10-Q 1 q0303.txt MARCH 31, 2003 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended March 31, 2003 OR [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 From the Transition Period From ________ to __________ Commission File Number: 1-9566 FIRSTFED FINANCIAL CORP. (Exact name of registrant as specified in its charter) Delaware 95-4087449 (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 401 Wilshire Boulevard, Santa Monica, California 90401-1490 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (310) 319-6000 Securities registered pursuant to Section 12(b) of the Act: Common Stock $0.01 par value Title of Class Securities registered pursuant to section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [X] No [ ] As of May 5, 2003, 16,975,323 shares of the 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, 2003, 3 December 31, 2002 and March 31, 2002 Consolidated Statements of Operations and Comprehensive Earnings for the 4 three months ended March 31, 2003 and 2002 Consolidated Statements of Cash Flows for the three months ended March 5 31, 2003 and 2002 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results 8 of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk 18 Item 4. Controls and Procedures 18 Part II. Other Information (omitted items are inapplicable) Item 6. Exhibits and Reports on Form 8-K 19 Signatures 20 Certification of Chief Executive Officer 21 Certification of Chief Financial Officer 22 Exhibits 99.1 Certification of Chief Executive Officer pursuant to 18 USC Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 23 99.2 Certification of Chief Financial Officer pursuant to 18 USC Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 24
2 PART I - FINANCIAL STATEMENTS Item 1. Financial Statements FirstFed Financial Corp. and Subsidiary Consolidated Statements of Financial Condition (In thousands, except share data) (Unaudited) March 31, December 31, March 31, 2003 2002 2002 ----------------- ---------------- ------------------ ASSETS Cash and cash equivalents $ 58,830 $ 45,199 $ 148,349 Investment securities, available-for-sale (at fair value) 109,390 103,055 104,068 Mortgage-backed securities, available-for-sale (at fair value) 185,315 200,585 256,934 Loans receivable, held-for-sale (fair value of $4,476, $2,300 and $4,489) 4,426 2,293 4,469 Loans receivable, net 3,925,471 3,766,942 3,902,667 Accrued interest and dividends receivable 17,422 17,752 20,623 Real estate, net 404 347 1,005 Office properties and equipment, net 10,111 10,342 10,651 Investment in Federal Home Loan Bank (FHLB) stock, at cost 75,182 78,728 92,738 Other assets 29,730 28,486 24,951 ----------------- ---------------- ------------------ $ 4,416,281 $ 4,253,729 $ 4,566,455 ================= ================ ================== LIABILITIES Deposits $ 2,492,422 $ 2,527,026 $ 2,582,043 FHLB advances 1,347,000 1,167,000 1,467,000 Securities sold under agreements to repurchase 149,021 155,273 127,695 Accrued expenses and other liabilities 40,651 32,789 52,380 ----------------- ---------------- ------------------ 4,029,094 3,882,088 4,229,118 ----------------- ---------------- ------------------ COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Common stock, par value $.01 per share; Authorized 100,000,000 shares; issued 23,469,842, 23,395,202 and 23,370,167 shares, outstanding 16,972,146, 16,931,306 and 17,259,271 shares 235 234 234 Additional paid-in capital 36,581 35,680 34,748 Retained earnings - substantially restricted 434,362 418,885 376,082 Unreleased shares to employee stock ownership plan (556) (597) -- Treasury stock, at cost, 6,497,696 shares, 6,463,896 and 6,110,896 shares (85,726) (84,762) (75,930) Accumulated other comprehensive earnings, net of taxes 2,291 2,201 2,203 ----------------- ---------------- ------------------ 387,187 371,641 337,337 ----------------- ---------------- ------------------ $ 4,416,281 $ 4,253,729 $ 4,566,455 ================= ================ ==================
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, -------------------------------------- 2003 2002 ---------------- ------------------ Interest income: Interest on loans $ 57,069 $ 65,150 Interest on mortgage-backed securities 1,670 2,970 Interest and dividends on investments 2,099 2,844 ---------------- ------------------ Total interest income 60,838 70,964 ---------------- ------------------ Interest expense: Interest on deposits 11,367 17,359 Interest on borrowings 11,956 19,428 ---------------- ------------------ Total interest expense 23,323 36,787 ---------------- ------------------ Net interest income 37,515 34,177 Provision for loan losses -- -- ---------------- ------------------ Net interest income after provision for loan losses 37,515 34,177 ---------------- ------------------ Non-interest income: Loan servicing and other fees 1,610 1,052 Retail office fees 1,147 1,044 Gain on sale of loans 472 186 Real estate operations, net 15 161 Other operating income 102 69 ---------------- ------------------ Total non-interest income 3,346 2,512 ---------------- ------------------ Non-interest expense: Salaries and employee benefits 8,782 8,197 Occupancy 2,007 2,051 Amortization of core deposit intangible 499 501 Other expense 2,828 4,562 ---------------- ------------------ Total non-interest expense 14,116 15,311 ---------------- ------------------ Earnings before income taxes 26,745 21,378 Income tax provision 11,268 9,009 ---------------- ------------------ Net earnings $ 15,477 $ 12,369 ================ ================== Other comprehensive earnings (loss), net of taxes 90 (788) ---------------- ------------------ Comprehensive earnings $ 15,567 $ 11,581 ================ ================== Earnings per share: Basic $ 0.91 $ 0.72 ================ ================== Diluted $ 0.90 $ 0.70 ================ ================== Weighted average shares outstanding: Basic 16,920,158 17,254,769 ================ ================== Diluted 17,271,160 17,608,147 ================ ==================
