-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RmH1b45ZwB76sA/5bxt3WHRAZpWI2/HbtfYIEyXKDLuGRvqCoLXOH1eTfmEFhXzB E53nmLnlXxj9bn6nqU/o1A== 0000810536-01-500007.txt : 20010515 0000810536-01-500007.hdr.sgml : 20010515 ACCESSION NUMBER: 0000810536-01-500007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRSTFED FINANCIAL CORP CENTRAL INDEX KEY: 0000810536 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 954087449 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-09566 FILM NUMBER: 1633253 BUSINESS ADDRESS: STREET 1: 401 WILSHIRE BOULEVARD CITY: SANTA MONICA STATE: CA ZIP: 90401-1490 BUSINESS PHONE: 3103196064 MAIL ADDRESS: STREET 1: 401 WILSHIRE BOULEVARD CITY: SANTA MONICA STATE: CA ZIP: 90401 10-Q 1 e1q01.txt MARCH 31, 2001 10-Q 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, 2001 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 27, 2001, 17,263,879 Registrant's $.01 par value common stock were outstanding. FirstFed Financial Corp. Index Page Part I. Financial Information Item 1. Financial Statements Consolidated Statements of Financial Condition as of March 31, 2001, December 31, 2000 and March 31, 2000 3 Consolidated Statements of Operations and Comprehensive Earnings for the three months ended March 31, 2001 and March 31, 2000 4 Consolidated Statements of Cash Flows for the three months ended March 31, 2001 and 2000 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 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, 2001 2000 2000 Assets Cash and cash equivalents $ 92,171 $ 77,677 $ 59,812 Investment securities, available-for-sale (at fair value) 120,519 136,537 151,403 Mortgage-backed securities, available-for-sale (at fair value) 362,643 374,405 406,271 Loans receivable, held-for-sale (fair value of $10,773, $2,324 and $1,585) 10,773 2,246 1,581 Loans receivable, net 3,780,518 3,627,038 3,296,665 Accrued interest and dividends receivable 28,298 28,488 23,482 Real estate 2,267 2,189 2,545 Office properties and equipment, net 10,259 10,651 11,620 Investment in Federal Home Loan Bank (FHLB) stock, at cost 84,635 80,885 72,714 Other assets 25,213 25,126 16,100 $4,517,296 $4,365,242 $4,042,193 Liabilities Deposits $2,291,287 $2,165,047 $ 2,208,143 FHLB advances and other borrowings 1,604,000 1,579,000 1,229,000 Securities sold under agreements to repurchase 275,205 294,110 332,546 Accrued expenses and other liabilities 63,306 59,643 43,361 4,233,798 4,097,800 3,813,050 Commitments and Contingent Liabilities Stockholders' Equity Common stock, par value $.01 per share; authorized 100,000,000 shares; issued 23,320,249 23,299,707, and 23,274,263 shares, outstanding 17,252,759, 17,232,217 and 17,361,573 shares 233 233 233 Additional paid-in capital 32,942 32,540 31,508 Retained earnings - substantially restricted 325,784 313,411 283,782 Unreleased shares to employee stock ownership plan (631) (841) (1,693) Treasury stock, at cost, 6,067,490, 6,067,490 and 5,192,690 shares (75,743) (75,743) (73,896) Accumulated other comprehensive earnings (loss), net of taxes 913 (2,158) (10,791) 283,498 267,442 229,143 $4,517,296 $4,365,242 $4,042,193
See accompanying notes to consolidated financial statements. 3 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, 2001 2000 Interest income: Interest on loans $ 76,837 $ 61,126 Interest on mortgage-backed securities 7,102 6,142 Interest and dividends on investments 4,078 3,834 Total interest income 88,017 71,102 Interest expense: Interest on deposits 26,616 23,130 Interest on borrowings 29,249 21,992 Total interest expense 55,865 45,122 Net interest income 32,152 25,980 Provision for loan losses - - Net interest income after provision for losses 32,152 25,980 Other income: Loan servicing and other fees 851 738 Gain (loss) on sale of loans 102 (35) Real estate operations, net 42 (38) Other operating income 1,012 1,060 Total other income 2,007 1,725 Non-interest expense: Compensation 7,295 6,630 Occupancy 1,881 1,956 Goodwill amortization 372 26 Other expenses 2,985 3,633 Total non-interest expense 12,533 12,245 Earnings before income taxes 21,626 15,460 Income tax provision 9,253 6,625 Net earnings $ 12,373 $ 8,835 Other comprehensive earnings (loss): net of taxes 3,071 (2,511) Comprehensive earnings $ 15,444 $ 6,324 Earnings per share: Basic $ 0.72 $ 0.50 Diluted $ 0.70 $ 0.49 Weighted average shares outstanding: Basic 17,182,624 17,819,996 Diluted 17,626,521 17,930,138 See accompanying notes to consolidated financial statements. 