 6,560 13,155 23,768 6,958
Charge-Offs, Net of Recoveries:
Single Family............ (342) (1,497) (5,633) (8,845) (6,040)
Multi-Family............. 2,650 1,354 2,341 (2,448) (13,676)
Commercial............... 111 (32) 482 240 851
Non-Real Estate.......... (103) 16 226 9 (67)
Total Net Recoveries (Charge-Offs)2,316 (159) (2,584) (11,044) (18,932)
Transfer to Liability Account for
Loans Sold with Recourse - - (4,234) - (503)
Transfer to Real Estate General
Valuation Allowance...... - - - (700) -
Ending General Loan Valuation
Allowance.......... $69,954 $67,638 $61,237 $54,900 $42,876
The Bank also maintains a repurchase liability for loans sold with
recourse, which is included in "Accrued expenses and other liabilities" in
the Company's Statement of Financial Condition. The activity in the
repurchase liability for loans sold with recourse for 1999, 1998, 1997, 1996
and 1995 is presented below (dollars in thousands):
Balance at December 31, 1995.............. $ 9,050
Net charge-offs........................... (652)
Balance at December 31, 1996.............. 8,398
Transfer from general valuation allowance. 4,234
Net recoveries............................ 397
Balance at December 31, 1997.............. 13,029
Net charge-offs........................... (483)
Balance at December 31, 1998.............. 12,546
Net recoveries............................ 278
Balance at December 31, 1999.............. $12,824
The Bank's total general valuation allowance for loans (including the
repurchase liability for loans sold with recourse) was 2.41% of total assets
with loss exposure (including loans sold with recourse) at December 31, 1999,
2.51% at December 31, 1998 and 2.12% at December 31, 1997. Depending on the
economy and real estate markets in which the Bank operates, increases in the
general valuation allowance may be required in future periods. In addition,
various regulatory agencies, as an integral part of their examination
process, periodically review the Bank's general valuation allowance. These
agencies may require the Bank to establish additional general valuation
allowances based on their judgment of the information available at the time
of their examination.
The following table details the general valuation allowance by loan
type for the periods indicated, including the repurchase liability for loans
sold with recourse:
<TABLE>
<CAPTION>
% of % of % of % of % of
1999 Total 1998 Total 1997 Total 1996 Total 1995 Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars In Thousands)
Real Estate Loans:
Single Family... $30,343 37% $27,611 34% $21,583 29% $15,355 24% $ 8,887 17%
Multi-Family.... 47,005 57 47,264 59 45,029 61 44,078 70 35,278 68
Commercial...... 5,255 6 5,247 7 6,658 9 3,587 6 7,529 15
Non-Real Estate Loans. 175 - 62 - 996 1 278 - 232 -
Total .......... $82,778 100% $80,184 100% $74,266 100% $63,298 100% $51,926 100%
</TABLE>
10
<PAGE>
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Asset Quality Ratios" for an analysis of the Bank's
general valuation allowances as a percentage of non-accrual loans, the total
loan portfolio and total loans with loss exposure.
Net loan charge-offs, including net charge-offs from the general
valuation allowance, impaired loan allowance, and the repurchase liability
for loans sold with recourse totaled $2.4 million, $3.4 million, $12.1
million, $37.5 million and $39.7 million for 1999, 1998, 1997, 1996 and 1995,
respectively, representing 0.08%, 0.09%, 0.39%, 1.21% and 1.28% of the
average loan portfolio for such periods. Charge-offs have improved due to
the improvement in the Southern California economy and real estate market.
Any increase in charge-offs would adversely impact the Company's future
loan loss provisions and earnings.
Potential Problem Loans. The Bank also had $6.9 million, $16.6 million
and $41.6 million in potential problem real estate loans as of December 31,
1999, December 31, 1998 and December 31, 1997, respectively. These are loans
which do not meet the criteria of impaired or non-performing loans but have
displayed some past or present weakness. If the weakness is not corrected,
the loan could eventually result in a loss to the Bank.
The Bank's Asset Classification Committee meets at least quarterly to
review and monitor the condition of the loan portfolio. Additionally, a
special workout group of the Bank's officers meets at least monthly to
resolve delinquent loan situations and to initiate actions enforcing the
Bank's rights in security properties pending foreclosure and liquidation.
Non-performing Assets. For a further discussion of non-performing
assets, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Non-Performing Assets."
Generally, loans greater than 60 days delinquent are placed into
foreclosure and a valuation allowance is established, if necessary. The Bank
acquires title to the property in most foreclosure actions in which the loan
is not reinstated by the borrower. Once real estate is acquired in settlement
of a loan, the property is recorded at fair value less estimated costs to
sell.
Following the acquisition of foreclosed real estate ("REO"), the Bank
evaluates the property and establishes a plan for marketing and disposing of
the property. After inspecting the property, the Bank determines whether the
property may be disposed of in its present condition or if repairs,
rehabilitation or improvements are necessary.
The following table provides information regarding the Bank's REO
activity for the periods indicated:
Real Estate Owned Activity
Year Ended December 31,
1999 1998 1997
(Dollars In Thousands)
Beginning Balance......... $ 4,755 $ 10,218 $ 14,331
Additions................. 10,831 17,096 49,150
Sales..................... (13,384) (22,559) (53,263)
Ending Balance............ $ 2,202 $ 4,755 $ 10,218
Other Interest-Earning Assets. The Bank owned no contractually
delinquent interest-earning assets other than loans as of December 31, 1999.
11
<PAGE>
Investment Activities
Savings institutions are required by federal regulations to maintain a
minimum ratio of liquid assets which may be invested in certain government
and other specified securities. This level is adjusted from time to time in
response to prevailing economic conditions and as a means of controlling the
amount of available mortgage credit. At December 31, 1999, the regulatory
liquidity requirement was 4.00% and the Bank's liquidity percentage was 6.39%.
It is the Bank's policy to maintain liquidity investments at a modest
level and to use available cash to originate mortgages which normally command
higher yields. Therefore, interest income on investments generally represents
approximately 5% of total revenues.
The following table summarizes the total investment portfolio at
historical cost by type at the end of the periods indicated:
December 31,
1999 1998 1997 1996 1995
(Dollars In Thousands)
U.S. Treasury Securities $ 300 $ 300 $ 300 $ 301 $ 301
U.S. Agency Securities 38,167 28,156 48,142 49,989 46,561
Collateralized Mortgage
Obligations ("CMOs") 115,704 36,380 1,009 8,776 29,874
154,171 64,836 49,451 59,066 76,736
Unrealized loss on
securities available-for-sale (2,976) (503) (541) (157) (552)
$151,195 $64,333 $48,910 $58,909 $76,184
Weighted average yield on
interest-earnings invest-
ments end of period. 5.86% 5.38% 5.17% 5.98% 5.15%
The following is a summary of the maturities of U.S government and
agency securities at amortized cost as of December 31, 1999:
<TABLE>
<CAPTION>
Maturity
Total Historical
Within 1 Year 1-5 Years Value
Weighted Weighted Weighted Average
Average Average Average Maturity
Amount Yield Amount Yield Amount Yield Yrs/Mos
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury
Securities....... $ 300 5.79% $ - -% $ 300 5.79% 0/4
U.S. Agency Securities - - 38,167 5.11 38,167 5.11 3/2
$ 300 5.79% $38,167 5.11 $38,467 5.11 1/7
</TABLE>
The Bank's collateralized mortgage obligations all have expected maturities
within five years.
12
<PAGE>
Sources of Funds
General. The Bank's principal sources of funds are savings deposits,
advances from the Federal Home Loan Bank of San Francisco ("FHLBSF") and
securities sold under agreements to repurchase.
Deposits. The Bank obtains deposits through three different sources: 1)
its retail branch system, 2) phone solicitations by designated employees,
and 3) national brokerage firms.
Deposits acquired through telemarketing efforts are typically placed
with the Bank by professional money managers and represented 3%, 5% and 5% of
total deposits at December 31, 1999, 1998 and 1997, respectively. The level
of telemarketing deposits varies based on yields available to depositors on
other investment instruments and the depositors' perception of the Bank's
creditworthiness.
Deposits acquired through national brokerage firms represented 22%, 23%
and 20% of total deposits at December 31, 1999, 1998 and 1997, respectively.
Any fees paid to deposit brokers are amortized over the term of the deposit.
Based on historical renewal percentages, management believes that these
deposits are a stable source of funds. Institutions meeting the regulatory
capital standards necessary to be deemed well-capitalized are not required to
obtain a waiver from the FDIC in order to accept brokered deposits. See
"Management's Discussion and Analysis - Capital Resources and Liquidity."
Deposits obtained through the retail branch system were $1.6 billion at
December 31, 1999 and $1.5 billion at both December 31, 1998 and December 31,
1997. Retail deposits comprised 75% of total deposits at December 31, 1999,72%
of total deposits at December 31, 1998 and 75% at December 31, 1997. The level
of deposits has remained approximately the same level during the last three
years due to increased competition for retail savings deposits in Southern
California. In order to increase fee income at the retail branches and
decrease interest cost , the Bank's retail deposit marketing efforts have been
concentrated on obtaining demand deposit accounts over the last several years.
The Bank operated 24 retail branches at the end of 1999.
The following table shows the average balances and average rates paid on
deposits by deposit type for the periods indicated:
<TABLE>
<CAPTION>
During the Year Ended December 31,
1999 1998 1997
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Passbook Accounts $ 82,634 1.96% $ 84,711 2.04% $ 83,958 2.06%
Money Market Deposit Accounts 380,971 4.17 251,866 3.89 138,764 3.16
Interest-bearing Checking Accounts 109,928 1.07 102,367 1.04 111,246 1.00
Fixed Term Certificate Accounts 1,492,179 4.59 1,682,080 5.06 1,638,892 5.22
$2,065,712 4.22% $2,121,024 4.61% $1,972,860 4.70%
</TABLE>
13
<PAGE>
The following table shows the maturity distribution of jumbo
certificates of deposit ($100,000 and greater) as of December 31, 1999
(dollars in thousands):
Maturing in:
1 month or less.................... $ 55,000
Over 1 month to 3 months............. 68,252
Over 3 months to 6 months............ 63,245
Over 6 months to 12 months........... 66,915
Over 12 months....................... 397
Total............................. $ 253,809
Based on historical renewal percentages at maturity, management
believes that jumbo certificates of deposit are a stable source of funds. For
additional information with respect to deposits, see Note 8 of the Notes to
Consolidated Financial Statements.
The following tables set forth information regarding the amount of
deposits in the various types of savings programs offered by the Bank at the
end of the years indicated and the balances and average rates for those dates:
<TABLE>
<CAPTION>
December 31,
1999 1998 1997
Amount % Amount % Amount %
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Variable rate non-term accounts:
Money market deposit accounts
(weighted average rate of 4.34%,
3.91% and 3.36%)......... $ 446,771 22% $ 293,159 14% $ 156,221 8%
Interest-bearing checking accounts
(weighted average rate of 1.06%
1.06% and 1.78%)......... 111,366 5 108,211 5 130,765 7
Passbook accounts (2.00%, 2.01%
and 2.04%)............... 78,547 4 84,132 4 86,547 4
Non-interest bearing checking
Accounts................. 144,310 7 137,822 6 112,373 6
780,994 38 623,324 29 485,906 25
Fixed term rate certificate accounts:
Under six month term (weighted
average rate of 5.21%, 4.18%
and 5.07%)............... 113,324 5 62,642 3 120,637 6
Six month term (weighted average
rate of 5.68%, 5.14% and 6.00%) 322,696 16 301,313 14 103,901 5
Nine month term (weighted average of
5.73%, 5.42% and 5.64%).. 250,460 12 438,443 21 374,259 19
One year to 18 month term (weighted
average rate of 4.99%, 5.14% and
5.53%)................... 284,464 14 263,291 12 348,941 18
Two year or 30 month term (weighted
average rate of 5.13%, 5.28% and
5.23%)................... 19,081 1 23,015 1 30,689 2
Over 30 month term (weighted
average rate of 5.33%, 5.79%
and 5.85%)............... 36,529 2 103,030 5 125,971 7
Negotiable certificates of $100,000
and greater, 30 day to one year terms
(weighted average rate of 5.20%,
5.08% and 5.50%)......... 253,809 12 320,851 15 353,343 18
1,280,363 62 1,512,585 71 1,457,741 75
Total deposits (weighted average
rate of 4.42%, 4.36% and 4.66%) $2,061,357 100% $2,135,909 100% $1,943,647 100%
</TABLE>
14
<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, Federal Home Loan Bank ("FHLB") borrowings
and securities sold under agreements to repurchase. As the cost of each
source of funds fluctuates from time to time, the Bank seeks funds from the
lowest cost source until the relative costs change. As the costs of funds,
operating margins and net earnings of the Bank associated with each source of
funds are generally comparable, the Bank does not deem the impact of a change
in incremental use of any one of the specific sources of funds at a given
time to be material.
Borrowings. The FHLB System functions as a source of credit to
financial institutions which are members of a regional Federal Home Loan
Bank. The Bank may apply for advances from the FHLBSF secured by the FHLBSF
capital stock owned by the Bank, certain of the Bank's mortgages and other
assets (principally obligations issued or guaranteed by the United States
government or agencies thereof). Advances can be requested for any sound
business purpose which an institution is authorized to pursue. Any
institution not meeting the qualified thrift lender test will be subject to
restrictions on its ability to obtain advances from the FHLBSF. See "Summary
of Material Legislation and Regulation - Qualified Thrift Lender Test." In
granting advances, the FHLBSF also considers a member's creditworthiness and
other relevant factors.
Total advances from the FHLBSF were $1.2 billion at December 31, 1999
at a weighted average rate of 5.91%. This compares with advances of $714
thousand at December 31, 1998 and $1.3 billion at December 31, 1997 at
weighted average rates of 5.43% and 5.80%, respectively. The level of FHLB
borrowings increased because these were often the lowest cost source of funds
available to the Bank. The Bank has credit availability with the FHLBSF which
allows it to borrow up to 40% of the Bank's assets or approximately $1.5
billion at December 31, 1999.
The Bank enters into sales of securities under agreements to repurchase
(reverse repurchase agreements) which require the repurchase of the same
securities. The agreements are treated as borrowings in the Company's
Consolidated Statements of Financial Condition. There are certain risks
involved with doing these types of transactions. In order to minimize these
risks, the Bank's policy is to enter into agreements only with well-known
national brokerage firms which meet their regulatory capital requirements.
Borrowings under reverse repurchase agreements totaled $363.6 million at
December 31, 1999 at a weighted average rate of 5.76% and were secured by
mortgage-backed securities with principal balances totaling $397.0 million.
Borrowings under reverse repurchase agreements totaled $471.2 million at
December 31, 1998 and $577.7 million at December 31, 1997 at weighted average
rates of 5.37% and 5.66%, respectively. The decrease in borrowings under
agreements to repurchase over the last three years is due to paydowns of the
underlying mortgage-backed securities.
The Company redeemed its $50 million senior unsecured 11.75% notes
during 1999. The premium and related costs of $2.2 million, net of taxes,
were recorded as a loss on early extinquishment of debt which is shown as an
extraordinary item in the Consolidated Statements of Operations and
Comprehensive Earnings.
Borrowings from all sources totaled $1.5 billion, $1.2 billion, and
$1.9 billion at weighted average rates of 5.88%, 5.66%, and 5.91% at December
31, 1999, 1998, and 1997, respectively. The increased borrowings during 1999
enabled the Company to fund increased loan originations and to repurchase
3,298,150 shares of its common stock.
15
<PAGE>
The Bank's portfolio of short term borrowings includes short-term
variable rate credit advances and FHLB advances due in less than one year
from the FHLBSF, securities sold under agreements to repurchase and other
short term borrowings. The following schedule summarizes short term
borrowings for the last three years:
<TABLE>
<CAPTION>
Maximum
Month-End
Outstanding
Balance
End of Period During the Average Period
Outstanding Rate Period Outstanding Rate
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
1999
Short term FHLB Advances........... $ 920,000 5.97% $ 920,000 $ 545,000 5.49%
Securities sold under agreements to repurchase 363,635 5.76 469,655 390,691 5.22
1998
Short term FHLB Advances........... $ 200,000 5.57% $1,035,000 $ 554,167 5.70%
Securities sold under agreements to repurchase 471,172 5.37 576,514 514,498 5.55
Other short term borrowings........ - - 5,500 3,250 5.73
1997
Short term variable rate credit advances $ - -% $ - $ 600 6.01%
Short term FHLB Advances........... 1,310,000 5.80 1,345,000 1,170,417 5.75
Securities sold under agreements to repurchase 577,670 5.66 634,976 607,479 5.60
Other short term borrowings........ 4,000 5.85 26,500 15,703 5.63
</TABLE>
Other Sources
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Sources of Funds" for a discussion of other funding
sources.
Subsidiaries
The Bank has three wholly-owned subsidiaries: Seaside Financial
Corporation ("Seaside"), Oceanside Insurance Agency, Inc. ("Oceanside"), and
Santa Monica Capital Group ("SMCG"), all of which are California corporations.
As of December 31, 1999, the Bank had invested an aggregate of $245
thousand (primarily equity) in Seaside, Oceanside and SMCG. Revenues and
operating results of these subsidiaries accounted for less than 1% of
consolidated revenues in 1999 and no material change is presently foreseen.
Real Estate Development Activities. Seaside has not been involved in
any real estate development activity for the last several years and there are
no plans for future real estate projects. Therefore, no gains or losses on
real estate development activities were recorded during 1999, 1998 or 1997.
Seaside continues to hold one condominium unit which is rented to the
Bank for use by its employees. In 1997, a condominium, rented to the Bank,
was sold. At December 31, 1999, Seaside's investment in the remaining unit
totaled $34 thousand. There were no loans outstanding against the property
at December 31, 1999. The unit is located in Southern California.
Trustee Activities. Seaside acts as trustee on the Bank's deeds of
trust. Trustee fees for this activity amounted to $165 thousand, $274
thousand and $494 thousand in 1999, 1998 and 1997, respectively. The
decrease in trustee fees over the last three years is consistent with the
decrease in loan foreclosure activity.
Insurance Brokerage Activities. Oceanside engages in limited insurance
agent activities. Income to date from this source has been insignificant.
Oceanside operates as a licensed life insurance agent for the purpose of
receiving commissions on the sale of fixed and variable rate annuities and
mutual funds conducted in the Bank's offices by a licensed third party
vendor. Independent Financial Securities, Inc. ("IFS"), a registered
broker-dealer, conducts its sales activities in the Bank's branch offices and
the Bank receives a percentage of the commissions on such sales through its
licensed insurance agency, Oceanside. During 1999, 1998 and 1997, Oceanside
16
<PAGE>
received commission income of $451 thousand, $263 thousand and $462 thousand,
respectively, from the sale of non-insured investment products by IFS.
Other Activities
Santa Monica Capital Group was reactivated during 1999 to hold a short
term interest in certain real property which was in the process of being
liquidated to satisfy certain obligations owed to the Bank by the original
borrower.
Employees
As of December 31, 1999, the Bank had a total of 459 full time
equivalent employees, including 92 part-time employees. No employees were
represented by a collective bargaining group. At present, the Company has no
employees who are not also employees of the Bank. The Bank provides its
regular full-time employees with a comprehensive benefits program that
includes basic and major medical insurance, long-term disability coverage,
sick leave, a 401(k) plan and a profit sharing employee stock ownership plan.
The Bank considers its employee relations to be excellent.
Summary of Material Legislation and Regulations
General. FFC, as a savings and loan holding company, is registered
with, and subject to regulation and examination by, the Office of Thrift
Supervision ("OTS"). The Bank, which is a federally chartered savings bank
and a member of the FHLBSF, is subject to regulation and examination by the
OTS with respect to most of its business activities, including, among others,
lending activities, capital standards, general investment authority, deposit
taking and borrowing authority, mergers and other business combinations,
establishment of branch offices, and permitted subsidiary investments and
activities. The Bank's deposits are insured by the FDIC through the SAIF.
As insurer, the FDIC is authorized to conduct examinations of the Bank. The
Bank is also subject to Federal Reserve Board regulations concerning reserves
required to be maintained against deposits.
As a member of the FHLB System, the Bank is required to own capital
stock in its regional FHLB, the FHLBSF, in an amount at least equal to the
greater of 1% of the aggregate principal amount of its unpaid residential
mortgage loans, home purchase contracts and similar obligations at the end of
each year, or 5% of its outstanding borrowings from the FHLBSF. The Bank was
in compliance with this requirement, with an investment of $71.7 million in
FHLBSF stock at December 31, 1999.
The FHLBSF serves as a source of liquidity for the member institutions
within its assigned region, the FHLB Eleventh District. It is funded
primarily from proceeds derived from the sale of consolidated obligations of
the FHLB System. It makes advances to members in accordance with policies
and procedures established by the Federal Housing Finance Board and the Board
of Directors of the FHLBSF. At December 31, 1999, the Bank's advances from
the FHLBSF amounted to $1.2 billion, or 33% of the Company's total funding
sources (deposits and borrowings).
The FHLBs provide funds for the resolution of troubled savings
institutions and are required to contribute to affordable housing programs
through direct loans or interest subsidies on advances targeted for community
investment and low and moderate income housing projects. These contributions
have adversely affected the level of dividends that the FHLBs have paid to
its members. These contributions also could have an adverse effect on the
value of FHLB stock in the future. For the year ended December 31, 1999,
dividends paid by the FHLBSF to the Bank totaled approximately $3.7 million.
Recent Legislation. On November 12, 1999, the Gramm-Leach-Bliley Act
(the"Act") was signed into law. The Act makes significant changes to the
operations of financial services companies. It repealed key provisions of
the 66-year old "Glass Steagall Act" by repealing prohibitions on
affiliations among banks, securities firms and insurance companies. It
authorizes a broad range of financial services to be conducted by these types
of companies within a new structure known as a "financial holding company"
("FHC"). The FHC may engage in a number of activities deemed to be new
activities, such as securities underwriting and dealing activities, insurance
underwriting and sales activities, merchant banking and equity investment
activities, and "incidental" and "complementary" non-financial activities.
While the Act specifies so-called, "functional regulation," various federal
17
<PAGE>
and state regulators will have continued authority over certain activities
of FHCs and other regulated financial institutions. However, the Federal
Reserve Board will be the principal regulator for FHCs. These changes do
not directly affect the Company, although they are likely to dramatically
affect the business activities of many of the Company's financial institution
competitors.
Other provisions of the Act have a more direct impact on the Company
and the Bank. The Act limits the ability of commercial entities to obtain
thrift charters. Commencing with applications filed on and after May 5,
1999, entities seeking control of a savings association will be required to
conform their activities to those permitted for financial holding companies.
Existing thrift holding companies which control only one insured institution
(such as the Company) are "grandfathered" with respect to their ability to
continue their activities. However, future sales of the savings institution
subsidiary of such a unitary thrift holding company will be limited to
companies and entities that limit their activities to those permitted for
financial holding companies.
Another aspect of the Act that has a direct effect on the Bank is the
establishment for the first time of a federal right to the confidential
treatment of "nonpublic personal information" of a consumer customer (the
"Privacy Legislation"). Regulations to implement the Privacy Legislation
must be proposed within six months from the date of the Act. Final
regulations have not yet been promulgated, although some of the regulatory
agencies have issued proposed regulations for comments. The Act requires
implementation of the Privacy Legislation by November 12, 2000. Under the
Privacy Legislation as it is currently expected to be implemented, financial
institutions will be required to promulgate a privacy policy at the time a
new relationship is established and on an annual basis thereafter, and to
provide customers with the right to "opt-out" of disclosure of confidential
consumer data to third parties. Under certain circumstances, nonpublic
personal information may be disclosed to third parties, including disclosure
made to providers of administrative services for the institution and its
customers (such as data processors) to effect a transaction requested or
authorized by a consumer, for a proposed or actual secondary market
transaction, or to protect the security of the financial institution.
The Act revised the Community Reinvestment Act (the"CRA", as discussed
in more detail below) by, among other things, requiring all insured
depository institution members of a FHC to hold at least a satisfactory CRA
rating in order to conduct new financial activities authorized by the Act.
The Act also significantly amends the Federal Home Loan Bank System, by
modifying membership requirements in local FHLBs to permit membership to be
voluntary for both thrift and bank members. The Act changed corporate
governance of the FHLBs by eliminating the right of the Federal Housing
Finance Board to select the management of the local FHLBs, and returning that
authority to the boards of directors of the FHLBs. Additionally, the
obligations of the FHLBs to repay federal borrowings to finance the thrift
bailout has been restructured from a fixed dollar amount to a fixed
percentage of the FHLBs' annual net earnings.
Savings and Loan Holding Company Regulations. The activities of
savings and loan holding companies are governed by the Home Owners' Loan Act,
as amended. Pursuant to that statute, the Company is subject to certain
restrictions with respect to its activities and investments.
A savings and loan holding company, like FFC, which controls only one
savings association, is exempt from restrictions on the conduct of unrelated
business activities that are applicable to savings and loan holding companies
that control more than one savings association. The restrictions on multiple
savings and loan holding companies are similar to the restrictions on the
conduct of unrelated business activities applicable to bank holding companies
under the Bank Holding Company Act. The Company would become subject to these
restrictions if it were to acquire control of another savings association or
if the Bank were to fail to meet its qualified thrift lender ("QTL") test.
See "Qualified Thrift Lender Test."
The OTS may impose restrictions when it has reasonable cause to believe
that the continuation of any particular activity by a savings and loan
holding company constitutes a serious risk to the financial safety, soundness
or stability of such holding company's savings institution. Specifically, the
OTS may, as necessary, (i) limit the payment of dividends by the savings
institution; (ii) limit transactions between the savings institution and its
holding company or its affiliates; and (iii) limit any activities of the
savings institution that create a serious risk that the liabilities of
the holding company and its affiliates may be imposed on the savings
18
<PAGE>
institution. Any such limits will be issued in the form of a directive
having the effect of a cease-and-desist order.
Regulatory Capital Requirements. The capital regulations of the OTS
(the "Capital Regulations") require, federally insured institutions such as
the Bank to meet certain minimum capital requirements. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Capital Resources and Liquidity - Capital Requirements." The OTS may
establish, on a case-by-case basis, individual minimum capital requirements
for a savings institution which vary from the requirements that would
otherwise apply under the Capital Regulations.
The OTS has adopted rules based upon five capital tiers:
well-capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized. An institution falls into
one of these classifications depending primarily on its capital ratios. The
Bank is considered to be "well capitalized" for purposes of these capital
measures.
Insurance of Accounts. The FDIC administers two separate deposit
insurance funds. The Bank Insurance Fund ("BIF") insures the deposits of
commercial banks and other institutions which were insured by the FDIC prior
to the enactment of the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA"). The Savings Association Insurance Fund
("SAIF") insures the deposits of savings institutions which were insured by
the Federal Savings and Loan Insurance Corporation ("FSLIC") prior to the
enactment of FIRREA. The Bank's deposits are insured by the SAIF. The FDIC
is authorized to increase deposit insurance premiums if it determines such
increases are appropriate to maintain the reserves of either the SAIF or the
BIF or to fund the administration of the FDIC. In addition, the FDIC is
authorized to levy emergency special assessments on BIF and SAIF members.
