UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 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 April 28, 2000, 17,206,773 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 March 31, 2000, December 31, 1999
and March 31, 1999 3
Consolidated Statements of Operations and Comprehensive
Earnings for the three months ended March 31, 2000 and
1999 4
Consolidated Statements of Cash Flows for the three
months ended March 31, 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 17
Signatures 18
2
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<TABLE>
<CAPTION>
PART I - FINANCIAL STATEMENTS
Item 1. Financial Statements
FirstFed Financial Corp. and Subsidiary
Consolidated Statements of Financial Condition
(Dollars in thousands, except per share data)
(Unaudited)
March 31, December 31, March 31,
2000 1999 1999
<S> <C> <C> <C>
Assets
Cash and cash equivalents $ 59,812 $ 101,807 $ 424,253
Investment securities, available-for-sale
(at fair value) 151,403 151,195 106,831
Mortgage-backed securities, available-for-sale
(at fair value) 406,271 428,641 525,937
Loans receivable, held-for-sale (fair value of
$1,585, $2,324 and $24,354) 1,581 2,303 24,251
Loans receivable, net 3,296,665 3,058,244 2,760,907
Accrued interest and dividends receivable 23,482 21,825 22,381
Real estate 2,545 2,236 5,754
Office properties and equipment, net 11,620 11,745 11,957
Investment in Federal Home Loan Bank
(FHLB) stock, at cost 72,714 71,722 73,694
Other assets 16,100 6,787 8,926
$4,042,193 $3,856,505 $3,964,891
Liabilities
Deposits $2,208,143 $2,061,357 $2,155,879
FHLB advances and other borrowings 1,229,000 1,169,000 1,074,000
Securities sold under agreements to repurchase 332,546 363,635 453,531
Accrued expenses and other liabilities 43,361 31,380 45,687
3,813,050 3,625,372 3,729,097
Commitments and Contingent Liabilities
Stockholders' Equity
Common stock, par value $.01 per share;
authorized 100,000,000 shares; issued 23,274,263
23,269,051, and 23,261,359 shares, outstanding
17,361,573, 18,023,061 and 19,418,919 shares 233 233 233
Additional paid-in capital 31,598 31,561 31,004
Retained earnings - substantially restricted 283,782 274,946 250,611
Loan to employee stock ownership plan (1,783) (1,759) (1,827)
Treasury stock, at cost, 5,912,690, 5,245,990
and 3,842,440 shares (73,896) (65,568) (44,150)
Accumulated other comprehensive loss,
net of taxes (10,791) (8,280) (77)
229,143 231,133 235,794
$4,042,193 $3,856,505 $3,964,891
</TABLE>
See accompanying notes to consolidated financial statements.
3
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FirstFed Financial Corp. and Subsidiary
Consolidated Statements of Operations and Comprehensive Earnings
(Dollars in thousands, except per share data)
(Unaudited)
Three Months Ended
March 31,
2000 1999
Interest income:
Interest on loans $61,126 $54,007
Interest on mortgage-backed securities 6,142 7,609
Interest and dividends on investments 3,834 3,121
Total interest income 71,102 64,737
Interest expense:
Interest on deposits 23,130 22,664
Interest on borrowings 21,992 16,908
Total interest expense 45,122 39,572
Net interest income 25,980 25,165
Provision for loan losses - -
Net interest income
after provision for losses 25,980 25,165
Non-interest income:
Loan and other fees 738 1,285
Gain (loss) on sale of loans (35) 583
Real estate operations, net (38) 302
Other operating income 1,060 963
Total non-interest income 1,725 3,133
Non-interest expense 12,245 12,588
Earnings before income taxes 15,460 15,710
Income tax provision 6,625 6,795
Net earnings $ 8,835 $ 8,915
Other comprehensive earnings - unrealized gain (loss)
on securities available-for-sale, net of taxes (2,511) 626
Comprehensive earnings $ 6,324 $ 9,541
Earnings per share:
Basic $ 0.50 $ 0.43
Diluted $ 0.49 $ 0.43
Weighted average shares outstanding:
Basic 17,819,996 20,553,809
Diluted 17,930,138 20,715,099
See accompanying notes to consolidated financial statements.
