-----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, NTXnQRyNL2rIO36tfIe1JF1cQFd78fVHOfvgR8bRf4kyidQ+pImmFHF5/CkqeCmK b9bQqNyvk/5x57Nt3q1CXw== 0000810536-05-000030.txt : 20051108 0000810536-05-000030.hdr.sgml : 20051108 20051108143216 ACCESSION NUMBER: 0000810536-05-000030 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20050930 FILED AS OF DATE: 20051108 DATE AS OF CHANGE: 20051108 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: 1934 Act SEC FILE NUMBER: 001-09566 FILM NUMBER: 051185900 BUSINESS ADDRESS: STREET 1: 401 WILSHIRE BOULEVARD CITY: SANTA MONICA STATE: CA ZIP: 90401-1490 BUSINESS PHONE: 3103196000 MAIL ADDRESS: STREET 1: 401 WILSHIRE BOULEVARD CITY: SANTA MONICA STATE: CA ZIP: 90401 10-Q 1 q10q0905.txt THIRD QUARTER 2005 FINANCIALS ================================================================================ 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 September 30, 2005 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 Identification No.) 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 |_| Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes |_| No |X| As of October 28, 2005, 16,556,450 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 Balance Sheets as of September 30, 2005, December 31, 2004 3 and September 30, 2004 Consolidated Statements of Income for the three and nine months ended 4 September 30, 2005 and 2004 Consolidated Statements of Cash Flows for the nine months ended 5 September 30, 2005 and 2004 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results 9 of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk 21 Item 4. Controls and Procedures 21 Part II. Other Information (omitted items are inapplicable) Item 6. Exhibits and Reports on Form 8-K 22 Signatures 23 Exhibits 31.1 Certification of Chief Executive Officer pursuant to Section 302 of 24 the Sarbanes-Oxley Act of 2002 25 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of Chief Executive Officer pursuant to 18 USC Section 26 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification of Chief Financial Officer pursuant to 18 USC Section 27 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
2 PART I - FINANCIAL STATEMENTS Item 1. Financial Statements FirstFed Financial Corp. and Subsidiary Consolidated Balance Sheets (In thousands, except share data) September 30, September 30, 2005 December 31, 2004 2004 (Unaudited) (Unaudited) ----------------- ---------------- ------------------ ASSETS Cash and cash equivalents $ 52,194 $ 68,343 $ 40,346 Investment securities, available-for-sale (at fair 274,419 value) 204,730 250,586 Mortgage-backed securities, available-for-sale (at fair value) 79,460 97,059 105,811 Loans receivable, held for sale (fair value $15,130, $0 and $0) 14,870 - - Loans receivable, net 9,216,259 6,837,945 5,825,939 Accrued interest and dividends receivable 41,220 24,115 20,847 Real estate held for investment - 986 1,606 Office properties and equipment, net 15,407 15,881 15,339 Investment in Federal Home Loan Bank (FHLB) stock, at cost 182,778 143,425 123,525 Other assets 44,060 30,643 30,707 ----------------- ---------------- ------------------ $ 9,850,978 $ 7,468,983 $ 6,438,539 ================= ================ ================== LIABILITIES Deposits $ 4,404,765 $ 3,761,165 $ 3,251,892 FHLB advances 3,654,900 3,004,600 2,576,200 Securities sold under agreements to repurchase 1,125,838 187,000 111,224 Senior debentures 50,000 - - Accrued expenses and other liabilities 76,292 38,744 41,044 ----------------- ---------------- ------------------ 9,311,795 6,991,509 5,980,360 ----------------- ---------------- ------------------ COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Common stock, par value $.01 per share; authorized 100,000,000 shares; issued 23,751,046, 23,693,350 and 23,627,644 shares, outstanding 16,556,450, 16,498,754 and 16,433,048 shares 238 237 236 Additional paid-in capital 42,157 40,977 38,815 Retained earnings - substantially restricted 612,737 549,202 532,762 Unreleased shares to employee stock ownership plan (2,628) (53) (969) Treasury stock, at cost, 7,194,596 shares (113,776) (113,776) (113,776) Accumulated other comprehensive income, net of taxes 455 887 1,111 ----------------- ---------------- ------------------ 539,183 477,474 458,179 ----------------- ---------------- ------------------ $ 9,850,978 $ 7,468,983 $ 6,438,539 ================= ================ ================== The accompanying notes are an integral part of these consolidated financial statements.