The FDIC has implemented a risk-based assessment system, under which an
institution's deposit insurance assessment is based on the probability that
the deposit insurance fund will incur a loss with respect to the institution,
the likely amount of any such loss, and the revenue needs of the deposit
insurance fund. Under the risk-based assessment system, a savings
institution is categorized into one of three capital categories: well
capitalized, adequately capitalized, and undercapitalized. A savings
institution is also categorized into one of three supervisory subgroup
categories based on examinations by the OTS.
The FDIC may terminate the deposit insurance of any insured depository
if the FDIC determines, after a hearing, that the institution has engaged or
is engaging in unsafe or unsound practices, is in an unsafe or unsound
condition to continue operations or has violated any applicable law,
regulation or order or any condition imposed in writing by the FDIC. The
FDIC may also suspend deposit insurance temporarily during the hearing
process if the institution has no tangible capital (which may be calculated
under certain conditions by including goodwill). In addition, FDIC
regulations provide that any insured institution that falls below a 2%
minimum leverage ratio will be subject to FDIC deposit insurance termination
proceedings unless it has submitted, and is in compliance with, a capital
plan with its primary federal regulator and the FDIC.
The OTS also imposes assessments and examination fees on savings
institutions. OTS assessments for the Bank were $567 thousand in 1999, $599
thousand in 1998 and $610 thousand in 1997.
Liquidity. Federal regulations currently require a savings institution
to maintain a monthly average daily balance of liquid assets (including cash,
certain time deposits, bankers' acceptances and specified United States
government, state or federal agency obligations) equal to at least 4% of: (i)
the average daily balance of its net withdrawable accounts and short-term
borrowings during the preceding calendar quarter or (ii) the ending balance
of its net withdrawable accounts as of the end of the preceding calendar
quarter. This liquidity requirement may be changed from time to time by the
OTS to any amount within the range of 4% to 10% of such accounts and
borrowings depending upon economic conditions and the deposit flows of member
institutions. Prior to December 1, 1997, the minimum liquidity requirement
was 5%. Monetary penalties may be imposed for failure to meet these
liquidity ratio requirements. The Bank's liquidity ratio for the quarter
ended December 31, 1999 was 6.39%, which exceeded the applicable requirements.
Community Reinvestment Act. The Community Reinvestment Act ("CRA")
requires each savings institution, as well as commercial banks and certain
other lenders, to identify the communities served by the institution's
offices and to identify the types of credit the institution is prepared to
extend within those communities. The CRA also requires the OTS to assess an
19
<PAGE>
institution's performance in meeting the credit needs of its identified
communities as part of its examination of the institution, and to take such
assessments into consideration in reviewing applications with respect to
branches, mergers and other business combinations, including acquisitions by
savings and loan holding companies. An unsatisfactory CRA rating may be the
basis for denying such an application and community groups have successfully
protested applications on CRA grounds. In connection with its assessment of
CRA performance, the OTS assigns CRA ratings of "outstanding,"
"satisfactory," "needs to improve" or "substantial noncompliance." The Bank
was rated "satisfactory" in its last CRA examination, which was conducted in
1998. For examinations in 1997 and thereafter, institutions are evaluated
based on: (i) performance in lending in their assessment areas; (ii) the
provision of deposit and other community services in their assessment areas;
and (iii) the investment in housing-related and other qualified community
investments. An institution which is found to be deficient in its
performance in meeting its community's credit needs may be subject to
enforcement actions, including cease and desist orders and civil money
penalties.
Restrictions on Dividends and Other Capital Distributions. During the
first quarter of 1999, the OTS changed its regulations governing capital
distributions. Those changes became effective on April 1, 1999. Under these
regulations, all savings associations controlled by savings and loan holding
companies (such as the Bank) are required to file a 30-day advance notice of
a proposed capital distribution. The OTS may disapprove a notice if it finds
that (a) the savings association will be undercapitalized, significantly
undercapitalized or critically undercapitalized following the distribution,
(b) the proposed capital distribution raises safety and soundness concerns;
or (c) the proposed distribution violates a prohibition contained in a
statute, regulation or agreement between the savings association and the OTS
(or FDIC) or a condition imposed by an OTS condition or approval. During
1999, the Bank paid a total of $99.6 million in capital distributions to the
Company.
Under these new regulations, savings associations which are not
controlled by a savings and loan holding company may pay capital
distributions during a calendar year, without notice or application to the
OTS, equal to net income for the applicable calendar year plus retained net
income for the two prior calendar years. Under certain circumstances, such
savings associations must file applications for approval of a proposed
distribution. The new regulations also require a 30-day advance notice to be
filed for proposed capital distributions that would result in the savings
association being less than well-capitalized or that involve the reduction or
retirement of the savings association's stock.
Limits on Types of Loans and Investments. Federal savings institutions
are authorized, without quantitative limits, to make loans on the security of
liens upon residential real property and to invest in a variety of
instruments such as obligations of, or fully guaranteed as to principal and
interest by, the United States; stock or bonds of the FHLB; certain
mortgages, obligations, or other securities which have been sold by FHLMC or
FNMA; and certain securities issued by, or fully guaranteed as to principal
and interest by, the Student Loan Marketing Association and the Government
National Mortgage Association. Certain other types of loans or investments
may be acquired subject to quantitative limits: secured or unsecured loans
for commercial, corporate, business, or agricultural purposes, loans on the
security of liens upon nonresidential real property, investments in personal
property, consumer loans and certain securities such as commercial paper and
corporate debt, and construction loans without security.
Savings institutions are subject to the same loans-to-one borrower
("LTOB") restrictions that are applicable to national banks, with limited
provisions for exceptions. In general, the national bank standard restricts
loans to a single borrower to no more than 15% of a bank's unimpaired capital
and surplus, plus an additional 10% if the loan is collateralized by certain
readily marketable collateral. The Bank's loans were within the LTOB
limitations at December 31, 1999.
Savings institutions and their subsidiaries are prohibited from
acquiring or retaining any corporate debt security that, at the time of
acquisition, is not rated in one of the four highest rating categories by at
least one nationally recognized statistical rating organization. The Bank
has no impermissible equity investments in its investment portfolio.
Safety and Soundness Standards. OTS regulations contain "safety and
soundness" standards covering various aspects of the operations of savings
institutions. The guidelines relate to internal controls, information systems
and internal audit systems, loan documentation, credit underwriting, interest
rate exposure, asset growth, executive compensation, maximum ratios of
20
<PAGE>
classified assets to capital, and minimum earnings sufficient to absorb
losses without impairing capital. If the OTS determines that a savings
institution has failed to meet the safety and soundness standards, it may
require the institution to submit to the OTS, and thereafter comply with, a
compliance plan acceptable to the OTS describing the steps the institution
will take to attain compliance with the applicable standard and the time
within which those steps will be taken.
Federal regulations contain a number of measures intended to promote
early identification of management problems at depository institutions and to
ensure that regulators intervene promptly to require corrective action by
institutions. The Bank's annual management report on the effectiveness of
internal control standards and compliance with certain designated laws will
be made available in March of 2000.
Prompt Corrective Action. The "prompt corrective action" regulations
require insured depository institutions to be classified into one of five
categories based primarily upon capital adequacy, ranging from "well
capitalized" to "critically undercapitalized." These regulations require,
subject to certain exceptions, the appropriate federal banking agency to take
"prompt corrective action" with respect to an institution which becomes
"undercapitalized" and to take additional actions if the institution becomes
"significantly undercapitalized" or "critically undercapitalized."
Only "well capitalized" institutions may obtain brokered deposits
without a waiver. An "adequately capitalized" institution can obtain
brokered deposits only if it receives a waiver from the FDIC. An
"undercapitalized" institution may not accept brokered deposits under any
circumstances. The Bank met the "well-capitalized" standards during 1999 and
was eligible to accept brokered deposits without a waiver.
Qualified Thrift Lender Test. In general, the QTL test requires that
65% of an institution's portfolio assets be invested in "qualified thrift
investments" (primarily loans, securities and other investments related to
housing), measured on a monthly average basis for nine out of every 12 months
on a rolling basis. Any savings institution that fails to meet the QTL test
must either convert to a bank charter or become subject to national bank-type
restrictions on branching, business activities, and dividends, and its
ability to obtain FHLB advances is affected. The Bank met the QTL test at
December 31, 1999, with 98% of its portfolio assets comprised of "qualified
thrift investments."
Transactions with Affiliates. Federal savings institutions are subject
to the provisions of Sections 23A and 23B of the Federal Reserve Act.
Section 23A restricts loans or extensions of credit to, or investments in,
or certain other transactions with, affiliates and as to the amount of
advances to third parties collateralized by the securities or obligations of
affiliates. Section 23B generally requires that transactions with affiliates
must be on a non-preferential basis. Federal savings institutions may not
make any extension of credit to an affiliate which is engaged in activities
not permitted by bank holding companies, and may not invest in securities
issued by an affiliate (except with respect to a subsidiary). The Company is
an "affiliate" of the Bank for the purposes of these provisions.
Transactions with Insiders. Federal savings institutions are subject
to the restrictions of Sections 22(g) and (h) of the Federal Reserve Act
which, among other things, restrict the amount of extensions of credit which
may be made to executive officers, directors, certain principal shareholders
(collectively "insiders"), and to their related interests. When lending to
insiders, a savings association must follow credit underwriting procedures
that are not less stringent than those applicable to comparable transactions
with persons outside the association. The amount that a savings association
can lend in the aggregate to insiders (and to their related interests) is
limited to an amount equal to the association's core capital and surplus.
Insiders are also prohibited from knowingly receiving (or knowingly
permitting their related interests to receive) any extensions of credit not
authorized under these statutes.
Federal Reserve System. Federal Reserve Board regulations require
savings institutions to maintain non-interest bearing reserves against their
transaction accounts. The reserve for transaction accounts as of December
31, 1999 was 0% of the first $5 million of such accounts, 3% of the next
$39.3 million of such accounts and 10% (subject to adjustment by the Federal
Reserve Board between 8% and 14%) of the balance of such accounts. The Bank
is in compliance with these requirements.
21
<PAGE>
Taxation. The Company, the Bank and its subsidiaries file a
consolidated federal income tax return on a calendar year basis using the
accrual method. The maximum marginal federal tax rate is currently 35%.
In August 1996, the Small Business Job Protection Act was signed into
law. One provision of this legislation repealed the reserve method of
accounting for bad debts for savings institutions effective for taxable years
beginning after 1995. Therefore, the Bank has used the specific charge-off
method since 1996.
The Bank may be required to recapture its "applicable excess reserves",
if its federal tax bad debt reserves are in excess of its base year reserve
amount. As of December 31, 1999, the Bank had no applicable excess
reserves. The base year reserves will be subject to recapture and the Bank
could be required to recognize a tax liability if: (1) the Bank fails to
qualify as a "bank" for federal income tax purposes; (2) certain
distributions are made with respect to the stock of the Bank; (3) the bad
debt reserves are used for any purpose other than to absorb bad debt losses;
or (4) there is a change in federal tax law. The enactment of this
legislation has not and is not expected to have a material impact on the
Bank's operations or financial position.
For state tax purposes, the Bank is allowed an addition to its tax bad
debt reserves in an amount necessary to fill up to its tax reserve balance
calculated using the experience method.
To the extent that distributions by the Bank to the Company that are
permitted under federal regulations exceed the Bank's earnings and profits
(as computed for federal income tax purposes), such distributions would be
treated for tax purposes as being made out of the Bank's excess bad debt
reserve and would thereby constitute taxable income to the Bank in an amount
equal to the lesser of the Bank's excess bad debt reserve or the amount
which, when reduced by the amount of income tax attributable to the inclusion
of such amount in gross income, is equal to the amount of such distribution.
At December 31, 1999, the Bank's excess bad debt reserve was zero. At
December 31, 1999, the Bank's earnings and profits (as computed for federal
income tax purposes) were approximately $253.2 million.
At December 31, 1999, the Bank had $50.6 million in gross deferred tax
assets. No valuation allowance was established because management believes
that it is more likely than not that the deferred tax assets will be
realized. Gross deferred tax liabilities totaled $35.0 million at December
31, 1999.
The Bank is subject to an alternative minimum tax if such tax is larger
than the tax otherwise payable. Generally, alternative minimum taxable
income is a taxpayer's regular taxable income, increased by the taxpayer's
tax preference items for the year and adjusted by computing certain
deductions in a special manner which negates the acceleration of such
deductions under the regular tax. The adjusted income is then reduced by an
exemption amount and is subject to tax at a 20% rate. The excess of the
addition to the bad debt reserve computed under the percentage of taxable
income method over the increase in the reserve calculated on the basis of
actual experience is an item of tax preference. No alternative minimum taxes
were applicable to the Bank for tax years 1999, 1998 or 1997.
California tax laws generally conform to federal tax laws. For
California franchise tax purposes, federal savings banks are taxed as
"financial corporations" at a rate 2% higher than that applicable to
non-financial corporations because of exemptions from certain state and local
taxes. The tax rates for 1999, 1998 and 1997 were 10.84%. The Franchise Tax
Board ("FTB") has not yet announced the rate for 2000.
During 1997, the Internal Revenue Service ("IRS") completed its
examination of the Company's consolidated federal income tax returns for tax
years up to and including 1992. The adjustments made by the IRS related to
temporary differences as to the recognition of certain taxable income and
expense items. While the Company had provided deferred taxes for federal and
state purposes, the changes in the period of recognition of certain income
and expense items resulted in interest due to the IRS and FTB. As a result,
the Company paid $7.4 million in interest to the IRS and FTB during 1997 and
accrued an additional $210 thousand in interest during that year. During
1998, the Company paid $598 thousand in interest to the IRS and FTB and
reversed $300 thousand. An additional $150 thousand in interest was reversed
during 1999.
22
<PAGE>
ITEM 2--PROPERTIES
At December 31, 1999, the Bank owned the building and land for seven of
its branch offices, owned the building but leased the land for three
additional offices, and leased its remaining offices. Properties leased by
the Bank include its home and executive offices located in a 12-story office
tower in downtown Santa Monica and a general services and corporate
operations office building in Santa Monica. For information concerning
rental obligations, see Note 6 of the Notes to Consolidated Financial
Statements.
ITEM 3--LEGAL PROCEEDINGS
The Company is involved as a plaintiff or defendant in various legal
actions incident to its business, none of which are believed by management to
be material to the Company.
ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5--MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
(a) Market Information. The Company's common stock is traded on the
New York Stock Exchange ("NYSE") under the symbol "FED." Included in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" is a chart representing the range of high and low stock prices
for the Company's common stock for each quarterly period for the last five
years.
(b) Holders. As of February 11, 2000, the Company had 17,910,873
shares of its common stock outstanding, representing approximately 893 record
stockholders, which total does not include the number of stockholders whose
shares are held in street name.
(c) Dividends. As a publicly traded company, the Company has no
history of dividend payments on its common stock. However, the Company may in
the future adopt a policy of paying dividends, depending on its net earnings,
financial position and capital requirements, as well as regulatory
restrictions, tax consequences and the ability of the Company to obtain a
dividend from the Bank for payment to stockholders. OTS regulations limit
amounts that the Bank can pay as a dividend to the Company. No dividend may
be paid if the Bank's net worth falls below regulatory requirements. (See
"Business - Summary of Material Legislation and Regulations" for other
regulatory restrictions on dividends.) The Board of Directors of the Bank
declared and paid to the Company $99.6 million in dividends during 1999 and
$5.9 million in dividends during both 1998 and 1997. The dividends paid
during 1999 enabled the Company to repurchase 3,298,150 shares of its common
stock and to service and pay off its $50 million in senior unsecured 11.75%
notes which were redeemed on December 30, 1999.
23
<PAGE>
<TABLE>
<CAPTION>
ITEM 6--SELECTED FINANCIAL DATA
Selected financial data for the Company is presented below:
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
FIVE YEAR CONSOLIDATED SUMMARY OF OPERATIONS
1999 1998 1997(1) 1996(1) 1995(1)
(Dollars In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C>
For the Year Ended December 31:
Interest income...... $ 260,001 $ 289,769 $ 299,220 $ 297,178 $ 301,735
Interest expense..... 161,031 186,491 204,226 198,031 224,077
Net interest income.. 98,970 103,278 94,994 99,147 77,658
Provision for loan losses - 7,200 20,500 35,155 28,376
Other income......... 12,688 13,657 10,218 10,915 8,725
Non-interest expense. 49,159 48,924 44,151 59,175 45,903
Earnings before income taxes 62,499 60,811 40,561 15,732 12,104
Income taxes......... 27,052 26,182 17,461 7,488 5,569
Earnings before extra-
ordinary items..... 35,447 34,629 23,100 8,244 6,535
Extraordinary item
Loss on early extinquishment
of debt, net of taxes (2,195) - - - -
Net earnings........ 33,252 34,629 23,100 8,244 6,535
Basic earnings per share
EPS before extraordinary item 1.84 1.63 1.09 0.39 0.31
Extraordinary item (.11) - - - -
EPS after extraordinary item 1.73 1.63 1.09 0.39 0.31
Dilutive earnings per share
EPS before extraordinary item 1.83 1.60 1.07 0.39 0.31
Extraordinary item (.12) - - - -
EPS after extraordinary item 1.71 1.60 1.07 0.39 0.31
End of Year:
Loans receivable, net (2). 3,060,547 2,808,221 3,145,164 3,048,469 3,059,780
Mortgage-backed securities 428,641 556,679 676,058 746,006 843,819
Investment securities 151,195 64,333 48,910 58,909 67,813
Total assets......... 3,856,505 3,677,128 4,160,115 4,143,852 4,139,737
Deposits............. 2,061,357 2,135,909 1,943,647 1,957,448 2,205,036
Borrowings........... 1,532,635 1,235,172 1,941,670 1,940,482 1,666,943
Liabilities.......... 3,625,372 3,420,128 3,937,328 3,949,302 3,943,446
Stockholders' equity. 231,133 257,000 222,787 194,550 196,291
Book value per share(1) 12.82 12.16 10.52 9.24 9.25
Selected Ratios:
Return on average assets 0.94% 0.88% 0.56% 0.20% 0.16%
Return on average equity 14.91% 14.40% 11.25% 4.22% 3.47%
Ratio of non-performing
assets to total assets 0.40% 0.84% 0.95% 1.77% 2.33%
Other Data:
Number of Bank full service
branches.................. 24 24 24 25 25
</TABLE>
(1) All per share amounts have been adjusted for the two-for-one stock split
declared June 25, 1998.
(2) Includes loans held for sale.
Also see summarized results of operations on a quarterly basis for
1999, 1998 and 1997 in Note 15 of the Notes to Consolidated Financial
Statements.
24
<PAGE>
ITEM 7--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The Company's results of operations are primarily affected by its
levels of net interest income, provisions for loan losses, non-interest
income, non-interest expense and income taxes. The Company's results are
strongly influenced by the Southern California economy in which it operates.
Net earnings of $33.3 million or $1.71 per share were recorded in
1999, compared to net earnings of $34.6 million or $1.60 per share in 1998
and $23.1 million or $1.07 per share in 1997. All per share amounts are
presented on a diluted basis and have been adjusted for the two for one
stock split declared June 25, 1998. The decrease in net earnings from 1998
to 1999 was primarily attributable to a $2.2 million loss on early
extinguishment of debt, net of taxes resulting from the redemption of the
$50 million senior unsecured 11.75% notes. Additionally, no loan loss
provision was recorded in 1999 compared to a $7.2 million provision in 1998
which was offset by a decrease in net interest income by $4.3 million in
1999 from the 1998 level. The Southern California economy and real estate
market remained strong during 1999. As a result, loan charge-offs declined
to $2.4 million in 1999 compared to $3.4 million in 1998 and $12.1 million
in 1997.
Certain key financial ratios for the Company are presented below:
Average
Return on Return on Equity to
Average Average Average
Assets Equity Assets
1999...... .94% 14.91% 6.29%
1998...... .88 14.40 6.09
1997...... .56 11.25 4.95
1996...... .20 4.22 4.61
1995...... .16 3.47 4.49
Core earnings reflect the Company's results from basic operations and
were $61.1 million in 1999, $63.6 million in 1998 and $60.6 million in
1997. Core earnings are defined as net interest income before provision for
loan losses plus other income (excluding gain on sale of loans and
securities) less non-interest expense. Non-recurring items, income taxes
and the provision for loan losses are excluded from core earnings. The
slight decrease in core earnings during 1999 compared to 1998 is due to a
reduction in interest income.
Non-performing assets (primarily loans 90 days past due or in
foreclosure plus foreclosed real estate) decreased to $15.4 million or 0.40%
of total assets at December 31, 1999 compared to $30.7 million or 0.84% of
total assets at December 31, 1998 and $39.6 million or 0.95% of total assets
at December 31, 1997. The decreasing trend in non-performing assets over the
last several years is due to lower balances of delinquent loans and
decreased foreclosures in the improved Southern California real estate
markets.
The Company repurchased 3,298,150 shares of its common stock during
1999. Total shares repurchased as of December 31, 1999 were 5,245,990 at an
average price of $12.50 per share. As of February 11, 2000 the Company had
repurchased an additional 117,400 shares at an average price of $12.35 per
share which brought total shares repurchased to date to 5,363,390 at an
average price of $12.50 per share.
25
<PAGE>
At December 31, 1999 the Bank's regulatory risk-based capital ratio
was 11.92% and its tangible and core capital ratios were 6.02%. The Bank
met the regulatory capital standards necessary to be deemed
"well-capitalized" at December 31, 1999.
The Bank's deposits are insured by the SAIF up to a maximum of
$100,000 for each insured depositor. The Bank's FDIC insurance premiums were
$1.2 million in both 1999 and 1998 compared to $1.9 million in 1997. The
lower premiums in 1999 and 1998 compared to 1997 were due to a drop in the
Bank's assessment rate from 9.3 basis points in 1997, to 6.3 in 1998, and
5.9 in 1999, due to an improvement in its regulatory rating.
Risks and Uncertainties
In the normal course of business, the Company encounters two
significant types of risk: economic risk and regulatory risk.
ECONOMIC RISK
There are two main components of economic risk: credit risk and market
risk (which includes interest rate risk.)
Credit Risk
Credit risk is the risk of default in the Company's loan portfolio
that results from a borrower's inability to make contractually required
payments. See "Loan Loss Provisions" and "Non-performing Assets."
The determination of the allowance for loan losses and the valuation
of real estate collateral is based on estimates that are susceptible to
changes in the economic environment and market conditions. No loan loss
provision was recorded during 1999. A downward turn in the current economic
climate could increase the likelihood of losses due to credit risks. This
could create the need for additional loan loss provisions.
Market Risk
Market risk is the risk of loss from unfavorable changes in market
prices and interest rates. The Bank's market risk arises primarily from the
interest rate risk inherent in its lending and deposit taking activities.
See "Asset-Liability Management" for additional information relating
to market risk.
REGULATORY RISK
Regulatory risk is the risk that the regulators will reach different
conclusions than management regarding the financial position of the Company.
The OTS examines the Bank's financial results annually. The OTS reviews the
allowance for loan losses and may require the Bank to adjust the allowance
based on information available at the time of their examination.
26
<PAGE>
OTHER RISKS
Year 2000
Following the end of 1999 and subsequently to date, the Company
experienced no problems relative to the Y2K issue that had a material
adverse impact on the Company's financial condition, results of operation or
liquidity. Because of the third party nature of its major data processing
relationships, the Bank did not incur any programming costs to make its
system Year 2000 ready. All of these costs were borne by the vendors. The
Bank's major cost of becoming Year 2000 ready was related to staff and
management time spent planning, monitoring and testing the systems. The
Company will continue to monitor its significant vendors with respect to
Year 2000 problems they may encounter as those issues may adversely effect
the Company's ability to continue operations. The Company does not believe
at this time that any potential problems relative to the Year 2000 issue
will materially impact the Company in the future, however, no assurance can
be given that this will be the case.
Inflation
Inflation substantially impacts the financial position and operations
of financial intermediaries, such as banks and savings institutions. These
entities primarily hold monetary assets and liabilities and, as such, can
experience significant purchasing power gains and losses over relatively
short periods of time. In addition, interest rate changes during
inflationary periods change the amounts and composition of assets and
liabilities held by financial intermediaries and could result in regulatory
pressure for an additional equity investment.
Pending Lawsuits
The Bank has been named as a defendant in various lawsuits, none of
which is expected to have a materially adverse effect on the Company.
27
<PAGE>
COMPONENTS OF EARNINGS
Net Interest Income
Net interest income is the primary component of the Company's
earnings. The chief determinants of net interest income are the dollar
amounts of interest-earning assets and interest-bearing liabilities and the
interest rates earned or paid thereon. The greater the excess of average
interest-earning assets over average interest-bearing liabilities, the more
beneficial the impact on net interest income. The excess of average
interest-earning assets over average interest-bearing liabilities was $139.2
million in 1999, $131.7 million in 1998 and $109.9 million in 1997. The
increase over the last two years was due to continued improvement in asset
quality.
The Company's net interest income is also impacted by a three month
time lag before changes in the cost of funds can be passed along to monthly
adjustable rate loan customers. Savings and borrowing costs adjust to market
rates immediately while it takes several months for the loan yield to
adjust. This time lag decreases the Company's net interest income during
periods of rising interest rates. The reverse is true during periods of
declining interest rates. See "Asset-Liability Management" for further
discussion.
The following table sets forth the components of interest-earning
assets and liabilities, the excess of interest-earning assets over
interest-bearing liabilities, the yields earned and rates paid and net
interest income for the periods indicated:
1999 1998 1997
(Dollars In Thousands)
Average loans and mortgage-backed
securities (1)......... $3,328,723 $3,638,628 $3,811,179
Average investment securities 199,686 148,871 160,224
Average interest-earning assets 3,528,409 3,787,499 3,971,403
Average savings deposits 2,065,712 2,121,024 1,972,860
Average borrowings...... 1,323,487 1,534,820 1,888,662
Average interest-bearing liabilities 3,389,199 3,655,844 3,861,522
Excess of interest-earning assets
over interest-bearing liabilities $ 139,210 $ 131,655 $ 109,881
Yields earned on average interest
earning assets......... 7.26% 7.54% 7.40%
Rates paid on average interest-
bearing liabilities.... 4.76 5.11 5.27
Net interest rate spread 2.50 2.43 2.13
Effective net spread.... 2.70 2.60 2.28
Total interest income... $ 256,335 $ 285,395 $ 293,931
Total interest expense.. 161,160 186,890 203,434
95,175 98,505 90,497
Total other items (2)... 3,795 4,773 4,497
Net interest income..... $ 98,970 $ 103,278 $ 94,994
(1) Non-accrual loans were included in the average dollar amount of loans
outstanding,but no income was recognized during the period that each such loan
was on non-accrual status.
(2) Includes dividends on FHLB stock and other miscellaneous items, including
interest on California tax refunds at June 30, 1997.
