UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Mark one
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 2000
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 1-9566
FirstFed Financial Corp.
(Exact name of registrant as specified in its charter)
Delaware 95-4087449
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
401 Wilshire Boulevard
Santa Monica, California 90401-1490
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(310) 319-6000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes x No
As of November 1, 2000 17,229,809 shares of the Registrant's $.01 par value
common stock were outstanding.
1
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FirstFed Financial Corp.
Index
Page
Part I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Financial Condition
as of September 30, 2000, December 31, 1999
and September 30, 1999 3
Consolidated Statements of Operations and Comprehensive
Earnings for the three months and nine months ended
September 30, 2000 and 1999 4
Consolidated Statements of Cash Flows for the nine
months ended September 30, 2000 and 1999 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Part II. Other Information (omitted items are inapplicable)
Item 6. Exhibits and Reports on Form 8-K 18
Signatures
19
2
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<TABLE>
PART I - FINANCIAL STATEMENTS
Item 1. Financial Statements
FirstFed Financial Corp. and Subsidiary
Consolidated Statements of Financial Condition
(Dollars in thousands, except per share data)
(Unaudited)
September 30, December 31 September 30,
2000 1999 1999
<S> <C> <C> <C>
Assets
Cash and cash equivalents $ 47,234 $ 101,807 $ 73,971
Investment securities, available-for-sale
(at fair value) 142,375 151,195 153,893
Mortgage-backed securities, available-for-sale
(at fair value) 381,074 428,641 447,444
Loans receivable, held-for-sale (fair value of
$1,422, $2,324 and $3,158) 1,422 2,303 3,158
Loans receivable, net 3,536,906 3,058,244 2,970,070
Accrued interest and dividends receivable 26,758 21,825 21,634
Real estate 2,031 2,236 2,052
Office properties and equipment, net 11,045 11,745 11,948
Investment in Federal Home Loan Bank
(FHLB) stock, at cost 76,700 71,722 70,760
Other assets 26,681 19,607 18,600
$ 4,252,226 $3,869,325 $ 3,773,530
Liabilities
Deposits $2,159,879 $2,061,357 $ 2,004,212
FHLB advances and other borrowings 1,469,000 1,169,000 1,153,550
Securities sold under agreements to repurchase 321,822 363,635 337,733
Accrued expenses and other liabilities 52,298 44,200 49,494
4,002,999 3,638,192 3,544,989
Commitments and Contingent Liabilities
Stockholders' Equity
Common stock, par value $.01 per share;
authorized 100,000,000 shares; issued 23,293,799
23,269,051, and 23,269,051 shares, outstanding
17,226,309, 18,023,061 and 18,409,411 shares 233 233 233
Additional paid-in capital 31,725 31,561 31,063
Retained earnings - substantially restricted 302,629 274,946 268,071
Loan to employee stock ownership plan (1,833) (1,759) (1,880)
Treasury stock, at cost, 6,067,490, 5,245,990
and 4,859,640 shares (75,743) (65,568) (60,299)
Accumulated other comprehensive loss,
net of taxes (7,784) (8,280) (8,647)
249,227 231,133 228,541
$4,252,226 $3,869,325 $ 3,773,530
</TABLE>
See accompanying notes to consolidated financial statements.
3
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<TABLE>
FirstFed Financial Corp.
and Subsidiary
Consolidated Statements of Operations and Comprehensive Earnings
(Dollars in thousands, except per share data)
(Unaudited)
Three Months Ended Nine Months ended
September 30, September 30,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Interest income:
Interest on loans $ 71,967 $ 53,097 $ 199,580 $ 160,428
Interest on mortgage-backed securities 6,064 6,443 18,302 21,095
Interest and dividends on investments 3,949 4,131 11,655 10,582
Total interest income 81,980 63,671 229,537 192,105
Interest expense:
Interest on deposits 25,832 21,141 73,470 65,073
Interest on borrowings 29,458 18,235 77,230 52,353
Total interest expense 55,290 39,376 150,700 117,426
Net interest income 26,690 24,295 78,837 74,679
Provision for loan losses - - - -
Net interest income after provision for losses 26,690 24,295 78,837 74,679
Non-interest income:
Loan servicing and other fees 886 968 2,418 3,352
Gain on sale of loans 19 111 22 1,198
Real estate operations, net 58 685 496 2,513
Other operating income 987 1,049 3,157 3,040
Total non-interest income 1,950 2,813 6,093 10,103
Non-interest expense:
Compensation 6,775 6,664 20,214 20,291
Occupancy 2,022 1,877 5,999 5,767
Goodwill amortization 399 122 824 362
Other expenses 3,080 3,327 10,054 11,271
Total non-interest expense 12,276 11,990 37,091 37,691
Earnings before income taxes and
extraordinary item 16,364 15,118 47,839 47,091
Income tax provision 6,867 6,409 20,156 20,364
Earnings before extraordinary item 9,497 8,709 27,683 26,727
Extraordinary item
Loss on early extinguishment of debt, net of taxes - (351) - (351)
Net earnings $ 9,497 $ 8,358 $ 27,683 $ 26,376
Other comprehensive earnings (loss),
net of taxes 3,049 (1,268) 496 (7,944)
Comprehensive earnings $ 12,546 $ 7,090 $ 28,179 $ 18,432
Basic EPS:
EPS before extraordinary item $ 0.55 $ 0.46 $ 1.59 $ 1.37
Extraordinary item - (0.02) - (0.02)
EPS after extraordinary item $ 0.55 $ 0.44 $ 1.59 $ 1.35
Diluted EPS:
EPS before extraordinary item $ 0.54 $ 0.46 $ 1.58 $ 1.36
Extraordinary item - (0.02) - (0.02)
EPS after extraordinary item $ 0.54 $ 0.44 $ 1.58 $ 1.34
</TABLE>
4
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<TABLE>
See accompanying notes to consolidated financial statements.
