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 June 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 August 4, 2000, 17,209,476 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 June 30, 2000, December 31, 1999
and June 30, 1999 3
Consolidated Statements of Operations and Comprehensive
Earnings for the three months and six months ended
June 30, 2000 and 1999 4
Consolidated Statements of Cash Flows for the six
months ended June 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>
<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)
June 30, December 31, June 30,
2000 1999 1999
<S> <C> <C> <C>
Assets
Cash and cash equivalents $ 55,867 $ 101,807 $ 141,806
Investment securities, available-for-sale
(at fair value) 147,428 151,195 121,956
Mortgage-backed securities, available-for-sale
(at fair value) 391,214 428,641 480,727
Loans receivable, held-for-sale (fair value of
$1,245, $2,324 and $6,038) 1,245 2,303 6,038
Loans receivable, net 3,458,146 3,058,244 2,762,208
Accrued interest and dividends receivable 25,038 21,825 21,719
Real estate 2,153 2,236 4,017
Office properties and equipment, net 11,349 11,745 12,261
Investment in Federal Home Loan Bank
(FHLB) stock, at cost 74,700 71,722 69,830
Other assets 15,792 6,787 8,022
$4,182,932 $3,856,505 $3,628,584
Liabilities
Deposits $2,141,868 $2,061,357 $2,012,504
FHLB advances and other borrowings 1,454,000 1,169,000 963,300
Securities sold under agreements to repurchase 327,610 363,635 376,800
Accrued expenses and other liabilities 22,873 31,380 39,875
3,946,351 3,625,372 3,392,479
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 23,266,501 shares, outstanding
17,206,773, 18,023,061 and 19,326,761 shares 233 233 233
Additional paid-in capital 31,598 31,561 31,048
Retained earnings - substantially restricted 293,132 274,946 259,712
Loan to employee stock ownership plan (1,806) (1,759) (1,859)
Treasury stock, at cost,6,067,490, 5,245,990
and 3,939,740 shares (75,743) (65,568) (45,650)
Accumulated other comprehensive loss,
net of taxes (10,833) (8,280) (7,379)
236,581 231,133 236,105
$4,182,932 $3,856,505 $3,628,584
</TABLE>
See accompanying notes to consolidated financial statements.
3
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<TABLE>
<CAPTION>
FirstFed Financial Corp. and Subsidiary
Consolidated Statements of Operations and Comprehensive Earnings
(Dollars in thousands, except per share data)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Interest income:
Interest on loans $66,487 $53,324 $127,613 $107,331
Interest on mortgage-backed securities 6,096 7,043 12,238 14,652
Interest and dividends on investments 3,872 3,330 7,706 6,451
Total interest income 76,455 63,697 147,557 128,434
Interest expense:
Interest on deposits 24,508 21,268 47,638 43,932
Interest on borrowings 25,780 17,210 47,772 34,118
Total interest expense 50,288 38,478 95,410 78,050
Net interest income 26,167 25,219 52,147 50,384
Provision for loan losses - - - -
Net interest income
after provision for loan losses 26,167 25,219 52,147 50,384
Non-interest income:
Loan and other fees 794 1,099 1,532 2,384
Gain on sale of loans 38 504 3 1,087
Real estate operations, net 476 1,526 438 1,828
Other operating income 1,110 1,028 2,170 1,991
Total non-interest income 2,418 4,157 4,143 7,290
Non-interest expense:
Compensation 6,809 6,637 13,439 13,627
Occupancy 2,021 1,991 3,977 3,889
Goodwill amortization 399 121 425 242
Other expenses 3,341 4,364 6,974 7,943
Total non-interest expense 12,570 13,113 24,815 25,701
Earnings before income taxes 16,015 16,263 31,475 31,973
Income tax provision 6,664 7,160 13,289 13,955
Net earnings $ 9,351 $ 9,103 $ 18,186 $ 18,018
Other comprehensive loss,
net of taxes (42) (7,302) (2,553) (6,676)
Comprehensive earnings $ 9,309 $ 1,801 $ 15,633 $ 11,342
Earnings per share:
Basic $ 0.54 $ 0.47 $ 1.04 $ 0.90
Diluted $ 0.54 $ 0.47 $ 1.03 $ 0.90
Weighted average shares outstanding:
Basic 17,225,285 19,331,157 17,522,641 19,939,106
Diluted 17,330,584 19,529,207 17,629,206 20,118,593