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<TABLE>
<CAPTION>
FirstFed Financial Corp. and Subsidiary
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
Three Months Ended
March 31,
2000 1999
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 8,835 $ 8,915
Adjustments to reconcile net earnings
to net cash provided by (used in) operating activities:
Net change in loans-held-for-sale 722 (7,801)
Depreciation and amortization 458 394
Provision for losses on real estate owned - 4
Valuation adjustments on real estate sold (259) (786)
Amortization of fees and discounts (214) (243)
Decrease in servicing asset 203 65
(Increase) Decrease in interest and dividends receivable (1,657) 1,095
Increase (decrease) in interest payable 1,051 (2,835)
Net change in goodwill (10,419) 121
Increase in other assets (1,187) (1,052)
Increase decrease in accrued expenses and other liabilities 5,837 (7,442)
Total adjustments (5,465) (18,480)
Net cash provided by (used in) operating activities 3,370 (9,565)
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans made to customers net of principal
collection on loans (114,348) 28,662
Loans purchased (125,475) (1,042)
Proceeds from sales of real estate owned 2,131 4,958
Proceeds from maturities and principal payments
of investment securities available-for-sale 2,783 1,338
Principal reductions on mortgage-backed securities
available for sale 18,440 32,024
Purchase of investment securities
available-for sale (3,447) (43,795)
Other (295) (2,946)
Net cash provided by (used in) investing activities (220,211) 19,199
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in savings deposits 146,786 19,970
Net increase in short term borrowings 28,911 292,359
Treasury stock purchases (8,328) (30,790)
Other 7,477 6,800
Net cash provided by financing activities 174,846 288,339
Net increase (decrease) in cash and cash equivalents (41,995) 297,973
Cash and cash equivalents at beginning of period 101,807 126,280
Cash and cash equivalents at end of period $ 59,812 $424,253
</TABLE>
See accompanying notes to consolidated financial statements.
5
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FirstFed Financial Corp. and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
1. The unaudited financial statements included herein have been prepared
by the Company, pursuant to the rules and regulations of the Securities and
Exchange Commission. In the opinion of the Company, all adjustments (which
include only normal recurring adjustments) necessary to present fairly the
results of operations for the periods covered have been made. Certain
information and note disclosures normally included in financial statements
presented in accordance with generally accepted accounting principles have
been condensed or omitted pursuant to such rules and regulations. The
Company believes that the disclosures are adequate to make the information
presented not misleading.
It is suggested that these condensed financial statements be read in
conjunction with the financial statements and the notes thereto included in
the Company's latest annual report on Form 10-K. The results for the periods
covered hereby are not necessarily indicative of the operating results for a
full year.
2. Earnings per share were computed by dividing net earnings by the
weighted average number of shares of common stock outstanding for the
period, plus the effect of stock options, if dilutive.
3. For purposes of reporting cash flows on the "Consolidated Statement of
Cash Flows", cash and cash equivalents include cash, overnight investments
and securities purchased under agreements to resell which mature within 90
days of the date of purchase.
4. Recent Accounting Pronouncements
In June of 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133"), which
establishes accounting and reporting standards for derivative instruments and
for hedging activities. It requires recognition of all derivatives as either
assets or liabilities in the statement of financial condition and the
measurement of those instruments at fair value. Recognition of changes in
fair value will be recognized into income or as a component of other
comprehensive income depending upon the type of the derivative and its
related hedge, if any. 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.
6
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Financial Condition
At March 31, 2000, FirstFed Financial Corp. (the "Company"), holding company
for First Federal Bank of California and its subsidiaries (the "Bank"), had
consolidated assets totaling $4.0 billion, compared to $3.9 billion at
December 31, 1999 and $4.0 billion at March 31, 1999. The growth in total
assets during the first quarter of 2000 is attributable to an increase in the
portfolio of loans, including mortgage-backed securities, offset by a
decrease in overnight investments. The Bank's portfolio increased to $3.7
billion as of March 31, 2000 from $3.5 billion at December 31, 1999. The
increase is due to $125.2 million of multi-family loans purchased from
Fidelity Federal Bank on March 31, 2000 and loan originations of $214.0
million for the first quarter of 2000. The increase was offset by principal
reductions, payoffs and other reductions in the aggregate amount of $123.9
million.