4 FirstFed Financial Corp. and Subsidiary Consolidated Statements of Cash Flows (Dollars in thousands) (Unaudited) Three Months Ended March 31, 2001 2000 CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 12,373 $ 8,835 Adjustments to reconcile net earnings to net cash (used in) provided by operating activities: Net change in loans-held-for-sale (8,527) 722 Depreciation and amortization 467 458 Valuation adjustments on real estate sold (81) (259) Amortization of fees and discounts 928 (214) Decrease in servicing asset 60 203 Change in deferred taxes (2,526) (552) Decrease (increase) in interest and dividends receivable 190 (1,657) (Decrease) increase in interest payable (8,810) 1,051 Amortization of goodwill 372 26 Increase in other assets (4,003) (660) Increase in accrued expenses and other liabilities 14,999 13,276 Total adjustments (6,931) 12,394 Net cash provided by operating activities 5,442 21,229 CASH FLOWS FROM INVESTING ACTIVITIES: Loans made to customers net of principal collection on loans (28,333) (114,348) Loans purchased (127,575) (304) Proceeds from sales of real estate owned 1,612 2,131 Proceeds from maturities and principal payments of investment securities available-for-sale 17,307 2,783 Principal reductions on mortgage-backed securities available-for-sale 15,764 18,440 Purchase of investment securities available-for-sale - (3,447) Purchase of FHLB stock (2,443) - Other (17) (295) Net cash from acquisition of loans and deposits - 32,866 Net cash used in investing activities (123,685) (62,174) CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in savings deposits 126,240 (21,671) Net increase in short term borrowings 6,095 28,911 Treasury stock purchases - (8,328) Other 402 38 Net cash provided by (used in) financing activities 132,737 (1,050) Net increase (decrease) in cash and cash equivalents 14,494 (41,995) Cash and cash equivalents at beginning of period 77,677 101,807 Cash and cash equivalents at end of period $ 92,171 $ 59,812 See accompanying notes to consolidated financial statements. 5 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 accounting principles generally accepted in the United States of America 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. Basic earnings per share were computed by dividing net earnings by the weighted average number of shares of common stock outstanding for the period. Diluted earnings per share additionally include 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 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 , as amended, 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 was effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. The implementation of this Statement has not had a material impact on the Company's financial position or results of operations. SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," establishes accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. Those standards are based on consistent application of a financial-components approach that focuses on control. SFAS No. 140 requires a debtor to (a) reclassify financial assets pledged as collateral and report those assets in its statement of financial condition separately from other assets no so encumbered if the secured party has the right by contract or custom to sell or repledge the collateral and (b) disclose assets pledged as collateral that have not been reclassified and separately reported in the statement of financial condition. This statement is effective for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. Disclosures about securitizations and collateral accepted need not be reported for periods on or before December 15, 2000, for which financial statements are presented for comparative purposes. The disclosure and reclassification provisions of the statement were implemented on December 31, 2000 and did not have a material impact on the Company. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Financial Condition At March 31, 2001, FirstFed Financial Corp. (the "Company"), holding company for First Federal Bank of California and its subsidiaries (the "Bank"), had consolidated assets totaling $4.5 billion, compared to $4.4 billion at December 31, 2000 and $4.0 billion at March 31, 2000. The increase in assets during the first quarter of 2001 is attributable to growth in the loan portfolio. The loan portfolio increased to $3.8 billion as of March 31, 2001 from $3.6 billion at December 31, 2000 and $3.3 billion at March 31, 2000. The increase is due to loan originations of $234.6 million and loan purchases of $127.6 million for the first quarter of 2001. The increase was offset by loan payoffs and principal reductions totaling $187.1 million, in addition to $13.1 in