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
Nine Months Ended
September 30,
2000 1999
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 27,683 $ 26,376
Adjustments to reconcile net earnings
to net cash provided by (used in) operating activities:
Net change in loans held-for-sale 881 13,292
Depreciation and amortization 1,403 1,776
Valuation adjustments on real estate sold (441) (2,370)
Amortization of fees and discounts 691 322
Decrease in servicing asset 345 220
(Increase) decrease in interest and dividends receivable (4,933) 1,842
Increase (decrease) in interest payable 2,591 (9,668)
Amortization of goodwill 824 362
Increase in other assets (2,726) (1,632)
Increase in accrued expenses and other liabilities 6,294 7,907
Total adjustments 4,929 12,051
Net cash provided by operating activities 32,612 38,427
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans made to customers net of principal
collection on loans (347,402) (50,872)
Loans purchased (9,044) (134,940)
Proceeds from sales of real estate owned 4,713 14,593
Proceeds from maturities and principal payments
of investment securities available-for-sale 13,237 5,112
Principal reductions on mortgage-backed securities
available-for-sale 47,477 97,023
Purchase of investment securities
available-for sale (3,547) (96,300)
Redemption (purchase) of FHLB stock (1,162) 4,823
Other (2,200) (4,880)
Increase in assets and liabilities due to acquisitions:
Loans (125,171) -
Deposits 168,457 -
Goodwill (10,420) -
Net cash used by investing activities (265,062) (165,441)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in savings deposits (69,935) (131,697)
Net increase in short-term borrowings 258,187 266,561
Treasury stock purchases (10,175) (46,945)
Decrease in long-term borrowings - (10,450)
Other (200) (2,764)
Net cash provided by financing activities 177,877 74,705
Net decrease in cash and cash equivalents (54,573) (52,309)
Cash and cash equivalents at beginning of period 101,807 126,280
Cash and cash equivalents at end of period $ 47,234 $ 73,971
See accompanying notes to consolidated financial statements.
</TABLE>
5
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FirstFed Financial Corp. and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
1. The unaudited consolidated financial statements included herein have
been prepared by the Company, pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of the Company, all
adjustments (which include only normal recurring adjustments) necessary to
present fairly the results of operations for the periods covered have been
made. Certain information and note disclosures normally included in
financial statements presented in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules
and regulations. The Company believes that the disclosures are adequate to
make the information presented not misleading.
It is suggested that these condensed financial statements are read in
conjunction with the financial statements and the notes thereto included in
the Company's latest annual report on Form 10-K. The results for the periods
covered hereby are not necessarily indicative of the operating results for a
full year.
2. Earnings per share were computed by dividing net earnings by the
weighted average number of shares of common stock outstanding for the
period, plus the effect of stock options. Weighted average outstanding
shares were as follows for the periods indicated:
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
Basic 17,217,052 18,785,478 17,420,034 19,550,337
Diluted 17,441,026 18,946,508 17,566,316 19,723,254
3. For purposes of reporting cash flows on the "Consolidated Statement of
Cash Flows", cash and cash equivalents include cash, overnight investments
and securities purchased under agreements to resell which mature within 90
days of the date of purchase.
4. Recent Accounting Pronouncements
In June of 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133"), which
establishes accounting and reporting standards for derivative instruments and
for hedging activities. In June of 2000, the FASB also issued SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities", which amends SFAS No. 133. SFAS No. 133, as amended 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 quarters 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 determined that implementing
this statement will not have a material affect on its financial condition or
results of operations.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities" as a
replacement of SFAS 125 effective for disclosure in financial statements
issued subsequent to December 15, 2000, and for transactions entered after
March 31, 2001. Management does not expect that the adoption of SFAS 140
will have a material impact on the financial statements.