See accompanying notes to consolidated financial statements. 4 FirstFed Financial Corp. and Subsidiary Consolidated Statements of Cash Flows (In thousands) (Unaudited) Three months ended March 31, --------------------------------------------- 2003 2002 -------------------- -------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 15,477 $ 12,369 Adjustments to reconcile net earnings to net cash provided by operating activities: Net change in loans held-for-sale (2,133) 777 Depreciation 372 388 Valuation adjustments on real estate sold 31 -- Amortization of fees and premiums/discounts 178 1,306 Decrease in servicing asset 60 60 Change in taxes payable 11,230 6,907 Decrease in interest and dividends receivable 330 1,453 Increase (decrease) in interest payable (1,981) 1,325 Amortization of core deposit intangible asset 499 501 Increase in other assets (5,403) (4,398) Decrease in accrued expenses and other liabilities (1,387) (11) -------------------- -------------------- Total adjustments 1,796 8,308 -------------------- -------------------- Net cash provided by operating activities 17,273 20,677 -------------------- -------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Loans made to customers and principal collections on loans (156,619) 97,768 Loans purchased (45) -- Proceeds from sales of real estate owned 177 1,495 Proceeds from maturities and principal payments of investment securities, available-for-sale 35,307 36,749 Principal reductions on mortgage-backed securities, available for sale 16,115 26,482 Purchase of investment securities, available for sale (42,300) (31,122) Redemption of FHLB stock 4,600 -- -------------------- -------------------- Net cash used by investing activities (142,765) 131,372 CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in deposits (34,604) 35,396 Net increase (decrease) in short term borrowings 143,748 (213,345) Increase in long term borrowings 30,000 -- Purchases of treasury stock (964) -- Other 943 78 -------------------- -------------------- Net cash provided by (used by) financing activities 139,123 (177,871) -------------------- -------------------- Net increase (decrease) in cash and cash equivalents 13,631 (25,822) Cash and cash equivalents at beginning of period 45,199 174,171 -------------------- -------------------- Cash and cash equivalents at end of period $ 58,830 $ 148,349 ==================== ====================
See accompanying notes to consolidated financial statements. 5 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 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 Statements 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. The Company applies the intrinsic-value-based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations including FASB Interpretation No. 44, Accounting for Certain Transactions involving Stock Compensation, an interpretation of APB Opinion No. 25, issued in March 2000, to account for its fixed-plan stock options. Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. SFAS No. 123, Accounting for Stock-Based Compensation, established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, the Company has elected to continue to apply the intrinsic-value-based method of accounting described above, and has adopted only the disclosure requirements of SFAS No. 123. The following table illustrates the effect on net income if the fair-value-based method had been applied to all outstanding and unvested awards in each period. Three Months Ended March 31, ------------------------------------ 2003 2002 ---------------- ----------------- (In thousands, except per share data) Net income as reported............................ $ 15,477 $ 12,369 Deduction total stock-based employee compensation expense determined under fair-value-based method for all rewards, net of tax..................... (132) (249) ---------------- ----------------- Pro forma net income............................ $ 15,345 $ 12,120 ================ ================= Earnings per share: Basic: As reported..................................... $ 0.91 $ 0.72 Pro forma....................................... $ 0.91 $ 0.70 Diluted: As reported..................................... $ 0.90 $ 0.70 Pro forma....................................... $ 0.89 $ 0.69