other reductions during the quarter. Payoff activity increased during the first quarter of 2001 as borrowers refinanced existing loans into new loans at lower rates. The mortgage-backed securities portfolio, classified as available-for-sale, was recorded at fair value as of March 31, 2001. An unrealized gain of $457 thousand, net of taxes, was reflected in stockholders' equity as of March 31, 2001. This compares to net unrealized losses of $1.9 million and $8.8 million as of December 31, 2000 and March 31, 2000, respectively. The mortgage-backed securities portfolio decreased to $362.6 million as of March 31, 2001 from $374.4 million and $406.3 million as of December 31, 2000 and March 31, 2000, respectively, due to increased payoffs on the underlying loans. The following is a summary of loan originations and purchases as of the dates indicated (dollars in thousands): Three months ended Three months ended March 31, March 31, 2001 2000 2001 2000 Type of Property: Type of Loan: Single family $ 289,447 $ 139,107 Multi-family 58,302 188,255 Adjustable $ 183,161 $ 331,964 Other 14,464 11,836 Fixed(1) 179,052 7,234 Total $ 362,213 $ 339,198 Total $ 362,213 $ 339,198 (1) This loan type includes fixed/adjustable hybrid loan products with initial repricing periods ranging from three to ten years. The Bank's primary market area is Southern California. According to the UCLA Anderson Forecast for California, March 2001 Report (The "UCLA Report"), Southern California will most likely avoid a recession but may experience an economic slowdown. However, forecasters believe that Northern California will likely experience a recession due to the slowdown of investment in information technology and software. Southern California real estate prices are expected to increase, but at a much slower pace during 2002. According to the UCLA Report, for Los Angeles County, average home prices which increased by 6.2% during 2000, are expected to increase by 6.5% during 2001 but only by 3.5% during 2002. Home building activity in California has reached its highest level in a decade during this quarter. Although mortgage rates are declining as a result of the Federal Reserve Board's reduction in short term interest rates, home sales have slowed with increased concerns over the health of the economy. The ratio of non-performing assets to total assets increased to 0.27% as of March 31, 2001 from 0.19% as of December 31, 2000 and decreased from 0.36% as of March 31, 2000. (See "Non-performing Assets" for further discussion.) 7 The Company recorded net charge-offs of $65 thousand during the first quarter of 2001 compared to net recoveries of $567 thousand for the first quarter of 2000. The Company did not record a provision for loan losses during the first quarter of 2001 or for the comparable 2000 period. The Bank's general valuation allowance was $71.0 million or 1.71% of total loans and real estate owned with loss exposure at March 31, 2001. This compares with $71.2 million or 1.81% as of December 31, 2000 and $71.1 million or 1.99% at March 31, 2000. The Bank also maintains valuation allowances for impaired loans, which totaled $1.9 million at March 31, 2001, $1.8 million at December 31, 2000 and $2.4 million at March 31, 2000. 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: March 31, December 31, March 31, 2001 2000 2000 (Dollars in thousands) REAL ESTATE LOANS: First trust deed residential loans: One to four units $2,294,910 $2,158,940 $1,887,805 Five or more units 1,332,111 1,308,440 1,279,833 Residential loans 3,627,021 3,467,380 3,167,638 OTHER REAL ESTATE LOANS: Commercial and industrial 217,965 217,619 190,223 Second trust deeds 9,680 8,543 12,716 Other 682 - - Real estate loans 3,855,348 3,693,542 3,370,577 NON-REAL ESTATE LOANS: Manufactured housing 352 391 594 Deposit accounts 558 576 660 Commercial business loans 13,039 12,600 8,859 Consumer 8,026 6,555 1,007 Loans receivable 3,877,323 3,713,664 3,381,697 LESS: General valuation allowances- loan portfolio 70,686 70,809 70,746 Valuation allowances - impaired loans 1,850 1,792 2,371 Unearned loan fees 13,496 11,779 10,334 Net loans receivable 3,791,291 3,629,284 3,298,246 FHLMC AND FNMA MORTGAGE- BACKED SECURITIES (at fair value): Secured by single family dwellings 348,803 360,210 390,347 Secured by multi-family dwellings 13,840 14,195 15,924 Mortgage-backed securities 362,643 374,405 406,271 TOTAL $4,153,934 $4,003,689 $3,704,517 The investment securities portfolio, classified as available-for-sale, was recorded at fair value as of March 31, 2001. An unrealized gain of $456 thousand, net of taxes, was reflected in stockholders' equity as of March 31, 2001. This compares to unrealized losses of $295 thousand and $2.0 million, net of taxes, as of December 31, 2000 and March 31, 2000. 