6
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Financial Condition
At September 30, 2000, FirstFed Financial Corp. (the "Company"), holding
company for First Federal Bank of California and its subsidiaries (the
"Bank"), had consolidated assets totaling $4.3 billion, compared to $3.9
billion at December 31, 1999 and $3.8 billion at September 30, 1999. The
growth in total assets during the first nine months of 2000 is primarily
attributable to an increase in the loan portfolio. The loan portfolio,
including mortgage-backed securities increased to $3.9 billion at September
30, 2000 from $3.5 billion at December 31, 1999 and $3.4 billion at September
30, 1999. The increase is due to loan originations and purchases of $854.9
million during the first nine months of 2000, which includes $125.2 million
in loans purchased from Fidelity Federal Bank on March 31, 2000.
The following is a summary of loan originations and purchases as of the dates
indicated (dollars in thousands):
Nine months ended Nine months ended
September 30, September 30,
2000 1999 2000 1999
Type of Property Type of Loan
Single family $ 526,891 $ 629,965
Multi-family 298,016 86,129 Adjustable $ 810,912 $ 433,477
Other 29,977 29,154 Fixed 43,972 311,771
Total $ 854,884 $ 745,248 Total $ 854,884 $ 745,248
The Bank's primary market area is Southern California, which remains
economically sound. According to the UCLA Anderson Forecast for California,
September 2000 Report (The "UCLA Report"), California's employment growth has
been double the nation's employment growth for the last year and is predicted
to continue. The unemployment rate in California is now only slightly higher
than the national level. The factors mentioned above have had a positive
impact on the housing industry in Southern California. According to the UCLA
Report, average home prices in Los Angeles County increased by 6.1% in 1999
and are expected to increase by 5.9% in 2000. Increased mortgage rates
and volatility in the stock market may negatively impact future increases in
home prices.
The improved economy and real estate market positively impacted several areas
of the Bank's operations during the first nine months of 2000. The ratio of
non-performing assets to total assets decreased to 0.25% as of September 30,
2000 from 0.40% as of December 31, 1999 and 0.37% as of September 30, 1999.
(See "Non-performing Assets" for further discussion.)
The Company recorded net loan charge-offs of $181 thousand for the third
quarter of 2000 and net loan loss recoveries of $605 thousand for the first
nine months of 2000. In comparison, net loan loss recoveries of $315
thousand were recorded during the third quarter of 1999 and net loan
charge-offs of $898 thousand were recorded for the first nine months of
1999. The Company did not record a provision for loan losses during the
first nine months of 2000 or for the comparable 1999 period. The Bank's
general valuation allowance was $71.7 million or 1.91% of total loans and
real estate owned with loss exposure at September 30, 2000. This compares
with $70.3 million or 2.15% as of December 31, 1999 and $69.3 million or
2.16% at September 30, 1999. The Bank also maintains valuation allowances
for impaired loans, which totaled $1.8 million at September 30, 2000, $2.6
million at December 31, 1999 and $5.3 million at September 30, 1999.
7
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The following table shows the components of the Bank's portfolio of loans
(including loans held for sale) and mortgage-backed securities by collateral
type as of the dates indicated:
<TABLE>
September 30, December 31, September 30,
2000 1999 1999
(Dollars in thousands)
<S> <C> <C> <C>
REAL ESTATE LOANS:
First trust deed residential loans:
One to four units $2,118,180 $1,813,783 $1,616,088
Five or more units 1,286,042 1,123,308 1,241,638
Residential loans 3,404,222 2,937,091 2,857,726
OTHER REAL ESTATE LOANS:
Commercial and industrial 189,762 183,194 181,035
Third trust deeds 9,092 13,489 13,783
Real estate loans 3,603,076 3,133,774 3,052,544
NON-REAL ESTATE LOANS:
Manufactured housing 518 613 727
Deposit accounts 497 683 705
Commercial business loans 12,598 8,140 3,895
Consumer 4,971 593 553
Loans receivable 3,621,660 3,143,803 3,058,424
LESS:
General valuation allowances-
loan portfolio 71,363 69,954 68,802
Valuation allowances - impaired loans 1,792 2,596 5,294
Unrealized loan fees 10,177 10,706 11,100
Net loans receivable 3,538,328 3,060,547 2,973,228
FHLMC AND FNMA MORTGAGE-
BACKED SECURITIES (at fair value):
Secured by single family dwellings 366,560 412,469 431,590
Secured by multi-family dwellings 14,514 16,172 15,854
Mortgage-backed securities 381,074 428,641 447,444
TOTAL $3,919,402 $3,489,188 $3,420,672
</TABLE>
The mortgage-backed securities portfolio, classified as available-for-sale,
was recorded at fair value as of September 30, 2000. A negative fair value
adjustment of $6.6 million, net of taxes, was recorded in stockholders'
equity as of September 30, 2000. This compares to $6.6 million as of
December 31, 1999 and $7.5 million as of September 30, 1999.
The investment securities portfolio, classified as available-for-sale, was
recorded at fair value as of September 30, 2000. An unrealized loss of $1.2
million, net of taxes, was reflected in stockholders' equity as of September
30, 2000. This compares to $1.7 million as of December 31, 1999 and $1.2
million as of September 30, 1999.