6 The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 2003 and 2002, respectively: no dividend yield in any year; expected volatility of 34% and 36%; risk free interest rates of 3.8% and 5.3%; and expected average lives of 5.5 years in both periods. The weighted-average grant date fair value of options granted during the periods are $11.82 and $10.90 for 2003 and 2002, respectively. The Company has elected to recognize forfeitures in the year they occur. 5. Recent Accounting Pronouncements In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of ARB No. 51. This Interpretation addresses the consolidation by business enterprises of variable interest entities as defined in the Interpretation. The Interpretation applies immediately to variable interests in variable interest entities created after January 31, 2003, and to variable interests in variable interest entities obtained after January 31, 2003. The Interpretation requires certain disclosures in financial statements issued after January 31, 2003 if it is reasonably possible that the Company will consolidate or disclose information about variable interest entities when the Interpretation becomes effective. The application of this Interpretation is not expected to have a material effect on the Company's financial statements as the Company has no variable interest entities. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" (SFAS 149). SFAS 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS 133. In particular, this Statement clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative and when a derivative contains a financing component that warrants special reporting in the statement of cash flows. This Statement is generally effective for contracts entered into or modified after June 30, 2003 and is not expected to have a material impact on the Company's financial statements as the Company has no derivative contracts. 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following narrative is written with the presumption that the users have read or have access to the Company's 2002 Annual Report on Form 10-K, which contains the latest audited financial statements and notes thereto, together with Management's Discussion and Analysis of Financial Condition and Results of Operations as of December 31, 2002, and for the year then ended. Therefore, only material changes in financial condition and results of operations are discussed herein. The Securities and Exchange Commission ("SEC") maintains a web site which contains reports, proxy and information statements, and other information pertaining to registrants that file electronically with the SEC, including the Company. The address is: www.sec.gov. In addition, the Company's periodic and current reports are available free of charge on its website at www.firstfedca.com as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. Note regarding forward looking statements: This quarterly report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities and Exchange Act of 1934, as amended (the "Exchange Act"). All statements, other than statements of historical facts, included in this quarterly report that address activities, events or developments that the Company expects, believes or anticipates will or may occur in the future, are forward-looking statements. These statements are based on certain assumptions and analyses made by the Company in light of its experience and perception of historical trends, current conditions, expected future developments and other factors it believes are appropriate in the circumstances. These forward-looking statements are subject to various factors, many of which are beyond the Company's control, which could cause actual results to differ materially from such statements. Such factors include, but are not limited to, the general business environment, interest rate fluctuations that may affect operating margins, the California real estate market, branch openings, competitive conditions in the business and geographic areas in which the Company conducts its business, and regulatory actions. In addition, these forward-looking statements are subject to assumptions as to future business strategies and decisions that are subject to change. The Company makes no guarantee or promises regarding future results and assumes no responsibility to update such forward-looking statements. Financial Condition At March 31, 2003, FirstFed Financial Corp. ("Company"), holding company for First Federal Bank of California and its subsidiaries ("Bank"), had consolidated stockholders' equity of $387.2 million compared to $371.6 million at December 31, 2002 and $337.3 million at March 31, 2002. Consolidated total assets at March 31, 2003 were $4.4 billion compared to $4.3 billion at December 31, 2002 and $4.6 billion at March 31, 2002. The increase in total assets for the period ended March 31, 2003 compared to December 31, 2002 is primarily attributable to an increase in the portfolio of loans. The loan portfolio increased to $3.9 billion at March 31, 2003 from $3.8 billion at December 31, 2002. The increase is primarily due to loan originations, which were $538.9 million during the first quarter of 2003 compared to $299.5 million during the first quarter of 2002. Loan payoffs and principal reductions were $383.4 million during the first quarter of 2003 compared to $397.5 million during the first quarter of 2002. The Bank's financial results are primarily influenced by the interest rate environment and Southern California real estate market. Southern California real estate sales prices and sales volume have continued at record high levels during early 2003. According to the UCLA Forecast for California, March 2003 Report ("Forecast"), real estate values in Los Angeles County over the last few years are fundamentally in line with falling rates and increasing rental prices. Real estate prices should stabilize late in 2003 and throughout 2004 when, according to the Forecast, interest rates will start to rise. 8 The following table summarizes loan originations and purchases by property type for the periods indicated: Three months ended March 31, 2003 2002 -------------- --------------- (In thousands) Single family $ 388,780 $ 159,320 Multi-family and commercial 131,925 135,344 Other (1) 18,224 4,866 ------------ ------------- Total $ 538,929 $ 299,530 ============ =============