The total assets increased by $77.4 million from March 31, 1999 to March 31,
2000. The growth in assets is attributable to the increases in the portfolio
of loans mentioned above and was offset by a $364.4 million reduction in cash
and overnight investments. During the first quarter of 1999, borrowed funds
grew faster than necessary to fund the Bank's loan portfolio, which resulted
in excess cash on hand at March 31, 2000.
The mortgage-backed securities portfolio, classified as available-for-sale,
was recorded at fair value as of March 31, 2000. An unrealized loss of $8.8
million, net of taxes, was reflected in stockholders' equity as of March 31,
2000. This compares to a net unrealized loss of $6.6 million as of December
31, 1999.
The Bank's primary market area is Southern California, which remains strong
economically. According to the UCLA Anderson Forecast for California, March
2000 Report (The "UCLA Report"), the California economy started to outpace
the rest of the nation in employment and economic growth during the last half
of 1999, which carried into the year 2000. For Los Angeles County, average
prices increased more than 6% during 1999.The expected rate of increase during
2000 is 4%.
The improved economy and real estate market positively impacted several areas
of the Bank's operations during the first quarter of 2000. The ratio of
non-performing assets to total assets decreased to 0.36% as of March 31, 2000
from 0.40% as of December 31, 1999 and 0.55% as of March 31, 1999. (See
"Non-performing Assets" for further discussion.)
The Company recorded net recoveries of $567 thousand during the first quarter
of 2000 compared to net loan charge-offs of $449 thousand for the first
quarter of 1999. The Company did not record a provision for loan losses
during the first quarter of 2000 or for the comparable 1999 period. The
Bank's general valuation allowance was $71.1 million or 1.99% of total loans
and real estate owned with loss exposure at March 31, 2000. This compares
with $70.3 million or 2.15% as of December 31, 1999 and $69.1 million or
2.34% at March 31, 1999. The Bank also maintains valuation allowances for
impaired loans, which totaled $2.4 million at March 31, 2000, $2.6 million at
December 31, 1999 and $5.9 million at March 31, 1999.
On March 31, 2000, the Bank acquired two retail savings branches with deposits
totaling $165.5 million from Fidelity Federal Bank as well as the
multi-family loans mentioned above. Goodwill totaling $10.4 million resulted
from the purchase.
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The following table shows the components of the Bank's portfolio of loans
(including loans held for sale) and mortgage-backed securities by collateral
type as of the dates indicated:
<TABLE>
<CAPTION>
March 31, December 31, March 31,
2000 1999 1999
(Dollars in thousands)
<S> <C> <C> <C>
REAL ESTATE LOANS:
First trust deed residential loans:
One to four units $1,887,805 $1,813,783 $1,552,422
Five or more units 1,280,059 1,123,308 1,111,805
Residential loans 3,167,864 2,937,091 2,664,227
OTHER REAL ESTATE LOANS:
Commercial and industrial 190,223 183,194 180,329
Second trust deeds 12,716 13,489 14,585
Real estate loans 3,370,803 3,133,774 2,859,141
NON-REAL ESTATE LOANS:
Manufactured housing 594 613 819
Deposit accounts 660 683 932
Commercial business loans 8,859 8,140 -
Consumer 1,007 593 2,294
Loans receivable 3,381,923 3,143,803 2,863,186
LESS:
General valuation allowances-
loan portfolio 70,747 69,954 68,644
Valuation allowances - impaired loans 2,596 2,596 5,901
Unrealized loan fees 10,334 10,706 3,483
Net loans receivable 3,298,246 3,060,547 2,785,158
FHLMC AND FNMA MORTGAGE-
BACKED SECURITIES (at fair value):
Secured by single family dwellings 390,347 412,469 508,465
Secured by multi-family dwellings 15,924 16,172 17,472
Mortgage-backed securities 406,271 428,641 525,937
TOTAL $3,704,517 $3,489,188 $3,311,095
</TABLE>
The investment securities portfolio, classified as available-for-sale, was
recorded at fair value as of March 31, 2000. An unrealized loss of $2.0
million, net of taxes, was reflected in stockholders' equity as of March 31,
2000. This compares to an unrealized loss of $1.7 million, net of taxes, as
of December 31, 1999.