The yield on earning assets decreased to 7.26% in 1999 from 7.54% in
1998 due to a 34 basis point decrease in the Index which determines the
yield on over 87% of the Bank's loan portfolio. The Bank's cost of funds
decreased by 35 basis points in 1999 compared to 1998 due to lower market
interest rates during the first half of 1999 compared to 1998.
28
<PAGE>
The table below sets forth certain information regarding changes in
the interest income and interest expense of the Bank for the periods
indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes
attributable to (i) changes in volume (changes in average balance multiplied
by old rate) and (ii) changes in rates (changes in rate multiplied by prior
year average balance):
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1999 December 31, 1998
Versus Versus
December 31, 1998 December 31, 1997
Change Due To Change Due To
Rate Volume Total Rate Volume Total
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Loans and mortgage-backed
Securities.......... $(8,949) $(23,073) $(32,022) $5,324 $(13,088) $(7,764)
Investments.......... 207 2,754 2,961 (168) (604) (772)
Total interest income (8,742) (20,319) (29,061) 5,156 (13,692) (8,536)
Interest Expense:
Deposits............. (8,058) (2,499) (10,557) (1,892) 6,861 4,969
Borrowings.......... (3,269) (11,905) (15,174) (962) (20,551) (21,513)
Total interest expense (11,327) (14,404) (25,731) (2,854) (13,690) (16,544)
Change in net
interest income $ 2,585 $ (5,915) (3,330) $8,010 $ (2) 8,008
Change in other items (1) (978) 276
Total change in net interest
Income including other items $ (4,308) $ 8,284
</TABLE>
(1) Includes dividends on FHLB stock and other miscellaneous items.
Note: Changes in rate / volume (change in rate multiplied by the change in
average volume) have been allocated to the change in rate or the change in
volume based upon the respective percentages of the combined totals.
29
<PAGE>
<TABLE>
<CAPTION>
Interest Rate Spreads and Yield on Average Interest-Earning Assets
Year Ended December 31,
1999 1998 1997 1996 1995
During End of During End of During End of During End of During End of
Period Period Period Period Period Period Period Period Period Period
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Weighted average yield
on loans and mortgage-
backed securities......... 7.37% 7.31% 7.63% 7.48% 7.49% 7.48% 7.44% 7.47% 7.31% 7.63%
Weighted average yield
on investment portfolio(1) 5.43 5.69 5.29 5.14 5.40 6.06 5.71 5.98 5.56 5.15
Weighted average yield
on all interest-earning
assets.................... 7.26 7.25 7.54 7.39 7.40 7.42 7.36 7.45 7.23 7.59
Weighted average rate
paid on deposits.......... 4.22 4.42 4.61 4.36 4.70 4.66 4.76 4.67 4.86 4.89
Weighted average rate
paid on borrowings and
FHLB advances............. 5.59 5.88 5.81 5.66 5.86 5.91 5.85(4) 5.77 6.32 6.11
Weighted average rate
paid on all interest-
bearing liabilities....... 4.76 5.04 5.11 4.84 5.27 5.28 5.25 5.22 5.51 5.41
Interest rate spread(2).... 2.50 2.17 2.43 2.55 2.13 2.14 2.11 2.23 1.72 2.18
Effective net spread(3).... 2.70 2.60 2.28 2.24 1.80
</TABLE>
(1) Dividends on FHLB stock and miscellaneous interest income were not
considered in this analysis.
(2) Weighted average yield on all interest-earning assets less weighted
average rate paid on all interest-bearing liabilities.
(3) Net interest income (the difference in the dollar amounts of interest
earned and paid) divided by average interest-earning assets.
(4) Excludes effect of IRS accrued interest reversal.
Loss Provision
The Company did not record a loan loss provision during 1999 but
recorded loan loss provisions of $7.2 million and $20.5 million in 1998 and
1997, respectively. No provision was recorded during 1999 because existing
allowances were sufficient in light of the overall asset quality improvement
in 1999. Non- performing assets decreased to $15.4 million in 1999 from $30.7
million in 1998 and $39.6 million in 1997. The Bank has a policy of providing
for general valuation allowances , unallocated to any specific loan, but
available to offset any future loan losses. The allowance is maintained at an
amount that management believes adequate to cover estimable and probable loan
losses. The Company also maintains valuation allowances for impaired loans and
loans sold with recourse. See "Allowances for Loan Losses."Management performs
regular risk assessments of the Bank's loan portfolio to maintain appropriate
valuation allowances. Additional loan loss provisions may be required to the
extent that charge-offs are recorded against the valuation allowance for
impaired loans, the general valuation allowance, or the valuation allowance
for loans sold with recourse. Loan charge-offs decreased to $2.4 million in
1999 from $3.4 million in 1998 and $12.1 million in 1997. Loan charge-offs
decreased from 0.09% of average loans outstanding in 1998 to 0.08% of average
loans outstanding in 1999. Charge-offs result from declines in the value of
the underlying collateral of the non-performing loans.
Non-interest Income
Loan servicing and other fees were $4.2 million in 1999, $4.2 million
in 1998, and $6.2 million in 1997. The lower fees earned in 1999 and 1998
compared to 1997 resulted from decreased fees earned on loans serviced for
other lenders. Fees earned during 1998 included a $1.4 million provision
for impairment of the Bank's servicing asset due to accelerated payoffs and
prepayments of loans serviced for others.
Gain on sale of loans was $1.2 million in 1999, $4.1 million in 1998,
and $652 thousand in 1997. The decrease in gain on sale of loans from 1998
to 1999 was due to a reduction in loans originated for sale in the rising
fixed interest rate environment during the second half of 1999. Increased
gains from 1997 to 1998 were due to cash gains and fees earned on the sale
of fixed rate loans which were available to the Bank's borrowers at
historically low rates during 1998.
30
<PAGE>
Real estate operations resulted in a net gain of $3.2 million in 1999
compared to gains of $1.2 million in 1998 and $20 thousand in 1997. Real
estate operations includes gain on sale of foreclosed properties,
operational income and expenses during the holding period, and recoveries of
prior losses on real estate sold.
Non-interest Expense
The ratio of non-interest expense to average total assets for 1999 was
1.30% compared with 1.24% in 1998. The increased ratio in 1999 compared to
1998 resulted primarily from increased legal costs offset by decreases in
rent expense and data processing expense.
Salary and benefit costs increased 3% in 1999 compared to 1998 due to
higher salary costs, incentive costs and bonus expense. Incentive costs
were higher due to the Bank's increase in loan originations. Loan officers
are compensated based on loans originated. Salary and benefit costs
increased 14% in 1998 compared to 1997 due to higher and incentive costs
profit sharing costs and bonus expenses.
Occupancy expense decreased 7% in 1999 compared to 1998 due to market
adjustments recorded during 1998 of $995 thousand on leased properties no
longer occupied by the Bank. Occupancy expense increased 23% in 1998
compared to 1997 due to the same market adjustment described above.
Other operating expenses increased to $11.5 million in 1999 from $11.4
million in 1998 due to an increase in legal costs to $3.5 million in 1999
from $1.5 million in 1998. Legal expenses increased during 1999 as a result
of higher than normal defense cases that were resolved in 1999 and early
into the year 2000. Offsetting the increase in legal costs was a decrease
in data processing costs to $1.9 million in 1999 from $3.4 million in 1998.
1998 data processing costs included costs related to the Bank's conversion
to a new computer system during that year.
31
<PAGE>
The following table details the components of non-interest expense for
the periods indicated:
<TABLE>
<CAPTION>
Non-Interest Expense
Year Ended December 31,
1999 1998 1997 1996 1995
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Salaries and Employee Benefits:
Salaries............. $17,461 $16,643 $15,413 $15,749 $16,436
Incentive compensation 1,677 1,478 883 556 899
Payroll taxes........ 1,607 1,455 1,371 1,389 1,400
Employee benefit insurance 1,220 1,069 1,048 1,137 1,180
Bonus compensation... 1,583 1,335 1,100 1,000 1,001
Profit sharing....... 1,100 1,000 501 500 500
Pension.............. - - - 241 436
SERP................. 988 795 628 506 408
401(k)............... 299 235 392 - -
Other salaries and benefits 729 1,801 1,404 850 785
26,664 25,811 22,740 21,928 23,045
Occupancy:
Rent................. 4,395 5,105 4,351 4,270 4,250
Equipment............ 2,145 1,855 1,336 959 885
Maintenance costs.... 469 344 450 477 460
Other occupancy...... 850 1,189 741 583 663
7,859 8,493 6,878 6,289 6,258
Other Operating Expense:
Insurance............ 430 362 345 381 528
Goodwill............. 452 565 839 915 996
Data processing...... 1,930 3,359 2,539 945 1,012
Contributions........ 299 509 412 401 341
Professional services 8 259 373 420 447
Legal expenses....... 3,516 1,479 1,309 412 330
Supervisory exam..... 567 599 610 611 603
Other operating costs 4,334 4,288 3,439 4,086 4,110
11,536 11,420 9,866 8,171 8,367
Federal Deposit Insurance:
Deposit insurance premiums... 1,236 1,241 1,872 5,418 6,400
SAIF special assessment - - - 15,007 -
1,236 1,241 1,872 20,425 6,400
Advertising.......... 1,864 1,959 2,795 2,362 1,833
Total.............. $49,159 $48,924 $44,151 $59,175 $45,903
Non-interest expense as
% of average assets. 1.30% 1.24% 1.06% 1.43%(1) 1.10%
</TABLE>
(1) The ratio for 1996 includes the special SAIF assessment. Excluding the
SAIF assessment, the ratio would have been 1.06%.
32
<PAGE>
BALANCE SHEET ANALYSIS
Consolidated assets at the end of 1999 were $3.9 billion, representing a
5% increase from $3.7 billion at the end of 1998 and a 7% decrease from
$4.2 billion at the end of 1997. Assets increased during 1999 due to
loan originations of $821.9 million and loan purchases of $122.2 million.
Offsetting the increase was accelerated amortization and prepayments of
adjustable rate loans and mortgage backed securities, particularly during the
first half of 1999 when interest rates were low.
Loan Portfolio
At the end of 1999, over 84% of the Bank's loans had adjustable interest
rates based on monthly changes in the Index. As part of its asset-liability
management strategy, the Bank has maintained the level of adjustable loans in
its portfolio at over 90% for several years. Management believes that the high
level of adjustable rate mortgages will help insulate the Bank from
fluctuations in interest rates, notwithstanding the several month time lag
between a change in its monthly cost of funds and a corresponding change in
its loan yields. See "Asset - Liability Management."
The Bank also originates loans with initial fixed interest rates with
periods ranging from 3 to 10 years. By policy, the Bank will either match the
fixed rate period of these loans with borrowings for the same term or will
hold an amount up to $150 million of unmatched fixed rate loans in its
portfolio. Management believes that the limited origination of fixed-rate
loans will enhance the Company's overall return on assets and improve loan
originations in this economy.
In 1999 and 1998, the Bank placed $9.9 million and $21.3 million ,
respectively, in mortgages with other lenders under fee arrangements, which
amount is not included in loan originations. In 1999, loans made on the
security of single family properties (one to four units) comprised 83% of the
dollar amount of new loan originations . Loans made on the security of
multi-family properties(five or more units) comprised 13% of new originations.
Loans made on the security of commercial real estate properties comprised 4%
of new loan originations. Loans originated through the Bank's commercial
lending units totaled $7.8 million. No construction loans were originated in
1999. Adjustable rate mortgages comprised 52% of new loan activity during 1999
compared to 49% in 1998.
The following table details loan originations and loan purchases by loan
type for the periods indicated:
<TABLE>
<CAPTION>
Loan Originations and Purchases by Type
Year Ended December 31,
1999 1998 1997 1996 1995
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Single Family (one to four units) $779,698 $594,763 $430,223 $239,866 $237,508
Multi-Family............ 118,622 37,720 48,033 57,414 55,832
Commercial Real Estate.. 37,744 383 2,551 5,568 4,881
Commercial Business Loans 7,768 1,733 - - -
Other................... 301 2,428 444 - 1,031
Total................. $944,133 $637,027 $481,251 $302,848 $299,252
</TABLE>
Loans originated upon the sale of the Bank's real estate owned were
$4.8 million or .51% of total originations in 1999. $430 thousand of these
loans were originated based on the security of single family properties,
$4.0 million were originated based on the security of multi-family properties
and $380 thousand were based on the security of commercial properties.
33
<PAGE>
From time to time , the Bank converts loans into mortgage-backed
securities for use in securitized borrowings (reverse repurchase agreements).
No loans were converted into mortgage-backed securities during 1999, 1998,
or 1997. Securitized loans have a lower risk weighting for regulatory
risk-based capital purposes. In exchange for the enhanced credit risk
associated with mortgage-backed securities, the Bank pays guarantee fees to
FHLMC and/or FNMA.
The Bank's adjustable rate loan products often provide for first year
monthly payments that are lower than the fully-indexed interest and principal
due. Any interest not fully paid by such lower first year payments is added to
the principal balance of the loan. This causes negative amortization until
payments increase to cover interest and principal repayment shortfalls. Due to
negative amortization, loan-to-value ratios may increase above those
calculated at the inception of the loan.
The Bank does not normally lend in excess of 90% of the appraised
collateral value on adjustable mortgage loans ("AMLs"). Where the Bank does
lend in excess of 90% of the appraised value, additional fees and rates are
charged. Mortgage insurance is required on loans in excess of 80% or premium
rates and/or fees are charged if the mortgage insurance requirement is waived.
Subsequent to the origination of a loan, the Bank may purchase private
mortgage insurance with its own funds. Loans originated under this program for
which there is no private mortgage insurance totaled $274.2 million at
December 31, 1999 compared to $265.0 million at December 31, 1998 and $163.8
million at December 31, 1997. See "Business - Interest Rates, Terms and Fees."
Loan Composition
Loans based on the security of single family properties (one to four
units) comprise the largest category of the Bank's loan portfolio (including
mortgage-backed securities). The loan portfolio also includes loans secured by
multi-family and commercial properties. At December 31, 1999, approximately
58% of the loan and mortgage-backed securities portfolio consisted of first
liens on single family properties. First liens on multi-family properties
comprised approximately 36% of the portfolio, and first liens on commercial
properties represented approximately 6% of the portfolio.
Multi-family and commercial real estate loans are considered more
susceptible to market risk than single family loans and higher interest rates
and fees are charged to borrowers for these loans. Approximately 13% of loan
originations in 1999 were multi-family loans compared to 6% in 1998 and 10%
during 1997. Multi-family loans originated upon the sale of REO were 0.42%, 1%
and 6% of total loan originations during 1999, 1998 and 1997, respectively.
The Bank has loss exposure on certain loans sold with recourse. These
loans are substantially all secured by multi-family properties. Loans sold
with recourse totaled $178.7 million as of December 31, 1999, $203.0 million
as of December 31, 1998 and $218.1 million as of December 31, 1997. Although
no longer owned by the Bank, these loans are evaluated for the purposes of
computing the repurchase liability and measuring risk exposure for regulatory
capital. Under the Bank's current policy, it no longer enters into loans sold
with recourse agreements.
34
<PAGE>
The following table sets forth the composition of the Bank's portfolio of
loans and mortgage-backed securities for each of the last five years:
<TABLE>
<CAPTION>
Loan Portfolio Composition
December 31,
1999 1998 1997 1996 1995
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
REAL ESTATE LOANS:
First trust deed residential loans:
One to four units..... $ 1,813,783 $ 1,564,392 $ 1,801,608 $ 1,621,497 $ 1,573,869
Five or more units.... 1,123,308 1,127,228 1,217,577 1,277,634 1,344,866
Residential loans....... 2,937,091 2,691,620 3,019,185 2,899,131 2,918,735
OTHER REAL ESTATE LOANS
Commercial and industrial 183,194 181,772 196,575 210,953 221,982
Second trust deeds.... 13,489 15,357 15,441 17,497 2,213
Other................. - - 6,303 2,137 3,157
Real estate loans... 3,133,774 2,888,749 3,237,504 3,129,718 3,146,087
NON-REAL ESTATE LOANS:
Manufactured housing.. 613 893 1,154 1,480 1,938
Deposit accounts...... 683 1,002 1,644 1,042 1,104
Commercial business loans 8,140 1,259 - - -
Consumer.............. 593 621 185 236 359
Loans receivable.... 3,143,803 2,892,524 3,240,487 3,132,476 3,149,488
LESS:
General valuation allowance 69,954 67,638 61,237 54,900 42,876
Valuation allowances -
impaired loans........ 2,596 7,634 9,775 12,350 26,101
Unrealized loan fees.. 10,706 9,031 24,311 16,757 20,731
Net loans receivable (1) 3,060,547 2,808,221 3,145,164 3,048,469 3,059,780
FHLMC AND FNMA MORT-
GAGE-BACKED SECURITIES:
Secured by single family
dwellings........... 412,469 539,079 657,342 715,286 810,980
Secured by multi-family
dwellings........... 16,172 17,600 18,716 20,189 24,468
Mortgage-backed securities 428,641 556,679 676,058 735,475 835,448
TOTAL............. $ 3,489,188 $ 3,364,900 $ 3,821,222 $ 3,783,944 $ 3,895,228
(1) Includes loans held for sale.
</TABLE>
35
<PAGE>
ASSET QUALITY
Asset Quality Ratios
The following table sets forth certain asset quality ratios of the Bank
for the periods indicated:
<TABLE>
<CAPTION>
December 31,
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Non-performing Loans to Loans Receivable(1) .42% .90% .91% 1.89% 2.44%
Non-performing Assets to Total Assets(2) .40% .84% .95% 1.77% 2.33%
Loan Loss Allowances to Non-performing
Loans(3).......................... 509.74% 242.09% 193.38% 94.27% 65.62%
General Loss Allowances to Assets
with Loss Exposure(4)............. 2.15% 2.26% 1.86% 1.73% 1.35%
General Loss Allowances to Total Assets with
Loss Exposure(5).................. 2.41% 2.51% 2.12% 1.86% 1.52%
</TABLE>
(1) Non-performing loans are net of valuation allowances related to those
loans. Loans receivable exclude mortgage-backed securities and are before
deducting unrealized loan fees, general valuation allowances and valuation
allowances for impaired loans.
(2) Non-performing assets are net of valuation allowances related to those
assets.
(3) The Bank's loan loss allowances, including valuation allowances for non-
performing loans and general valuation allowances but excluding repurchase
liability 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 repurchase liability
for loans sold with full or limited recourse. The Bank's assets with loss
exposure includes its loan portfolio , real estate owned, loan commitments,
and potential loan buybacks but excludes mortgage-backed securities.
(5) The Bank's general valuation allowances, repurchase liability for loans
sold with full or limited recourse. Assets with loss exposure include the
Bank's loan portfolio plus loans sold with recourse, but exclude mortgage-
backed securities.
36
<PAGE>
NON-PERFORMING ASSETS
Non-performing assets, as defined by the Bank, include loans delinquent
over 90 days or in foreclosure, real estate acquired in settlement of loans,
and other loans less than 90 days delinquent but for which collectibility is
questionable.
The table below details the amounts of non-performing assets by type of
collateral. Also shown is the ratio of non-performing assets to total assets.
<TABLE>
<CAPTION>
Non-Performing Assets
December 31,
1999 1998 1997 1996 1995
$ % $ % $ % $ % $ %
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Owned:
Single Family..... $ 1,069 6.93% $ 3,946 12.84% $ 5,806 14.66% $ 6,840 9.32% $ 7,252 7.50%
Multi-Family...... 1,483 9.62 1,309 4.26 4,034 10.19 7,339 10.00 9,827 10.17
Commercial and Industrial - - - - 826 2.09 673 .92 2,544 2.63
Less: General Valuation
Allowance...... (350) (2.27) (500) (1.63) (500) (1.26) (521) (.71) - -
Other............. - - - - 52 .13 - - 78 0.08
Total Real Estate
Owned............ 2,202 14.28 4,755 15.47 10,218 25.81 14,331 19.53 19,701 20.38
Non-Performing Loans:
Single Family..... 9,626 62.41 12,270 39.92 16,799 42.43 25,602 34.89 25,991 26.89
Multi-Family...... 3,995 25.90 13,005 42.31 15,785 39.86 44,754 60.98 69,579 72.00
Commercial and Industrial 225 1.46 4,040 13.14 1,533 3.87 2,223 3.03 3,313 3.43
Other............. - - - - - - - - 220 .23
Less Valuation
Allowances....... (625) (4.05) (3,332) (10.84) (4,738) (11.97) (13,522) (18.43) (22,159) (22.93)
Total Non-Performing
Loans............ 13,221 85.72 25,983 84.53 29,379 74.19 59,057 80.47 76,944 79.62
Total............. $15,423 100.00% $30,738 100.00% $39,597 100.00% $73,388 100.00% $ 96,645 100.00%
Ratio of Non-Performing
Assets To Total Assets: .40% .84% .95% 1.77% 2.33%
</TABLE>
The decrease in non-performing loans in 1999 and 1998 is due to
reductions in delinquent loans and non-performing loans due to improvement in
the Southern California real estate markets.
Single family non-performing loans are primarily due to factors such as
layoffs and decreased incomes. Multi-family and commercial non-performing
loans are attributable primarily to factors such as declines in occupancy
rates and decreased real estate values. The Bank actively monitors the status
of all non-performing loans.
Impaired loans totaled $11.4 million, $17.5 million and $25.7 million,
net of related allowances of $2.6 million, $7.6 million and $9.8 million as of
December 31, 1999, December 31, 1998 and 1997, respectively. See "Business -
Risk Elements" for a further discussion of impaired loans.
37
<PAGE>
The Bank's modified loans result primarily from temporary modifications
of principal and interest payments. Under these arrangements, loan terms are
typically reduced to no less than a required monthly interest payment. Any
loss of revenues under the modified terms would be immaterial to the Bank.
If the borrower is unable to return to scheduled principal and interest
payments at the end of the modification period, foreclosure procedures are
initiated, or, in certain circumstances, the modification period is extended.
As of December 31, 1999, the Bank had modified loans totaling $7.4 million,
net of loan loss allowances. This compares with $11.0 million and $16.7
million net of allowances as of December 31, 1998 and December 31, 1997,
respectively. Modified loans included as impaired loans total $6.5 million,
$6.0 million and $8.1 million, net of valuation allowances, as of December
31, 1999, 1998 and 1997, respectively. No modified loans were 90 days or more
delinquent as of December 31, 1999, 1998, and 1997.
Allowances for Loan Losses
For an analysis of the changes in the loan loss allowances, see
"Business - Risk Elements." At December 31, 1999, the general valuation
allowance was $70.0 million or 2.15% of the Bank's loans with loss exposure.
This compares to 2.26% at the end of 1998 and 1.86% at the end of 1997. In
addition to the general valuation allowance and the allowance for impaired
loans mentioned above, the Bank also maintains a repurchase liability for
loans sold with recourse. This repurchase liability amounted to 7.18%, 6.18%
and 5.97% of loans sold with recourse at December 31, 1999, 1998 and 1997,
respectively. Management considers the current level of loss allowances
adequate to cover the Bank's loss exposure at this time. However, there can
be no assurance that future additions to loan loss allowances will not be
required.
CAPITAL RESOURCES AND LIQUIDITY
Liquidity Requirements
Federal regulations currently require a savings institution to maintain
a monthly average daily balance of liquid assets (including cash, certain
time deposits, bankers' acceptances and specified United States government,
state or federal agency obligations) equal to at least 4% of: (i) the average
daily balance of its net withdrawable accounts and short-term borrowings
during the preceding calendar quarter or (ii) the ending balance of its net
withdrawable accounts as of the end of the preceding calendar quarter. The
liquidity requirement may be changed from time-to-time by the OTS to any
amount within the range of 4% to 10% of such accounts and borrowings
depending upon economic conditions and the deposit flows of member
institutions. Effective December 1, 1997, the OTS reduced this liquidity
requirement to 4% from 5%. The OTS also gave institutions the option of
using a quarterly average calculation or an end of quarter calculation of the
liquidity base and removed the requirement of maintaining a monthly average
balance of short-term liquid assets equal to at least 1% of the average daily
balance of its net withdrawable accounts and short term borrowings. Monetary
penalties may be imposed for failure to meet these liquidity ratio
requirements. The Bank's liquidity ratio for the quarter ended December 31,
1999 was 6.39%, which exceeded the applicable requirements.
38
<PAGE>
External Sources of Funds
External sources of funds include savings deposits, loan sales,
advances from the FHLBSF and reverse repurchase agreements ("reverse
repos"). For purposes of funding asset growth, the source or sources of
funds with the lowest total cost for the desired term are generally selected.
The incremental source of funds used most often during 1999 was advances from
the FHLBSF.
Deposits obtained from national brokerage firms ("brokered deposits")
are considered a source of funds similar to a borrowing. In evaluating
brokered deposits as a source of funds, the cost of these deposits, including
commission fees, is compared to other funding sources. Brokered deposits were
$445.9 million at December 31, 1999. This compares to $494.2 million at
December 31, 1998 and $378.1 million at December 31, 1997.
Deposits at retail savings offices were $1.6 billion at December 1999
compared to $1.5 billion for 1998 and 1997. The retail deposits have
remained steady due to the availability of alternative investments paying
higher returns to customers and intense competition for deposits by other
financial institutions.
The Bank also solicits deposits through telemarketing efforts.
Telemarketing deposits are obtained by the Bank's employees via telephone,
from depositors outside of the Bank's normal service areas. Telemarketing
deposits decreased by 44% to $64.5 million at the end of 1999. This compares
with $115.6 million at the end of 1998 and $99.8 million at the end of 1997.
The level of telemarketing deposits varies based on the activity of
investors, who are typically professional money managers. The availability of
telemarketing deposits also varies based on the investors' perception of the
Bank's creditworthiness.
Reverse repurchase agreements are short term borrowings secured by
mortgage-backed securities. These borrowings decreased 23% to $363.6 million
at the end of 1999 from $471.2 million at the end of 1998 and $577.7 million
at the end of 1997. Borrowings under reverse repurchase agreements have
decreased over the last three years due to prepayments of the underlying
collateral. The Bank did not securitize any mortgage loans in 1999, 1998 or
1997.
FHLB advances increased to $1.2 billion at the end of 1999 from $714
million at the end of 1998 compared to $1.3 billion at the end of 1997. FHLB
advances increased during 1999 because these were often the lowest cost
source funds available to the Bank. FHLB advances decreased during 1998 from
1997 due to the availability of lower cost funds from other sources.
Sales of loans were $133.0 million in 1999. This compares to $379.6
million during 1998 and $52.4 million during 1997. Loan sales decreased
substantially in 1999 due to increased interest rates on fixed rate mortgages
during the second half of 1999 which resulted in a decrease in loans
originated for sale.
Internal Sources of Funds
Internal sources of funds include scheduled loan principal payments,
loan payoffs, and positive cash flows from operations. Principal payments
were $670.5 million in 1999 compared to $658.0 million in 1998 and $289.1
million in 1997. Principal payments include both amortization and
prepayments and are a function of real estate activity and the general level
of interest rates. Prepayments increased in 1999 due to refinancing activity
into fixed rate loans which were available to borrowers at favorable interest
rates for the first half of 1999.