(1) Includes consumer loans and commercial business loans. At March 31, 2003, 72% of the Bank's loan portfolio was invested in adjustable rate products. Loans that adjust monthly based on the FHLB Eleventh District Cost of Funds Index ("COFI") comprised 53.7% of the loan portfolio. Loans that adjust monthly based on the 12-month average U.S. Treasury Security rate ("12MAT") comprised 12.5% of the loan portfolio. Loans that adjust monthly based on the Three Month Certificate of Deposit Index ("CODI") comprised 3.2% of the loan portfolio and loans that adjust monthly based on the London Inter-Bank Offering Rate ("LIBOR") comprised 2.5% of the loan portfolio. The following table summarizes loan originations and purchases by loan type for the periods indicated: Three months ended March 31, 2003 2002 --------------- -------------- (In thousands) Fixed $ 29,068 $ 17,082 Hybrid (1) 154,869 150,781 Adjustable: 12MAT 174,563 46,928 CODI 111,814 -- COFI 50,391 70,573 LIBOR -- 9,300 Other 18,224 4,866 ------------- ------------ Total $ 538,929 $ 299,530 ============= ============
(1) These loan types are adjustable rate loans with initial fixed interest rate periods ranging from 3 to 7 years. The Bank's non-performing assets to total assets ratio was 0.14% as of March 31, 2003, compared to 0.17% as of December 31, 2002 and 0.16% as of March 31, 2002. (See "Non-performing Assets" for further discussion.) The Bank recorded net loan loss recoveries of $47 thousand for the first quarter of 2003 and net loan loss recoveries of $54 thousand for the first quarter of 2002. The Bank did not record a provision for loan loss during the first quarter of 2003 or for the comparable 2002 period. Allowances for loan losses (including general valuation allowances and valuation allowances for impaired loans) totaled $75.8 million or 1.89% of gross loans at March 31, 2003. This compares with $75.7 million or 1.96% at December 31, 2002 and $74.9 million or 1.88% at March 31, 2002. 9 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, 2003 2002 2002 ----------------- ---------------- ------------------ (In thousands) REAL ESTATE LOANS First trust deed residential loans One-to-four units $ 1,871,704 $ 1,723,690 $ 1,964,515 Five or more units 1,653,530 1,646,430 1,565,477 ----------------- ---------------- ------------------ Residential loans 3,525,234 3,370,120 3,529,992 OTHER REAL ESTATE LOANS Commercial and industrial 408,846 419,273 381,526 Second trust deeds 5,507 5,965 9,025 Other 7,071 7,130 32,916 ----------------- ---------------- ------------------ Real estate loans 3,946,658 3,802,488 3,953,459 NON-REAL ESTATE LOANS: Deposit accounts 1,196 1,185 584 Commercial business loans 27,930 19,582 19,080 Consumer 41,586 35,395 22,596 ----------------- ---------------- ------------------ Loans Receivable 4,017,370 3,858,650 3,995,719 LESS: General valuation allowances - loan portfolio 75,270 75,223 72,723 Valuation allowances - impaired loans 496 496 2,100 Unearned loan fees 11,707 13,696 13,760 ----------------- ---------------- ------------------ Net loans receivable 3,929,897 3,769,235 3,907,136 FHLMC AND FNMA MORTGAGE-BACKED SECURITIES (at fair value): Secured by single family dwellings 177,295 192,395 246,601 Secured by multi-family dwellings 8,020 8,190 10,333 ----------------- ---------------- ------------------ Mortgage-backed securities 185,315 200,585 256,934 ----------------- ---------------- ------------------ TOTAL $ 4,115,212 $ 3,969,820 $ 4,164,070 ================= ================ ==================
The mortgage-backed securities portfolio, classified as available-for-sale, was recorded at fair value as of March 31, 2003. An unrealized gain of $2.1 million, net of taxes, was recorded in stockholders' equity as of March 31, 2003. This compares to net unrealized gains of $1.6 million as of December 31, 2002 and $1.5 million as of March 31, 2002. The investment securities portfolio, classified as available-for-sale, was recorded at fair value as of March 31, 2003. An unrealized gain of $212 thousand, net of taxes, was reflected in stockholders' equity as of March 31, 2003. This compares to net unrealized gains of $611 thousand as of December 31, 2002 and $716 thousand as of March 31, 2002. Asset/Liability Management Market risk is the risk of loss from adverse changes in market prices and interest rates. The Bank's market risk arises primarily from the interest rate risk inherent in its lending and liability funding activities. 