Asset/Liability Management
Market risk is the risk of loss from adverse changes in market prices and
rates. The Company's market risk arises primarily from interest rate risk
inherent in its lending and deposit taking activities. Management actively
monitors its interest rate risk exposure. The Company does not engage in
trading activities. Nothing has occurred since December 31, 1999 that
materially affects the Company's market risk.
8
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The one year GAP (the difference between rate-sensitive assets and
liabilities repricing within one year or less) was a negative $38.6 million
or a negative 0.96% of total assets at March 31, 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 $282.8 million or 7.13% of total assets as
of March 31, 1999. Over 88% of the Bank's rate-sensitive assets reprice
within one year. Therefore, the Bank's one year GAP generally varies based
upon the extent to which the maturities of its deposits and borrowings exceed
one year. The decrease in the one year GAP from December 31, 1999 to March
31, 2000 and from March 31, 1999 to March 31, 2000 is due to an increase in
short term borrowings.
A positive GAP normally benefits a financial institution in times of
increasing interest rates. However, the Bank's net interest income typically
declines during periods of increasing interest rates because of a three month
time lag before changes in the FHLB Eleventh District Cost of Funds Index
(the "Index") can be implemented with respect to the Bank's loans.
Capital
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and 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 March
31, 2000:
Tangible Core Risk-based
Capital Capital Capital
(Dollars in thousands)
Actual Capital:
Amount $224,664 $224,664 $254,040
Ratio 5.52% 5.52% 11.00%
Minimum required capital:
Amount $61,103 $162,942 $184,700
Ratio 1.50% 4.00% 8.00%
Well capitalized required capital:
Amount - $203,677 $230,875
Ratio - 5.00% 10.00%
During the first three months of 2000, the Company repurchased 666,700 shares
of its common stock at an average price of $12.49 per share. As of March 31,
2000, 1,043,816 shares remain eligible for repurchase under the Company's
authorized repurchase program.
Results of Operations
The Company reported consolidated net earnings of $8.8 million for the first
quarter of 2000 compared to net earnings of $8.9 million for the first
quarter of 1999. Earnings were slightly less than last year due to decreases
in various non-interest income items. Loan and other fees decreased due
to a reduction of fees earned on Bank's servicing portfolio and an adjustment
of $144 thousand for impairment of the Bank's servicing asset. Also, gain
(loss) on sale of loans was impacted by a decline in fixed rate loans
originated for sale. Real estate operations decreased due to payments of
prior years property taxes on foreclosed properties and a reduction of the
real estate owned portfolio. Offsetting these decreases was an increase in
net interest income. Although the Company's interest rate margin decreased
to 2.44% from 2.58%, net interest income improved due to an increase in the
earning asset base and miscellaneous interest income derived from a refund
for IRS interest. Also offsetting the decrease in non-interest income was a
reduction in non-interest expenses, primarily in incentive based compensation.
9
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Loan Loss Allowances
Listed below is a summary of the activity in the general valuation allowance
and the valuation allowance for impaired loans for the Bank's loan portfolio
during the periods indicated:
Three Months Ended March 31, 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 (288) - (288)
Multi-family - (225) (225)
Commercial (105) - (105)
Others - non-real estate (103) - (103)
Total charge-offs (496) (225) (721)
Recoveries 1,288 - 1,288
Net recoveries (charge-offs) 792 (225) 567
Balance at March 31, 2000 $70,746 $ 2,371 $73,117
Three Months Ended March 31, 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 (83) - (83)
Multi-family - (1,181) (1,181)
Commercial - (552) (552)
Total charge-offs (83) (1,733) (1,816)
Recoveries 1,089 - 1,089
Net recoveries (charge-offs) 1,006 (1,733) (727)
Balance at March 31, 1999 $68,644 $ 5,901 $74,545
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.