3 FirstFed Financial Corp. and Subsidiary Consolidated Statements of Income (Dollars in thousands, except per share data) (Unaudited) Three months ended Sep. 30, Nine months ended Sep. 30, ------------------------------------- ------------------------------- 2005 2004 2005 2004 ---------------- ---------------- --------------- ------------ Interest and dividend income: Interest on loans $ 120,007 $ 60,821 $ 311,768 $ 174,335 Interest on mortgage-backed securities 702 777 2,128 2,583 Interest and dividends on investments 4,048 3,401 11,606 7,958 ---------------- ---------------- --------------- ------------ Total interest income 124,757 64,999 325,502 184,876 ---------------- ---------------- --------------- ------------ Interest expense: Interest on deposits 26,922 10,485 64,943 27,614 Interest on borrowings 41,833 15,648 100,419 40,696 ---------------- ---------------- --------------- ------------ Total interest expense 68,755 26,133 165,362 68,310 ---------------- ---------------- --------------- ------------ Net interest income 56,002 38,866 160,140 116,566 Provision for loan losses 8,000 - 15,750 - ---------------- ---------------- --------------- ------------ Net interest income after provision for loan lossses 48,002 38,866 144,390 116,566 ---------------- ---------------- --------------- ------------ Other income: Loan servicing and other fees 6,844 2,463 14,185 6,928 Banking service fees 1,400 1,411 4,168 4,127 Gain on sale of loans (14) 5,403 (14) 5,434 Real estate operations, net 1,785 (24) 2,060 106 Other operating income 123 73 330 232 ---------------- ---------------- --------------- ------------ Total other income 10,138 9,326 20,729 16,827 ---------------- ---------------- --------------- ------------ Non-interest expense: Salaries and employee benefits 10,966 11,066 34,721 29,681 Occupancy 2,480 2,359 7,255 6,438 Advertising 60 69 412 428 Amortization of core deposit intangible 498 498 1,496 1,496 Federal deposit insurance 125 99 372 289 Legal 127 556 1,200 1,288 Other operating expense 3,516 3,047 9,869 8,707 ---------------- ---------------- --------------- ------------ Total non-interest expense 17,772 17,694 55,325 48,327 ---------------- ---------------- --------------- ------------ Income before income taxes 40,368 30,498 109,794 85,066 Income taxes 17,010 12,626 46,259 35,664 ---------------- ---------------- --------------- ------------ Net income $ 23,358 $ 17,872 $ 63,535 $ 49,402 ================ ================ =============== ============ Net income $ 23,358 $ 17,872 $ 63,535 $ 49,402 Other comprehensive income (loss), net of taxes (670) 531 (432) 20 ---------------- ---------------- --------------- ------------ Comprehensive income $ 22,688 $ 18,403 $ 63,103 $ 49,422 ================ ================ =============== ============ Earnings per share: Basic $ 1.41 $ 1.09 $ 3.85 $ 2.95 ================ ================ =============== ============ Diluted $ 1.38 $ 1.06 $ 3.76 $ 2.88 ================ ================ =============== ============ Weighted average shares outstanding: Basic 16,536,425 16,416,629 16,517,040 16,752,261 ================ ================ =============== ============ Diluted 16,928,804 16,825,386 16,897,927 17,158,980 ================ ================ =============== ============ The accompanying notes are an integral part of these consolidated financial statements.
4 FirstFed Financial Corp. and Subsidiary Consolidated Statements of Cash Flows (In thousands) (Unaudited) Nine months ended September 30, -------------------- --- -------------------- 2005 2004 -------------------- -------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 63,535 $ 49,402 Adjustments to reconcile net income to net cash provided by operating activities: Net change in loans held-for-sale (14,870) 492 Depreciation and amortization 1,380 837 Provision for loan losses 15,750 - Amortization of fees and premiums/discounts 32,491 9,506 Increase in interest income accrued in excess of borrower payments (37,535) (3,505) Gain on sale of real estate held for investment (1,870) - Loss (gain) on sale of loans 14 (5,400) Decrease in servicing asset 49 90 FHLB stock dividends (4,573) (2,805) Change in taxes (14,546) 4,193 Increase in interest and dividends receivable (17,105) (3,906) Increase in interest payable 16,673 2,027 Amortization of core deposit intangible asset 1,496 1,496 Decrease (increase) in other assets (3,066) (7,301) Increase in accrued expenses and other liabilities 7,759 3,183 -------------------- -------------------- Total adjustments (17,953) (1,093) -------------------- -------------------- Net cash provided by operating activities 45,582 48,309 -------------------- -------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Loans made to customers and principal collections on loans, net (2,326,475) (1,429,019) Loans purchased - (422) Deferred loan origination costs (61,449) (28,913) Proceeds from sales of real estate held for investment 2,856 1,324 Proceeds from maturities and principal payments of investment securities, available-for-sale 96,910 40,561 Principal reductions on mortgage-backed securities, available for sale 17,270 28,880 Purchase of investment securities, available for sale (51,570) (198,494) Purchases of FHLB stock (34,780) (32,945) Purchases of premises and equipment - (5,608) -------------------- -------------------- Net cash used by investing activities (2,357,238) (1,624,636) CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposits 643,600 713,494 Net increase in accounts payable to investors 6,161 - Net increase in short term borrowings 1,954,138 1,062,802 Net decrease in long term borrowings (315,000) (192,000) Increase