10 The Bank's net interest income typically improves during periods of decreasing interest rates because there is a three month time lag before changes in COFI and a two month time lag before changes in 12MAT, LIBOR and CODI can be implemented with respect to the Bank's adjustable rate loans. Therefore, during a period immediately following interest rate decreases, the Bank's cost of funds tends to decrease faster than the rates on its adjustable rate loan portfolio. The composition of the Bank's financial instruments subject to market risk has not changed materially since December 31, 2002. The one year GAP (the difference between rate-sensitive assets and liabilities repricing within one year or less) was a positive $166.8 million or 3.8% of total assets at March 31, 2003. In comparison, the one year GAP was a positive $260.7 million or 6.1% of total assets at December 31, 2002. Capital Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and percentages of total capital to 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, 2003: Tangible Risk-based Capital Core Capital Capital -------------- -------------- ---------------- (Dollars in thousands) Actual Capital: Amount $ 357,792 $ 357,792 $ 391,879 Ratio 8.13% 8.13% 14.59% Minimum required capital: Amount $ 66,052 $ 176,138 $ 214,865 Ratio 1.50% 4.00% 8.00% Well capitalized required capital: Amount $ -- $ 220,172 $ 268,581 Ratio --% 5.00% 10.00%
During the first quarter of 2003, the Company repurchased 33,800 shares of common stock at an average market price of $28.53 per share. During the fourth quarter of 2002, the Company repurchased 119,600 shares of common stock at an average market price of $25.74 per share. During 2002, the Company repurchased 353,000 shares of common stock at an average market price of $25.02 per share. There remain 1,348,677 shares eligible for repurchase under the Company's stock repurchase program as of May 5, 2003. 11 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: Three Months Ended March 31, 2003 ------------------------------------------------------ General Impaired Valuation Valuation Allowances Allowances Total ----------------- ---------------- ------------- (In thousands) Balance at December 31, 2002 $ 75,223 $ 496 $ 75,719 Charge-offs: Single family (48) -- (48) ----------------- ---------------- ------------- Total charge-offs (48) -- (48) Recoveries 95 -- 95 ----------------- ---------------- ------------- Net recoveries 47 -- 47 ----------------- ---------------- ------------- Balance at March 31, 2003 $ 75,270 $ 496 $ 75,766 ================= ================ ============= Three Months Ended March 31, 2002 ------------------------------------------------------ General Impaired Valuation Valuation Allowances Allowances Total ----------------- ---------------- ------------- (In thousands) Balance at December 31, 2001 $ 72,919 $ 1,850 $ 74,769 Transfers (250) 250 -- Charge-offs: Single family (149) -- (149) Other - non-real estate -- -- -- ----------------- ---------------- ------------- Total charge-offs (149) -- (149) Recoveries 203 -- 203 ----------------- ---------------- ------------- Net recoveries 54 -- 54 ----------------- ---------------- ------------- Balance at March 31, 2002 $ 72,723 $ 2,100 $ 74,823 ================= ================ =============
Management is unable to predict future levels of loan loss provisions. Among other things, loan loss provisions are based on the level of loan charge-offs, foreclosure activity, and the economy in Southern California. The Bank also maintains a general valuation allowance for real estate acquired by foreclosure, which totaled $200 thousand at March 31, 2003 and December 31, 2002 and $350 thousand at March 31, 2002, respectively. This allowance is used to offset any further deterioration in property value after acquisition of the foreclosed real estate. See "Non-performing Assets" for additional discussion on foreclosed real estate. Results of Operations The Company reported consolidated net earnings of $15.5 million or $0.90 per diluted share of common stock for the first quarter of 2003 compared to net earnings of $12.4 million or $0.70 per diluted share of common stock for the first quarter of 2002. Net earnings increased for the first quarter of 2003 compared to the first quarter of 2002 primarily from increased net interest income due to higher interest rate spreads. 12 Net Interest Income Net interest income increased to $37.5 million during the first quarter of 2003 compared to $34.2 million for the first quarter of 2002 primarily as a result of an increase in the interest rate spread for the comparable periods. The interest rate spread increased to 3.34% compared to 2.72% for the same period last year as the cost of interest-bearing liabilities dropped by more than the yield on interest-earning assets. The following tables 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, -------------------------------------- 2003 2002 --------------- ------------------ (Dollars in thousands) Average loans and mortgage-backed securities $ 4,031,046 $ 4,219,538 Average investment securities 116,624 227,636 --------------- ------------------ Average interest-earning assets 4,147,670 4,447,174 --------------- ------------------ Average savings deposits 2,513,998 2,526,068 Average borrowings 1,377,121 1,715,087 --------------- ------------------ Average interest-bearing liabilities 3,891,119 4,241,155 --------------- ------------------ Excess of interest-earning assets over interest-bearing liabilities $ 256,551 $ 206,019 =============== ================== Yields earned on average interest-earning assets 5.77% 6.24% Rates paid on average interest-bearing liabilities 2.43 3.52 Net interest rate spread 3.34 2.72 Effective net spread (1) 3.49 2.89 Total interest income $ 59,830 $ 69,376 Total interest expense 23,323 36,787 --------------- ------------------ 36,507 32,589 Total other items (2) 1,008 1,588 --------------- ------------------ Net interest income $ 37,515 $ 34,177 =============== ==================