</TABLE>
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)
Six Months Ended
June 30,
2000 1999
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 18,186 $ 18,018
Adjustments to reconcile net earnings
to net cash provided by (used in) operating activities:
Net change in loans-held-for-sale 1,058 10,412
Depreciation and amortization 929 1,072
Provision for losses on real estate owned - 4
Valuation adjustments on real estate sold (367) (2,053)
Amortization of fees and discounts 589 (231)
Decrease in servicing asset 269 130
(Increase) Decrease in interest and dividends receivable (3,212) 1,757
Decrease in interest payable (1,010) (4,682)
Amortization of goodwill 425 242
Increase in other assets (2,774) (1,093)
Increase (decrease) in accrued expenses and other liabilities (3,118) 2,784
Total adjustments (7,211) 8,342
Net cash provided by operating activities 10,975 26,360
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans made to customers net of principal
collection on loans (276,982) 36,753
Loans purchased (304) (13,419)
Proceeds from sales of real estate owned 3,743 11,131
Proceeds from maturities and principal payments
of investment securities available-for-sale 7,064 3,211
Principal reductions on mortgage-backed securities
available for sale 33,107 65,435
Purchase of investment securities
available-for sale (3,447) (61,795)
Redemption (purchase) of FHLB stock (494) 4,823
Other (1,186) (4,149)
Increase in assets and liabilities due to acquisitions:
Loans (125,171) -
Deposits 168,457 -
Goodwill (10,420) -
Net cash provided by (used in) investing activities (205,633) 41,990
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in savings deposits (87,946) (123,405)
Net increase in short term borrowings 248,975 105,628
Treasury stock purchases (10,175) (32,296)
Decrease in long term borrowings - (700)
Other (2,136) (2,051)
Net cash provided by financing activities 148,718 (52,824)
Net increase (decrease) in cash and cash equivalents (45,940) 15,526
Cash and cash equivalents at beginning of period 101,807 126,280
Cash and cash equivalents at end of period $ 55,867 $141,806
</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 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, 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. 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.
6
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Financial Condition
At June 30, 2000, FirstFed Financial Corp. (the "Company"), holding company
for First Federal Bank of California and its subsidiaries (the "Bank"), had
consolidated assets totaling $4.2 billion, compared to $3.9 billion at
December 31, 1999 and $3.6 billion at June 30, 1999. The growth in total
assets during the first six months of 2000 is primarily attributable to an
increase in the portfolio of loans, including mortgage-backed securities.
The loan portfolio including mortgage-backed securities increased to $3.9
billion at June 30, 2000 from $3.5 billion at December 31, 1999 and $3.2
billion at December 31, 1999. The increase is due to loan originations of
$626.1 million during the first six months of 2000, which includes $125.2
million in loans purchased from Fidelity Federal Bank on March 31, 2000.
The Bank's primary market area is Southern California, which remains
economically sound. According to the UCLA Anderson Forecast for California,
June 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. The unemployment rate
in California is now converging with the national level for the first time
in many years. 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 six months of 2000. The ratio of
non-performing assets to total assets decreased to 0.27% as of June 30, 2000
from 0.40% as of December 31, 1999 and 0.45% as of June 30, 1999. (See "Non-
performing Assets" for further discussion.)
The Company recorded net loan loss recoveries of $219 thousand and $787
thousand for the second quarter and first six months of 2000, respectively.