39
<PAGE>
Capital Requirements
Current OTS regulatory capital standards require that the Bank maintain
tangible capital of at least 1.5% of total assets, core capital of 4.0% of
total assets, and risk-based capital of 8.0% of total assets, risk-weighted.
Among other things, failure to comply with these capital standards will
result in restrictions on asset growth and necessitate the preparation of a
capital plan, subject to regulatory approval. Generally, any institution with
a risk-based capital ratio in excess of 10% and a core capital ratio greater
than 5% is considered well-capitalized for regulatory purposes. Institutions
who maintain this capital level can take in brokered deposits at their
discretion, and if they achieve a sufficient ranking on their regulatory
examination, may be assessed a lower deposit insurance rate.
Management presently intends to maintain its capital position at levels
above those required by regulators to ensure operating flexibility and growth
capacity for the Bank. The Bank's capital position is actively monitored by
management. The Bank met the regulatory capital standards to be deemed
"well-capitalized" for purposes of the various regulatory measures of capital
including the prompt corrective action regulations.
To be considered "well capitalized" for purposes of the prompt
corrective action requirements the Bank must maintain the capital ratios as
set forth in the table below:
December 31, 1999
Amount %
(Dollars In Thousands)
Core capital requirement......... $194,633 5.00%
Bank's core capital.............. 234,166 6.02
Excess core capital............ $ 39,533 1.02%
Tier 1 risk-based capital requirement $131,942 6.00%
Bank's tier 1 risk-based capital. 234,166 10.65
Excess tier 1 risk-based capital $102,224 4.65%
Risk-based capital requirement... $219,904 10.00%
Bank's risk-based capital........ 262,178 11.92
Excess risk-based capital...... $ 42,274 1.92%
40
<PAGE>
ASSET-LIABILITY MANAGEMENT
The Bank's primary objective in managing interest rate risk is to
minimize the adverse impact of changes in interest rates on the Bank's net
interest income and capital, while, at the same time, adjusting the Bank's
asset-liability mix to achieve the most favorable impact on earnings.
The Bank's asset-liability management policy is designed to improve the
balance between the maturities and repricings of interest-earning assets and
interest-bearing liabilities in order to better insulate net earnings from
interest rate fluctuations. Under this program, the Bank emphasizes the
funding of monthly adjustable mortgages with short term savings and
borrowings and matching the maturities of these assets and liabilities. The
Bank also match funds a limited amount of fixed rate loans with initial fixed
interest periods ranging from 3 to 10 years.
The majority of the Bank's assets are monthly adjustable rate mortgages
with interest rates that fluctuate based on changes in the FHLBSF Eleventh
District Cost of Funds Index ("Index"). These mortgages constitute over 87%
of the loan portfolio at the end of 1999. Comparisons over the last several
years show that changes in the Bank's cost of funds generally correlates with
changes in the Index. The Bank does not use any futures, options or swaps in
its asset-liability strategy.
Assets and liabilities which are subject to repricing are considered
rate sensitive. The mis-match in the repricing of rate sensitive assets and
liabilities is referred to as a company's "GAP." The GAP is positive if
rate-sensitive assets exceed rate-sensitive liabilities. Generally, a
positive GAP benefits a company during periods of increasing interest rates.
The reverse is true during periods of decreasing interest rates. However,
because the Index lags changes in market interest rates by three months while
the Bank's short-term savings and borrowing costs adjust immediately, the
Bank's net interest income initially decreases during periods of rising
interest rates and increases during periods of declining interest rates.
In order to minimize the impact of rate fluctuations on earnings,
management's goal is to keep the one year GAP at less than 20% of total
assets (positive or negative). At December 31, 1999 the Company's one-year
GAP was $108.2 million or 2.81% of total assets. This compares with positive
GAP ratios of 13.0% and 4.14% of total assets at December 31, 1998 and
December 31, 1997, respectively.
41
<PAGE>
The following chart shows the interest sensitivity of the Company's
assets and liabilities by repricing period at December 31, 1999 and the
consolidated GAP position as a percentage of total assets at that time:
<TABLE>
<CAPTION>
INTEREST-SENSITIVITY GAP
Balances Balances Balances Balances
Repricing Repricing Repricing Repricing
Total Within Within Within After
Balance 0-3 Months 4-12 Months 1-5 Years 5 Years
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Interest-Earning Assets:
FHLB interest bearing deposits $ 8,937 $ 8,937 $ - $ - $ -
Investment Securities... 151,195 200 28,300 10,000 112,695
Overnight Investments... 67,000 67,000 - - -
Mortgage-backed Securities 428,641 426,427 103 673 1,438
Loans Receivable........ 3,060,547 2,712,843 24,032 245,223 78,449
Total Interest-Earning
Assets.............. $3,716,320 $3,215,407 $ 52,435 $ 255,896 $ 192,582
Interest-Bearing Liabilities:
Demand Accounts........ $ 636,684 $ 636,684 $ - $ - $ -
Fixed Rate Term Certificate 1,280,363 436,354 802,937 37,357 3,715
Borrowings:
FHLB Advances........ 1,169,000 545,000 375,000 219,000 30,000
Reverse Repurchase
Agreements.... 363,635 340,417 23,218 - -
Other Borrowings - - - - -
Total Interest-Bearing
Liabilities.... $3,449,682 $1,958,455 $ 1,201,155 $ 256,357 $ 33,715
Interest-Sensitivity Gap.. $ 266,638 $1,256,952 $(1,148,720) $ (461) $ 158,867
Interest-Sensitivity Gap as a
Percentage of Total Assets 32.59% (29.79)% (0.01)% 4.12%
Cumulative Interest-Sensitivity Gap $1,256,952 $ 108,232 $ 107,771 $ 266,638
Cumulative Interest-Sensitivity
Gap as a Percentage of Total
Assets................. 32.59% 2.81% 2.79 6.91%
</TABLE>
42
<PAGE>
Another measure of interest rate risk, required to be performed by
OTS-regulated institutions, is an analysis specified by OTS Thrift Bulletin
TB-13a, "Management of Interest Rate Risk, Investment Securities, and
Derivatives Activities". Under this regulation, which became effective
December 1, 1998 and replaced TB-13, institutions are required to establish
limits on the sensitivity of their net interest income and net portfolio
value to changes in interest rates. Such changes in interest rates are
defined as instantaneous and sustained movements in interest rates in 100
basis point increments. In addition, the Bank monitors the impact of the
same changes in interest rates on its interest income. The following table
shows the estimated impact of a parallel shift in interest rates on the
Bank's portfolio value at December 31, 1999 and December 31, 1998:
Percentage
Change in Interest Rates Change in Net Portfolio Value(1)
(In Basis Points) 1999 1998
+300................ (15)% (13)%
+200................ (10)% (8)%
+100................ (6)% (4)%
-- 100.............. 2% 1%
-- 200.............. 5% 2%
-- 300.............. 13% 7%
(1) The percentage change in this column represents the projected change
in the net portfolio value of the Bank in a stable interest rate environment
versus the net portfolio value in the various rate scenarios. The OTS defines
net portfolio value as the present value of expected cash flows from existing
assets minus the present value of expected cash flows from existing
liabilities.
43
<PAGE>
The following table shows the fair value and contract terms of the Bank's
interest-earning assets and interest-bearing liabilities as of December 31,
1999 categorized by type and expected maturity for each of the next five
years and thereafter:
<TABLE>
<CAPTION>
Expected Maturity Date as of December 31, (1)
There- Total Fair
2000 2001 2002 2003 2004 after Balance Value
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Earning Assets
Loans Receivable:
Adjustable Rate Loans:
Single family $196,847 $201,547 $187,476 $164,198 $143,651 $904,353 $1,798,072 $1,812,726
Average interest rate 7.26% 7.27% 7.27% 7.27% 7.28% 7.28% 7.28%
Multi-family 80,259 80,783 77,586 75,810 71,357 736,134 1,121,929 1,132,896
Average interest rate 7.29% 7.29% 7.31% 7.32% 7.35% 7.32% 7.32%
Commercial and Industrial 13,894 13,885 14,258 16,604 20,587 97,613 176,841 182,044
Average interest rate 7.73% 7.77% 7.48% 7.67% 8.02% 7.87% 7.82%
Fixed Rate Loans:
Single family 1,325 1,147 978 819 679 3,334 8,282 8,474
Average interest rate 8.29% 8.24% 8.17% 8.18% 8.17% 7.83% 8.06%
Multi-family 830 795 748 675 614 1,858 5,520 5,653
Average interest rate 8.56% 8.46% 8.46% 8.53% 8.59% 7.85% 8.29%
Commercial and Industrial 609 685 544 485 1,874 2,696 6,893 7,216
Average interest rate 9.69% 9.43% 8.79% 8.63% 8.42% 8.79% 8.92%
Business Loans 3,321 945 1,039 1,142 1,114 579 8,140 8,309
Average interest rate 10.06% 9.50% 9.50% 9.50% 9.50% 9.50% 9.73%
Consumer loans 1,277 999 - - - - 2,276 2,474
Average interest rate 13.11% 13.50% - - - - 13.28%
Other loans 192 322 395 355 307 1,058 2,629 2,660
Average interest rate 0.62% 7.55% 7.55% 7.55% 7.55% 7.55% 4.41%
Mortgage-backed
Securities:
Adjustable 58,254 51,125 44,836 39,291 34,403 209,796 437,705 426,169
Average interest rate 5.90% 5.90% 5.90% 5.90% 5.90% 5.90% 5.90%
Fixed 370 324 283 247 215 809 2,248 2,472
Average interest rate 8.51% 8.51% 8.51% 8.51% 8.51% 8.48% 8.50%
Investment Securities 300 9,996 28,171 - - 115,704 154,171 151,195
Average interest rate 5.79% 5.38% 5.01% - - 6.23% 5.95%
Overnight investments 67,000 - - - - - 67,000 67,000
Average interest rate 4.50% - - - - - 4.50%
Total Interest-Earning
Assets $424,478 $362,553 $356,314 $299,626 $274,801 $2,073,934 $3,791,706 $3,809,288
Interest-Bearing Liabilities
Deposits:
Checking Accounts $ 111,366 $ - $ - $ - $ - $ - $ 111,366 $ 111,366
Average interest rate 1.06% - - - - - 1.06%
Savings Accounts 525,318 - - - - - 525,318 525,318
Average interest rate 3.86% - - - - - 3.86%
Certificate Accounts 1,239,291 20,587 6,548 6,927 3,295 3,715 1,280,363 1,275,921
Average interest rate 5.28% 5.18% 5.48% 5.57% 4.97% 4.46% 5.28%
Borrowings:
FHLB Advances 920,000 72,000 - - 147,000 30,000 1,169,000 1,167,152
Average interest rate 5.97% 5.59% - - 5.74% 5.38% 5.90%
Reverse repurchase
agreements 363,635 - - - - - 363,635 363,634
Average interest rate 5.75% - - - - - 5.75%
Total Interest-Earning
Liabilities $3,159,610 $92,587 $ 6,548 $ 6,927 $ 150,295 $ 33,715 $3,449,682 $3,443,391
</TABLE>
(1) Expected maturities are contractual maturities adjusted for prepayments
of principal. The Bank uses certain assumptions to estimate fair values
and expected maturities. For assets, expected maturities are based upon
contractual maturity, projected repayments and prepayments of principal.
The prepayment experience used is based on the Bank's historical
experience. The Bank's average CPR (Constant Prepayment rate) is 12% for
the single family portfolio and 6% for its multi-family and commercial
real estate portfolios. The Bank used estimated deposit runoff based on
available industry information.
44
<PAGE>
STOCK PRICES
The common stock of FirstFed Financial Corp. is traded on the New York
Stock Exchange under the trading symbol "FED." The quarterly high and low
information presented below is based on information supplied by the New York
Stock Exchange.
The Company has never declared or paid a cash dividend. The Company's
Board of Directors declared a two-for-one stock split on June 25, 1998 to
stockholders of record on July 15, 1998. The additional shares were
distributed on July 30, 1998.
The Company repurchased 3,298,150 shares of its common stock during
1999. Total shares repurchased as of December 31, 1999 were 5,245,990 at an
average price of $12.50 per share. As of February 11, 2000 the Company had
repurchased an additional 117,400 shares at an average price of $12.35 per
share. Total shares repurchased as of February 11, 2000 were 5,363,390 at
an average price of $12.50. As of February 11, 2000, there remain 716,318
shares eligible for repurchase.
PRICE RANGE OF COMMON STOCK
First Quarter Second Quarter Third Quarter Fourth Quarter
High Low High Low High Low High Low
1999 $18.00 $15.56 $20.00 $15.31 $17.81 $15.00 $18.50 $12.81
1998 21.19 15.94 26.41 20.41 26.94 14.75 18.56 14.13
1997(1) 14.00 10.75 15.53 11.25 17.44 15.38 19.75 17.50
1996(1) 7.94 6.19 8.75 7.75 9.88 8.38 12.13 9.75
1995(1) 8.00 5.56 8.88 7.31 8.81 7.25 9.25 6.88
(1) All amounts have been adjusted for the stock split declared June 25, 1998.
RECENT DEVELOPMENTS
On February 7, 2000, the Bank entered into an agreement with Fidelity
Federal Bank, a Federal Savings Bank ("Fidelity") to acquire two Fidelity
branch offices. Pursuant to the terms of the agreement, the Bank will assume
approximately $160 million in deposits held at the two Fidelity branches,
will assume the liabilities and related contracts, including the leases
related to such branches, and will acquire approximately $125 million in
multifamily residential mortgage loans as part of the transaction. It is
anticipated that the acquisition will close late in the first quarter or
early in the second quarter of 2000, subject to regulatory approval and
satisfaction of the other terms and conditions of the agreement. However,
there can be no assurance as to when the transaction will be consummated, if
at all.
45
<PAGE>
FORWARD LOOKING STATEMENTS
The preceding Management's Discussion and Analysis of the Company's
Financial Condition and Results of Operations contain certain
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, which provides a "safe harbor" for these types
of statements. This Annual Report on form 10-K contains forward-looking
statements which reflect the current views of the Company's and the Bank's
management with regard to future events and financial performance. These
forward looking statements are subject to certain risks and uncertainties
including those identified herein which could cause actual results to differ
materially form historical results or those anticipated. Forward-looking
terminology can be identified by the use of terms such as "may", "will",
"expect", "anticipate", "estimate", "should" or "continue" or other
variations or comparable terms. Readers should not place undue reliance on
these forward-looking statements, which speak only of their date. The
Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. The following factors could cause actual results to
differ materially from historical results or those anticipated: (1) the level
of demand for adjustable rate mortgages, which is affected by external
factors such as interest rates, the strength of the California economy and
Southern California economy in particular, and demographics of the lending
areas of the Bank, (2) fluctuations between consumer interest rates and the
cost of funds; (3) federal and state regulation of lending and other
operations, and (4) competition within the Bank's market areas.
Investor should carefully consider the risks in an evaluation of the
Company and its common stock. The risk and uncertainties described herein
are not the only ones facing the Company. Additional risks and
uncertainties, including but not limited to credit, economic, competitive,
governmental and financial factors affecting the Company's operations,
markets, financial products, and services and other factors discussed in the
Company's fillings with the Securities and exchange Commission, may also
adversely impact and impair its business. If any of these risks actually
occur, the Company's business, results of operation, cash flows or financial
condition would likely suffer. In such case, the trading price of the
Company's common stock could decline, and an investor may lose all or part of
the money paid to buy such common stock.
46
<PAGE>
ITEM 8--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1999 AND 1998
(Dollars In Thousands, Except Per Share Data)
1999 1998
ASSETS
Cash and cash equivalents.. $ 101,807 $ 126,280
Investment securities, available-for-sale
(at fair value) (Note 2) 151,195 64,333
Mortgage-backed securities, available-for-sale
(at fair value) (Notes 3 and 10) 428,641 556,679
Loans receivable, held-for-sale (fair value of
$2,303 and $16,602) (Note 4) 2,303 16,450
Loans receivable, net (Notes 4 and 9) 3,058,244 2,791,771
Accrued interest and dividends receivable 21,825 23,476
Real estate (Note 5)....... 2,236 4,791
Office properties and equipment, net (Note 6) 11,745 11,819
Investment in Federal Home Loan Bank
(FHLB) stock, at cost (Notes 7 and 9) 71,722 72,700
Other assets (Note 1)...... 6,787 8,829
$3,856,505 $3,677,128
LIABILITIES
Deposits (Note 8).......... 2,061,357 2,135,909
FHLB advances and other borrowings
(Notes 7 and 9)........... 1,169,000 764,000
Securities sold under agreements to repurchase
(Note 10)................ 363,635 471,172
Accrued expenses and other liabilities 31,380 49,047
$3,625,372 $3,420,128
COMMITMENTS AND CONTINGENT
LIABILITIES (Notes 4, 6 and 13)
STOCKHOLDERS' EQUITY (Notes 12 and 13)
Common stock, par value $.01 per share;
authorized 100,000,000 shares; issued
23,269,051 and 23,075,266 shares,
outstanding 18,023,061 and 21,127,426
shares................... 233 231
Additional paid-in capital. 31,561 29,965
Retained earnings - substantially restricted 274,946 241,694
Loan to employee stock ownership plan (1,759) (833)
Treasury stock, at cost,
5,245,990 and 1,947,840 shares (65,568) (13,354)
Accumulated other comprehensive loss,
net of taxes............. (8,280) (703)
231,133 257,000
$3,856,505 $3,677,128
See accompanying notes to consolidated financial statements.
47
<PAGE>
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE EARNINGS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(Dollars In Thousands, Except Per Share Data)
1999 1998 1997
Interest income:
Interest on loans.................. $216,634 $238,171 $237,835
Interest on mortgage-backed securities 28,700 39,462 48,652
Interest and dividends on investments 14,667 12,136 12,733
Total interest income .......... 260,001 289,769 299,220
Interest expense:
Interest on deposits (Note 8) .... 87,199 97,659 92,678
Interest on borrowings (Note 9)... 73,832 88,832 111,548
Total interest expense ......... 161,031 186,491 204,226
Net interest income ................ 98,970 103,278 94,994
Provision for loan losses (Note 4) - 7,200 20,500
Net interest income after provision for
loan losses....................... 98,970 96,078 74,494
Other income:
Loan servicing and other fees .... 4,204 4,152 6,233
Gain on sale of loans............. 1,221 4,061 652
Real estate operations, net ...... 3,217 1,182 20
Other operating income............ 4,046 4,262 3,313
Total other income ............ 12,688 13,657 10,218
Non-interest expense:
Salaries and employee benefits (Note 13) 26,664 25,811 22,740
Occupancy (Note 6) ............... 7,859 8,493 6,878
Advertising ..................... 1,864 1,959 2,795
Federal deposit insurance ....... 1,236 1,241 1,872
Other operating expense .......... 11,536 11,420 9,866
Total non-interest expense .... 49,159 48,924 44,151
Earnings before income taxes and
extraordinary item.................. 62,499 60,811 40,561
Income taxes (Note 11) ............ 27,052 26,182 17,461
Earnings before extraordinary item . 35,447 34,629 23,100
Extraordinary item:
Loss on early extinguishment
of debt, net of taxes.......... (2,195) - -
Net earnings........................ $ 33,252 $ 34,629 $ 23,100
Other comprehensive earnings (loss)
Unrealized gain (loss) on mortgage-backed-
securities and securities
available-for-sale, net of taxes.. (7,577) (311) 3,798
Comprehensive earnings.............. $ 25,675 $ 34,318 $ 26,898
Earnings per share (Notes 12 and 15):
Basic EPS before extraordinary item $ 1.84 $ 1.63 $ 1.09
Extraordinary item.............. (.11) - -
Basic EPS after extraordinary item $ 1.73 $ 1.63 $ 1.09
Diluted EPS before extraordinary item $ 1.83 $ 1.60 $ 1.07
Extraordinary item.............. (.12) - -
Diluted EPS after extraordinary item $ 1.71 $ 1.60 $ 1.07
See accompanying notes to consolidated financial statements.
48
<PAGE>
<TABLE>
<CAPTION>
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(Dollars In Thousands)
Accumulated
Other
Comprehensive
Retained Earnings
Earnings (Loss),
(Sub- Loan to Net of
Additional stantially ESOP Taxes
Common Paid-In Restricted) (Notes 12 Treasury (Notes 3
Stock Capital (Note 12) and 13) Stock and 4) Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996... $115 $28,677 $183,965 $(2,132) $(11,885) $(4,190) $194,550
Exercise of employee stock options - 892 - - - - 892
Net decrease in loan to employee
stock ownership plan..... - - - 388 - - 388
Unrealized gain on securities
available-for-sale, net of taxes - - - - - 3,798 3,798
Benefit from stock option tax
adjustment............... - 59 - - - - 59
Net earnings 1997.......... - - 23,100 - - - 23,100
Balance, December 31, 1997. 115 29,628 207,065 (1,744) (11,885) (392) 222,787
Exercise of employee stock options 1 452 - - - - 453
Net decrease in loan to employee
stock ownership plan...... - - - 911 - - 911
Stock split in form of stock dividend
(Note 12)................ 115 (115) - - - - -
Unrealized loss on securities
available-for-sale, net of taxes - - - - - (311) (311)
Common stock repurchased
(100,800) shares......... - - - - (1,469) - (1,469)
Net earnings 1998.......... - - 34,629 - - - 34,629
Balance, December 31, 1998. 231 29,965 241,694 (833) (13,354) (703) 257,000
Exercise of employee stock options 2 1,098 - - - - 1,100
Net increase in loan to employee
stock ownership plan...... - - - (926) - - (926)
Benefit from stock option tax
adjustment................ - 498 - - - - 498
Unrealized loss on securities
available-for-sale, net of taxes - - - - - (7,577) (7,577)
Common stock repurchased
(3,298,150) shares....... - - - - (52,214) - (52,214)
Net earnings 1999.......... - - 33,252 - - - 33,252
Balance, December 31, 1999. $233 $ 31,561 $274,946 $(1,759) $(65,568) $(8,280) $231,133
See accompanying notes to consolidated financial statements.
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(Dollars In Thousands)
<S> <C> <C> <C>
1999 1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings........................ $ 33,252 $ 34,629 $ 23,100
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Net change in loans held-for-sale. 14,147 23,932 (34,187)
Depreciation and amortization..... 2,645 1,546 1,775
Provision for losses on loans..... - 7,200 20,500
Provision (benefit) for losses on real
estate owned...................... (54) 572 1,639
Valuation adjustments on real estate sold (2,542) (6,591) 3,795
Amortization of fees and discounts (597) (1,549) (1,503)
Decrease in servicing asset....... 318 2,059 387
Change in deferred taxes.......... (1,643) (6,988) 2,919
Decrease in tax interest accrual.. (150) (881) (7,182)
(Increase) decrease in interest and dividends
receivable....................... 1,651 3,514 (80)
Increase (decrease) in interest payable (6,819) 2,775 633
Increase in other assets.......... (2,767) (5,158) (1,237)
Increase (decrease) in accrued expenses and
other liabilities................ (2,074) 2,487 876
Total adjustments............... 2,115 22,918 (11,665)
Net cash provided by operating activities 35,367 57,547 11,435
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans made to customers and principal collections
on loans........................... (149,842) 288,360 (121,095)
Loans repurchased under recourse arrangements (1,242) (1,765) (7,899)
Loans purchased..................... (121,522) - -
Proceeds from sales of real estate owned 15,980 29,150 53,263
Proceeds from maturities and principal payments
of investment securities available-for-sale 6,809 23,892 37,912
Principal reductions of mortgage-backed
securities available-for-sale...... 117,440 118,801 76,923
Purchases of investment securities
available-for-sale................. (96,300) (39,061) (28,400)
Redemption of FHLB stock............ 4,823 - (2,186)
Other............................... (5,536) 1,104 (1,288)
Net cash provided by investing activities (229,390) 420,481 7,230
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits. (74,552) 192,262 (13,801)
Net increase (decrease) in short term borrowings 347,463 (706,498) 51,188
Repayment of long term borrowings... (50,000) - (50,000)
Purchases of treasury stock......... (52,214) (1,353) -
Other............................... (1,147) 706 (5,319)
Net cash provided (used) by financing activities 169,550 (514,883) (17,932)
Net increase in cash and cash
equivalents........................ (24,473) (36,855) 733
Cash and cash equivalents at beginning of year 126,280 163,135 162,402
Cash and cash equivalents at end of year $101,807 $126,280 $163,135
</TABLE>
See accompanying notes to consolidated financial statements.
50
<PAGE>
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
The following is a summary of the significant accounting policies of
FirstFed Financial Corp. ("Company") and its wholly-owned subsidiary First
Federal Bank of California ("Bank").
The preparation of the Company's financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date
of the financial statements and the reported operations of the Company for
the periods presented. Actual results may differ from those estimates
calculated by management.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its subsidiary, the Bank. The Bank maintains 24 full-service
savings branches in Southern California. The Bank's primary business consists
of attracting retail deposits from the general public and originating loans
secured by mortgages on residential real estate. All significant
inter-company balances and transactions have been eliminated in
consolidation. Certain items in the 1997 and 1998, consolidated financial
statements have been reclassified to conform to the 1999 presentation.
Statement of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include
cash, overnight investments and securities purchased under agreements to
resell with maturities within 90 days of the date of purchase.
Financial Instruments
Generally Accepted Accounting Principles ("GAAP") requires the
disclosure of the fair value of financial instruments, whether or not
recognized on the Statement of Financial Condition, for which it is
practicable to estimate the value. A significant portion of the Bank's assets
and liabilities are financial instruments as defined under GAAP. Fair
values, estimates and assumptions are set forth in Note 16, Fair Value of
Financial Instruments.
Risks Associated with Financial Instruments
The credit risk of a financial instrument is the possibility that a
loss may result from the failure of another party to perform in accordance
with the terms of the contract. The most significant credit risk associated
with the Bank's financial instruments is concentrated in its loans
receivable. Additionally, the Bank is subject to credit risk on certain loans
sold with recourse. The Bank has established a system for monitoring the
level of credit risk in its loan portfolio and for loans sold with recourse.
The market risk of a financial instrument is the possibility that
future changes in market prices may reduce the value of a financial
instrument or increase the contractual obligations of the Bank. The Bank's
market risk is concentrated in its portfolios of loans receivable and real
estate acquired by foreclosure. When a borrower fails to meet the
contractual requirements of his or her loan agreement, the Bank is subject to
the market risk of the collateral securing the loan. Likewise, the Bank is
subject to the volatility of real estate prices with respect to real estate
acquired by foreclosure. The Bank's securities available-for-sale are traded
in active markets. The value of these securities is susceptible to the
fluctuations of the market.