(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 interest income. Non-Interest Income and Expense Loan servicing and other fees were $1.6 million for the first quarter of 2003 compared to $1.1 million for the same period of 2002. The increase is primarily the result of increased prepayment fees as borrowers paid off loans early to refinance into lower rate loans. Gains on sale of loans were $472 thousand for the first quarter of 2003 compared to gains of $186 thousand for the same period of 2002. The increase is primarily the result of an increase in the volume of loans sold and a higher gain realized per sale. The volume of loans sold totaled $40.5 million during the first quarter of 2003 compared to $18.2 million for the same period of 2002. 13 Real estate operations resulted in net income of $15 thousand for the first quarter of 2003 compared to net income of $161 thousand for the same period of 2002. Real estate operations include gains and losses on the sale of foreclosed properties as well as rental income and operating expense during the holding period. Gains on sale typically result from legal fee and insurance recoveries associated with foreclosed properties sold. Non-interest expense decreased to $14.1 million during the first quarter of 2003. This compares with $15.3 million during the first quarter of 2002. The decrease in non-interest expense during the first quarter of 2003 compared to the same period last year resulted from a reduction in both legal and advertising expenses. Advertising expenses have been delayed due to the development of new marketing campaigns that are expected in the second half of the year. Due to the decrease in non-interest expense and decrease in average assets for the comparable periods, the ratio of non-interest expense to average assets decreased to 1.30% for the first quarter of 2003 from 1.32% during the comparable 2002 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 in foreclosure. Loans requiring delinquent interest allowances (non-accrual loans) totaled $5.9 million at March 31, 2003 compared to $6.7 million at December 31, 2002 and $6.4 million at March 31, 2002. The amount of interest allowance for loans 90 days or more delinquent or in foreclosure was $340 thousand, $373 thousand, and $449 thousand as of March 31, 2003, December 31, 2002, and March 31, 2002, respectively. Delinquent loans as a percentage of the Bank's total gross loan portfolio for the periods indicated are as follows: March 31, December 31, March 31, 2003 2002 2002 ------------------- ------------------ ------------------- (Percentage of Gross Loans) Period of delinquency 1 monthly payment 0.25% 0.24% 0.18% 2 monthly payments 0.02% 0.08% 0.02% 3 or more monthly payments or in foreclosure 0.15% 0.17% 0.16%
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, 2003, the Bank had net modified loans totaling $3.8 million. No modified loans were 90 days or more delinquent as of March 31, 2003. 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 (commercial business loans with an outstanding principal amount greater than or equal to $500 thousand and single-family loans greater than or equal to $750 thousand, and income property loans with an outstanding principal amount greater than or equal to $1.5 million), modified loans, and major loans less than 90 days delinquent in which full payment of principal and interest is not expecte qd to be received. 14 The following is a summary of impaired loans, net of valuation allowances for impairment, as of the periods indicated: March 31, December 31, March 31, 2003 2002 2002 ------------------- ------------------ ------------------- (In thousands) Non-accrual loans $ -- $ -- $ 631 Modified loans 1,557 1,567 3,220 ------------------- ------------------ ------------------- $ 1,557 $ 1,567 $ 3,851 =================== ================== ===================
The Bank evaluates loans for impairment whenever the collectibility of contractual principal and interest payments is questionable. 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 March 31, 2003, December 31, 2002 and March 31, 2002, respectively. Impaired loans for which valuation allowances had been established totaled $496 thousand for the quarter ended March 31, 2003, $496 thousand for the quarter ended December 31, 2002 and $3.7 million for the quarter ended March 31, 2002. Impaired loans for which there was no valuation allowance established totaled $1.6 million for the quarter ended March 31, 2003, $1.6 million for the quarter ended December 31, 2002 and $2.3 million for the quarter ended March 31, 2002. See "Results of Operations" for an analysis of activity in the valuation allowance for impaired loans. Impaired non-performing loans were $496 thousand, $496 thousand and $631 thousand at March 31, 2003, December 31, 2002 and March 31, 2002, respectively. 