In comparison, net loan charge-offs were $764 thousand and $1.2 million for
the second quarter and first six months of 1999, respectively. The Company
did not record a provision for loan losses during the first six months of
2000 or for the comparable 1999 period. The Bank's general valuation
allowance was $71.9 million or 1.93% of total loans and real estate owned
with loss exposure at June 30, 2000. This compares with $70.3 million or
2.15% as of December 31, 1999 and $68.6 million or 2.28% at June 30, 1999.
The Bank also maintains valuation allowances for impaired loans, which
totaled $1.8 million at June 30, 2000, $2.6 million at December 31, 1999 and
$5.6 million at June 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>
<CAPTION>
June 30, December 31, June 30,
2000 1999 1999
(Dollars in thousands)
<S> <C> <C> <C>
REAL ESTATE LOANS:
First trust deed residential loans:
One to four units $2,022,106 $1,813,783 $1,563,094
Five or more units 1,302,565 1,123,308 1,091,402
Residential loans 3,324,671 2,937,091 2,654,496
OTHER REAL ESTATE LOANS:
Commercial and industrial 186,794 183,194 180,203
Second trust deeds 12,350 13,489 14,063
Real estate loans 3,523,815 3,133,774 2,848,762
NON-REAL ESTATE LOANS:
Manufactured housing 545 613 759
Deposit accounts 566 683 908
Commercial business loans 10,787 8,140 2,905
Consumer 3,578 593 468
Loans receivable 3,539,291 3,143,803 2,853,802
LESS:
General valuation allowances-
loan portfolio 71,545 69,954 68,137
Valuation allowances - impaired loans 1,792 2,596 5,644
Unrealized loan fees 6,563 10,706 11,775
Net loans receivable 3,459,391 3,060,547 2,768,246
FHLMC AND FNMA MORTGAGE-
BACKED SECURITIES (at fair value):
Secured by single family dwellings 376,024 412,469 464,552
Secured by multi-family dwellings 15,190 16,172 16,175
Mortgage-backed securities 391,214 428,641 480,727
TOTAL $3,850,605 $3,489,188 $ 3,248,973
</TABLE>
The mortgage-backed securities portfolio, classified as available-for-sale,
was recorded at fair value as of June 30, 2000. A negative fair value
adjustment of $9.1 million, net of taxes, was recorded in stockholders'
equity as of June 30, 2000. This compares to $6.6 million as of December 31,
1999 and $6.5 million as of June 30, 1999.
The investment securities portfolio, classified as available-for-sale, was
recorded at fair value as of June 30, 2000. An unrealized loss of $1.7
million, net of taxes, was reflected in stockholders' equity as of June 30,
2000. This compares to $1.7 million as of December 31, 1999 and $872
thousand as of June 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 $77.6 million
or a negative 1.86% of total assets at June 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 $379.7 million or 10.47% of total assets as
of June 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 June
30, 2000:
Tangible Core Risk-based
Capital Capital Capital
(Dollars in thousands)
Actual Capital:
Amount $232,509 $232,509 $263,078
Ratio 5.51% 5.51% 10.94%
Minimum required capital:
Amount $ 63,324 $168,863 $192,365
Ratio 1.50% 4.00% 8.00%
Well capitalized required capital:
Amount - $211,079 $240,456
Ratio - 5.00% 10.00%
During the first six months of 2000, the Company repurchased 821,500 shares
of its common stock at an average price of $12.39 per share. As of June 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 $9.4 million for the second
quarter of 2000 compared to net earnings of $9.1 million for the second
quarter of 1999. Quarterly earnings improved compared to last year due to 4%
growth in net interest income, a special dividend from the Federal Home Loan
Bank of San Francisco, and a 4% reduction in non-interest expenses due to
decreased legal expenses. Decreases in gain on sale of loans and income from
real estate operations offset the increased earnings.
9
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The Company reported consolidated net earnings of $18.2 million for the first
six months of 2000, compared to $18.0 million for the same period last year.
The increase in year-to-date net earnings resulted primarily from the same
factors that affected quarterly earnings.