8 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. The Federal Reserve Board has decreased interest rates four times thus far during 2001. The Bank's market risk profile remains substantially unchanged with regard to interest rate risk because 89% of its loan portfolio is invested in adjustable rate loan products. The one year GAP (the difference between rate-sensitive assets and liabilities repricing within one year or less) was a positive $224.1 million or 4.96% of total assets at March 31, 2001. In comparison, the one year GAP was a positive $515.2 million or 11.8% of total assets as of December 31, 2000 and a negative $38.6 million or a negative 0.96% of total assets as of March 31, 2000. The decrease in one year GAP from December 31, 2000 to March 31, 2001 is due to a $40.8 million decrease in assets repricing within one year along with a $141.9 million increase in assets repricing in greater than one year. Asset growth during the first quarter of 2001 was primarily in fixed/adjustable hybrid loan products that reprice for the first time in periods ranging from three to ten years. The Bank has lengthened the maturities of its borrowings to reduce the interest rate risk of these hybrid loans. The increase in the one year GAP from March 31, 2000 to March 31, 2001 is due to a $205.4 million increase in assets repricing within one year. 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 and improves during periods of decreasing rates. There is 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 adjustable rate loans. Therefore, during the period immediately following interest rate decreases, the Bank's cost of funds tends to decrease faster than the rates earned on its adjustable rate loan portfolio. 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, 2001: Tangible Core Risk-based Capital Capital Capital (Dollars in thousands) Actual Capital: Amount $267,991 $267,991 $299,840 Ratio 5.95% 5.95% 11.95% Minimum required capital: Amount $67,529 $180,079 $200,729 Ratio 1.50% 4.00% 8.00% Well capitalized required capital: Amount - $225,098 $250,912 Ratio - 5.00% 10.00% 9 Results of Operations The Company reported consolidated net earnings of $12.4 million for the first quarter of 2001 compared to net earnings of $8.8 million for the first quarter of 2000. Earnings improved due to increases in the following categories: net interest income, loan servicing and other fees, and gain on sale of loans. Offsetting these increases was a slight increase in non-interest expense. 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, 2001 General Impaired Valuation Valuation Allowances Allowances Total (Dollars in thousands) Balance at December 31, 2000 $ 70,809 $ 1,792 $ 72,601 Provision for loan losses (58) 58 - Charge-offs: Single family (55) - (55) Multi-family - - - Commercial - - - Others - non-real estate (51) - (51) Total charge-offs (106) - (106) Recoveries 41 - 41 Net recoveries (charge-offs) (65) - (65) Balance at March 31, 2001 $ 70,686 $ 1,850 $ 72,536 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 Provision for loan losses - - - 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 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, based on economic and market conditions, that the general allowance for loan losses is adequate as of March 31, 2001. 10 The Bank maintains a repurchase liability for loans sold with recourse, which totaled $12.8 million at March 31, 2001, December 31, 2000 and March 31, 2000. This liability was 9.06% of loans sold with recourse as of March 31, 2001, compared to 8.75% as of December 31, 2000 and 7.83% as of March 31, 2000. The balance of loans sold with recourse totaled $141.6 million, $146.5 million and $163.7 million as of March 31, 2001, December 31, 2000 and March 31, 2000, 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, which totaled $350 thousand at March 31, 2001, December 31, 2000 and March 31, 2000. This allowance is to be used to offset further deterioration of property value after acquisition of the foreclosed real estate. See "Non-performing Assets" for additional discussion on foreclosed real estate. Net Interest Income The Company's interest rate margin increased to 2.59% for the first quarter of 2001 from 2.44% for the first quarter of last year. The Index (on a lagged basis) determines the yield on over 82% of the loan portfolio. The Index in effect during the three months ended March 31, 2001 increased by 0.84% compared to the same period of the prior year. However, during the same time period, the Company's average cost of funds increased by 0.43%. 