51
<PAGE>
(1) Summary of Significant Accounting Policies (continued)
Interest Rate Risk
Financial instruments are subject to interest rate risk to the extent
that they report on a frequency, degree or basis that varies from market
pricing. The Bank is subject to interest rate risk to the degree that its
interest-earning assets reprice on a different frequency or schedule than its
interest-bearing liabilities. A majority of the Bank's loans receivable and
mortgage-backed securities reprice based on the Federal Home Loan Bank
Eleventh District Cost of Funds Index (the "Index"). The repricing of the
Index tends to lag market interest rates. The Bank closely monitors the
pricing sensitivity of its financial instruments.
Concentrations of Credit Risk
Concentrations of credit risk would exist for groups of borrowers when
they have similar economic characteristics that would cause their ability to
meet contractual obligations to be similarly affected by changes in economic
or other conditions. The ability of the Bank's borrowers to repay their
commitments is contingent on several factors, including the economic
condition in the borrowers' geographic area and the individual financial
condition of the borrowers. The Company generally requires collateral or
other security to support borrower commitments on loans receivable . This
collateral may take several forms. Generally, on the Bank's mortgage loans,
the collateral will be the underlying mortgaged property. The Bank's lending
activities are primarily concentrated in Southern California. The Bank does
not have significant exposure to any individual customer.
Securities Purchased under Agreements to Resell
The Bank invests in securities purchased under agreements to resell
("repurchase agreements"). The Bank obtains collateral for these agreements,
which normally consists of U.S. treasury securities or mortgage-backed
securities guaranteed by agencies of the U.S. government. The collateral is
held in the custody of a trustee, who is not a party to the transaction. The
duration of these agreements is typically 1 to 30 days. The Bank deals only
with nationally recognized investment banking firms as the counterparties to
these agreements. The Bank's investment in repurchase agreements consisted
solely of securities purchased under agreements to resell identical
securities.
Investments and Mortgage-Backed Securities
The Bank's investment in securities principally consists of U.S.
Treasury and agency securities and mortgage-backed securities. The Bank
creates mortgage-backed securities when it exchanges pools of its own loans
for mortgage-backed securities.
The Bank classifies its investment in securities as "held-to-maturity"
securities, "trading" securities and "available-for-sale" securities as
applicable.
52
<PAGE>
(1) Summary of Significant Accounting Policies (continued)
The Bank classifies all of its investments and mortgage-backed
securities as "available-for-sale" based upon a determination that such
securities may be sold at a future date or that there may be foreseeable
circumstances under which the Bank would sell such securities.
Securities designated as available-for-sale are recorded at fair value.
Changes in the fair value of debt securities available-for-sale are included
in stockholders' equity as unrealized gains (losses) on securities
available-for-sale, net of taxes. Unrealized losses on available-for-sale
securities, reflecting a decline in value judged to be other than temporary,
are charged to earnings in the Consolidated Statements of Operations and
Comprehensive Earnings. Unrealized gains or losses on available-for-sale
securities are computed on a specific identification basis.
The Bank did not hold any trading securities at December 31, 1999 or
1998.
Loans Held-for-Investment
The Bank's loan portfolio is primarily comprised of single family
residential loans (one to four units), and multi-family loans (five or more
units). Loans are generally recorded at the contractual amounts owed by
borrowers, less unearned interest and allowances for loan losses.
Loans Held-for-Sale
The Bank identifies loans that foreseeably may be sold prior to
maturity and classifies them as held-for-sale. These loans are carried at the
lower of amortized cost or fair value on an aggregate basis by type of asset.
For loans, fair value is calculated on an aggregate basis as determined by
current market investor yield requirements.
Impaired Loans
The Bank evaluates loans for impairment whenever the collectibility of
contractual principal and interest payments is questionable. A loan is
impaired when, based on current circumstances and events, a creditor will be
unable to collect all amounts contractually due under a loan agreement.
Large groups of smaller balance homogenous loans that are collectively
evaluated for impairment are not subject to the evaluation of impairment on
an individual basis.
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.
Non-Accrual Loans
The Bank establishes allowances for delinquent interest equal to the
amount of accrued interest on all loans 90 days or more past due or in
foreclosure. This practice effectively places such loans on non-accrual status
for financial reporting purposes.
53
<PAGE>
(1) Summary of Significant Accounting Policies (continued)
Allowances for Loan Losses
The Bank maintains a general valuation allowance for loan losses for
the inherent risk in the loan portfolio which has yet to be specifically
identified. The allowance is unallocated to any specific loan. The allowance
is maintained at an amount that management believes adequate to cover
estimable and probable loan losses based on a risk analysis of the current
portfolio. Additionally, management performs periodic reviews of the loan
portfolio to identify potential problems and to establish impairment
allowances if losses are expected to be incurred. Additions to the allowances
are charged to earnings. The regulatory agencies periodically review the
allowances for loan losses and may require the Bank to adjust the allowances
based on information available to them at the time of their examination.
General allowances are provided for all loans, regardless of any specific
allowances provided. The determination of the Bank's general allowance for
loan losses is based on estimates that are affected by changes in the regional
or national economy and market conditions. The Bank's management believes,
based on economic and market conditions, that the general allowance for loan
losses is adequate as of December 31, 1999 and 1998. Should there be an
economic or market downturn or if market interest rates increase
significantly, the Bank could experience a material increase in the level of
loan defaults and charge-offs.
Loan Origination Fees and Costs
Loan origination fees and certain direct loan origination costs are
deferred and recognized over the lives of the related loans as an adjustment
of loan yields using the interest method. When a loan is repaid or sold, any
unamortized net deferred fee balance is credited to income.
Gain or Loss on Sale of Loans
The Bank primarily sells its mortgage loans on a servicing released basis
and recognizes cash gains or losses immediately in its Statement of Operations
and Comprehensive Earnings. The Bank has previously sold mortgage loans and
loan participation's on a servicing retained basis with yield rates to the
buyer based upon the current market rates which may differ from the
contractual rate of the loans sold. Under GAAP, servicing assets or
liabilities and other retained interests are required to be recorded as an
allocation of the carrying amount of the loans sold based on the estimated
relative fair values of the loans sold and any retained interests, less
liabilities incurred. Servicing assets are evaluated for impairment based on
the asset's fair value. The Bank estimates fair values by discounting
servicing assets cash flows using discount and prepayment rates that it
believes market participants would use. The Bank had no such activity in 1999,
1998 and 1997.
Servicing assets arising from the sale of loans are included in other
assets and were $2,367,000 and $2,685,000 at December 31, 1999 and 1998,
respectively. No additional servicing assets were recorded in 1999, 1998
and 1997.
54
<PAGE>
(1) Summary of Significant Accounting Policies (continued)
Real Estate
The Bank's real estate acquired in settlement of loans ("REO") consists
of property acquired through foreclosure proceedings or by deed in lieu of
foreclosure. Generally, all loans greater than 60 days delinquent are placed
into foreclosure and, if necessary, a valuation allowance is established.
The Bank acquires title to the property in most foreclosure actions that are
not reinstated by the borrower. Once real estate is acquired in settlement
of a loan, the property is recorded as REO at fair market value, less
estimated selling costs. The REO's balance is adjusted for any subsequent
declines in fair value through a valuation allowance.
The recognition of gain on the sale of real estate is dependent on a
number of factors relating to the nature of the property, terms of sale, and
any future involvement of the Bank or its subsidiaries in the property sold.
If a real estate transaction does not meet certain down payment, cash flow and
loan amortization requirements, gain is deferred and recognized under an
alternative method.
Depreciation and Amortization
Depreciation of office properties and equipment is provided by use of
the straight-line method over the estimated useful lives of the related
assets. Amortization of leasehold improvements is provided by use of the
straight-line method over the lesser of the life of the improvement or the
term of the lease.
Income Taxes
The Company files a consolidated federal income tax return and a
combined California franchise tax report with the Bank and its subsidiaries.
The Bank accounts for income taxes using the asset and liability method. In
the asset and liability method, deferred tax assets and liabilities are
established as of the reporting date for the realizable cumulative temporary
differences between the financial reporting and tax return bases of the
Bank's assets and liabilities. The tax rates applied are the statutory rates
expected to be in effect when the temporary differences are realized or
settled.
Earnings Per Share
The Company reports both basic and diluted net earnings per share.
Basic net earnings per share is determined by dividing net earnings by the
average number of shares of common stock outstanding, while diluted net
earnings per share is determined by dividing net earnings by the average
number of shares of common stock outstanding adjusted for the dilutive effect
of common stock equivalents. Earnings per share have been adjusted to
reflect a two-for-one split during 1998.
Comprehensive Earnings
GAAP establishes standards for reporting and presentation of
comprehensive income and its components in a full set of financial
statements. Comprehensive earnings consists of net earnings and net
unrealized gains (losses) on securities available-for-sale and is presented
in the consolidated statements of operations and comprehensive earnings and
consolidated statements of stockholders' equity. The Statement requires only
additional disclosures in the consolidated statements; it does not affect the
Company's financial position or results of operations.
55
<PAGE>
(1) Summary of Significant Accounting Policies (continued)
Segments Information and Disclosures
GAAP establishes standards to report information about operating
segments in annual financial statements and requires reporting of selected
information about operating segments in interim reports to stockholders. It
also establishes standards for related disclosures about products and
services, geographic areas and major customers. This statement did not have
a material effect on the consolidated financial statements or disclosures.
The Company manages its business as one segment.
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. As amended by SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities-Deferral of the Effective Date
of FASB Statement No. 133." SFAS No. 133 is effective for all fiscal quarter
of all fiscal years beginning after June 15, 2000. Early implementation is
permitted under this statement. The Company has not adopted early
implementation and management has not yet determined the impact of
implementing this statement on its financial condition or results of
operations.
(2) Investment Securities
The amounts advanced under agreements to resell securities (repurchase
agreements) represent short-term investments. During the agreement period the
securities are maintained by the dealer under a written custodial agreement
that explicitly recognizes the Bank's interest in the securities. The Bank
had $67,000,000 and $71,000,000 in agreements to resell securities at
December 31, 1999 and 1998, respectively which are classified as cash and
cash equivalents in the accompanying Consolidated Statements of Financial
Condition. Securities purchased under agreements to resell averaged
$76,705,000 and $101,637,000 during 1999 and 1998, and the maximum amounts
outstanding at any month end during 1999 and 1998 were $252,000,000 and
$147,000,000 respectively.
56
<PAGE>
2) Investment Securities (continued)
Investment securities, available-for-sale, are recorded at fair value
and summarized below for the periods indicated:
1999
Gross Gross
Historical Unrealized Unrealized Fair
Value Gains Losses Value
(Dollars In Thousands)
United States Government
and federal agency
obligations........... $ 38,467 $ 1 $ (647) $ 37,821
Collateralized
Mortgage Obligations.. 115,704 - (2,330) 113,374
$154,171 $ 1 $(2,977) $151,195
1998
Gross Gross
Historical Unrealized Unrealized Fair
Value Gains Losses Value
(Dollars In Thousands)
United States Government
and federal agency
obligations........... $ 28,456 $ 4 $ (521) $ 27,939
Collateralized
Mortgage Obligations.. 36,380 78 ( 64) 36,394
$ 64,836 $ 82 $ (585) $ 64,333
Related maturity data for U.S. government and agency securities,
available-for-sale, is summarized below for the period indicated:
1999
Gross Gross
Historical Unrealized Unrealized Fair
Value Gains Losses Value
(Dollars In Thousands)
Maturing within 1 year.. $ 300 $ 1 $ - $ 301
Maturing 1 to 5 years... 38,167 - (647) 37,520
$ 38,467 $ 1 $ (647) $ 37,821
Collateralized Mortgage Obligations as of December 31, 1999 all have
expected maturities within five years. There were no sales of investment
securities during 1999, 1998 or 1997. Accrued interest on investments was
$1,215,000 and $693,000 at December 31, 1999 and 1998, respectively.
57
<PAGE>
3) Mortgage-backed Securities
Mortgage-backed securities, available-for-sale, are due through the year
2035 and are summarized below for the periods indicated:
1999
Gross Gross
Historical Unrealized Unrealized Fair
Value Gains Losses Value
(Dollars In Thousands)
FNMA........... $ 16,601 $ 10 $ (390) $ 16,221
FHLMC.......... 423,351 21 (10,952) 412,420
Total.......... $ 439,952 $ 31 $(11,342) $ 428,641
1998
Gross Gross
Historical Unrealized Unrealized Fair
Value Gains Losses Value
(Dollars In Thousands)
FNMA........... $ 19,038 $ 85 $ - $ 19,123
FHLMC.......... 538,352 40 (836) 537,556
Total.......... $ 557,390 $125 $ (836) $ 556,679
There were no mortgage-backed securities created with loans originated
by the Bank in 1999, 1998 or 1997. There were no sales of mortgage-backed
securities during 1999, 1998 or 1997.
Accrued interest receivable related to mortgage-backed securities
outstanding at December 31, 1999 and 1998 totaled $4,135,000 and $5,556,000
respectively.
58
<PAGE>
4) Loans Receivable
Loans receivable are summarized as follows:
1999 1998
(Dollars In Thousands)
Real estate loans:
First trust deed residential loans:
One to four units.......... $1,813,783 $1,564,392
Five or more units......... 1,123,308 1,127,228
Residential loans.......... 2,937,091 2,691,620
Other real estate loans:
Commercial and industrial.. 183,194 181,772
Second trust deeds......... 13,489 15,357
Real estate loans............. 3,133,774 2,888,749
Non-real estate loans:
Manufactured housing......... 613 893
Deposit accounts............. 683 1,002
Business banking loans....... 8,140 1,259
Consumer..................... 593 621
Loans receivable......... 3,143,803 2,892,524
Less:
General loan valuation allowance 69,954 67,638
Valuation allowances for impaired loans 2,596 7,634
Unearned loan fees........... 10,706 9,031
Subtotal................. 3,060,547 2,808,221
Less:
Loans held-for-sale.......... 2,303 16,450
Loans receivable, net.... $3,058,244 $2,791,771
Loans serviced for others totaled $377,661,000, $424,908,000 and
$519,353,000 at December 31, 1999, 1998 and 1997, respectively.
The Bank had outstanding commitments to fund $105,649,000 in real
estate loans at December 31,1999. The Bank had outstanding commitments to
sell real estate loans of $958,000 at December 31, 1999.
Accrued interest receivable related to loans outstanding at December
31, 1999 and 1998 totaled $16,220,000 and $18,052,000 respectively.
Loans delinquent greater than 90 days or in foreclosure were
$13,846,000 and $29,315,000 at December 31, 1999 and 1998, respectively, and
the related allowances for delinquent interest were $720,000 and $1,896,000
respectively.
59
<PAGE>
4) Loans Receivable (continued)
Loans originated upon the sale of real estate totaled $4,792,000,
$9,966,000, and $31,649,000 during 1999, 1998 and 1997, respectively.
See Note 9 for loans which were pledged as security for borrowings.
The following is a summary of the activity in general loan valuation
allowances and impaired valuation allowances for the periods indicated:
General Impaired
Valuation Valuation
Allowance Allowance Total
(Dollars In Thousands)
Balance at December 31, 1996 ............. $54,900 $12,350 $67,250
Provision for loan losses................. 13,155 7,345 20,500
Charge-offs............................... (9,419) (10,064) (19,483)
Recoveries................................ 6,835 144 6,979
Transfer of general valuation allowance for
loans to repurchase liability ........... (4,234) - (4,234)
Balance at December 31, 1997.............. 61,237 9,775 71,012
Provision for loan losses................. 6,560 640 7,200
Charge-offs............................... (3,208) (2,781) (5,989)
Recoveries................................ 3,049 - 3,049
Balance at December 31, 1998.............. 67,638 7,634 75,272
Charge-offs............................... (1,362) (5,038) (6,400)
Recoveries................................ 3,678 - 3,678
Balance at December 31, 1999.............. $69,954 $ 2,596 $72,550
The Bank has loss exposure on certain loans sold with recourse. The
dollar amount of loans sold with recourse totaled $178,723,000 and
$203,022,000 at December 31, 1999 and 1998, respectively. The maximum
potential recourse liability totaled $33,674,000 and $37,267,000 at December
31, 1999 and December 31, 1998, respectively.
The Bank maintains a repurchase liability for loans sold with
recourse. This liability is included in accrued expenses and other
liabilities in the Consolidated Statements of Financial Condition. The
following is a summary of the activity in the repurchase liability for the
periods indicated (dollars in thousands):
Balance at December 31, 1996.............. $ 8,398
Transfer from general valuation allowance. 4,234
Recoveries, net of charge-offs............ 397
Balance at December 31, 1997.............. 13,029
Charge-offs, net of recoveries............ (483)
Balance at December 31, 1998.............. 12,546
Recoveries, net of charge-offs............ 278
Balance at December 31, 1999.............. $12,824
60
<PAGE>
Loans Receivable (continued)
The following is a summary of impaired loans, net of valuation
allowances for impairment, for the periods indicated:
1999 1998
(Dollars In Thousands)
Non-accrual loans......................... $ 2,079 $ 5,934
Modified loans............................ 6,534 5,976
Other impaired loans...................... 2,820 5,613
$11,433 $17,523
The Bank considers a loan to be impaired when management believes that
it is probable that the Bank will be unable to collect all amounts due under
the contractual terms of the loan. Estimated impairment losses are included
in the Bank's impairment allowances. At December 31, 1999, the total
recorded amount of loans for which impairment had been recognized in
accordance with SFAS No. 114 was $11,433,000 (after deducting $2,596,000 of
impairment allowances attributable to such loans). The Bank's impaired
non-accrual loans consist of single family loans with an outstanding
principal amount greater than or equal to $500,000 and multi-family loans
with an outstanding principal amount greater than or equal to $750,000.
All impaired loans as of December 1998 had valuation allowances
established. As of December 1999 and December 1997, impaired loans totaling
$2,079,000 and $2,540,000, respectively, had no valuation allowances
established.
The average recorded investment in impaired loans during the years
ended December 31, 1999, 1998 and 1997 was $11,448,000, $17,546,000 and
$24,459,000 respectively. The amount of interest income recognized for
impaired loans during the years ended December 31, 1999, 1998 and 1997 was
$1,045,000, $1,289,000, and $1,913,000 respectively, under the cash basis
method of accounting. Interest income recognized under the accrual basis
method of accounting for the years ended December 31, 1999, 1998 and 1997
totaled $997,000, $1,287,000 and $1,900,000, respectively. There were no
commitments to lend additional funds to borrowers whose loan terms have been
modified.
61
<PAGE>
(5) Real Estate
Real estate consists of the following:
1999 1998
(Dollars In Thousands)
Real estate acquired by
(or deed in lieu of) foreclosure ("REO").. $2,552 $5,255
Valuation allowance....................... (350) (500)
2,202 4,755
Real estate held-for-investment........... 34 36
Real estate, net........................ $2,236 $4,791
Listed below is a summary of the activity in the general valuation
allowance for real estate owned for the periods indicated (dollars in
thousands):
Balance, December 31, 1996................ $ 521
Provision for losses on REO............... 1,639
Charge-offs............................... (1,660)
Balance at December 31, 1997.............. 500
Provision for losses on REO............... 572
Charge-offs............................... (572)
Balance at December 31, 1998.............. 500
Provision for losses on REO............... (54)
Charge-offs............................... (96)
Balance at December 31, 1999.............. $ 350
The following table summarizes real estate operations, net:
December 31,
1999 1998 1997
(Dollars In Thousands)
Net income (loss) from operations
Gain on sales of REO............... $ 3,852 $ 3,320 $ 5,213
Other REO operations............... (635) (2,138) (5,193)
Real estate operations, net .... $ 3,217 $ 1,182 $ 20
The Bank acquired $10,831,000, $17,096,000 and $49,150,000 of real
estate in settlement of loans during 1999, 1998 and 1997, respectively.
62
<PAGE>
6) Office Properties, Equipment and Lease Commitments
Office properties and equipment, at cost, less accumulated depreciation
and amortization, are summarized as follows:
1999 1998
(Dollars In Thousands)
Land...................................... $ 3,061 $ 3,061
Office buildings.......................... 4,592 4,594
Furniture, fixtures and equipment......... 15,089 15,117
Leasehold improvements.................... 9,495 8,671
Other..................................... 56 44
32,293 31,487
Less accumulated depreciation and amortization 20,548 19,668
$ 11,745 $ 11,819
The Bank is obligated under noncancelable operating leases for periods
ranging from five to thirty years. The leases are for certain of the Bank's
office facilities. Approximately half of the leases for office facilities
contain five and ten year renewal options. Minimum rental commitments at
December 31, 1999 under all noncancelable leases are as follows (dollars in
thousands):
2000................................ $ 3,920
2001................................ 3,538
2002................................ 3,437
2003................................ 3,309
2004................................ 3,234
Thereafter.......................... 11,539
$28,977
Rent payments under these leases were $3,946,000, $4,055,000 and
$4,325,000 for 1999, 1998 and 1997, respectively. Certain leases require the
Bank to pay property taxes and insurance. Additionally, certain leases have
rent escalation clauses based on specified indices.
(7) Federal Home Loan Bank Stock
The Bank's investment in FHLB stock at December 31, 1999 and 1998 was
$71,722,000 and $72,700,000, respectively. The FHLB provides a central
credit facility for member institutions. As a member of the FHLB system, the
Bank is required to own capital stock in the FHLBSF in an amount at least
equal to the greater of 1% of the aggregate principal amount of its unpaid
home loans, home purchase contracts and similar obligations at the end of
each calendar year, assuming for such purposes that at least 30% of its
assets were home mortgage loans, or 5% of its advances (borrowings) from the
FHLBSF. The Bank was in compliance with this requirement at December 31,
1999. The Bank's investment in FHLB stock was pledged as collateral for
advances from the FHLB at December 31, 1999 and 1998. The fair value of the
Bank's FHLB stock approximates book value due to the Bank's ability to redeem
such stock with the FHLB at par value. Accrued dividends on FHLB stock
totaled $975,000 and $1,071,000 as of December 31, 1999 and December 31,
1998, respectively.
63
<PAGE>
(8) Deposits
Deposit account balances are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
Amount % Amount %
(Dollars In Thousands)
<S> <C> <C> <C> <C>
Variable rate non-term accounts:
Money market deposit accounts (weighted
average rate of 4.34% and 3.91%) $ 446,771 22% $ 293,159 14%
Interest-bearing checking accounts
(weighted average rate of 1.06% and
1.06%).......................... 111,366 5 108,211 5
Passbook accounts (weighted average
rate of 2.00% and 2.01%)........ 78,547 4 84,132 4
Non-interest bearing checking accounts 144,310 7 137,822 6
780,994 38 623,324 29
Fixed-rate term certificate accounts:
Under six-month term (weighted average
rate of 5.21% and 4.18%)........ 113,324 5 62,642 3
Six-month term (weighted average rate of
5.68% and 5.14%)................ 322,696 16 301,313 14
Nine-month term (weighted average rate of
5.73% and 5.42%)................ 250,460 12 438,443 21
One year to 18 month term (weighted
average rate of 4.99% and 5.14%) 284,464 14 263,291 12
Two year or 30 month term (weighted
average rate of 5.13% and 5.28%) 19,081 1 23,015 1
Over 30-month term (weighted average rate
of 5.33% and 5.79%)............ 36,529 2 103,030 5
Negotiable certificates of $100,000 and
greater, 30 day to one year terms (weighted
average rate of 5.20% and 5.08%) 253,809 12 320,851 15
1,280,363 62 1,512,585 71
Total Deposits (weighted average rate of
4.42% and 4.36%).............. $2,061,357 100% $2,135,909 100%
</TABLE>
64
<PAGE>
8) Deposits (continued)
Certificates of deposit, placed through five major national brokerage
firms, totaled $445,945,000 and $494,224,000 at December 31, 1999 and 1998,
respectively.
Cash payments for interest on deposits (including interest credited)
totaled $90,604,000, $93,793,000 and $92,152,000 during 1999, 1998 and 1997,
respectively. Accrued interest on deposits at December 31, 1999 and 1998
totaled $8,284,000 and $11,417,000, respectively, and is included in accrued
expenses and other liabilities in the accompanying Consolidated Statements of
Financial Condition.
The following table indicates the maturities and weighted average
interest rates of the Bank's deposits at December 31, 1999:
<TABLE>
<CAPTION>
Non-Term There-
Accounts 2000 2001 2002 2003 after Total
<S> <C> <C> <C> <C> <C> <C> <C>
(Dollars In Thousands)
Deposits at
December 31, 1999 $780,994 $1,239,291 $20,587 $ 6,548 $6,927 $ 7,010 $2,061,357
Weighted average
interest rates.. 2.85% 5.39% 5.18% 5.48% 5.57% 4.70% 4.42%
</TABLE>
Interest expense on deposits is summarized as follows:
1999 1998 1997
(Dollars In Thousands)
Passbook accounts............. $ 1,618 $ 2,050 $ 1,750
Money market deposits and
interest-bearing checking accounts 17,035 9,308 5,705
Certificate accounts.......... 68,546 86,301 85,223
$ 87,199 $ 97,659 $92,678
65
<PAGE>
(9) Federal Home Loan Bank Advances and Other Borrowings
Federal Home Loan Bank (FHLB) advances and other borrowings consist of
the following:
1999 1998
(Dollars In Thousands)
Advances from the FHLB of San Francisco with a
weighted average interest rate of 5.91% and 5.43%,
respectively, secured by FHLB stock and certain
real estate loans with unpaid principal balances of
approximately $2.4 billion at December 31, 1999,
advances mature through 2009........ $1,169,000 $714,000
10 Year Senior Unsecured Notes with an interest
rate of 11.75%, due 2004........... - 50,000
$1,169,000 $764,000
At December 31, 1999 and 1998, accrued interest payable on FHLB advances
and other borrowings totaled $190,000 and $2,050,000, respectively, which is
included in accrued expenses and other liabilities in the accompanying
Consolidated Statements of Financial Condition.
The Bank has a credit facility with the FHLB in the form of FHLB advances
and letters of credit which allow borrowings up to 40% of the Bank's assets,
as computed for regulatory purposes, or approximately $1,543,000,000 at
December 31, 1999 with terms up to 30 years.
The Company redeemed its $50,000,000 senior unsecured 11.75% notes with
premium and related costs totaling $2,195,000, net of taxes during 1999. The
premium is disclosed as an extraordinary item in the accompanying Consolidated
Statements of Operations and Comprehensive Earnings.
66
<PAGE>
9) Federal Home Loan Bank Advances and Other Borrowings (continued)
The following is a summary of borrowing maturities at December 31,
1999 (dollars in thousands):
2000.................. $ 920,000
2001................... 52,000
2002................... 20,000
2003................... 17,000
2004................... 130,000
2005................... 10,000
2006................... 5,000
2008................... 10,000
2009................... 5,000
$1,169,000
Cash payments for interest on borrowings (including reverse repurchase
agreements) totaled $77,372,000, $101,757,000 and $110,991,000 during 1999,
1998 and 1997, respectively.
Interest expense on borrowings is comprised of the following for the
years indicated:
Year Ended December 31,
1999 1998 1997
(Dollars In Thousands)
FHLB Advances............... $48,077 $53,116 $ 70,004
Reverse Repurchase Agreements 20,396 29,915 34,335
10 Year Senior Unsecured Notes 5,459 5,875 5,875
Other....................... (100) (74) 1,334
$73,832 $88,832 $111,548
Other interest expense in 1999 and 1998 includes the reversal of accrued
interest due to the IRS. See Note 11.