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:
Six Months Ended June 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 (484) - (484)
Multi-family - (804) (804)
Commercial (105) - (105)
Others - non-real estate (103) - (103)
Total charge-offs (692) (804) (1,496)
Recoveries 2,283 - 2,283
Net recoveries (charge-offs) 1,591 (804) 787
Balance at June 30, 2000 $71,545 $ 1,792 $73,337
Six Months Ended June 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) (1,438) (1,587)
Commercial - (552) (552)
Non-real estate (133) - (133)
Total charge-offs (590) (1,990) (2,580)
Recoveries 1,089 - 1,089
Net recoveries (charge-offs) 499 (1,990) (1,491)
Balance at June 30, 1999 $68,137 $ 5,644 $73,781
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 maintains a repurchase liability for loans sold with recourse,
recorded as a liability. This liability was 8.14% of loans sold with
recourse as of June 30, 2000, compared to 7.18% as of December 31, 1999 and
6.66% as of June 30, 1999. The balance of loans sold with recourse totaled
$157.6 million, $178.7 million and $192.6 million as of June 30, 2000,
December 31, 1999 and June 30, 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:
Six Months Ended June 30,
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 Bank also maintains a general valuation allowance for real estate
acquired by foreclosure. The following table summarizes activity in the
general valuation allowance for real estate acquired by foreclosure during
the periods indicated:
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Six Months Ended June 30,
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
During the first six months of 2000, the interest rate margin decreased to
2.35% from 2.60% for the same period of the prior year because 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
85% of the loan portfolio. Due to increased interest rates, the COFI Index
in effect during the six months ended June 30, 2000 increased by 0.23% over
the COFI Index in effect during the same period of last year. However, the
Bank's average cost of funds increased by 0.49% during the first six months
of 2000 compared to the same period of last year.
On a quarterly basis, the Bank's interest rate margin decreased to 2.28% for
the second quarter of 2000 from 2.63% for the second quarter of last year.
The Index in effect during the second quarter of 2000 increased by 0.40%
compared to the prior year second quarter. However, the Bank's average cost
of funds increased by 0.65% compared to the second quarter of the prior year.
Despite the decreases in margin during the second quarter and first six
months, net interest income increased by 4% during both the second quarter
and first six months of 2000. The increases were caused by growth in
interest-earning assets of 14% and 10% during the second quarter and first
six months of 2000, respectively. The Bank also received $501 thousand in
special dividends from the Federal Home Loan Bank of San Francisco during the
second quarter.
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:
11
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During the Six Months Ended June 30,
2000 1999
(Dollars in thousands)
Average loans and mortgage-backed
securities $ 3,657,015 $3,289,283
Average investment securities 170,311 182,420
Average interest-earning assets 3,827,326 3,471,703
Average savings deposits 2,109,439 2,109,079
Average borrowings 1,585,304 1,240,162
Average interest-bearing liabilities 3,694,743 3,349,241
Excess of interest-earning assets over
interest-bearing liabilities $ 132,583 $ 122,462
Yields earned on average interest
earning assets 7.54% 7.30%
Rates paid on average interest-
bearing liabilities 5.19 4.70
Net interest rate spread 2.35 2.60
Effective net spread(1) 2.53 2.77
Total interest income $ 144,319 $ 126,717
Total interest expense 95,392 78,043
48,927 48,674
Total other items(2) 3,220 1,710
Net interest income $ 52,147 $ 50,384
During the Three Months Ended June 30,
2000 1999
(Dollars in thousands)
Average loans and mortgage-backed
securities $ 3,786,079 $3,272,833
Average investment securities 157,131 180,659
Average interest-earning assets 3,943,210 3,453,492
Average savings deposits 2,146,295 2,063,939
Average borrowings 1,670,431 1,261,228
Average interest-bearing liabilities 3,816,726 3,325,167
Excess of interest-earning assets over
interest-bearing liabilities $ 126,484 $ 128,325
Yields earned on average interest
earning assets 7.57% 7.27%
Rates paid on average interest-
bearing liabilities 5.29 4.64
Net interest rate spread 2.28 2.63
Effective net spread(1) 2.44 2.80
Total interest income $ 74,616 $ 62,754
Total interest expense 50,257 38,474
24,359 24,280
Total other items(2) 1,808 939
Net interest income $ 26,167 $ 25,219
(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.