8
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Asset/Liability Management
Market risk is the risk of loss from adverse changes in market prices and
rates. The Company's market risk arises primarily from the interest rate
risk inherent in its lending and deposit taking activities. Management
actively monitors its interest rate risk exposure. The Company does not
engage in trading activities. Nothing has occurred since December 31, 1999
that materially affects the Company's market risk.
The one year GAP (the difference between rate-sensitive assets and
liabilities repricing within one year or less) was a negative $30.4 million
or a negative 0.72% of total assets at September 30, 2000. In comparison,
the one year GAP was a positive $108.2 million or 2.81% of total assets as of
December 31, 1999 and a positive $171.6 million or 4.56% of total assets as
of September 30, 1999. Over 89% of the Bank's rate-sensitive assets reprice
within one year. Therefore, the Bank's one year GAP generally varies based
upon the extent to which the maturities of its deposits and borrowings exceed
one year. The one year GAP has decreased over the last year due to an
increase in borrowings with maturities of less than one year.
Although there is little difference in the repricing periods of the Bank's
assets and liabilities, the Bank's interest rate margin typically declines
during periods of increasing interest rates. A three-month time lag before
changes in the FHLB Eleventh District Cost of Funds Index (the "COFI Index")
can be implemented with respect to the Bank's loans causes the adjustable
rate loan portfolio to adjust slowly to increasing interest rates. However,
the Bank's cost of funds responds immediately to increasing interest rates
due to the short term nature of its deposits and borrowings. See "Net
Interest Income" for additional information.
Capital
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and percentages of total capital
to risk-weighted assets. The Bank meets the standards necessary to be deemed
well capitalized under the applicable regulatory requirements. The following
table summarizes the Bank's actual capital and required capital as of
September 30, 2000:
Tangible Core Risk-based
Capital Capital Capital
(Dollars in thousands)
Actual Capital:
Amount $242,441 $242,441 $273,176
Ratio 5.69% 5.69% 11.30%
Minimum required capital:
Amount $63,889 $170,369 $193,456
Ratio 1.50% 4.00% 8.00%
Well capitalized required capital:
Amount - $212,962 $241,820
Ratio - 5.00% 10.00%
During the first nine months of 2000, the Company repurchased 821,500 shares
of its common stock at an average price of $12.39 per share. No shares were
repurchased during the third quarter of 2000. As of September 30, 2000,
889,016 shares remain eligible for repurchase under the Company's authorized
repurchase program.
Results of Operations
The Company reported consolidated net earnings of $9.5 million for the third
quarter of 2000 compared to earnings of $8.7 million for the third quarter of
1999, before the extraordinary item. Quarterly earnings improved compared to
last year due to 10% growth in net interest income. Decreases in gain on sale
of loans and income from real estate operations offset the increased earnings.
9
<PAGE>
The Company retired $10.5 million of its senior unsecured 11.75% notes during
the third quarter of 1999 at a price of 103% of the face value of the notes.
The premium and related costs of $351 thousand, net of taxes, were recorded
as a loss on the early extinguishment of debt (which is shown as an
extraordinary item in the consolidated financial statements). Net earnings
after extraordinary items were $8.4 million for the third quarter of 1999.
The Company reported consolidated net earnings of $27.7 million for the first
nine months of 2000, compared to earnings of $26.7 million for the first nine
months of 1999 before the extratordinary item. Net earnings after the
extraordinary item were $26.4 million for the first nine months of 1999. The
increase in year-to-date net earnings resulted primarily from the same factors
that affected quarterly earnings. Additionally, other expenses decreased from
September 30, 1999 to September 30, 2000 due to a reduction of legal expenses.
Loan Loss Allowances
Listed below is a summary of activity in the Bank's general valuation
allowance and the valuation allowance for impaired loans during the periods
indicated:
Nine Months Ended September 30, 2000
General Impaired
Valuation Valuation
Allowances Allowances Total
(Dollars in thousands)
Balance at December 31, 1999 $ 69,954 $ 2,596 $ 72,550
Charge-offs:
Single family (613) - (613)
Multi-family - (804) (804)
Commercial (105) - (105)
Others - non-real estate (171) - (171)
Total charge-offs (889) (804) (1,693)
Recoveries 2,298 - 2,298
Net recoveries (charge-offs) 1,409 (804) 605
Balance at September 30, 2000 $ 71,363 $ 1,792 $ 73,155
Nine Months Ended September 30, 1999
General Impaired
Valuation Valuation
Allowances Allowances Total
(Dollars in thousands)
Balance at December 31, 1998 $ 67,638 $ 7,634 $ 75,272
Charge-offs:
Single family (308) - (308)
Multi-family (149) (1,788) (1,937)
Commercial (6) (552) (558)
Non-real estate (133) - (133)
Total charge-offs (596) (2,340) (2,936)
Recoveries 1,760 - 1,760
Net recoveries (charge-offs) 1,164 (2,340) (1,176)
Balance at September 30, 1999 $ 68,802 $ 5,294 $ 74,096
10
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Management is unable to predict future levels of loan loss provisions. Among
other things, future loan loss provisions are based on the level of loan
charge-offs, foreclosure activity, and the economic climate in Southern
California. Management believes that the allowance for loan losses is
adequate as of September 30, 2000.