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 was $1.6 million for the quarter ended March 31, 2003, $2.6 million for the quarter ended December 31, 2002 and $6.8 million for the quarter ended March 31, 2002. The amount of interest income recognized on the cash basis for impaired loans during the quarters ended March 31, 2003, December 31, 2002 and March 31, 2002 was $20 thousand, $61 thousand and $118 thousand, respectively. Interest income recognized under the accrual basis for the quarters ended March 31, 2003, December 31, 2002 and March 31, 2002 was $19 thousand, $61 thousand and $110 thousand, respectively. 15 Asset Quality The following table sets forth certain asset quality ratios of the Bank at the periods indicated: March 31, December 31, March 31, 2003 2002 2002 ------------------- ------------------ ------------------- Non-Performing Loans to Loans Receivable (1) 0.15% 0.17% 0.16% Non-Performing Assets to Total Assets (2) 0.14% 0.17% 0.16% Allowances for Loan Losses to Non-Performing Loans (3) 1,286% 1,126% 1,167% Allowances for Loan Losses to Loans Receivable (4) 1.89% 1.96% 1.88%
(1) Non-performing loans are net of valuation allowances related to those loans. Loans receivable 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 any valuation allowances for non-performing loans, impaired loans and the general valuation allowance. Non-performing loans are before deducting valuation allowances related to those loans. (4) The Bank's general valuation allowances plus the allowance for impaired loans as a percentage of gross loans receivable before deducting unrealized loan fees, general valuation allowances and valuation allowances for impaired loans. 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). The following is an analysis of non-performing assets as of the periods indicated: March 31, December 31, March 31, 2003 2003 2002 -------------------- ------------------ ---------------------- (In thousands) Real estate owned: Single family $ 568 $ 519 $ 1,161 Multi-family -- -- 164 Less: General valuation allowance (200) (200) (350) -------------------- ------------------ ---------------------- Total real estate owned 368 319 975 -------------------- ------------------ ---------------------- Non-accrual loans: Single family 5,176 5,705 5,596 Multi-family 701 1,017 814 Other 16 -- 9 -------------------- ------------------ ---------------------- Total non-accrual loans 5,893 6,722 6,419 -------------------- ------------------ ---------------------- Total non-performing assets $ 6,261 $ 7,041 $ 7,394 ==================== ================== ======================
16 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. Historically, single family non-performing loans have been attributable to factors such as layoffs and decreased incomes. Historically, multi-family and commercial non-performing loans have been attributable to factors such as declines in occupancy rates, employment rates and rental values. 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 selects 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. Total savings deposits decreased by $34.6 million during the first quarter of 2003. The decrease in deposits for the first quarter of 2003 is attributable to a reduction in deposits acquired from national brokerage firms ("brokered deposits") and telemarketing deposits. Brokered deposits decreased by $109.3 million during the first quarter of 2003. Due to increased liquidity from loan payoffs, the Bank decreased its use of brokered deposits during the first quarter of 2003. Brokered deposits comprised 2% and 12% of total deposits at March 31, 2003 and March 31, 2002, 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. Deposits accepted by retail banking offices increased by $91.6 million during the first quarter of 2003. Management attributes the increase to customer demand for safe, liquid investments due to volatility in the equity markets. If the equity markets improve, the Bank may lose substantial amounts of deposits, particularly money market deposits, which have increased to 51% of total retail deposits as of March 31, 2003 from 41% of total retail deposits at March 31, 2002. Retail deposits comprised 96% and 85% of total deposits as of March 31, 2003 and March 31, 2002, respectively. Telemarketing deposits decreased by $16.9 million during the first quarter of 2003. 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 2% and 3% of total deposits at March 31, 2003 and March 31, 2003, respectively. Total borrowings increased by $173.7 million during the first quarter of 2003 due to a $180.0 million net increase in advances from the FHLB and net payoffs of $6.3 million in repurchase agreements. The increase during the first quarter of 2003 in borrowings is primarily attributable to increased loan origination activity. 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 lending activity and the general level of interest rates. Total principal payments on loans and mortgage-backed securities were $383.4 million for the first quarter of 2003. This compares with principal payments of $397.5 million for the first quarter of 2002. The increase is primarily attributable to increased payoff activity as borrowers continue to refinance existing loans into new loans at lower rates. 