12
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Non-Interest Income and Expense
Loan and other fees were $794 thousand and $1.5 million for the second
quarter and first six months of 2000, respectively, compared to $1.1 million
and $2.4 million for the second quarter and first six 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 $38 thousand and $3 thousand for
the second quarter and first six months of 2000, respectively, compared to
gains of $504 thousand and $1.1 million for the second quarter and first six
months of 1999, respectively. The volume of loans sold totaled $2.6 million
and $3.9 million during the second quarter and first six months of 2000,
respectively, compared to $56.7 and $114.5 million, respectively, for the
same periods of 1999. The lower volumes during 2000 result from the fact
that borrower demand for fixed rated loans originated for sale by the Bank
decreased due to higher interest rates on those mortgages.
Real estate operations resulted in net gains of $476 thousand and $438
thousand for the second quarter and first six months of 2000, respectively.
This compares to net gains of $1.5 million and $1.8 million for second
quarter and first six months 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 decreased to $12.6 million and $24.8 million during the
second quarter and first six months of 2000, respectively, compared with
$13.1 million and $25.7 million for second quarter and first six months of
1999, respectively. The decreases are primarily the result of lower legal
expenses. However, non-interest expense during the second quarter of 2000
includes operational expenses, goodwill amortization and FDIC insurance
premiums associated with the new branches purchased from Fidelity Bank at the
end of the first quarter.
The ratio of non-interest expense to average assets decreased to 1.22% and
1.23% of average assets for the second quarter and first six months of 2000,
respectively, from 1.38% and 1.37% for second quarter and first six months of
1999, respectively. The ratio 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 $9.6 million at June 30, 2000 compared with $13.8 million at
December 31, 1999 and $13.3 million at June 30, 1999.
The amount of interest allowance for loans 90 days or more delinquent or in
foreclosure was $604 thousand at June 30, 2000 and $720 thousand at both
December 31, 1999 and June 30, 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 June 30, 2000, the Bank had
modified loans totaling $8.1 million, net of loan loss allowances totaling
$1.9 million. No modified loans were 90 days or more delinquent as of June
30, 2000.
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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:
June 30, December 31, June 30,
2000 1999 1999
(Dollars in thousands)
Non-accrual loans $ 1,004 $ 2,079 $ 959
Modified loans 7,145 6,534 4,796
Other impaired loans 1,851 2,820 6,520
$10,000 $11,433 $12,275
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 June 30,
2000, December 31, 1999 and June 30, 1999.
Impaired loans for which valuation allowances had been established totaled
$3.7 million, $7.5 million, and $12.3 million for the quarters ended June 30,
2000, December 31, 1999, and June 30, 1999, respectively. Impaired loans for
which there was no valuation allowance established totaled $6.3 million and
$3.9 million for the quarters ended June 30, 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:
June 30, December 31, June 30,
2000 1999 1999
(Dollars in thousands)
Single family $1,004 $ 987 $ -
Multi-family - 1,092 959
$1,004 $2,079 $ 959
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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
June 30, 2000, December 31, 1999, and June 30, 1999 was $10.0 million, $11.4
million and $12.3 million, respectively. The amount of interest income
recognized on the cash basis for impaired loans during the quarters ended
June 30, 2000, December 31, 1999 and June 30, 1999 was $175 thousand, $188
thousand and $297 thousand, respectively. Interest income recognized under
the accrual basis for the quarters ended June 30, 2000, December 31, 1999 and
June 30, 1999 was $176 thousand, $188 thousand and $273 thousand,
respectively.