The Bank maintains a repurchase liability for loans sold with recourse. This
liability totaled $12.8 million at September 30, 2000, December 31, 1999, and
September 30, 1999, which represented 8.27%, 7.18%, and 6.83%, respectively,
of loans sold with recourse as of the same dates. The balance of loans sold
with recourse totaled $155.0 million, $178.7 million and $187.7 million as of
September 30, 2000, December 31, 1999 and September 30, 1999, respectively.
The Bank has not entered into any new recourse arrangements for over ten
years.
The Bank also maintains a general valuation allowance for real estate
acquired by foreclosure. The balance totaled $350 thousand at both September
30, 2000 and December 31, 1999 and $500 thousand as of September 30, 1999.
Net Interest Income
During the first nine months of 2000, the interest rate margin decreased to
2.34% from 2.58% for the same period of the prior year. Increases in the
Bank's cost of funds were greater than increases in the yield on the loan
portfolio. The COFI Index (on a lagged basis) determines the yield on over
86% of the loan portfolio. The average COFI Index in effect during the nine
months ended September 30, 2000 increased by 0.39% over the COFI Index in
effect during the same period of last year. However, the Bank's average cost
of funds increased by 0.63% during the first nine months of 2000 compared to
the same period of last year.
On a quarterly basis, the Bank's interest rate margin decreased to 2.31% for
the third quarter of 2000 from 2.53% for the third quarter of last year. The
average COFI Index in effect during the third quarter of 2000 increased by
0.72% compared to the third quarter of last year. However, the Bank's
average cost of funds increased by 0.92% compared to the third quarter of the
prior year.
Despite the decreases in margin during the third quarter and first nine
months of 2000, net interest income increased by 10% and 6% for the third
quarter and first nine months of 2000, respectively. The increases were
caused by growth in interest-earning assets of 16% and 12% during the third
quarter and first nine months of 2000, respectively. The Bank also received
$321 thousand and $822 thousand in special dividends from the Federal Home
Loan Bank of San Francisco during the third quarter and first nine months of
2000, respectively.
The following table sets forth: (i) the average daily dollar amounts of and
average yields earned on loans, mortgage-backed securities and investment
securities, (ii) the average daily dollar amounts of and average rates paid
on savings and borrowings, (iii) the average daily dollar differences, (iv)
the interest rate spreads, and (v) the effective net spreads for the periods
indicated:
During the Nine Months Ended September 30,
2000 1999
(Dollars in thousands)
Average loans and mortgage-backed
securities $ 3,740,957 $3,282,975
Average investment securities 163,052 194,247
Average interest-earning assets 3,904,009 3,477,222
Average savings deposits 2,121,575 2,082,816
Average borrowings 1,652,719 1,264,398
Average interest-bearing liabilities 3,774,294 3,347,214
Excess of interest-earning assets over
interest-bearing liabilities $ 129,715 $ 130,008
Yields earned on average interest
earning assets 7.66% 7.27%
Rates paid on average interest-
bearing liabilities 5.32 4.69
Net interest rate spread 2.34 2.58
Effective net spread(1) 2.52 2.75
Total interest income $ 224,414 $ 189,526
Total interest expense 150,673 117,426
73,741 72,100
Total other items(2) 5,096 2,579
Net interest income $ 78,837 $ 74,679
11
<PAGE>
During the Three Months Ended September 30,
2000 1999
(Dollars in thousands)
Average loans and mortgage-backed
securities $ 3,908,839 $3,270,359
Average investment securities 148,535 217,901
Average interest-earning assets 4,057,374 3,488,260
Average savings deposits 2,146,262 2,030,290
Average borrowings 1,787,548 1,312,683
Average interest-bearing liabilities 3,933,810 3,342,973
Excess of interest-earning assets over
interest-bearing liabilities $ 123,564 $ 145,287
Yields earned on average interest
earning assets 7.90% 7.20%
Rates paid on average interest-
bearing liabilities 5.59 4.67
Net interest rate spread 2.31 2.53
Effective net spread(1) 2.48 2.72
Total interest income $ 80,096 $ 62,802
Total interest expense 55,281 39,376
24,815 23,426
Total other items(2) 1,875 869
Net interest income $ 26,690 $ 24,295
(1)The effective net spread is a fraction, the denominator of which is the
average dollar amount of interest-earning assets, and the numerator of
which is net interest income (excluding stock dividends and miscellaneous
interest income).
(2)Include Federal Home Loan Bank Stock dividends and other miscellaneous
items.