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, 2001 2000 (Dollars in thousands) Average loans and mortgage-backed securities $ 4,078,319 $3,527,951 Average investment securities 198,208 183,492 Average interest-earning assets 4,276,527 3,711,443 Average savings deposits 2,224,330 2,072,582 Average borrowings 1,879,022 1,500,178 Average interest-bearing liabilities 4,103,352 3,572,760 Excess of interest-earning assets over interest-bearing liabilities $ 173,175 $ 138,683 During the Three Months Ended March 31, 2001 2000 (Dollars in thousands) Yields earned on average interest earning assets 8.10% 7.52% Rates paid on average interest- bearing liabilities 5.51 5.08 Net interest rate spread 2.59 2.44 Effective net spread(1) 2.81 2.63 Total interest income $ 86,651 $ 69,760 Total interest expense 55,856 45,135 30,795 24,625 Total other items(2) 1,357 1,355 Net interest income $ 32,152 $ 25,980 (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. 11 Non-Interest Income and Expense Loan servicing and other fees were $851 thousand for the first quarter of 2001, compared to $738 thousand for the same period of 2000. Loan servicing fees for 2000 include 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 gain of $102 thousand was recorded for the first quarter of 2001 compared to a loss of $35 thousand for the same period of 2000. The volume of loans sold totaled $10.7 million during the first quarter of 2001 compared to $1.3 million for the same period of the prior year. The increase in loans originated for sale is due to borrower demand for 15-year and 30-year fixed rate loans. Real estate operations resulted in a net gain of $42 thousand for the first quarter of 2001. This compares to a net loss of $38 thousand for the same period of the prior year. Real estate operations include gains and losses on the sale of foreclosed properties as well as operational income and expense during the holding period. Gains on sale typically result from the recovery of excess valuation allowances associated with foreclosed properties sold. Non-interest expense increased to $12.5 million as of March 31, 2001 from $12.2 million for the same period of the prior year. The increase in non-interest expense resulted from increases in compensation and goodwill amortization, offset by a decrease in non-recurring expenses. Due to an improvement in business volume, incentive payments and accrued contributions to the Company's ESOP plan increased. Goodwill amortization increased due to the acquisition of two retail savings branches in March of 2000. Non-recurring expenses decreased because charges related to the Bank's data processing conversion were recorded during the first quarter of 2000. Due to the growth in average assets, the ratio of non-interest expense to average assets decreased to 1.13% of average assets for the first quarter of 2001 from 1.24% during the comparable 2000 period. 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 $10.5 million at March 31, 2001 compared to $6.3 million at December 31, 2000 and $12.4 million at March 31, 2000. The amount of interest that has been provided for loans 90 days or more delinquent or in foreclosure was $641 thousand at March 31, 2001, $511 thousand at December 31, 2000 and $606 thousand at March 31, 2000. Delinquent loans as a percentage of the Bank's total loans portfolio for the periods indicated are as follows: March 31, December 31, March 31, 2001 2000 2000 Percentage of Portfolio Period of delinquency 1 monthly payment 0.37% 0.39% 0.18% 2 monthly payments 0.07% 0.12% 0.09% 3 or more monthly payments or in foreclosure 0.25% 0.17% 0.35% 12 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, 2001, the Bank had modified loans totaling $9.4 million, net of loan loss allowances totaling $2.0 million. No modified loans were 90 days or more delinquent as of March 31, 2001. 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, 2001 2000 2000 (Dollars in thousands) Non-accrual loans $ 1,713 $ - $ 3,259 Modified loans 8,598 8,770 6,610 Other impaired loans - - 1,857 $10,311 $ 8,770 $11,726 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. Impaired loans for which valuation allowances had been established based upon the fair value method totaled $3.5 million, $3.7 million, and $6.6 million for the quarters ended March 31, 2001, December 31, 2000, and March 31, 2000, respectively. Impaired loans for which there was no valuation allowance established totaled $6.8 million for the quarter ended March 31, 2001 and $5.1 million for the quarters ended March 31, 2000 and December 31, 2000, respectively. 