Asset Quality
The following table sets forth certain asset quality ratios of the Bank at
the dates indicated:
June 30, December 31, June 30,
2000 1999 1999
Non-Performing Loans to
Loans Receivable (1) 0.25% 0.42% 0.43%
Non-Performing Assets to
Total Assets(2) 0.27% 0.40% 0.45%
Loan Loss Allowances to
Non-Performing Loans (3) 750.54% 509.74% 520.13%
General Loss Allowances to
Assets with Loss Exposure (4) 1.93% 2.15% 2.28%
General Loss Allowances to
Total Assets with Loss
Exposure (5) 2.18% 2.41% 2.55%
_______________________
(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.
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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:
June 30, December 31, June 30,
2000 1999 1999
(Dollars in thousands)
Real estate owned:
Single family $ 2,470 $ 1,069 $ 2,981
Multi-family - 1,483 1,500
Less:
General valuation allowance (350) (350) (500)
Total real estate owned 2,120 2,202 3,981
Non-accrual loans:
Single family 7,543 9,626 7,740
Multi-family 1,912 3,995 4,391
Commercial real estate 163 225 1,190
Less:
Valuation allowances (1) (642) (625) (1,150)
Total non-accrual loans 8,976 13,221 12,171
Total non-performing assets $11,096 $15,423 $16,152
__________________________
(1) Includes valuation allowances for impaired loans and loss allowances on
other non-performing loans requiring fair value adjustments.
Real estate owned at June 30, 2000 decreased 4% compared to the December 31,
1999 level and decreased 47% compared to the June 30, 1999 level.
Non-accrual loans, net of valuation allowances, at June 30, 2000 decreased
32% compared to the December 31, 1999 level and decreased 26% compared to
the June 30, 1999 level. The decreases 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.
Deposits accepted by retail banking offices decreased by $61.9 million during
the second quarter of 2000 due to expected outflows of deposits purchased from
Fidelity Federal Bank on March 31, 2000 and normal outflows during the second
quarter due to tax payments by depositors. Retail deposits increased by $134.9
million during the first six months of 2000 due to $168.5 million in deposits
acquired from Fidelity Federal Bank during the first quarter of 2000, offset
by the outflows described during the second quarter of 2000. Retail deposits
comprised 79% of total savings deposits as of June 30, 2000.
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Telemarketing deposits decreased by $20.2 million and $27.0 million during
the second quarter and first six months of 2000, respectively. These
deposits are normally large deposits from pension plans, managed trusts and
other financial institutions. These deposit levels fluctuate based on the
attractiveness of the Bank's rates compared to returns available to
investors on alternative investments. Telemarketing deposits comprised 1%
of total deposits at June 30, 2000.
Deposits acquired from national brokerage firms ("brokered deposits")
increased by $15.9 million and decreased by $27.3 million during the second
quarter and first six 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. At June 30, 2000, brokered
deposits comprised 20% of total deposits.
Total borrowings increased by $220.1 million and $249.0 million during the
second quarter and first six months of 2000, respectively. The increase was
attributable to increased loan originations.
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 $136.7
million and $254.0 million for the second quarter and first six months of
2000, respectively. This compares with principal payments of $214.9 million
and $401.8 million for the second quarter and first six months of 1999,
respectively.
Loan sales were $2.6 million and $3.9 for the second quarter and first six
months of 2000, compared with sales of $56.7 million and $114.5 million for
the second quarter and first six months of 1999. The decrease is
attributable to a reduction in loans originated for sale.
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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.
(22) Power of Attorney
(b) Reports on Form 8-K
The Company filed a current report on Form 8-K dated April 5, 2000, wherein
First Federal Bank, the sole subsidiary of the Company, announced that on
March 31, 2000, it consummated the previously announced purchase of the Culver
City and West Hollywood Branches of Fidelity Federal Bank.
The Company also filed a report on Form 8-K dated April 26, 2000 to report the
release of earnings for the quarter ended March 31, 2000.
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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: August 11, 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
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