Non-Interest Income and Expense
Loan and other fees were $886 thousand and $2.4 million for the third quarter
and first nine months of 2000, respectively, compared to $968 thousand and
$3.4 million for the third quarter and first nine months of 1999,
respectively. The decrease in loan and other fees is attributable to a
decline in service fees on loans serviced for other investors, due to loan
payoffs, and lower late charge and prepayment fee income. Also, an adjustment
for impairment of the Bank's servicing asset ($144 thousand) was recorded
during the first quarter of 2000.
Gain on sale of loans results primarily from loan fees recognized at the time
of sale. Gain on sale of loans decreased to $19 thousand and $22 thousand for
the third quarter and first nine months of 2000, respectively, compared to
gains of $111 thousand and $1.2 million for the third quarter and first nine
months of 1999, respectively. The volume of loans sold totaled $1.6 million
and $5.5 million during the third quarter and first nine months of 2000,
respectively, compared to $13.5 million and $128.0 million, respectively, for
the same periods of 1999. The lower volumes during 2000 result from borrower
demand for 15 and 30 year fixed rate loans, which are originated for sale by
the Bank.
12
<PAGE>
Real estate operations resulted in net gains of $58 thousand and $496
thousand for the third quarter and first nine months of 2000, respectively.
This compares to net gains of $685 thousand and $2.5 million for third
quarter and first nine months of 1999, respectively. Real estate operations
include gains and losses on the sale of foreclosed properties as well as
operational income and expense during the holding period. Gain on real estate
operations during 2000 resulted primarily from the collection of outstanding
judgements.
Non-interest expense increased to $12.3 million during the third quarter of
2000 from $12.0 million for the third quarter of 1999. Non-interest expense
decreased to $37.1 million during first nine months of 2000 from $37.7
million for first nine months of 1999. The decrease in other expense for the
first nine months of 1999 from the first nine months of 2000 is due to a
reduction in legal costs offset by an increase in goodwill amortization
resulting from the two branches acquired from Fidelity Federal Bank on March
31, 2000.
The ratio of non-interest expense to average assets decreased to 1.16% and
1.21% of average assets for the third quarter and first nine months of 2000,
respectively, from 1.30% and 1.34% for third quarter and first nine months of
1999, respectively. The year 2000 ratios decreased due to growth in average
assets and a reduction in legal expenses.
Non-accrual, Past Due, Modified and Restructured Loans
The Bank accrues interest earned but uncollected for every loan without
regard to its contractual delinquency status and establishes a specific
interest allowance for each loan which becomes 90 days or more past due or is
in foreclosure. Loans requiring delinquent interest allowances (non-accrual
loans) totaled $9.0 million at September 30, 2000 compared with $13.8 million
at December 31, 1999 and $13.1 million at September 30, 1999.
The amount of delinquent interest allowance for loans 90 days or more
delinquent or in foreclosure was $605 thousand at September 30, 2000 compared
with $720 thousand at December 31, 1999 and $851 thousand at September 30,
1999.
Delinquent loans as a percentage of the Bank's total loans portfolio for the
periods indicated are as follows:
<TABLE>
September 30, December 31, September 30,
2000 1999 1999
Percentage of Portfolio
<S> <C> <C> <C>
Period of delinquency
1 monthly payment 0.29% 0.40% 0.34%
2 monthly payments 0.03% 0.05% 0.05%
3 or more monthly payments or in foreclosure 0.23% 0.42% 0.39%
</TABLE>
The Bank has debt restructurings that result from temporary modifications of
principal and interest payments. Under these arrangements, loan terms are
typically reduced to no less than a monthly interest payment required under
the note. Any loss of revenues under the modified terms would be immaterial
to the Bank. Generally, if the borrower is unable to return to scheduled
principal and interest payments at the end of the modification period,
foreclosure proceedings are initiated. As of September 30, 2000, the Bank
had modified loans totaling $10.1 million, net of loan loss allowances
totaling $1.9 million. No modified loans were 90 days or more delinquent as
of September 30, 2000.
13
<PAGE>
Pursuant to Statement of Financial Accounting Standards No. 114, "Accounting
by Creditors for Impairment of a Loan" ("SFAS No. 114"), the Bank considers a
loan impaired when management believes that it is probable that the Bank will
not be able to collect all amounts due under the contractual terms of the
loan. Estimated impairment losses are recorded as separate valuation
allowances and may be subsequently adjusted based upon changes in the
measurement of impairment. Impaired loans, disclosed net of valuation
allowances, include non-accrual major loans (single family loans with an
outstanding principal amount greater than or equal to $500 thousand and
multi-family and commercial real estate loans with an outstanding principal
amount greater than or equal to $750 thousand), modified loans, and major
loans less than 90 days delinquent in which full payment of principal and
interest is not expected to be received.