The Bank also maintains a repurchase liability for loans sold with recourse,
recorded as a liability. This liability was 7.83% of loans sold with
recourse as of March 31, 2000, compared to 7.18% as of December 31, 1999 and
6.44% as of March 31, 1999. The balance of loans sold with recourse totaled
$163.7 million, $178.7 million and $199.2 million as of March 31, 2000,
December 31, 1999 and March 31, 1999, respectively. The Bank has not entered
into any new recourse arrangements since 1989. Listed below is a summary of
the activity in the repurchase liability for loans sold with recourse during
the periods indicated:
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Three Months Ended March 31,
2000 1999
(Dollars in thousands)
Balance at beginning of period $12,824 $12,546
Recoveries - 278
Balance at end of period $12,824 $12,824
The following table summarizes the activity in the general valuation
allowance for real estate acquired by foreclosure for the periods indicated:
Three Months Ended March 31,
2000 1999
(Dollars in thousands)
Balance at beginning of period $ 350 $ 500
Provision for losses - 4
Charge-offs - (4)
Balance at end of period $ 350 $ 500
Net Interest Income
The Company's interest rate margin decreased to 2.44% for the first quarter
of 2000 from 2.58% for the first quarter of last year. The Index (on a
lagged basis) determines the yield on over 87% of the loan portfolio. The
Index in effect during the three months ended March 31, 2000 increased by
0.06% compared to the same period of the prior year. However, during the
same time period, the Company's average cost of funds increased by 0.33%.
Despite the decrease in margin compared to the prior year's first quarter,
net interest income increased by 3% due to a 6% increase in average interest
earning assets.
The following table sets forth: (i) the average daily dollar amounts of and
average yields earned on loans, mortgage-backed securities and investment
securities, (ii) the average daily dollar amounts of and average rates
paid on savings and borrowings, (iii) the average daily dollar
differences, (iv) the interest rate spreads, and (v) the effective net
spreads for the periods indicated:
During the Three Months Ended March 31,
2000 1999
(Dollars in thousands)
Average loans and mortgage-backed
securities $ 3,527,951 $3,305,734
Average investment securities 183,492 184,181
Average interest-earning assets 3,711,443 3,489,915
Average savings deposits 2,072,582 2,154,218
Average borrowings 1,500,178 1,219,095
Average interest-bearing liabilities 3,572,760 3,373,313
Excess of interest-earning assets over
interest-bearing liabilities $ 138,683 $ 116,602
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Yields earned on average interest
earning assets 7.52% 7.33%
Rates paid on average interest-
bearing liabilities 5.08 4.75
Net interest rate spread 2.44 2.58
Effective net spread(1) 2.63 2.74
Total interest income $ 69,760 $ 63,965
Total interest expense 45,135 39,572
24,625 24,393
Total other items(2) 1,355 772
Net interest income $ 25,980 $ 25,165
(1)The effective net spread is a fraction, the denominator of which is the
average dollar amount of interest-earning assets, and the numerator of
which is net interest income (excluding stock dividends and miscellaneous
interest income).
(2)Includes Federal Home Loan Bank Stock dividends and other miscellaneous
items. For the period ended March 31, 2000, includes a $272 thousand refund
of interest from the Internal Revenue Service.
Non-Interest Income and Expense
Loan and other fees were $738 thousand for the first quarter of 2000,
compared to $1.3 million for the same period of 1999. The decrease in loan
and other fees is attributable to a decline in service fees on mortgage back
securities resulting from the reduction of the mortgage-backed securities
portfolio, a decrease in prepayment charge income, and a $144 thousand
adjustment for impairment of the Bank's servicing asset.