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: 13 March 31, December 31, March 31, 2001 2000 2000 (Dollars in thousands) Single family $ 923 $ - $1,003 Multi-family 790 - - Commercial - - 2,256 $1,713 $ - $3,259 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, 2001, December 31, 2000, and March 31, 2000 was $10.3 million, $8.8 million and $11.7 million, respectively. The amount of interest income recognized on the cash basis for impaired loans during the quarters ended March 31, 2001, December 31, 2000 and March 31, 2000 was $185 thousand, $183 thousand and $171 thousand, respectively. Interest income recognized under the accrual basis for the quarters ended March 31, 2001, December 31, 2000 and March 31, 2000 was $185 thousand, $184 thousand and $173 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, 2001 2000 2000 Non-Performing Loans to Loans Receivable (1) 0.25% 0.17% 0.35% Non-Performing Assets to Total Assets(2) 0.27% 0.19% 0.36% Loan Loss Allowances to Non-Performing Loans (3) 679.13% 1132.19% 573.47% General Loss Allowances to Assets with Loss Exposure (4) 1.71% 1.81% 1.99% General Loss Allowances to Total Assets with Loss Exposure (5) 1.96% 2.06% 2.25% ----------------------- (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. 14 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, 2001 2000 2000 (Dollars in thousands) Real estate owned: Single family $ 2,586 $ 2,507 $ 2,599 Multi-family - - 262 Less: General valuation allowance (350) (350) (350) Total real estate owned 2,236 2,157 2,511 Non-accrual loans: Single family 8,149 5,603 7,903 Multi-family 2,277 662 2,114 Commercial real estate 76 - 2,420 Less: Valuation allowances (1) (636) (123) (576) Total non-accrual loans 9,866 6,142 11,861 Total non-performing assets $12,102 $ 8,299 $14,372 -------------------------- (1)Includes valuation allowances for impaired loans and loss allowances on other non-performing loans requiring fair value adjustments. Real estate owned and non-accrual loans, while varying slightly from quarter to quarter, have remained at very low levels for the last few years due to strength in the Southern California real estate market. 15 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 $68.8 million during the first quarter of 2001. Management attributes the increase to customer demand for safe, liquid investments due to volatility in the stock market. Retail deposits comprised 79% of total savings deposits as of March 31, 2001. Telemarketing deposits increased by $73.0 million during the first quarter of 2001. 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 5% of total deposits at March 31, 2001. Deposits acquired from national brokerage firms ("brokered deposits") decreased by $15.6 million during the first quarter of 2001. 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, 2001, brokered deposits comprised 16% of total deposits. Total borrowings increased by $6.1 million during the first quarter of 2001 due to a $25.0 million increase in advances from the FHLB, offset by net payoffs of $18.9 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 $202.8 million for the first quarter of 2001. This compares with principal payments of $117.3 million for the first quarter of 2000. Loan sales were $10.7 million for the first quarter of 2001, compared with sales of $1.3 million for the first quarter of 2000. The increase is attributable to borrower demand for 15-year and 30-year fixed rate loans, which are only originated for sale. 16 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form-8K (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)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 Amendment filed as Exhibit 10.3 10.4 for change of control to Form 10-Q for the Quarter ended September 30, 2000 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 Amendment filed as Exhibit 10.5 to Form 10-Q for the Quarter ended September 30, 2000, 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 current reports on Form 8-K during the quarter ended March 31, 2001 on the following dates: January 31, 2001 and March 5, 2001. These reports are related to the release of the Company's fourth quarter earnings and the disclosure of certain other financial data. 17 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 11, 2001 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 -----END PRIVACY-ENHANCED MESSAGE-----