The following is a summary of impaired loans, net of valuation allowances for
impairment, as of the dates indicated:
September 30, December 31, September 30,
2000 1999 1999
(Dollars in thousands)
Non-accrual loans $ - $ 2,079 $ 976
Modified loans 8,813 6,534 4,760
Other impaired loans - 2,820 5,908
$ 8,813 $ 11,433 $ 11,644
The Bank evaluates loans for impairment whenever the collectibility of
contractual principal and interest payments is questionable. Large groups of
smaller balance homogenous loans that are collectively evaluated for
impairment, including residential mortgage loans, are not subject to the
application of SFAS No. 114.
When a loan is considered impaired the Bank measures impairment based on the
present value of expected future cash flows (over a period not to exceed 5
years) discounted at the loan's effective interest rate. However, if the
loan is "collateral-dependent" or foreclosure is probable, 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 were measured using the fair value method as of September
30, 2000, December 31, 1999 and September 30, 1999.
Impaired loans for which valuation allowances had been established totaled
$3.7 million, $7.5 million, and $11.6 million for the quarters ended
September 30, 2000, December 31, 1999, and September 30, 1999, respectively.
Impaired loans for which there was no valuation allowance established totaled
$5.1 million as of September 30, 2000 and $3.9 million as of December 31,
1999. All impaired loans for September 30, 1999 had related valuation
allowances. See "Results of Operations" for an analysis of activity in the
valuation allowance for impaired loans.
The table below shows the Bank's net investment in non-accrual loans that
were determined to be impaired by property type, as of the dates indicated:
September 30, December 31, September 30,
2000 1999 1999
(Dollars in thousands)
Single family $ - $ 987 $ 976
Multi-family - 1,092 -
$ - $ 2,079 $ 976
14
<PAGE>
Cash payments received from impaired loans are recorded in accordance with
the contractual terms of the loan. The principal portion of the payment is
used to reduce the principal balance of the loan, whereas the interest
portion is recognized as interest income.
The average recorded investment in impaired loans during the quarters ended
September 30, 2000, December 31, 1999, and September 30, 1999 was $8.8
million, $11.4 million and $11.7 million, respectively. The amount of
interest income recognized on the cash basis for impaired loans during the
quarters ended September 30, 2000, December 31, 1999 and September 30, 1999
was $176 thousand, $188 thousand and $254 thousand, respectively. Interest
income recognized under the accrual basis for the quarters ended September
30, 2000, December 31, 1999 and September 30, 1999 was $179 thousand, $188
thousand and $253 thousand, respectively.
Asset Quality
The following table sets forth certain asset quality ratios of the Bank at
the dates indicated:
September 30, December 31, September 30,
2000 1999 1999
Non-Performing Loans to
Loans Receivable (1) 0.23% 0.42% 0.39%
Non-Performing Assets to
Total Assets(2) 0.25% 0.40% 0.37%
Loan Loss Allowances to
Non-Performing Loans (3) 817.85% 509.74% 534.43%
General Loss Allowances to
Assets with Loss Exposure (4) 1.91% 2.15% 2.16%
(1) Non-performing loans are net of valuation allowances related to those
loans.Loans receivable exclude mortgage-backed securities and are before
deducting unrealized loan fees, general valuation allowances and valuation
allowances for impaired loans.
(2) Non-performing assets are net of valuation allowances related to those
assets.
(3) The Bank's loan loss allowances, including valuation allowances for
non-performing loans and general valuation allowances but excluding
general valuation allowances for loans sold by the Bank with full or
limited recourse. Non-performing loans are before deducting valuation
allowances related to those loans.
(4) The Bank's general valuation allowances, excluding general valuation
allowances for loans sold with full or limited recourse. The Bank's
assets with loss exposure include its loan portfolio, real estate owned,
loan commitments, and potential loan buybacks but excludes mortgage-backed
securities.
15
<PAGE>
Non-performing Assets
The Bank defines non-performing assets as loans delinquent over 90 days
(non-accrual loans), loans in foreclosure and real estate acquired by
foreclosure (real estate owned). An analysis of non-performing assets
follows as of the dates indicated:
September 30, December 31, September 30,
2000 1999 1999
(Dollars in thousands)
Real estate owned:
Single family $ 2,348 $ 1,069 $ 1,659
Multi-family - 1,483 858
Less:
General valuation allowance (350) (350) (500)
Total real estate owned 1,998 2,202 2,017
Non-accrual loans:
Single family 6,798 9,626 8,506
Multi-family 1,923 3,995 3,960
Commercial real estate 293 225 591
Less:
Valuation allowances (1) (558) (625) (979)
Total non-accrual loans 8,456 13,221 12,078
Total non-performing assets $ 10,454 $ 15,423 $ 14,095
__________________________
(1) Includes valuation allowances for impaired loans and loss allowances on
other non-performing loans requiring fair value adjustments.
The decreases in real estate owned and non-accrual loan throughout the past
year are due to the improved economy and real estate market in Southern
California.
Sources of Funds
External sources of funds include savings deposits from several sources,
advances from the Federal Home Loan Bank of San Francisco ("FHLB"), and
securitized borrowings.