Gain (loss) on the sale of loans results primarily from loan fees recognized
at the time of sale. A loss of $35 thousand resulted for the first quarter
of 2000 compared to a gain of $583 thousand for the same period of 1999. The
volume of loans sold totaled $1.3 million during the first quarter of 2000
compared to $57.8 million for the same period of the prior year. The decrease
in loans sold results from a decrease in loans originated for sale due to
market conditions.
Real estate operations resulted in a net loss of $38 thousand for the first
quarter of 2000. This compares to net gains of $302 thousand for the same
period of the prior year. Real estate operations include gains and losses on
the sale of foreclosed properties as well as operational income and expense
during the holding period. Gains on sale typically result from the recovery
of excess valuation allowances associated with foreclosed properties sold.
The loss during the first quarter of 2000 is due to accruals for property
taxes on foreclosures that were sold during previous years.
Non-interest expense decreased to $12.2 million during the first quarter of
2000 compared to $12.6 million for the same period of the prior year. The
decrease in non-interest expense was primarily a result of a reduction in
incentive-based compensation.
The ratio of non-interest expense to average assets decreased to 1.24% of
average assets for the first quarter of 2000 from 1.32% during the comparable
1999 period. The ratio decreased due to growth in average assets, and a
decline in compensation.
12
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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 on which delinquent interest allowances had been
established (non-accrual loans) totaled $12.4 million at March 31, 2000
compared to $13.8 million at December 31, 1999 and $17.9 million at March 31,
1999.
The amount of interest that has been provided for loans 90 days or more
delinquent or in foreclosure was $606 thousand at March 31, 2000, $720
thousand at December 31, 1999 and $1.1 million at March 31, 1999.
The Bank has debt restructurings that result from temporary modifications of
principal and interest payments. Under these arrangements, loan terms are
typically reduced to no less than a monthly interest payment required under
the note. Any loss of revenues under the modified terms would be immaterial
to the Bank. Generally, if the borrower is unable to return to scheduled
principal and interest payments at the end of the modification period,
foreclosure proceedings are initiated. As of March 31, 2000, the Bank had
modified loans totaling $7.5 million, net of loan loss allowances totaling
$2.5 million. No modified loans were 90 days or more delinquent as of March
31, 2000.
Pursuant to Statement of Financial Accounting Standards No. 114, "Accounting
by Creditors for Impairment of a Loan" ("SFAS No. 114"), the Bank considers a
loan to be impaired when management believes that it is probable that the
Bank will be unable to collect all amounts due under the contractual terms of
the loan. Estimated impairment losses are recorded as separate valuation
allowances and may be subsequently adjusted based upon changes in the
measurement of impairment. Impaired loans, disclosed net of valuation
allowances, include non-accrual major loans (single family loans with an
outstanding principal amount greater than or equal to $500 thousand and
multi-family and commercial real estate loans with an outstanding principal
amount greater than or equal to $750 thousand), modified loans, and major
loans less than 90 days delinquent in which full payment of principal and
interest is not expected to be received.
The following is a summary of impaired loans, net of valuation allowances for
impairment, as of the dates indicated:
March 31, December 31, March 31,
2000 1999 1999
(Dollars in thousands)
Non-accrual loans $ 3,259 $ 2,079 $ 3,711
Modified loans 6,610 6,534 5,946
Other impaired loans 1,857 2,820 5,574
$11,726 $11,433 $15,231
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. The following summary
details loans measured using the fair value method and loans measured based
on the present value of expected future cash flows discounted at the
effective interest rate of the loan as of the dates indicated:
13
<PAGE>
March 31, December 31, March 31,
2000 1999 1999
(Dollars in thousands)
Fair value method $6,610 $7,488 $14,163
Present value method - - 1,068
Total impaired loans $6,610 $7,488 $15,231
Impaired loans for which valuation allowances had been established totaled
$6.6 million, $7.5 million, and $15.2 million for the quarters ended March
31, 2000, December 31, 1999, and March 31, 1999, repsectively. Impaired
loans for which there was no valuation allowance established totaled $5.1
million and $3.9 million for the quarters ended March 31, 2000 and December
31, 1999. See "Results of Operations" for an analysis of activity in
the valuation allowance for impaired loans.