(10) Securities Sold Under Agreements to Repurchase
The Bank enters into sales of securities under agreements to repurchase
(reverse repurchase agreements) which require the repurchase of the same
securities. Reverse repurchase agreements are treated as financing
arrangements, and the obligation to repurchase securities sold is reflected as
a borrowing in the Consolidated Statements of Financial Condition. The
mortgage-backed securities underlying the agreements were delivered to the
dealer who arranged the transactions or its trustee.
At December 31, 1999, $363,635,000 in reverse repurchase agreements were
collateralized by mortgage-backed securities with principal balances totaling
$397,003,000 and fair values totaling $386,372,000. At December 31, 1998,
$471,172,000 in reverse repurchase agreements were collateralized by
mortgage-backed securities with principal balances totaling $491,089,000 and
fair values totaling $490,354,000.
67
<PAGE>
(10) Securities Sold Under Agreements to Repurchase (continued)
The weighted average interest rates for borrowings under reverse
repurchase agreements were 5.76% and 5.37%, respectively, as of December 31,
1999 and December 31, 1998.
Securities sold under agreements to repurchase averaged $390,691,000 and
$514,498,000 during 1999 and 1998, respectively, and the maximum amounts
outstanding at any month-end during 1999 and 1998 were $469,655,000 and
$576,514,000 respectively.
The following is a summary of maturities at December 31, 1999 (dollars in
thousands):
Up to 30 days........... $106,850
30 to 90 days........... 233,567
Over 90 to 182 days..... 23,218
$363,635
Accrued interest on securities sold under agreements to repurchase which
is included in accrued expenses and other liabilities in the accompanying
Consolidated Statements of Financial Condition was $3,561,000 and $5,657,000
at December 31, 1999 and 1998, respectively.
(11) Income Taxes
Income taxes (benefit) consist of the following:
1999 1998 1997
(Dollars In Thousands)
Current:
Federal..................... $20,093 $ 24,936 $ 14,311
State....................... 8,602 8,234 231
28,695 33,170 14,542
Deferred:
Federal..................... (456) (5,812) (1,502)
State....................... (1,187) (1,176) 4,421
(1,643) (6,988) 2,919
Total:
Federal..................... 19,637 19,124 12,809
State....................... 7,415 7,058 4,652
$27,052 $ 26,182 $ 17,461
68
<PAGE>
(11) Income Taxes (continued)
A reconciliation of the statutory federal corporate income tax rate to
the Company's effective income tax rate follows:
1999 1998 1997
Statutory federal income tax rate 35.0% 35.0% 35.0%
Increase in taxes resulting from:
State franchise tax, net of federal income
tax benefit................... 7.7 7.5 7.4
Core deposit intangibles....... 0.1 0.1 0.1
Other, net.................... 0.5 0.5 0.5
Effective rate............... 43.3% 43.1% 43.0%
Cash payments for income taxes totaled $29,609,000, $31,762,000 and
$21,310,000 during 1999, 1998 and 1997, respectively. The Company received
cash refunds totaling $48,000 and $1,158,000 during 1998 and 1997,
respectively. No refunds were received during 1999.
Current income taxes receivable at December 31, 1999 and 1998 were
$325,000 and $98,000 respectively.
Listed below are the significant components of the net deferred tax
(asset) and liability:
1999 1998
(Dollars In Thousands)
Components of the deferred tax asset:
Bad debts............................... $(35,371) $(32,819)
Pension expense......................... (3,640) (2,802)
State taxes............................. (3,516) (3,484)
IRS interest accrual.................... (160) (229)
Tax effect of unrealized loss on
securities available-for-sale.......... (6,007) (510)
Other................................... (1,857) (1,764)
Total deferred tax asset.............. (50,551) (41,608)
Components of the deferred tax liability:
Loan fees............................... 15,380 17,171
Loan sales.............................. 1,041 1,178
FHLB stock dividends.................... 16,011 14,294
Other................................... 2,573 559
Total deferred tax liability........... 35,005 33,202
Net deferred tax asset.................... $(15,546) $ (8,406)
Net federal deferred tax asset.......... $(13,926) $ (9,399)
Net state deferred tax liability (asset) (1,620) 993
Net deferred tax asset.................... $(15,546) $ (8,406)
69
<PAGE>
(11) Income Taxes (continued)
The Company provides for recognition and measurement of deductible
temporary differences to the extent that it is more likely than not that the
deferred tax asset will be realized. The Company did not have a valuation
allowance for the deferred tax asset at December 31, 1999 and 1998, as it is
more likely than not that the deferred tax asset will be realized through loss
carrybacks and the timing of future reversals of existing temporary
differences.
The Internal Revenue Service ("IRS") has examined the Company's
consolidated federal income tax returns for tax years up to and including
1992. The adjustments proposed by the IRS were primarily related to temporary
differences as to the recognition of certain taxable income and expense items.
While the Company had provided for deferred taxes for federal and state
purposes, the change in the period of recognition of certain income and
expense items resulted in interest due to the IRS and Franchise Tax Board
("FTB"). As a result, the Company paid $7,392,000 in interest to the IRS and
FTB and accrued an additional $210,000 in interest during 1997. During 1998,
the Company paid $598 thousand in interest to the IRS and FTB and reversed
$300 thousand. During 1999, the Company recorded a $150,000 net reversal of
accrued interest. The total amount of accrued interest payable for amended
returns, yet to be filed, recorded as a liability in the Consolidated
Statements of Financial Condition, was $350,000 and $500,000 as of December
31, 1999 and December 31, 1998, respectively.
As a result of legislation enacted during 1996, the Bank is required to
use the specific charge-off method of accounting for debts for all periods
beginning after 1995. Prior to this legislation, the Bank used the reserve
method of accounting for bad debts. The Consolidated Statements of Financial
Condition at December 31, 1999 and 1998 did not include a liability of
$5,356,000 related to the adjusted base year bad debt reserve. This reserve
was created when the Bank was on the reserve method.
(12) Stockholders' Equity and Earnings Per Share
The Company's stock charter authorizes 5,000,000 shares of serial
preferred stock. As of December 31, 1999 no preferred shares had been issued.
The Company's Board of Directors declared a two-for-one stock split on
June 25, 1998 to stockholders of record on July 15, 1998. The additional
shares were distributed on July 30, 1998.
70
<PAGE>
(12) Stockholders' Equity and Earnings Per Share (continued)
The following is the reconciliation of the numerators and denominators
of the basic and diluted earnings per share computations for the years
indicated:
<TABLE>
<CAPTION>
For the Year Ended For the Year Ended For the Year Ended
December 31, 1999 December 31, 1998 December 31, 1997
Per Per Per
Earnings Shares Share Earnings Shares Share Earnings Shares Share
(Numerator)(Denominator) Amount (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
(Dollars in thousands except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic EPS
Earnings before
extraordinary item $35,447 19,234,869 $1.84 $34,629 21,181,859 $1.63 $23,100 21,139,544 $1.09
Extraordinary item, net
of taxes...... (2,195) - (.11) - - - - - -
Net earnings.... $33,252 19,234,869 $1.73 $34,629 21,181,859 $1.63 $23,100 21,139,544 $1.09
Diluted EPS
Earnings before
extraordinary item $35,447 19,234,869 $1.84 $34,629 21,181,859 $1.63 $23,100 21,139,544 $1.09
Options-common stock
equivalents... 168,183 407,518 354,472
Earnings before
extraordinary item 35,447 19,403,052 1.83 34,629 21,589,377 1.60 23,100 21,494,016 1.07
Extraordinary item, net
of taxes...... (2,195) - (.12) - - - - - -
Net earnings... $33,252 19,403,052 $1.71 $34,629 21,589,377 $1.60 $23,100 21,494,016 $1.07
</TABLE>
Regulatory Capital
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory - and possibly additional
discretionary - actions by regulators that, if undertaken, could have a
direct material effect on the Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities and certain
off-balance sheet items as calculated under regulatory accounting practices.
The Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set forth
in the table below) of total and Tier I capital (as defined in the
regulations) to risk weighted assets (as defined). Management believes, as
of December 31, 1999, that the Bank meets all capital adequacy requirements
to which it is subject.
As of December 31, 1999, the most recent notification from the OTS
indicated that the Bank was well capitalized under the regulatory framework
for prompt corrective action. There are no conditions or events since
December 31, 1999 that management believes have changed the Bank's
classification.
71
<PAGE>
12) Stockholders' Equity and Earnings Per Share (continued)
The following table summarizes the Bank's regulatory capital and required
capital for the years indicated (dollars in thousands):
<TABLE>
<CAPTION>
December 31, 1999
Tier 1
Tangible Core Risk-based Risk-based
Capital Capital Capital Capital
<S> <C> <C> <C> <C>
Actual Capital:
Amount...................... $234,166 $234,166 $234,166 $262,178
Ratio....................... 6.02% 6.02% 10.65% 11.92%
FIRREA minimum required capital:
Amount...................... $ 58,390 $155,707 - $175,923
Ratio....................... 1.50% 4.00% - 8.00%
FIDICIA well capitalized required capital:
Amount...................... - $194,633 $131,942 $219,904
Ratio....................... - 5.00% 6.00% 10.00%
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998
Tier 1
Tangible Core Risk-based Risk-based
Capital Capital Capital Capital
<S> <C> <C> <C> <C>
Actual Capital:
Amount...................... $294,223 $294,223 $294,223 $320,720
Ratio....................... 7.98% 7.98% 14.15% 15.43%
FIRREA minimum required capital:
Amount...................... $ 55,280 $110,561 - $166,297
Ratio....................... 1.50% 3.00% - 8.00%
FIDICIA well capitalized required capital:
Amount...................... - $184,268 $124,722 $207,871
Ratio....................... - 5.00% 6.00% 10.00%
</TABLE>
The payment of dividends is subject to certain federal income tax
consequences. Specifically, the Bank is capable of paying dividends to the
Company in any year without incurring tax liability only if such dividends do
not exceed both the tax basis current year earnings and profits and
accumulated tax earnings and profits as of the beginning of the year.
Thirty days' prior notice to the OTS of the intent to declare dividends
is required for the declaration of such dividends by the Bank. The OTS
generally allows a savings institution which meets its fully phased-in capital
requirements to distribute without OTS approval dividends up to 100% of the
institution's net income for the applicable calendar year plus retained net
income for the two prior calendar years. However, the OTS has the authority to
preclude the declaration of any dividends or adopt more stringent amendments
to its capital regulations.
The Company may loan up to $6,000,000 to the Employee Stock Ownership
Plan ("ESOP") under a line of credit loan. At December 31, 1999 and 1998, the
loan to the ESOP totaled $1,759,000 and $833,000, respectively. Interest on
the outstanding loan balance is due each December 31. Interest varies based on
the Bank's monthly cost of funds. The average rates paid during 1999 and 1998
were 4.62% and 5.11%, respectively.
72
<PAGE>
12) Stockholders' Equity and Earnings Per Share (continued)
On June 25, 1998, the Company adopted an Amended and Restated Shareholder
Rights Plan ("Rights Plan") which is designed to protect shareholders from
attempts to acquire control of the Company at an inadequate price. Under the
Rights Plan, the owner of each share of Company stock received a dividend of
one right ("Right") to purchase one one-thousandth of a share of a new series
of preferred stock for its estimated long term value of $200.00. In the event
of certain acquisitions of 15% or more of the voting stock or a tender offer
for 15% or more of the voting stock of the Company, each holder of a Right who
exercises such Right will receive shares of the Company with a market value
equal to two times the exercise price of the Right. Also, in the event of
certain business combination transactions following the acquisition by a
person of 15% or more of the Company stock, each Rights holder will have the
right to receive upon exercise of the Right common stock of the surviving
company in such transaction having a market value of two times the exercise
price of the Right. The Company may redeem the Rights at any time prior to
such acquisition or tender offer should the Board of Directors deem redemption
to be in its stockholders' best interests. The Amended and Restated
Shareholder Rights Plan replaces the previous Shareholder Rights Plan which,
by its terms, expired on November 15, 1998.
(13) Employee Benefit Plans
Until August 31, 1996, the Bank maintained a pension plan ("Pension
Plan") covering substantially all employees who are employed on either a full
time or a part time basis. The benefits were based on an employee's years of
credited service, average annual salary and primary social security benefit,
as defined in the Pension Plan.
Effective August 31, 1996, the Pension Plan was discontinued and benefits
accrued to participants under the Pension Plan were distributed to
participants in accordance with their instructions during 1997. The Pension
Plan's assets exceeded its liabilities by $106,000, which reverted back to the
Bank and are included in the Company's 1997 Consolidated Statement of
Operations and Comprehensive Earnings.
Effective January 1, 1997, the Bank made available to its employees a
qualified defined contribution plan established under Section 401 (k) of the
Internal Revenue Code, as amended (the "401(k) Plan"). Participants are
permitted to make contributions on a pre-tax basis, a portion of which is
matched by the Bank. The 401(k) Plan expense was $299,000 and $235,000 for
1999 and 1998, respectively.
The Bank has a Supplementary Executive Retirement Plan ("SERP") which
covers any individual employed by the Bank as its Chief Executive Officer or
Chief Operating Officer. The pension expense for the SERP was $988,000,
$795,000 and $628,000 in 1999, 1998 and 1997, respectively. The SERP is
unfunded.
The discount rate and rate of increase in future compensation levels used
in determining the actuarial value of benefit obligations were 7.75% and 6.5%,
respectively, as of December 31, 1999 and 1998. The discount rate and rate of
increase in future compensation levels used in determining the pension cost
for the SERP was 4.0% and 5.0% as of December 31, 1999 and 1998. The plan had
no assets at December 31, 1999 or 1998.
73
<PAGE>
(13) Employee Benefit Plans (continued)
The following table sets forth the funded status of the SERP and amounts
recognized in the Company's Statements of Financial Condition for the years
indicated:
1999 1998
(Dollars In Thousands)
Change in Benefit Obligation
Projected benefit obligation, beginning of the year $ 6,472 $ 5,548
Service cost.................................... 316 201
Interest cost................................... 411 378
Benefits paid................................... (286) (286)
Actuarial (gain)/loss........................... (1,076) 631
Projected benefit obligation, end of the year... $ 5,837 $ 6,472
Change in Plan Assets
Funded status................................... $(5,837) $(6,472)
Unrecognized transition obligation.............. 125 187
Unrecognized prior service cost................. 688 822
Unrecognized (gain)/loss........................ 274 1,411
Net amount recognized........................... $(4,750) $(4,052)
Components of Net Periodic Benefit Cost
Service cost.................................... $ 316 $ 201
Interest cost................................... 411 378
Amortization of unrecognized transition obligation 63 63
Amortization of unrecognized prior service cost. 135 135
Amortization of unrecognized (gain)/loss........ 60 18
Pension (income)/cost........................... $ 985 $ 795
The projected benefit obligation, accumulated benefit obligation, and
fair value of assets were $5,836,626, $4,473,664, and $0, respectively, at
December 31, 1999, and $6,472,394, $4,569,322, and $0 respectively, at
December 31, 1998.
The Bank has a profit sharing plan (the "ESOP") for all salaried
employees and officers who have completed one year of continuous service. At
December 31, 1999, the ESOP held 5.57% of outstanding stock of the Company.
Profit sharing expense for the years ended December 31, 1999, 1998 and 1997
was $1,100,000, $1,000,000 and $501,000, respectively. The amount of the
contribution made by the Bank is determined each year by the Board of
Directors, but is not to exceed 15% of the participants' aggregated
compensation. The Bank does not offer post retirement benefits under this
plan.
Stock Compensation Plans
At December 31, 1999, the Company had two stock-based compensation
programs, which are described below. The Company applies APB Opinion 25 and
related interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized for its stock compensation plans.
74
<PAGE>
(13) Employee Benefit Plans (continued)
Stock Option Programs
The Company has an employee stock option program which is comprised of
two plans. One of these plans, the 1983 Stock Option and Stock Appreciation
Rights Plan (the "1983 Plan"), expired in 1993 but some grants issued under
that plan are still outstanding and exercisable. The 1983 Plan provided for
the issuance of up to 3,142,000 shares of common stock to employees of the
Bank. Under the 1994 Stock Option and Stock Appreciation Rights Plan (the"1994
Plan"), the Company may grant options to employees of the Bank for up to
3,000,000 shares of common stock, subject to limitations set forth under the
1994 Plan. Under both the 1983 Plan and the 1994 Plan, the exercise price of
each option equals the market value of the Company's stock on the date of the
grant, and an option's maximum term is 10 years. Options typically begin to
vest on the second anniversary date of the grant under both plans.
The Company also has a stock option plan for outside directors, the
1997 Non-employee Directors Stock Incentive Plan (the "Directors Stock
Plan"). The Directors Stock Plan provides for the issuance of up to 400,000
shares of common stock to non-employee directors of the Company. The
exercise price of each option equals the market value of the Company's stock
on the date of the grant, and an option's maximum term is 10 years plus one
month. Options typically vest 100% on the one year anniversary date of the
grant.
The fair value of each option grant is estimated on the date of the
grant using the Black-Scholes option pricing model with the following
weighted average assumptions used for grants in 1999, 1998 and 1997,
respectively: no dividend yield in any year; expected volatility of 38%, 35%
and 35%; risk free interest rates of 6.6%, 4.7% and 6.5%; and expected
average lives of 6, 6 and 10 years. The weighted-average grant date fair
value of options granted during the year are $6.04, $7.85 and $5.15 for 1999,
1998 and 1997, respectively. The Company has elected to recognize forfeitures
in the year they occur.
75
<PAGE>
13) Employee Benefit Plans (continued)
Had compensation cost for the Company's stock-option programs been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of Statement of Financial Standards
No. 123, "Accounting for Stock Based Compensation," the Company's net
earnings and earnings per share would have been reduced to the pro forma
amounts indicated below (all per share amounts have been adjusted for the
two-for-one stock split declared June 25, 1998):
1999 1998 1997
(Dollars In Thousands, Except Per Share Data)
Before Extraordinary Items:
Earnings before
extraordinary items:
As reported..... $35,447 $34,629 $23,100
Pro forma....... $35,085 $34,354 $22,910
Earnings per share:
Basic:
As reported..... $1.84 $1.63 $1.09
Pro forma....... $1.83 $1.62 $1.08
Diluted:
As reported..... $1.83 $1.60 $1.07
Pro forma....... $1.81 $1.59 $1.06
After Extraordinary Items:
Net earnings:
As reported..... $33,252 $34,629 $23,100
Pro forma....... $32,890 $34,354 $22,910
Earnings per share:
Basic:
As reported..... $1.73 $1.63 $1.09
Pro forma....... $1.71 $1.62 $1.08
Diluted:
As reported..... $1.71 $1.60 $1.07
Pro forma....... $1.70 $1.59 $1.06
Pro forma net earnings and earnings per share reflect only options
granted since 1995. Therefore, the full impact of calculating compensation
cost for stock options under SFAS No. 123 is not reflected in the pro forma
net earnings per share amounts presented above because compensation cost is
reflected over the options' vesting period and compensation cost for options
granted prior to January 1, 1995 is not considered.
76
<PAGE>
13) Employee Benefit Plans (continued)
Information with respect to stock options follows:
Options Outstanding 1999 1998 1997
(Weighted Average option prices) (In Shares)
Beginning of year ($9.84, $7.85 and $6.86) 713,500 707,914 639,062
Granted ($16.13, $17.25 and $10.88) 181,130 168,790 226,700
Exercised ($5.68, $8.55 and $7.72). (193,785) (52,990) (115,538)
Canceled ($13.64, $8.99 and $9.01). (47,103) (110,214) (42,310)
End of Year ($12.54, $9.84 and $7.85) 653,742 713,500 707,914
Shares exercisable at December 31..
($7.97, $5.69 and $5.89)......... 126,544 291,560 227,200
Restricted Stock Plan
The Company also has a restricted stock plan. Under the 1991
Restricted Stock Plan (the "Restricted Stock Plan"), the Company may issue
shares of restricted stock to employees of the Company and its subsidiaries,
including officers and directors. A total of 1,000,000 shares have been
reserved for issuance under the Restricted Stock Plan. As of December 31,
1999 and 1998, 878,740 shares and 880,540 shares are available for grant.
All per share amounts have been adjusted for the two-for-one stock split
declared June 25, 1998. The shares consist of previously issued shares
reacquired by the Company. The shares typically vest in increments of 25% per
year, beginning on the fourth anniversary of the grant date. As shares vest,
they are released to the recipient, at which time the recipient will
recognize ordinary income equal to the fair market value of the restricted
stock at the time the restrictions lapse. During 1999 and 1998, 1,800 and
1,000 shares respectively were issued under this program. No shares were
issued in 1997. Compensation costs related to shares granted under the
Restricted Stock Plan have been recorded in previous periods.
(14) Parent Company Financial Information
The following condensed parent company financial information should be
read in conjunction with the other Notes to the Consolidated Financial
Statements.
CONDENSED STATEMENTS OF FINANCIAL CONDITION
December 31,
1999 1998
(Dollars In Thousands)
Assets:
Cash......................... $ 3,089 $ 12,466
Other assets................. 1,728 1,333
Investment in subsidiary..... 226,734 294,819
$231,551 $308,618
Liabilities and Stockholders' Equity:
Notes payable................ $ - $ 50,000
Other liabilities............ 418 1,618
Stockholders' equity......... 231,133 257,000
$231,551 $308,618
77
<PAGE>
(14) Parent Company Financial Information (continued)
<TABLE>
<CAPTION>
Years Ended December 31,
CONDENSED STATEMENTS OF OPERATIONS AND 1999 1998 1997
COMPREHENSIVE EARNINGS (Dollars In Thousands)
<S> <C> <C> <C>
Dividends received from Bank... $99,554 $ 5,875 $ 5,875
Equity in undistributed (distributed) net
earnings of subsidiary ....... (60,508) 32,558 20,987
Other expense, net............. (5,794) (3,804) (3,762)
Net earnings................... $33,252 $34,629 $23,100
Other comprehensive earnings (loss), net
Net of taxes................... (7,577) (311) 3,798
Comprehensive earnings......... $25,675 $34,318 $26,898
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
CONDENSED STATEMENTS OF CASH FLOWS 1999 1998 1997
(Dollars In Thousands)
<S> <C> <C> <C>
Net Cash Flows from Operating Activities:
Net earnings........................ $ 33,252 $ 34,629 $ 23,100
Adjustments to reconcile net earnings to
net cash provided by operating
activities:
Equity in undistributed (distributed) net
net earnings of subsidiary......... 60,508 (32,558) (20,987)
Write-off deferred issuance cost.... 1,332 - -
Other............................... 1,326 (129) 577
Net cash provided by operating activities 96,418 1,942 2,690
Cash Flows from Investing Activities:
(Increase) Decrease in ESOP loan.... (926) 911 388
Net cash (used) provided by investing
Activities......................... (926) 911 388
Cash Flows from Financing Activities:
Repayment of long term borrowings... (50,000) - -
Premiums paid on early extinguishment of debt (2,655) - -
Purchase of treasury stock.......... (52,214) (1,469) -
Other............................... - 482 952
Net cash provided (used by) financing activities (104,869) (987) 952
Net increase in cash................. (9,377) 1,866 4,030
Cash at beginning of period........... 12,466 10,600 6,570
Cash at end of period................. $ 3,089 $ 12,466 $ 10,600
</TABLE>
78
<PAGE>
(15) Quarterly Results of Operations: (unaudited)
Summarized below are the Company's results of operations on a quarterly
basis for 1999, 1998 and 1997:
<TABLE>
<CAPTION>
Provision Non- Basic Diluted
Interest Interest For Loan Other Interest Net Earnings Earnings
Income Expense Losses Income Expense Earnings Per Share Per Share
(Dollars In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
First quarter
1999........ $ 64,737 $ 39,572 $ - $ 3,133 $ 12,588 $ 8,915 $ 0.43 $ 0.43
1998........ 75,955 49,504 2,500 2,255 11,990 8,143 0.38 0.38
1997........ 73,685 49,653 6,000 2,902 11,911 5,168 0.25 0.24
Second quarter
1999........ $ 63,697 $ 38,478 $ - $ 4,157 $ 13,113 $ 9,103 $ 0.47 $ 0.47
1998........ 73,587 47,673 2,100 3,974 12,684 8,637 0.41 0.40
1997........ 73,946 50,917 5,500 2,890 10,996 5,348 0.25 0.25
Third quarter
1999........ $ 63,671 $ 39,376 $ - $ 2,813 $ 11,990 $ 8,358 $ 0.44 $ 0.44
1998........ 71,212 46,402 1,600 3,868 11,698 8,830 0.42 0.41
1997........ 75,551 51,862 5,000 2,564 10,784 5,971 0.28 0.28
Fourth quarter
1999........ $ 67,896 $ 43,605 $ - $ 2,585 $ 11,468 $ 6,876 $ 0.38 $ 0.37
1998........ 69,015 42,912 1,000 3,560 12,552 9,019 0.43 0.42
1997........ 76,038 51,794 4,000 1,862 10,460 6,613 0.31 0.31
Total year
1999........ $260,001 $161,031 $ - $12,688 $ 49,159 $33,252 $ 1.73 $ 1.71
1998........ 289,769 186,491 7,200 13,657 48,924 34,629 1.63 1.60
1997........ 299,220 204,226 20,500 10,218 44,151 23,100 1.09 1.07
</TABLE>
(16) Fair Value of Financial Instruments
The following table presents fair value information for financial
instruments for which a market exists. The fair values for these financial
instruments were estimated based upon prices published in financial newspapers
or quotations received from national securities dealers.
1999 1998
Carrying Carrying
Value Fair Value Value Fair Value
(Dollars In Thousands)
Mortgage-backed Securities ... $428,641 $428,641 $556,679 $556,679
US Government Securities ..... 37,821 37,821 27,939 27,939
Collateralized Mortgage Obligations 113,374 113,374 36,394 36,394
Loans Held-for-Sale .......... 2,303 2,303 16,602 16,602
79
<PAGE>
16) Fair Value of Financial Instruments (continued)
The following table presents fair value information for financial
instruments shown in the Company's Consolidated Statements of Financial
Condition for which there is no readily available market. The fair values for
these financial instruments were calculated by discounting expected cash
flows. Because these financial instruments have not been evaluated for
possible sale and because management does not intend to sell these financial
instruments, the Company does not know whether the fair values shown below
represent values at which the respective financial instruments could be sold.