in advance payments for taxes and insurance 8,002 5,869 Purchases of treasury stock - (28,049) Other (1,394) 239 -------------------- -------------------- Net cash provided by financing activities 2,295,507 1,562,355 -------------------- -------------------- Net decrease in cash and cash equivalents (16,149) (13,972) Cash and cash equivalents at beginning of period 68,343 54,318 -------------------- -------------------- Cash and cash equivalents at end of period $ 52,194 $ 40,346 ==================== ==================== The accompanying notes are an integral part of these 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. In January of 2005, the Bank completed a multi-family loan securitization with Fannie Mae in which $1.3 billion in loans from its loan portfolio were formed into mortgage-backed securities. In accordance with Statement of Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS 140), loan securitizations are not recorded as sales because the Company retains all beneficial ownership interests. Securitized loans are presented in the Company's loan portfolio and the borrowings used as collateral are presented in the Company's liabilities as securities sold under agreements to repurchase. Because the Bank retains full recourse on the securitized loans, the mortgage-backed securities will continue to be accounted for as part of its loan portfolio. These loans are evaluated for risk along with the remainder of the Bank's multi-family loan portfolio. 5. 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, establishes 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 Nine Months Ended September 30, September 30, ------------------------------------ ---------------------------------- 2005 2004 2005 2004 ---------------- ---------------- --------------- --------------- (In thousands, except per share data) Net income as reported...........................$ 23,358 $ 17,872 $ 63,535 $ 49,402 Deduction: Total stock-based compensation expense determined under fair-value-based method for all awards, net of tax......................... (310) (116) (871) (536) ---------------- ---------------- --------------- --------------- Pro forma net income...........................$ 23,048 $ 17,756 $ 62,664 $ 48,866 ================ ================ =============== =============== Earnings per share: Basic: As reported....................................$ 1.41 $ 1.09 $ 3.84 $ 2.95 Pro forma......................................$ 1.39 $ 1.08 $ 3.79 $ 2.92 Diluted: As reported....................................$ 1.38 $ 1.06 $ 3.76 $ 2.88 Pro forma......................................$ 1.36 $ 1.06 $ 3.72 $ 2.86
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 2005 and 2004, respectively: no dividend yield in any year; expected volatility of 31% and 32%; risk free interest rates of 4.2%; and expected average lives of 5.5 years. The weighted-average grant date fair value of options granted during the periods is $19.34 and $15.58 for 2005 and 2004. The Company has elected to recognize forfeitures in the year they occur. 6. The following table sets forth the net periodic benefit cost attributable to the Company's Supplementary Executive Retirement Plan: Pension Benefits Three months ended Nine months ended September 30, September 30, ----------------------------------- ------------------------------------ 2005 2004 2005 2004 --------------- ---------------- ---------------- --------------- (In thousands) Service cost..................................$ 141 $ 122 $ 423 $ 365 Interest cost................................. 167 152 501 454 Amortization of net loss...................... 57 38 171 111 Amortization of prior service cost............ 4 34 12 101 --------------- ---------------- ---------------- --------------- Net periodic benefit cost...................$ 369 $ 346 $ 1,107 $ 1,031 =============== ================ ================ =============== Weighted Average Assumptions Discount rate................................. 5.75% 6.00% 5.75% 6.00% Rate of compensation increase................. 4.00% 4.00% 4.00% 4.00% Expected return on plan assets................ N/A N/A N/A N/A
The Company does not expect any significant changes to the amounts previously disclosed for contributions for benefits payments. 7 7. Recent Accounting Pronouncements In May 2005, FASB issued FASB Statement No. 154, "Accounting Changes and Error Corrections" ("SFAS No. 154"). SFAS No. 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes, unless impracticable, retrospective application as the required method for reporting a change in accounting principle in the absence of explicit transition requirements specific to the newly adopted accounting principle. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company does not expect the adoption of SFAS No. 154 to have a material impact on the financial condition or operating results of the Company. In December 2004, FASB issued FASB Statement No. 123R " Share-Based Payment " ("SFAS No. 123R"), which is a revision to FASB Statement No. 123, " Accounting for Stock-Based Compensation " ("SFAS No. 123"), and which addresses the accounting for transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise's equity instruments or that may be settled by the issuance of such equity instruments. This statement eliminates the ability to account for share-based compensation transactions using Accounting Principles Board Opinion ("APB") No. 25, and generally would require instead that such transactions be accounted for using a fair-value-based method. The statement does not change the accounting in SFAS No. 123, for transactions in which an enterprise exchanges