Savings deposits are accepted from retail banking offices, telemarketing
sources, and national deposit brokers. The cost of funds, operating margins
and net earnings of the Bank associated with brokered and telemarketing
deposits are generally comparable to the cost of funds, operating margins
and net earnings of the Bank associated with retail deposits, FHLB
borrowings and repurchase agreements. As the cost of each source of funds
fluctuates from time to time, based on market rates of interest offered by
the Bank and other depository institutions, the Bank will seek funds from
the lowest cost source until the relative costs change. As the cost of
funds, operating margins and net earnings of the Bank associated with each
source of funds are generally comparable, the Bank does not deem the impact
of its use of any one of the specific sources of funds at a given time to be
material.
16
<PAGE>
The following table shows the components of the Company's deposits for the
periods indicated:
<TABLE>
September 30, December 31, September 30,
2000 1999 1999
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Retail Deposits $1,704,022 78.89% $1,550,876 75.24% $1,547,217 77.20%
Brokered Deposits 415,697 19.25 445,945 21.63 379,128 18.92
Telemarketing 40,160 1.86 64,536 3.13 77,867 3.88
Total Deposits $2,159,879 100.00% $2,061,357 100.00% $2,004,212 100.00%
</TABLE>
Deposits accepted by retail banking offices increased by $18.3 million and
$153.1 million during the third quarter and first nine months of 2000. The
increase during the first nine months of 2000 is primarily due to $168.5
million in deposits acquired from Fidelity Federal Bank during the first
quarter of 2000, offset by the outflows from the acquired deposits.
Telemarketing deposits increased by $2.7 million during the third quarter of
2000 and decreased by $24.4 million first nine months of 2000. These
deposits are normally large deposits from pension plans, managed trusts and
other financial institutions. These deposit levels fluctuate based on the
attractiveness of the Bank's rates compared to returns available to
investors on alternative investments.
Deposits acquired from national brokerage firms ("brokered deposits")
decreased by $3.0 million and $30.3 million during the third quarter and
first nine months of 2000, respectively. Because the Bank has sufficient
capital to be deemed "well-capitalized" under the standards established by
the Office of Thrift Supervision, it may solicit brokered funds without
special regulatory approval.
The following table shows the components of the Company's borrowings for the
periods indicated:
<TABLE>
September 30, December 31, September 30,
2000 1999 1999
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Reverse Repurchase Agreements $ 321,822 17.97% $ 363,635 23.73% $ 337,733 22.65%
FHLB Advances 1,469,000 82.03 1,169,000 76.27 1,114,000 74.70
Senior Unsecured Notes - - - - 39,550 2.65
Total Borrowings $1,790,822 100.00% $1,532,635 100.00% $1,491,283 100.00%
</TABLE>
Borrowings from the FHLB increased by $15.0 million and $300.0 million
during the third quarter and first nine months of 2000, respectively. FHLB
advances increased to fund loan originations because they are the lowest
cost source of borrowed funds.
Internal sources of funds include both principal payments and payoffs on
loans and mortgage-backed securities, loan sales, and positive cash flows
from operations. Principal payments include amortized principal and
prepayments that are a function of real estate activity and the general
level of interest rates.
Total principal payments on loans and mortgage-backed securities were $162.2
million and $416.2 million for the third quarter and first nine months of
2000, respectively. This compares with principal payments of $140.2 million
and $542.0 million for the third quarter and first nine months of 1999,
respectively.
Loan sales were $1.6 million and $5.5 million for the third quarter and first
nine months of 2000, compared with sales of $13.5 million and $128.0 million
for the third quarter and first nine months of 1999. The decrease is
attributable to a reduction in loans originated for sale.
17
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form-8K
(1)Underwriting Agreement filed as Exhibit 1 to Amendment No. 2 to Form S-3
dated September 7, 1994 and incorporated by reference.
(3.1)Restated Certificate of Incorporation filed as Exhibit 3.1 to Form
10-K for the fiscal year ended December 31, 1999 and incorporated by
reference.
(3.2)By-laws filed as Exhibit (1)(a) to Form 8-A dated September 4,1987 and
incorporated by reference.
(4.1)Amended and Restated Rights Agreement dated as of September 25, 1998,
filed as Exhibit 4.1 to Form 8-A/A, dated September 25, 1998 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)Amendment to 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)Amendment to Change of Control Agreement effective September 26, 1996
filed as Exhibit 10.4 to Form 10-Q for the Quarter ended September 30,
1996 and incorporated by reference.
(10.5)Amendment to 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.
(22)Power of Attorney
(b) Reports on Form 8-K
The Company filed a current report on Form 8-K dated July 27, 2000 to
report the release of earnings for the quarter ended June 30, 2000.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRSTFED FINANCIAL CORP.
Registrant
Date: November 14, 2000
By /s/ BABETTE E. HEIMBUCH
Babette E. Heimbuch
President and
Chief Executive Officer
By /s/ DOUGLAS J. GODDARD
Douglas J. Goddard
Chief Financial Officer and
Executive Vice President
19
<PAGE>