1999 1998
Calculated Calculated
Carrying Fair Value Carrying Fair Value
Value Amount Value Amount
(Dollars In Thousands)
Adjustable Loans:
Single Family .......... $1,798,072 $1,812,726 $1,530,367 $1,575,173
Multi-Family ........... 1,121,929 1,132,896 1,119,519 1,159,688
Commercial ............ 176,841 182,044 178,784 188,145
Fixed Rate Loans:
Single Family .......... 8,282 8,474 21,863 21,691
Multi-Family ........... 5,520 5,653 7,257 7,680
Commercial ............. 6,893 7,216 1,940 1,968
Other Real Estate Loans .. 2,629 2,660 5,189 5,147
Consumer Loans............ 2,276 2,474 1,619 1,617
Business Loans............ 8,140 8,309 - -
Non-Performing Loans ..... 13,221 13,221 25,986 25,986
Fixed-Term Certificate Accounts 1,280,363 1,275,921 1,512,585 1,516,809
Non-Term Deposit Accounts 636,684 636,684 623,324 623,324
Borrowings ............... 1,532,635 1,530,786 1,235,172 1,241,859
OFF-BALANCE SHEET:
Loans sold with recourse. 178,723 177,899 203,022 190,476
GAAP specifies that fair values should be calculated based on the value
of one unit. The estimates do not necessarily reflect the price the Company
might receive if it were to sell the entire holding of a particular financial
instrument at one time.
Fair value estimates are based on the following methods and
assumptions, some of which are subjective in nature. Changes in assumptions
could significantly affect the estimates.
Cash and Cash Equivalents
The carrying amounts reported in the Consolidated Statements of
Financial Condition for this item approximate fair value.
Investment Securities and Mortgage-Backed Securities
Fair values are based on bid prices published in financial newspapers
or bid quotations received from national securities dealers.
80
<PAGE>
(16) Fair Value of Financial Instruments (continued)
Loans Receivable
The portfolio is segregated into those loans with adjustable rates of
interest and those with fixed rates of interest. Fair values are based on
discounting future cash flows by the current rate offered for such loans with
similar remaining maturities and credit risk. The amounts so determined for
each loan category are reduced by the Bank's allowance for loans losses which
thereby takes into consideration changes in credit risk. As of December 31,
1999, the Bank had outstanding commitments to fund $105,649,000 in real
estate loans which were substantially at fair value.
Non-performing Assets
The carrying amounts reported in the Consolidated Statements of
Financial Condition for this item approximate fair value.
Deposits
The fair value of deposits with no stated term, such as regular
passbook accounts, money market accounts and checking accounts, is defined by
SFAS No. 107 as the carrying amounts reported in the Consolidated Statements
of Financial Condition. The fair value of deposits with a stated maturity,
such as certificates of deposit, is based on discounting future cash flows by
the current rate offered for such deposits with similar remaining maturities.
Borrowings
For short term borrowings, fair value approximates carrying value. The
fair value of long term borrowings is based on their interest rate
characteristics. For variable rate borrowings, fair value is based on
carrying values. For fixed rate borrowings, fair value is based on
discounting future contractual cash flows by the current interest rate paid
on such borrowings with similar remaining maturities.
81
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
FirstFed Financial Corp.
We have audited the accompanying consolidated statements of financial
condition of FirstFed Financial Corp. and subsidiary ("Company") as of
December 31, 1999 and 1998, and the related consolidated statements of
operations and comprehensive earnings, stockholders' equity and cash flows
for each of the years in the three-year period ended December 31, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of FirstFed
Financial Corp. and subsidiary as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with generally
accepted accounting principles.
KPMG LLP
Los Angeles, California
January 28, 2000
82
<PAGE>
ITEM 9--CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10--DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors and executive officers appearing on
pages 3 through 7 of the Proxy Statement for the Annual Meeting of
Stockholders dated April 26, 2000 is incorporated herein by reference.
ITEM 11--EXECUTIVE COMPENSATION
Information regarding executive compensation appearing on pages 8
through 14 of the Proxy Statement for the Annual Meeting of Stockholders
dated April 26, 2000 is incorporated herein by reference.
ITEM 12--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners
and management appearing on pages 2 and 3 of the Proxy Statement for the
Annual Meeting of Stockholders dated April 26, 2000 is incorporated herein by
reference.
ITEM 13--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a)Certain Relationships: None.
(b)Information regarding certain related transactions appearing on page 11
of the Proxy Statement for the Annual Meeting of Stockholders dated
April 26, 2000 is incorporated herein by reference.
PART IV
ITEM 14--EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8K
(a) 1.Consolidated Financial Statements
The consolidated financial statements included in this Report are
listed under Item 8.
2.Consolidated Financial Statement Schedules
Schedules have been omitted because they are not applicable or the
required information is presented in the consolidated financial statements or
notes thereto.
83
<PAGE>
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
EXHIBIT
NUMBER
-------------
(1) Underwriting Agreement filed as Exhibit 1 to Amendment No. 2 to Form S-3
dated September 7, 1994 and incorporated by reference.
(3.1) 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
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.
(23) Independent Auditors' consent
(24)Power of Attorney (included at page 86).
This 1999 Annual Report on Form 10-K and the Proxy Statement for the
Annual Meeting of Stockholders dated April 26, 2000 have already been
furnished to each stockholder of record who is entitled to receive copies
thereof. Copies of these items will be furnished without charge upon request
in writing by any stockholder of record on March 2, 2000 and any beneficial
owner of Company stock on such date who has not previously received such
material and who so represents in good faith and in writing to:
Corporate Secretary
FirstFed Financial Corp.
401 Wilshire Boulevard
Santa Monica, California 90401
Other exhibits will be supplied to any such stockholder at a charge
equal to the Company's cost of copying, postage, and handling.
(b) Reports on Form 8-K
The Company filed a current report on Form 8-K dated October 18, 1999
which, among other things, announced that its Board or Directors authorized
an expansion of its stock repurchase program. The increase authorized the
Company to repurchase an additional 5% of the shares outstanding as of
October 15, 1999. The Company also filed a current report on Form 8-K dated
December 2, 1999 which announced the extinguishment of the Company's senior
unsecured note.
84
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
FIRSTFED FINANCIAL CORP.,
a Delaware corporation
By: /s/ Babette E. Heimbuch
Babette E. Heimbuch
President and
Chief Executive Officer
Date: February 24, 2000
85
<PAGE>
POWER OF ATTORNEY
Each person whose signature appears below hereby authorizes Babette E.
Heimbuch and Douglas J. Goddard, and each of them or either of them, as
attorney-in-fact to sign on his or her behalf as an individual and in every
capacity stated below, and to file all amendments to the Registrant's Form
10-K, and the Registrant hereby confers like authority to sign and file in
its behalf.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the 24th day of February, 2000.
SIGNATURE TITLE
/s/ Babette E. Heimbuch Chief Executive Officer (Principal
Babette E. Heimbuch Executive Officer)
/s/ Douglas J. Goddard Executive Vice President and
Douglas J. Goddard Chief Financial Officer (Principal
Financial Officer)
/s/ Brenda J. Battey Senior Vice President and Controller
Brenda J. Battey (Principal Accounting Officer)
/s/ Christopher M. Harding Director
Christopher M. Harding
/s/ James L. Hesburgh Director
James L. Hesburgh
/s/ William S. Mortensen Chairman of the Board
William S. Mortensen
/s/ William G. Ouchi Director
William G. Ouchi
/s/ William P. Rutledge Director
William P. Rutledge
/s/ Charles F. Smith Director
Charles F. Smith
/s/ Steven L. Soboroff Director
Steven L. Soboroff
/s/ John R. Woodhull Director
John R. Woodhull
86
<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> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> Dec-31-1999
<CASH> 34,807
<INT-BEARING-DEPOSITS> 67,000
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 579,836
<INVESTMENTS-CARRYING> 579,836
<INVESTMENTS-MARKET> 579,836
<LOANS> 3,060,547
<ALLOWANCE> 72,550
<TOTAL-ASSETS> 3,856,505
<DEPOSITS> 2,061,357
<SHORT-TERM> 1,283,635
<LIABILITIES-OTHER> 31,380
<LONG-TERM> 249,000
0
0
<COMMON> 233
<OTHER-SE> 230,900
<TOTAL-LIABILITIES-AND-EQUITY> 3,856,505
<INTEREST-LOAN> 216,634
<INTEREST-INVEST> 43,367
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 260,001
<INTEREST-DEPOSIT> 87,199
<INTEREST-EXPENSE> 161,031
<INTEREST-INCOME-NET> 98,970
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 49,159
<INCOME-PRETAX> 62,499
<INCOME-PRE-EXTRAORDINARY> 35,447
<EXTRAORDINARY> (2,195)
<CHANGES> 0
<NET-INCOME> 33,252
<EPS-BASIC> 1.73
<EPS-DILUTED> 1.71
<YIELD-ACTUAL> 2.70
<LOANS-NON> 13,221
<LOANS-PAST> 0
<LOANS-TROUBLED> 2,079
<LOANS-PROBLEM> 6,900
<ALLOWANCE-OPEN> 87,818
<CHARGE-OFFS> 6,400
<RECOVERIES> 3,956
<ALLOWANCE-CLOSE> 85,374
<ALLOWANCE-DOMESTIC> 85,374
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
FirstFed Financial Corp.
We consent to incorporation by reference in the registration statements
(No. 333-33463, 033-63207) on Form S-8 of FirstFed Financial Corp. of our
report dated January 28, 2000, relating to the consolidated statements of
financial condition of FirstFed Financial Corp. as of December 31, 1999, and
1998, and the related consolidated statements of operations and comprehensive
earnings, stockholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1999, which report appears in the
December 31, 1999, annual report on Form 10-K of FirstFed Financial Corp.
KPMG LLP
Los Angeles, California
March 13, 2000
RESTATED CERTIFICATE OF INCORPORATION
OF
FIRSTFED FINANCIAL CORP.
**********
This Restated Certificate of Incorporation of FirstFed Financial Corp.
(the "Corporation") was duly approved by the Board of Directors of the
Corporation and only restates and integrates but does not further amend the
provisions of the Corporation's Certificate of Incorporation as theretofore
amended or supplemented, including the amendment dated April 21, 1999 as to
Article Fourth; and there is no discrepancy between these amended and
supplemented provisions and the provisions of the Restated Certificate of
Incorporation set forth below except as permitted by Section 245 of the
General Corporation Law. The original Certificate of Incorporation of the
Corporation was filed with the Secretary of State of the State of Delaware on
February 3, 1987.
FIRST: Corporate Title. The name of the Corporation is FirstFed
Financial Corp.
SECOND: Registered Office. The address of the Corporation's registered
office in the State of Delaware is 1013 Centre Road, City of Wilmington,
County of New Castle, Delaware 19805. The name of its registered agent at such
address is United States Corporation Company.
THIRD: Purpose. The purpose of the Corporation is to engage in any
lawful act or activity for which corporations may be organized under the
General Corporation Law of the State of Delaware.
FOURTH: Authorized Shares. The total number of shares of all classes
of stock which the Corporation shall have the authority to issue is one
hundred five million (105,000,000) shares, one cent ($0.1) par value, divided
into two classes of which one hundred million (100,000,000) shares shall be
Common Stock ("Common Stock") and five million (5,000,000) shares shall be
Preferred Stock ("Preferred Stock").
A. Common Stock.
1. Dividends. Subject to the rights of the holders of shares of any series
of the Preferred Stock, and except as may be expressly provided with respect
to the Preferred Stock or any series thereof herein or by law, or in a
resolution of the Board of Directors establishing such series, the holders of
shares of Common Stock shall be entitled to receive, when and if declared by
the Board of Directors, out of the assets of the Corporation which are by law
available therefor, dividends payable either in cash, in property, or in
shares of the Corporation's capital stock.
2. Voting Rights. Each share of Common Stock shall be entitled to one vote
for the election of directors and on all other matters requiring stockholder
action.
1
<PAGE>
B. Preferred Stock.
The designations and the powers, preferences and rights, and the
qualifications, limitations or restrictions thereof, of the Preferred Stock
shall be as follows:
1. The Board of Directors is expressly authorized at any time, and from
time to time, to provide for the issuance of shares of Preferred Stock in one
or more series, with such voting powers, full or limited (including, without
limitation, more than one vote, less than one vote or one vote per share and
the ability to vote separately as a class or together with all or some of the
other classes or series of capital stock on all or certain of the matters to
be voted on by the stockholders of the Corporation), or no voting powers, and
with such designations, preferences and relative, participating, optional or
other special rights, and qualification, limitations or restrictions thereof,
as shall be stated and expressed in the resolution or resolutions providing
for the issuance thereof adopted by the Board of Directors, including, but not
limited to, the following:
(a) the designation and number of shares constituting such series;
(b) the dividend rate or rates of such series, if any, or the manner of
determining such rate or rates, if any, the conditions and dates upon which
such dividends shall be payable, the preference or relation which such
dividends shall bear to the dividends payable on any other class or classes or
of any other series of capital stock and whether such dividends shall be
cumulative or non-cumulative, and if cumulative, from which date or dates;
(c) whether the shares of such series shall be subject to redemption by the
Corporation, and, if made subject to such redemption, the times, prices and
other terms and conditions of such redemption;
(d) the terms and amount of any sinking fund provided for the purchase or
redemption of the shares of such series;
(e) whether or not the shares of such series shall be convertible into or
exchangeable for shares of any other class or classes or of any other series
of any class or classes of capital stock of the Corporation, and, if
provision be made for conversion or exchange, the time, prices, rates,
adjustments and other terms and conditions of such conversion or exchange;
(f) the extent, if any, to which the holders of the shares of such series
shall be entitled to vote as a class or otherwise, and if so entitled, with
respect to the election of directors or otherwise;
(g) the restrictions, if any, on the issue or reissue of any additional
series of Preferred Stock; and
(h) the rights, if any, of the holders of the shares of such series in the
event of voluntary or involuntary liquidation, dissolution or winding up.
2
<PAGE>
Designation, Preferences and Rights of Series A Preferred Stock
Section 1.Designation and Amount. The shares of such series shall be
designated as "Series A Preferred Stock" $0.01 par value per share, and the
number of shares constituting such series shall be 250,000. Such number of
shares may be increased or decreased by resolution of the Board of Directors;
provided, that no decrease shall reduce the number of shares of Series A
Preferred Stock to a number less than that of the shares then outstanding plus
the number of shares issuable upon exercise of outstanding rights, options or
warrants or upon conversion of outstanding securities issued by the
Corporation.
Section 2.Dividends and Distributions.
(A) Subject to the prior and superior rights of the holders of any shares of
any series of Preferred Stock ranking prior and superior to the shares of
Series A Preferred Stock with respect to dividends, the holders of shares of
Series A Preferred Stock in preference to the holders of shares of Common
Stock, par value $0.01 per share (the "Common Stock"), of the Corporation and
any other junior stock, shall be entitled to receive, when, as and if declared
by the Board of Directors out of funds legally available for the purpose,
quarterly dividends payable in cash on the first day of January, April, July
and October in each year (each such date being referred to herein as a
"Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend
Payment Date after the first issuance of a share or fraction of a share of
Series A Preferred Stock in an amount per share (rounded to the nearest cent)
equal to the greater of (a) $10.00, or (b) subject to the provision for
adjustment hereinafter set forth, 1,000 times the aggregate per share amount
of all cash dividends, and 1,000 times the aggregate per share amount (payable
in kind) of all non-cash dividends or other distributions other than a
dividend payable in shares of Common Stock or a subdivision of the outstanding
shares of Common Stock (by reclassification or otherwise), declared on the
Common Stock, since the immediately preceding Quarterly Dividend Payment Date,
or, with respect to the first Quarterly Dividend Payment Date, since the first
issuance of any share or fraction of a share of Series A Preferred Stock. In
the event the Corporation shall at any time after November 15, 1988 (the
"Rights Declaration Date") (i) declare any dividend on Common Stock payable in
shares of Common Stick, (ii) subdivide the outstanding Common Stock, or (iii)
combine the outstanding Common Stock into a smaller number of shares, then in
each case the amount to which holders of shares of Series A Preferred Stock
were entitled immediately prior to such event under clause (b) of the
preceding sentence shall be adjusted by multiplying such amount by a fraction
the numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
(B) The Corporation shall declare a dividend or distribution on the Series A
Preferred Stock as provided in paragraph (A) above immediately after it
declares a dividend or distribution on the Common Stock (other than a dividend
payable in shares of Common Stock); provided that, in the event no dividend or
distribution shall have been declared on the Common Stock during the period
between any Quarterly Dividend Payment Date and the next subsequent Quarterly
Dividend Payment Date, a dividend of $10.00 per share on the Series A
Preferred Stock shall nevertheless be payable on such subsequent Quarterly
Dividend Payment Date.
3
<PAGE>
(C) Dividends shall begin to accrue and be cumulative on outstanding shares
of Series A Preferred Stock from the Quarterly Dividend Payment Date next
preceding the date of issue of such shares of Series A Preferred Stock unless
the date of issue of such shares is prior to the record date for the first
Quarterly Dividend Payment Date, in which case dividends on such shares shall
begin to accrue from the date of issue of such shares, or unless the date of
issue is a Quarterly Dividend Payment Date or is a date after the record date
for the determination of holders of shares of Series A Preferred Stock
entitled to receive a quarterly dividend and before such Quarterly Dividend
Payment Date, in either of which events such dividends shall begin to accrue
and be cumulative from such Quarterly Dividend Payment Date. Accrued but
unpaid dividends shall not bear interest. Dividends paid on the shares of
Series A Preferred Stock in an amount less than the total amount of such
dividends at the time accrued and payable on such shares shall be allocated
pro rata on a share-by-share basis among all such shares at the time
outstanding. The Board of Directors may fix a record date for the
determination of holders of shares of Series A Preferred Stock entitled to
receive payment of a dividend or distribution declared thereon, which record
date shall be no more than 30 days prior to the date fixed for the payment
thereof.
Section 3.Voting Rights. The holders of shares of Series A Preferred
Stock shall have the following voting rights:
(A) Subject to the provision for adjustment hereinafter set forth, each
share of Series A Preferred Stock shall entitle the holder thereof to 1,000
votes on all matters submitted to a vote of the stockholders of the
Corporation.
(B) Except as otherwise provided herein or by law, the holders of shares of
Series A Preferred Stock and the holders of shares of Common Stock shall vote
together as one class on all matters submitted to a vote of stockholders of
the Corporation.
(C) (i) If at any time dividends on any Series A Preferred Stock shall be
in arrears in an amount equal to six (6) quarterly dividends thereon, the
occurrence of such contingency shall mark the beginning of a period (herein
called a "default period") which shall extend until such time when all accrued
and unpaid dividends for all previous quarterly dividend periods and for the
current quarterly dividend period on all shares of Series A Preferred Stock
then outstanding shall have been declared and paid or set apart for payment.
During each default period, all holders of Preferred Stock (including holders
of the Series A Preferred Stock) with dividends in arrears in an amount equal
to six (6) quarterly dividends thereon, voting as a class, irrespective of
series, shall have the right to elect two (2) Directors.
(ii) During any default period, such voting right of the holders of Series A
Preferred Stock may be exercised initially at a special meeting called
pursuant to subparagraph (iii) of this Section 3(c) or at any annual meeting
of stockholders, and thereafter at annual meetings of stockholders, provided
that neither such voting right nor the right of the holders of any other
series of Preferred Stock, if any, to increase, in certain cases, the
authorized number of Directors shall be exercised unless the holders of ten
percent (10%) in number of shares of Preferred Stock outstanding shall be
present in person or by proxy. The absence of a quorum of the holders of
Common Stock shall not affect the exercise by the holders of Preferred Stock
of such voting right. At any meeting at which the holders of Preferred Stock
4
<PAGE>
shall exercise such voting right initially during an existing default period,
they shall have the right, voting as a class, to elect Directors to fill such
vacancies, if any, in the Board of Directors as may then exist up to two (2)
Directors or, if such right is exercised at any annual meeting, to elect two
(2) Directors. If the number which may be so elected at any special meeting
does not amount to the required number, the holders of the Preferred Stock
shall have the right to make such increase in the number of Directors as shall
be necessary to permit the election by them of the required number. After the
holders of the Preferred Stock shall have exercised their right to elect
Directors in any default period and during the continuance of such period, the
number of Directors shall not be increased or decreased except by vote of the
holders of Preferred Stock as herein provided or pursuant to the rights of any
equity securities ranking senior to or pari passu with the Series A Preferred
Stock.
(iii) Unless the holders of Preferred Stock shall, during an existing default
period, have previously exercised their right to elect Directors, the Board of
Directors may order, or any stockholder or stockholders owning in the
aggregate not less than ten percent (10%) of the total number of shares of
Preferred Stock outstanding, irrespective of series, may request, the calling
of a special meeting of the holders of Preferred Stock, which meeting shall
thereupon be called by the President, a Vice President or the Corporate
Secretary of the Corporation, Notice of such meeting and of any annual meeting
at which holders of Preferred Stock are entitled to vote pursuant to this
paragraph (C)(iii) shall be given to each holder of record of Preferred Stock
by mailing a copy of such notice to him or her at his last address as the same
appears on the books of the Corporation. Such meeting shall be called for a
time not earlier than 10 days and not later than 60 days after such order or
request or in default of the calling of such meeting within 60 days after such
order or request, such meeting may be called on similar notice by any
stockholder or stockholders owning in the aggregate not less than ten percent
(10%) of the total number of shares of Preferred Stock outstanding.
Notwithstanding the provisions of this paragraph (C)(iii), no such special
meeting shall be called during the period within 60 days immediately preceding
the date fixed for the next annual meeting of the stockholders.
(iv) In any default period, the holders of Common Stock, and other classes of
stock of the Corporation if applicable, shall continue to be entitled to elect
the whole number of Directors until the holders of Preferred Stock shall have
exercised their right to elect two (2) Directors voting as a class, after the
exercise of which right (x) the Directors so elected by the holders of
Preferred Stock shall continue in office until their successors shall have
been elected by such holders or until the expiration of the default period,
and (y) any vacancy in the Board of Directors may (except as provided in
paragraph (C)(ii) of this Section 3) be filled by vote of a majority of the
remaining Directors theretofore elected by the holders of the class of stock
which elected the Director whose office shall have become vacant. References
in this paragraph (C) to Directors elected by the holders of a particular
class of stock shall include Directors elected by such Directors to fill
vacancies as provided in clause (y) of the foregoing sentence.
(v) Immediately upon the expiration of a default period, (x) the right of
the holders of Preferred Stock as a class to elect Directors shall cease, (y)
the term of any Directors elected by the holders of Preferred Stock as a class
shall terminate, and (z) the number of Directors shall be such number as may
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be provided for in, or pursuant to, the Restated Certificate of Incorporation
or By-Laws irrespective of any increase made pursuant to the provisions of
paragraph (C)(ii) of this Section 3 (such number being subject, however to
change thereafter in any manner provided by law or in the Restated Certificate
of Incorporation or By-Laws). Any vacancies in the Board of Directors
effected by the provisions of clauses y) and (z)in the preceding sentence may
be filled by a majority of the remaining Directors, even though less than a
quorum.
(D) Except as set forth herein, holders of Series A Preferred Stock shall
have no special voting rights and their consent shall not be required (except
to the extent they are entitled to vote with holders of Common Stock as set
forth herein) for taking any corporate action.
Section 4.Certain Restrictions.
(A) Whenever quarterly dividends or other dividends or distributions payable
on the Series A Preferred Stock as provided in Section 2 are in arrears,
thereafter and until all accrued and unpaid dividends and distributions,
whether or not declared, on shares of Series A Preferred Stock outstanding
shall have been paid in full, the Corporation shall not:
(i) declare or pay dividends on, make any other distributions on, or redeem
or purchase or otherwise acquire for consideration any shares of stock ranking
junior (either as to dividends or upon liquidation, dissolution or winding up)
to the Series A Preferred Stock;
(ii) declare or pay dividends on or make any other distributions on any
shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series A Preferred Stock
except dividends paid ratably on the Series A Preferred Stock and all such
parity stock on which dividends are payable or in arrears in proportion to the
total amounts to which the holders of all such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for consideration shares of any
stock ranking on a parity (either as to dividends or upon liquidation,
dissolution or winding up) with the Series A Preferred Stock provided that the
Corporation may at any time redeem, purchase or otherwise acquire shares of
any such parity stock in exchange for shares of any stock of the Corporation
ranking junior (either as to dividends or upon dissolution, liquidation or
winding up) to the Series A Preferred Stock; or
(iv) purchase or otherwise acquire for consideration any shares of Series A
Preferred Stock or any shares of stock ranking on a parity with the Series A
Preferred Stock except in accordance with a purchase offer made in writing or
by publication (as determined by the Board of Directors) to all holders of
such shares upon such terms as the Board of Directors, after consideration of
the respective annual dividend rates and other relative rights and preferences
of the respective series and classes, shall determine in good faith will
result in fair and equitable treatment among the respective series or classes.
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(B) The Corporation shall not permit any subsidiary of the Corporation to
purchase or otherwise acquire for consideration any shares of stock of the
Corporation unless the Corporation could, under paragraph (A) of this Section
4, purchase or otherwise acquire such shares at such time and in such manner.
Section 5. Reacquired Shares. Any shares of Series A Preferred Stock
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and cancelled promptly after the acquisition thereof. All
such shares shall upon their cancellation become authorized but unissued
shares of Preferred Stock and may be reissued as part of a new series of
Preferred Stock to be created by resolution or resolutions of the Board of
Directors, subject to the conditions and restrictions on issuance set forth
herein.
Section 6.Liquidation, Dissolution or Winding Up. (A) Upon any
liquidation (voluntary or otherwise), dissolution or winding up of the
Corporation, no distribution shall be made to the holders of shares of stock
ranking junior (either as to dividends or upon liquidation, dissolution or
winding up) to the Series A Preferred Stock unless, prior thereto, the holders
of shares of Series A Preferred Stock shall have received per share, the
greater of 1,000 times the exercise price per Right or 1,000 times the payment
made per share of Common Stock, plus an amount equal to accrued and unpaid
dividends and distributions thereon, whether or not declared, to the date of
such payment (the "Series A Liquidation Preference"). Following the payment of
the full amount of the Series A Liquidation Preference, no additional
distributions shall be made to the holders of shares of Series A Preferred
Stock unless, prior thereto, the holders of shares of Common Stock shall have
received an amount per share (the "Common Adjustment") equal to the quotient
obtained by dividing (i) the Series A Liquidation Preference by (ii) 1,000 (as
appropriately adjusted as set forth-in subparagraph (C) below to reflect such
events as stock splits, stock dividends and recapitalizations with respect to
the Common Stock) (such number in clause (ii), the "Adjustment Number").
Following the payment of the full amount of the Series A Liquidation
Preference and the Common Adjustment in respect of all outstanding shares of
Series A Preferred Stock and Common Stock, respectively, holders of Series A
Preferred Stock and holders of shares of Common Stock shall receive their
ratable and proportionate share of the remaining assets to be distributed in
the ratio of the Adjustment Number to 1 with respect to such Preferred Stock
and Common Stock, on a per share basis, respectively.
(B) In the event there are not sufficient assets available to permit
payment in full of the Series A Liquidation Preference and the liquidation
preferences of all other series of Preferred Stock, if any, which rank on a
parity with the Series A Preferred Stock, then such remaining assets shall be
distributed ratably to the holders of such parity shares in proportion to
their respective liquidation preferences. In the event there are no sufficient
assets available to permit payment in full of the Common Adjustment, then such
remaining assets shall be distributed ratably to the holders of Common Stock.