The table below shows the Bank's net investment in non-performing loans that
were determined to be impaired by property type, as of the dates indicated:
March 31, December 31, March 31,
2000 1999 1999
(Dollars in thousands)
Single family $1,003 $ 987 $ -
Multi-family - 1,092 1,887
Commercial 2,256 - 1,824
$3,259 $2,079 $3,711
Cash payments received from impaired loans are recorded in accordance with
the contractual terms of the loan. The principal portion of the payment is
used to reduce the principal balance of the loan, whereas the interest
portion is recognized as interest income.
The average recorded investment in impaired loans during the quarters ended
March 31, 2000, December 31, 1999, and March 31, 1999 was $11.7 million,
$11.4 million and $15.3 million, respectively. The amount of interest income
recognized on the cash basis for impaired loans during the quarters ended
March 31, 2000, December 31, 1999 and March 31, 1999 was $171 thousand, $188
thousand and $263 thousand, respectively. Interest income recognized under
the accrual basis for the quarters ended March 31, 2000, December 31, 1999
and March 31, 1999 was $173 thousand, $188 thousand and $282 thousand,
respectively.
Asset Quality
The following table sets forth certain asset quality ratios of the Bank at
the dates indicated:
March 31, December 31, March 31,
2000 1999 1999
Non-Performing Loans to
Loans Receivable (1) 0.35% 0.42% 0.56%
Non-Performing Assets to
Total Assets(2) 0.36% 0.40% 0.55%
Loan Loss Allowances to
Non-Performing Loans (3) 573.47% 509.74% 393.79%
14
<PAGE>
General Loss Allowances to
Assets with Loss Exposure (4) 1.99% 2.15% 2.34%
General Loss Allowances to
Total Assets with Loss
Exposure (5) 2.25% 2.41% 2.60%
_______________________
(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 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 , including general valuation
allowances for loans sold with full or limited recourse. Assets with
loss exposure include the Bank's portfolio plus loans sold with recourse,
but exclude mortgage-backed securities.
Non-performing Assets
The Bank defines non-performing assets as loans delinquent over 90 days
(non-accrual loans), loans in foreclosure and real estate acquired by
foreclosure (real estate owned). An analysis of non-performing assets
follows as of the dates indicated:
March 31, December 31, March 31,
2000 1999 1999
(Dollars in thousands)
Real estate owned:
Single family $ 2,599 $ 1,069 $ 2,501
Multi-family 262 1,483 3,322
Commercial real estate - - 395
Less:
General valuation allowance (350) (350) (500)
Total real estate owned 2,511 2,202 5,718
Non-accrual loans:
Single family 7,903 9,626 8,889
Multi-family 2,114 3,995 6,538
Commercial real estate 2,420 225 2,473
Less:
Valuation allowances (1) (576) (625) (1,844)
Total non-accrual loans 11,861 13,221 16,056
Total non-performing assets $14,372 $15,423 $21,774
__________________________
(1)Includes valuation allowances for impaired loans and loss allowances
on other non-performing loans requiring fair value adjustments.
15
<PAGE>
Real estate owned at March 31, 2000 increased 14% compared to the December
31, 1999 level and decreased 56% compared to the March 31, 1999 level. The
increase in the first quarter of 2000 compared to December 31, 1999 is due
to an increase in single family real estate owned acquisitions offset by a
decrease in multi-family acquisitions. The decrease from the March 31, 1999
level compared to the March 31, 2000 level is due to the improved real
estate market in Southern California.
Non-accrual loans, net of valuation allowances, at March 31, 2000 decreased 10%
compared to the level at December 31, 1999 and decreased 26% compared to March
31, 1999 due to reductions in delinquent loans of all loan types.
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.
Deposits accepted by retail banking offices increased by $196.8 million
during the first quarter of 2000. The increase is primarily due to $168.5
million in Fidelity Federal Bank branch deposits that were acquired on March
31, 2000. Retail deposits comprised 79% of total savings deposits as of
March 31, 2000.