17 Loan sales were $40.5 million for the first quarter of 2003, compared with sales of $18.2 million for the first quarter of 2002. Loan sale activity varies based upon borrower demand for 15-year and 30-year fixed rate loans, which the bank only originates for sale in the secondary market. Item 3. Quantitative and Qualitative Disclosures About Market Risk See "Management's and Discussion and Analysis of Financial Condition and Results of Operations - Asset/Liability Management" on page 10 hereof for Quantitative and Qualitative Disclosures About Market Risk. Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures Under SEC rules, the Company is required to maintain disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Within the 90-day period prior to the filing date of this report, the Company carried out an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures. The Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, supervised and participated in the evaluation. Based on this evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of the evaluation date. Changes in Internal Controls There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. 18 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form-8K (a) Exhibits (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)Bylaws filed as Exhibit 3.2 to Form 10-Q dated August 12, 2002 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) 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. (10.3) 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 March 31, 2001 and incorporated by reference. (10.4) 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 March 31, 2001, and incorporated by reference. (21) Registrant's sole subsidiary is First Federal Bank of California, a federal savings bank. (99.1) Certification of Chief Executive Officer pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (99.2) Certification of Chief Financial Officer pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K The Company filed current reports on Form 8-K during the quarter ended March 31, 2003 on the following dates: January 29, 2003, February 28, 2003, and March 18, 2003. These reports are related to the release of the Company's disclosure of certain other financial data. 19 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 9, 2003 By: /s/ Douglas J. Goddard ---------------------- Douglas J. Goddard Chief Financial Officer and Executive Vice President 20 CERTIFICATION OF CHIEF EXECUTIVE OFFICER I, Babette Heimbuch, certify that: (1) I have reviewed this quarterly report on Form 10-Q of FirstFed Financial Corp.; (2) Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; (3) Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; (4) The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: (i) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (ii) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (iii) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; (5) The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons fulfilling the equivalent function): (i) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (ii) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and (6) The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated this 9th day of May 2003. By: /s/ Babette E. Heimbuch ------------------- Babette E. Heimbuch Chief Executive Officer 21 CERTIFICATION OF CHIEF FINANCIAL OFFICER I, Douglas Goddard, certify that: (1) I have reviewed this quarterly report on Form 10-Q of FirstFed Financial Corp.; (2) Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; (3) Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; (4) The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: (i) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (ii) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (iii) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; (5) The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons fulfilling the equivalent function): (i) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (ii) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and (6) The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated this 9th day of May 2003. By: /s/ Douglas Goddard ------------------- Douglas Goddard Chief Financial Officer 22 EXHIBIT 99.1 Exhibit 99.1 CEO CERTIFICATION The undersigned, as Chief Executive Officer hereby certifies, to the best of her knowledge and belief, that: (1) the Form 10-Q of FirstFed Financial Corp. (the "Company") for the quarterly period ended March 31, 2003 (the "Report ") accompanying this certification fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company for such period. This certification is made solely for purposes of complying with the provisions of Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. FIRSTFED FINANCIAL CORP. Registrant Date: May 9, 2003 By: /s/ Babette E. Heimbuch ------------------- Babette E. Heimbuch Chief Executive Officer 23 EXHIBIT 99.2 Exhibit 99.2 CFO CERTIFICATION The undersigned, as Chief Financial Officer hereby certifies, to the best of his knowledge and belief, that: (1) the Form 10-Q of FirstFed Financial Corp. (the "Company") for the quarterly period ended March 31, 2003 (the "Report ") accompanying this certification fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company for such period. This certification is made solely for purposes of complying with the provisions of Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. FIRSTFED FINANCIAL CORP. Registrant Date: May 9, 2003 By: /s/ Douglas J. Goddard ---------------------- Douglas J. Goddard Chief Financial Officer and Executive Vice President 24