(C) In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on Common Stock payable in shares of
Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine
the outstanding Common Stock into a smaller number of shares, then in each
such case the Adjustment Number in effect immediately prior to such event
shall be adjusted by multiplying such Adjustment Number by a fraction the
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numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
Section 7.Consolidation, Merger, etc. In case the Corporation shall
enter into any consolidation, merger, combination or other transaction in
which the shares of Common Stock are exchanged for or changed into other stock
or securities, cash and/or any other property, then in any such case the
shares of Series A Preferred Stock shall at the same time be similarly
exchanged or changed in an amount per share (subject to the provision for
adjustment hereinafter set forth) equal to 1,000 times the aggregate amount of
stock, securities, cash and/or any other property (payable in kind), as the
case may be, into which or for which each share of Common Stock is changed or
exchanged. In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on Common Stock payable in shares of
Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine
the outstanding Common Stock into a smaller number of shares, then in each
such case the amount set forth in the preceding sentence with respect to the
exchange or change of shares of Series A Preferred Stock shall be adjusted by
multiplying such amount by a fraction the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that are
outstanding immediately prior to such event.
Section 8.Redemption. The shares of Series A Preferred Stock shall not
be redeemable.
Section 9.Ranking. The Series A Preferred Stock shall rank junior to
all other series of the Corporation's Preferred Stock as to the payment of
dividends and the distribution of assets, unless the terms of any such series
shall provide otherwise.
Section 10. Amendment. The Certificate of Incorporation of the
Corporation shall not be further amended in any manner which would materially
alter or change the powers, preferences or special rights of the holders of
Series A Preferred Stock so as to affect them adversely without the
affirmative vote of the holders of at least two-thirds (66 2/3%) of the
outstanding shares of Series A Preferred Stock voting separately as a class.
Section 11. Fractional Shares. Series A Preferred Stock may be
issued in fractions of a share which shall entitle the holder, in proportion
to such holder's fractional shares, to exercise voting rights, receive
dividends, in distributions and to have the benefit of all other rights of
holders of Series A Preferred Stock.
C. Change in Number of Shares.
The number of authorized shares of any class of stock of the Corporation
may be increased or decreased (but not below the number of shares thereof then
outstanding) by the affirmative vote of a majority of the stock of the
Corporation entitled to vote generally with the election of directors.
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FIFTH: Incorporator. The name and mailing address of the
Incorporator is as follows:
Robert E. Braun
725 South Figueroa Street
Los Angeles, California 90017
SIXTH: Board of Directors. The business and affairs of the
Corporation shall be managed by or under the direction of a board of directors
(the "Board of Directors"). The authorized number of directors shall consist
of not fewer than seven nor more than fifteen directors. Within such limits,
the exact number of directors shall be fixed from time to time pursuant to a
resolution adopted by the affirmative vote of a majority of the Continuing
Directors as defined in Article SEVENTH.
A. Election of Directors.
The directors of this Corporation shall be divided into three classes,
as nearly equal in number as possible: the first class, the second class and
the third class. Each director shall serve for a term ending on the third
annual meeting following the annual meeting at which such director was
elected; provided, however, that the directors first elected to the first
class shall serve for a term ending upon the election of directors at the
annual meeting next following the end of the calendar year 1987, the directors
first elected to the second class shall serve for a term ending upon the
election of directors at the second annual meeting next following the end of
the calendar year 1987, and the directors first elected to the third class
shall serve for a term ending upon the election of directors at the third
annual meeting next following the end of the calendar year 1987.
At each annual election commencing at the first annual meeting of
stockholders, the successors to the class of directors whose term expires at
that time shall be elected by the stockholders to hold office for a term of
three years to succeed those directors whose term expires, so that the term of
one class of directors shall expire each year, unless, by reason of any
intervening changes in the authorized number of directors, the Board of
Directors shall have designated one or more directorships whose term then
expires as directorships of another class in order more nearly to achieve
equality of number of directors among the classes of directors.
Notwithstanding the requirement that the three classes of directors
shall be as nearly equal in number of directors as possible, in the event of
any change in the authorized number of directors, each director then
continuing to serve as such shall nevertheless continue as a director of the
class of which he or she is a member until the expiration of his or her
current term, or his or her prior resignation, disqualification, disability or
removal.
B. Newly Created Directorships An Vacancies.
Any vacancies on the Board of Directors resulting from death,
resignation, retirement, disqualification, removal from office or other cause
shall be filled by the affirmative vote of a majority of Continuing Directors,
by the affirmative vote of a majority of Continuing Directors, as defined in
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Article SEVENTH hereof, then in office, or if there be no Continuing
Directors, by the affirmative vote of a majority of directors then in office,
or if there be no Continuing Directors, by the affirmative vote of a majority
of directors then in office, although less than a quorum, or by the sole
remaining director, or, in the event of the failure of the Continuing
Directors, the directors or sole remaining director so to act, by the
stockholders at the next election of directors; provided that, if the holders
of any class or classes of stock or series thereof of the Corporation, voting
separately, are entitled to elect one or more directors, vacancies and newly
created directorships of such class or classes or series may be filled by a
majority of the directors elected by such class or classes or series thereof
then in office, or by a sole remaining director so elected. Directors so
chosen shall hold office for a term expiring at the annual meeting of
stockholders at which the term of the class to which they have been elected
expires. A director elected to fill a vacancy by reason of an increase in the
number of directorships shall be elected by a majority vote of the directors
then in office, although less than a quorum of the Board of Directors, to
serve until the next election of the class for which such director shall have
been chosen. If the number of directors is changed, any increase or decrease
shall be apportioned among the three classes so as to make all classes as
nearly equal in number as possible. If, consistent with the preceding
requirement, the increase or decrease may be allocated to more than one class,
the increase or decrease may be allocated to any such class the Board of
Directors selects in its discretion. No decrease in the number of directors
constituting the Board of Directors shall shorten the term of any incumbent
director.
C. Removal.
A director may be removed either (i) without cause, by the vote of at
least eighty percent (80%) of the shares entitled to vote in an election of
directors; or (ii) for cause, by the affirmative vote of the holders of at
least a majority of the shares then entitled to vote in an election of
directors, which vote, in either case, may only be taken at a meeting of
stockholders, the notice of which meeting expressly states such purpose and
not by written consent. Cause for removal shall be deemed to exist only if the
director whose removal is proposed has been convicted of a felony by a court
of competent jurisdiction or has been adjudged by a court of competent
jurisdiction to be liable for gross negligence or misconduct in the
performance of such director's duty to the Corporation and such adjudication
is no longer subject to direct appeal.
SEVENTH: Certain Business Combinations.
A. Higher Vote Required For Certain Business Combinations.
In addition to any affirmative vote of holders of a class or series of
capital stock of the Corporation required by law or the provisions of this
Certificate of Incorporation, and except as otherwise expressly provided in
Paragraph B of this Article SEVENTH, a Business Combination (as hereinafter
defined) with, or upon a proposal by, a Related Person (as hereinafter defined
shall be approved only upon the affirmative vote of the holders of at least
eighty percent (80%) of the Voting Stock (as hereinafter defined) of the
Corporation voting together as a single class. Such affirmative vote shall be
required notwithstanding the fact that no vote may be required, or that a
lesser percentage may be specified, by law or regulation.
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B When Higher Vote Is Not Required.
The provisions of Paragraph A of this Article SEVENTH shall not be
applicable to any particular Business Combination and such Business
Combination shall require only such affirmative vote as is required by law,
regulation or any other provision of this Certificate of Incorporation, if
all of the conditions specified in any one of the following subparagraphs
(i), (ii) or (iii) are met:
(i) Approval by directors. The Business Combination has been approved by a
vote of a majority of all of the Continuing Directors (as hereinafter
defined); or
(ii) Combination with subsidiary. The Business Combination is solely between
the Corporation and a subsidiary of the Corporation and such Business
Combination does not have the direct or indirect effect set forth in
Subparagraph C(ii)(e) of this Article SEVENTH; or
(iii) Price and procedural conditions. The proposed Business Combination will
be consummated within three years after the date the Related Person
became a Related Person (the "Determination Date") and all of the
following conditions have been met:
(a) The aggregate amount of cash and fair market value (as of the date of
the consummation of the Business Combination) of consideration other
than cash, to be received per share of Common Stock in such Business
Combination by holders thereof shall be at least equal to the highest of
the following: (x) the highest per share price, including any brokerage
commissions, transfer taxes and soliciting dealers' fees (with
appropriate adjustments for recapitalizations, reclassifications, stock
splits, reverse stock splits and stock dividends) paid by the Related
Person for any shares of Common Stock acquired by it, including those
shares acquired by the Related Person before the Determination Date, or
(y) the fair market value of the Common Stock (as determined by the
Continuing Directors) on the date the Business Combination is first
proposed (the "Announcement Date").
(b) The aggregate amount of cash and fair market value (as of the date of
the consummation of the Business Combination) of consideration other
than cash, to be received per share of any class or series of Preferred
Stock in such Business Combination by holders thereof shall be at least
equal to the highest of the following: (x) the highest per share price,
including any brokerage commissions, transfer taxes and soliciting
dealers' fees (with appropriate adjustments for recapitalizations,
reclassifications, stock splits, reverse stock splits and stock
dividends) paid by the Related Person for any shares of such class or
series of Preferred Stock acquired by it, including those shares
acquired by the Related Person before the Determination Date; (y) the
fair market value of such class or series of Preferred Stock of the
Corporation (as determined by the Continuing Directors) on the
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Announcement Date; and (z) the highest preferential amount per share
of such class or series of Preferred Stock to which the holders thereof
would be entitled in the event of voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Corporation (regardless
of whether the Business Combination to be consummated constitutes such
an event).
(c) The consideration to be received by holders of a particular class or
series of outstanding Common or Preferred Stock shall be in cash or in
the same form as the Related Person has previously paid for shares of
such class or series of stock. If the Related Person has paid for shares
of any class or series of stock with varying forms of consideration, the
form of consideration given for such class or series of stock in the
Business Combination shall be either cash or the form used to acquire
the largest number of shares of such class or series of stock previously
acquired by it.
(d) No Extraordinary Event (as hereinafter defined) occurs after the Related
Person has become a Related Person and prior to the consummation of the
Business Combination.
(e) A proxy or information statement describing the proposed Business
Combination and complying with the requirements of the Securities
Exchange Act of 1934 and the rules and regulations thereunder (or any
subsequent provisions replacing such Act, rules or regulations) is
mailed to stockholders of the Corporation at least 30 days prior to the
consummation of such Business Combination (whether or not such proxy or
information statement is required pursuant to such Act or subsequent
provisions, although such proxy or information statement need be filed
with the Securities and Exchange Commission only if a filing is required
by such Act or subsequent provisions) and shall contain at the front
therefore in a prominent place the recommendation, if any, of the
Continuing Directors as to the advisability or inadvisability of the
Business Combination and of any investment banking firm selected by a
majority of the Continuing Directors as to the fairness of the Business
Combination from the point of view of the stockholders of the
Corporation other than the Related Person.
C. Certain Definitions.
For purposes of this Article SEVENTH, and such other Articles of
this Certificate of Incorporation that specifically incorporate the
definition contained in this Article SEVENTH:
(i) The term "person" shall mean any individual, corporation, partnership,
bank, association, joint stock company, trust, syndicate, unincorporated
organization or similar company, or a group of "persons" acting or
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agreeing to act together for the purpose of acquiring, holding, voting
or disposing of securities of the Corporation, including any group of
"persons" seeking to combine or pool their voting or other interest in
the equity securities of the Corporation for common purpose, pursuant to
any contract, understanding, relationship, agreement or other
arrangement, whether written or otherwise.
(ii) "Business Combination" shall mean any of the following transactions,
when entered into by the Corporation or a subsidiary of the Corporation
with, or upon a proposal by, a Related Person:
(a) the acquisition, merger or consolidation of the Corporation or any
subsidiary of the Corporation; or
(b) the sale, lease, exchange, mortgage, pledge, transfer or other
disposition (in one or a series of transactions) of any assets of the
Corporation or any subsidiary of the Corporation having an aggregate
fair market value of $2,000,000 or more; or
(c) the issuance or transfer by the Corporation or any subsidiary of the
Corporation (in one or a series of transactions) of securities of this
Corporation or that subsidiary having a aggregate fair market value of
$2,000,000 or more; or
(d) the adoption of a plan or proposal for the liquidation or dissolution of
the Corporation; or
(e) the reclassification of securities ( including a reverse stock split),
recapitalization, consolidation or any other transaction (whether or not
involving a Related Person) which has the direct or indirect effect of
increasing the voting power, whether or not then exercisable, of, a
Related Person in any class or series of capital stock of the
Corporation or any subsidiary of the Corporation; or
(f) any agreement, contract or other arrangement providing directly or
indirectly for any of the foregoing or any amendment or repeal of the
Article SEVENTH.
(iii) "Related Person" shall mean any person (other than the Corporation, a
subsidiary of the Corporation, or any profit sharing, employee stock
ownership or other employee benefit plan of the Corporation or a
subsidiary of the Corporation or any trustee of or fiduciary with
respect to any such plan acting in such capacity) that is the direct or
indirect beneficial owner (as defined in Rule 13d-3 and Rule 13d-5 under
the Securities Exchange Act of 1934 as in effect on January 1, 1987) of
more than ten percent (10%) of the outstanding shares of stock of the
Corporation entitled to vote, and any Affiliate or Associate of any such
person.
(iv) "Continuing Director" shall mean any member of the Board of Directors of
the Corporation who is not a Related Person or an Affiliate or Associate
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of a Related Person and who was a member of the Board of Directors
of the Corporation immediately prior to the time that the Related
Person became a Related Person, and any successor to a Continuing
Director who is not an Affiliate or Associate of the Related Person and
is recommended to succeed a Continuing Director by a majority of
Continuing Directors of the Corporation.
(v) "Affiliate" and "Associate" shall have the respective meanings ascribed
to such terms in Rule 12b-2 under the Securities Exchange Act of 1934 as
in effect on January 1, 1987.
(vi) "Extraordinary Event" shall mean, as to any Business Combination and
Related Person, any of the following events that is not approved by a
majority of all Continuing Directors:
(a) any failure to declare and pay at the regular date therefore any full
quarterly divided (whether or not cumulative) on outstanding Preferred
Stock; or
(b) any reduction in the annual rate of dividends paid on the Common Stock
(except as necessary to reflect any subdivision of the Common Stock); or
(c) any failure to increase the annual rate of dividends paid on the Common
Stock as necessary to reflect any reclassification (including any
reverse stock split), recapitalization, reorganization or any similar
transaction that has the effect of reducing the number of outstanding
shares of the Common Stock; or
(d) the receipt by the Related Person, after the Determination Date, of a
direct or indirect benefit (except proportionately as a stockholder)
from any loans, advances, guarantees, pledges or other financial
assistance or any tax credits or other tax advantages provided by the
Corporation or any subsidiary of the Corporation, whether in
anticipation of or in connection with the Business Combination or
otherwise.
(vii) "Voting Stock" shall mean all outstanding shares of the
Common or Preferred Stock of the Corporation entitle to vote
generally in the election of directors and each reference to a
proportion of Voting Stock shall refer to shares having such
proportion of the number of shares entitled to be cast, excluding
all shares beneficially owned or controlled by the Related Person.
(viii) In the event of any Business Combination in which the
Corporation survives, the phrase "consideration other than cash" as
used in Paragraphs B (iii)(a) and B (iii)(b) of this Article
SEVENTH shall include the shares of Common Stock and/or the shares
of any other class of Preferred Stock retained by the holders of
such shares.
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(ix) A majority of all Continuing Directors shall have the
power to make all determinations with respect to this Article
SEVENTH, including, without limitation, the transactions that are
Business Combinations, the persons who are Related Persons, the
time at which a Related Person became a Related Person, and the
fair market value of any assets, securities or other property, and
any such determinations of such Continuing Directors shall be
conclusive and binding.
D. No Effect On Fiduciary Obligations Of Related Persons.
Nothing contained in this Article SEVENTH shall be construed to relieve
any Related Person from any fiduciary obligation imposed by law.
EIGHTH: Action by Written Consent. Any action required to be
taken or which may be taken at any annual or special meeting of the
stockholders of the Corporation may be taken by written consent without a
meeting if a consent in writing, setting forth the action so taken, shall be
signed by all of the stockholders of the Corporation entitled to vote thereon.
NINTH: Special Meetings. Special meeting of the stockholders may
only be called by a majority of the Continuing Directors (as defined in
Article SEVENTH).
TENTH: Bylaws. Bylaws may be adopted, amended or repealed by the
affirmative vote of the holders of at least eighty percent (80%) of the total
votes eligible to be cast at a meeting duly called and held or by a
resolution adopted by the Board of Directors, including, a majority of
Continuing Directors (as defined in Article SEVENTH).
ELEVENTH: Limitations of Directors' Liability. A director of the
Corporation shall not be personally liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except: (i) for any breach of the director's duty of loyalty to the
Corporations or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) under Section 174 of the Delaware General Corporation Law, as so
amended.
Any repeal or modification of the foregoing Paragraph by the
stockholders of the Corporation shall not adversely affect any right or
protection of a director of the Corporation in respect of any act or omission
occurring prior to the time of such repeal or modification.
TWELFTH: Indemnification.
A. Actions, Suits or Proceeding Other than by or in the Right of the
Corporation.
The Corporation shall indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Corporation) by
reason of the fact that he or she is or was or has agreed to become a director
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or officer of the Corporation, or is or was serving or has agreed to serve at
the request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
including service with respect to employee benefit plans, or by reason of any
action alleged to have been taken or omitted in such capacity, against
expenses (including attorney's fees and related disbursements), judgements,
fines and amounts paid in settlement actually and reasonably incurred by him
or her or on his or her behalf in connection with such action, suit or
proceeding and any appeal therefrom, if he or she acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interest of the Corporation, and with respect to any criminal action or
proceeding, had no reasonable cause to believe his or her conduct was
unlawful; provided, however, that except as provided in Paragraph G hereof
with respect to proceedings seeking to enforce rights of indemnification with
respect to a proceeding (or part thereof) initiated by such person only if
such proceeding or part thereof was authorized by a majority of the Continuing
Directors. The termination of any action, suit or proceeding by judgment,
order, settlement, conviction, or upon a plea of nolo contendere or its
equivalent, shall not, of itself, create a presumption that the person did not
act in good faith and in a manner which such person reasonably believed to be
in or not opposed to the best interests of the Corporation, and, with respect
to any criminal action or proceeding, had reasonable cause to believe that his
or her conduct was unlawful.
B. Actions or Suits by or in the Right of the Corporation.
The Corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit by or in the right of the Corporation to procure a judgment in its favor
by reason of the fact that such person is or was or has agreed to become a
director of officer of the Corporation, or is or was serving or has agreed to
serve at the request of the Corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, including service with respect to employee benefit plans, or by
reason of any action alleged to have been taken or omitted in such capacity,
against expenses (including attorney's fees and related disbursement) actually
and reasonably incurred by him or her or on his or her behalf in connection
with the defense or settlement of such action or suit and any appeal
therefrom, if such person acted in good faith and in a manner such person
reasonably believed to be in or not opposed to the best interests of the
Corporation, except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the Corporation unless and only to the extent that the Court of
Chancery of Delaware or the court in which such action or suit was brought
shall determine upon application that, despite the adjudication of such
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which the Court
of Chancery or such other court shall deem proper. Notwithstanding the
provisions of this Paragraph B, the Corporation shall indemnify any such
person seeking indemnification in connection with a proceeding (or part
thereof) initiated by such person (except with respect to proceedings seeking
to enforce rights to indemnification pursuant to Paragraph G), only if such
proceeding (or part thereof) was authorized by a majority of the Continuing
Directors.
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C. Indemnification of Employees and Agents of the Corporation.
The Corporation may, to the extent authorized from time to time by a
majority vote of the Continuing Directors, indemnify any employee or agent of
the Corporation and pay the expenses incurred by any employee or agent of the
Corporation in defending any proceeding in advance of its final disposition,
to the fullest extent of the provisions of this Article TWELFTH.
D. Indemnification for Expenses of Successful Party.
Notwithstanding the other provisions of this Article TWELFTH, to the
extent that a director, officer, employee or agent of the Corporation has been
successful on the merits or otherwise, including, without limitation, the
dismissal of an action without prejudice, in defense of any action, suit or
proceeding referred to in Paragraphs A and B of this Article TWELFTH, or in
defense of any claim, issue or matter therein, such person shall be
indemnified against all expenses (including attorneys' fees and related
disbursements) actually and reasonably incurred by him or her or in his or her
behalf in connection therewith.
E. Determination of Right to Indemnification.
Any indemnification under Paragraphs A and B of this Article TWELFTH
shall be made by the Corporation upon a determination (i) by a quorum of the
board consisting of Continuing Directors (as defined in Article SEVENTH of
this Certification of Incorporation) who were not parties to such action, suit
or proceeding, or (ii) if such majority of disinterested Continuing Directors
is not obtainable or, even if obtainable, a quorum of disinterested Continuing
Directors so directs, by independent legal counsel in a written opinion that
indemnification of the director, officer, employee or agent is proper in the
circumstances because such person has met the applicable standard of conduct
set forth in Paragraphs A and B of this Article TWLFTH. Notwithstanding the
determination made by the Corporation hereunder, a court may order the
Corporation to make indemnification pursuant to Paragraphs A or B of the
Article TWELFTH.
F. Advance of Expenses.
Expenses (including attorneys' fees and related disbursements) incurred
by a person referred to in Paragraphs A or B of this Article TWELFTH in
defending a civil or criminal action, suit or proceeding shall be paid by the
Corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of the director or
officer to repay all amounts to be advanced in the event that it shall
ultimately be determined that such director or officer is not entitled to be
indemnified by the Corporation as authorized in this Article TWELFTH. Such
expenses incurred by employees and agents, other than directors and officers,
may be so paid upon such terms and conditions, if any, as the majority of the
Continuing Directors deem appropriate. The majority of the Continuing
Directors may, upon approval of such director, officer, employee or agent of
the Corporation, authorize the Corporation's counsel to represent such person,
in any action, suit or proceeding, whether or not the Corporation is a party
to such action, suit or proceeding.
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G. Procedure for Indemnification: Right of Claimant to Bring Suit.
Any indemnification under Paragraphs A, B and D, or advance of expenses
under Paragraph F of this Article TWELFTH, shall be made promptly, and in any
event within 60 days, (or in the case of any advance of expenses under
Paragraph E, within 20 days) upon the written request of the director,
officer, employee or agent. The right to indemnification or advances as
granted by this Article TWELFTH shall be enforceable by the director, officer,
or agent in any court of competent jurisdiction, if the Corporation denies
such request, in whole or in part, or if no disposition thereof is made within
the applicable time period specified in the preceding sentence hereof. Such
person's expenses incurred in connection with successfully establishing his or
her right to indemnification, in whole or in part, in any such action shall
also be indemnified by the Corporation. It shall be a defense to any such
action (other than an action brought to enforce a claim for the advance of
expenses under Paragraph F of this Article TWELFTH where the required
undertaking, if any, has been received by the Corporation) that the claimant
has not met the standard of conduct set forth in Paragraph A or B of this
Article TWELFTH, but the burden of proving such defense shall be on the
Corporation. Neither the failure of the Corporation (including its Board of
Directors, its independent legal counsel, and its stockholders) to have made a
determination prior to the commencement of such action that indemnification of
the claimant is proper in the circumstances because such person has met the
applicable standard of conduct set forth in Paragraph A or B of this Article
TWELFTH, nor the fact that there has been an actual determination by the
Corporation (including its Board of Directors or its independent legal
counsel) that the claimant has not met such applicable standard of conduct,
shall be a defense to the action or create a presumption that the claimant has
not met the applicable standard of conduct.
H. Other Rights; Continuation of Right to Indemnification.
The indemnification and advancement of expenses provided by this Article
TWELFTH shall not be deemed exclusive of any other rights to which a person
seeking indemnification or advancement of expenses may be entitled under any
law (common or statutory), bylaw, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in his or her official
capacity and as to action in another capacity while holding office or while
employed by or acting as agent for the Corporation, and the indemnification
and advancement of expenses proved by this Article TWELFTH shall continue as
to a person who has ceased to be a director or officer and shall inure to the
benefit of the estate, heirs, executors and administrators of such person.
Nothing contained in this Article TWELFTH shall be deemed to prohibit, and the
Corporation is specifically authorized to enter into, agreements between the
Corporation and directors, officers, employees or agents providing
indemnification rights and procedures different from those set forth herein.
All rights to indemnification under Article TWELFTH shall be deemed to be a
contract between the Corporation and each director, officer, employee or agent
of the Corporation who serves or served in such capacity at any time while
this Article TWELFTH is in effect, and between the Corporation and each person
who, at the request of the Corporation, serves or served as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, including service with respect to employee benefit
plans. Any repeal or modification of this Article TWELFTH shall nor in any way
diminish any rights to indemnification 18 of such director or officer, or the
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obligations of the Corporation arising hereunder with respect to any action,
suit or proceeding arising out of, or relating to, any actions, transactions
or facts occurring prior to the final adoption of such modification or repeal.
I. Insurance.
The Corporation may purchase and maintain insurance on behalf of any
person who is or was or has agreed to become a director, officer, employee or
agent of the Corporation, or is or was serving or has agreed to serve at the
request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against any liability asserted against him or her and incurred by him or her
on his or her behalf in any such capacity, or arising out of his or her status
as such, whether or not the Corporation would have the power to indemnify him
or her against such liability under the provision of this Article TWELFTH.
J. Savings Clause.
If this Article TWELFTH or any portion hereof shall be invalidated on
any ground by any court of competent jurisdiction, then the Corporation shall
nevertheless indemnify each director or officer of the Corporation as to any
expense (including attorney's fees), judgment, fine and amount paid in
settlement with respect to any action, suit or proceeding, whether civil,
criminal, administrative or investigative, including an action by or in the
right of the Corporation, to the full extent permitted by any applicable
portion of this Article TWELFTH that shall not have been invalidated and to
the full extent permitted by applicable law.
K. Subsequent Legislation.
If the Delaware General Corporation Law is hereafter amended to further
expand the indemnification permitted to directors or officers of the
Corporation, then the Corporation shall indemnify such persons to the fullest
extent permitted by the Delaware General Corporation Law, as so amended.
THIRTEENTH: Amendment of Certificate of Incorporation. The
Corporation reserves the right to amend, alter, change or repeal any provision
contained in this Certificate of Incorporation in the manner now or hereafter
prescribed by statute. Notwithstanding the foregoing, the affirmative vote of
the holders of at least eighty percent (80%) of the total votes eligible to be
cast at a legal meeting shall be required to amend, repeal or adopt any
provisions inconsistent with, Articles SIXTH, SEVENTH, EIGHTH, NINTH, TENTH,
ELEVENTH, TWELFTH, and this Article THIRTEENTH of this Certificate of
Incorporation.
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