Telemarketing deposits decreased by $6.8 million during the first quarter 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. Telemarketing
deposits comprised 3% of total deposits at March 31, 2000.
Deposits acquired from national brokerage firms ("brokered deposits")decreased
by $43.2 million during the first quarter of 2000. Because the Bank has
sufficient capital to be deemed "well-capitalized" under the standards
established by the Office of Thrift Supervision, it may solicit brokered funds
without special regulatory approval. At March 31, 2000, brokered deposits
comprised 18% of total deposits.
Total borrowings increased by $28.9 million during the first quarter of 2000
due to a $60.0 million increase in advances from the FHLB, offset by net
payoffs of $31.1 million in repurchase agreements.
Internal sources of funds include both principal payments and payoffs on
loans and mortgage-backed securities, loan sales, and positive cash flows
from operations. Principal payments include amortized principal and
prepayments that are a function of real estate activity and the general
level of interest rates.
Total principal payments on loans and mortgage-backed securities were $117.3
million for the first quarter of 2000. This compares with principal payments
of $186.9 million for the first quarter of 1999.
Loan sales were $1.3 million for the first quarter of 2000, compared with
sales of $57.8 million for the first quarter of 1999. The decrease is
attributable to a reduction in loans originated for sale.
16
<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 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.
(10.1)Deferred Compensation Plan filed as Exhibit 10.3 to Form 10-K for the
fiscal year ended December 31, 1983 and incorporated by reference.
(10.2)Bonus Plan filed as Exhibit 10(iii)(A)(2) to Form 10 dated November 2,
1993 and incorporated by reference.
(10.3)Supplemental Executive Retirement Plan dated January 16, 1986 filed as
Exhibit 10.5 to Form 10-K for the fiscal year ended December 31, 1992
and incorporated by reference.
(10.4)Change of Control Agreement effective September 26, 1996 filed as Exhibit
10.4 to Form 10-Q for the Quarter ended September 30, 1996 and
incorporated by reference.
(10.5)1997 Non-employee Directors Stock Incentive Plan filed as Exhibit 1 to
Form S-8 dated August 12, 1997 and incorporated by reference.
(21)Registrant's sole subsidiary is First Federal Bank of California, a
federal savings bank.
(24)Power of Attorney
(b) Reports on Form 8-K
The Company filed a current report on Form 8-K dated March 24, 2000
wherein the Board of Directors approved an expansion of the stock repurchase
program. The increase authorized the Company to repurchase an additional 5% of
the shares outstanding as of March 22, 2000.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRSTFED FINANCIAL CORP.
Registrant
Date: May 12, 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
18
<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> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 49,812
<INT-BEARING-DEPOSITS> 10,000
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 557,674
<INVESTMENTS-CARRYING> 557,674
<INVESTMENTS-MARKET> 557,674
<LOANS> 3,298,246
<ALLOWANCE> 73,117
<TOTAL-ASSETS> 4,042,193
<DEPOSITS> 2,208,143
<SHORT-TERM> 1,357,546
<LIABILITIES-OTHER> 43,361
<LONG-TERM> 204,000
0
0
<COMMON> 233
<OTHER-SE> 228,910
<TOTAL-LIABILITIES-AND-EQUITY> 4,042,193
<INTEREST-LOAN> 61,126
<INTEREST-INVEST> 9,976
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 71,102
<INTEREST-DEPOSIT> 23,130
<INTEREST-EXPENSE> 45,122
<INTEREST-INCOME-NET> 25,980
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 12,245
<INCOME-PRETAX> 15,460
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,835
<EPS-BASIC> 0.50
<EPS-DILUTED> 0.49
<YIELD-ACTUAL> 2.63
<LOANS-NON> 11,861
<LOANS-PAST> 0
<LOANS-TROUBLED> 3,259
<LOANS-PROBLEM> 6,038
<ALLOWANCE-OPEN> 85,374
<CHARGE-OFFS> 721
<RECOVERIES> 1,288
<ALLOWANCE-CLOSE> 85,941
<ALLOWANCE-DOMESTIC> 85,941
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