its equity instruments for services of parties other than employees or the accounting for employee stock ownership plans, which are subject to American Institute of Certified Public Accountants ("AICPA") Statement of Position 93-6, " Employers' Accounting for Employee Stock Ownership Plans" . A release was issued by the SEC on April 14, 2005 which changes the phase in period for SFAS No. 123R to the first quarter of 2006. The company will account for stock-based compensation based on this new pronouncement at that time. The Company does not expect the adoption of SFAS No. 123R to have a material impact on the financial condition or operating results of the Company. In March 2005, the SEC staff issued Staff Accounting Bulletin No. 107 ("SAB No. 107") to provide guidance on SFAS No. 123R. SAB No. 107 provides the SEC staff's view regarding the valuation of share-based payment arrangements for public companies. In particular, SAB No. 107 provides guidance related to share-based payment transactions with non-employees, the transition from non public to public entity status, valuation methods (including assumptions such as expected volatility and expected term), the accounting for certain redeemable financial instruments issued under share-based payment arrangements, the classification of compensation expense, non-GAAP financial measures, first time adoption of SFAS No. 123R, the modification of employee share options prior to the adoption of SFAS No. 123R and disclosure in Management's Discussion and Analysis subsequent to adoption of SFAS No. 123R. The Company does not expect the adoption of SFAS No. 123R and the guidance of SAB No. 107 to have a material impact on the financial condition or operating results of the Company. 8 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 our 2004 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, 2004, and for the year then ended. Therefore, only material changes in the consolidated balance sheets and consolidated statements of income 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, our periodic and current reports are available free of charge on our 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. 9 Consolidated Balance Sheets At September 30, 2005, FirstFed Financial Corp. ("Company"), holding company for First Federal Bank of California and its subsidiaries ("Bank"), had consolidated stockholders' equity of $539.2 million compared to $477.5 million at December 31, 2004 and $458.2 million at September 30, 2004. Consolidated total assets at September 30, 2005 were $9.9 billion compared to $7.5 billion at December 31, 2004 and $6.4 billion at September 30, 2004. The increase in total assets for the period ended September 30, 2005 compared to December 31, 2004 and September 30, 2004 is primarily attributable to growth in the loan portfolio to $9.2 billion at September 30, 2005 from $6.8 billion at December 31, 2004 and $5.8 billion at September 30, 2004. Loan originations and purchases were $3.7 billion during the first nine months of 2005 compared to $2.5 billion during the first nine months of 2004. Loan payoffs and principal reductions were $1.4 billion during the first nine months of 2005 compared to $1.1 billion during the first nine months of 2004. Our asset growth during the first nine months of 2005 was funded with collateralized borrowings, deposits and borrowings from the FHLB. Collateralized borrowings increased to $1.1 billion at September 30, 2005 from $187.0 million at December 31, 2004 and $111.2 million at September 30, 2004. To facilitate these borrowings, in January of 2005 we completed a loan securitization with Fannie Mae in which $1.3 billion of multi-family loans were converted into mortgage-backed securities. Because we retained full recourse on the securitized loans, we continue to account for these mortgage-backed securities as part of our loan portfolio. FHLB advances increased by $650.3 million and deposits increased by $643.6 million during the first nine months of 2005. On June 15, 2005, the Company completed a $50 million offering of senior debentures due in 2015 with interest fixed at 5.65% for the first five years and adjustable thereafter at 1.55% over the 3-month LIBOR. As of September 30, 2005, $25 million had been invested in the Bank as additional equity. The remaining proceeds will be used to finance the Bank's growth and for general corporate purposes. The Bank's risk-based capital ratio was 11.70% and its core and tangible capital ratios were 5.66% as of September 30, 2005. Because substantially all of the Bank's loans are located in California, we continuously monitor the California real estate market and the sufficiency of the collateral supporting our real estate loan portfolio. We consider several factors including the property location, the date of loan origination, the original loan-to-value ratio and the current loan to value ratio. The state of California has been experiencing record high home prices for the last several years. According to the California Association of Realtors ("CAR") report released October 25, 2005, the median price of a single family home in California grew to $543,980 during the month of September, an increase of 17.3% over the median price one year ago. Sales activity levels also increased 3.9% during September 2005 compared to one year ago. Many economists believe that the California real estate market can not continue to increase at these record levels. The UCLA Anderson Forecast for California, September 2005 Report (the "UCLA Forecast"), predicts a slow down in the LA County housing market early in 2006, with a broader economic slowdown in 2006-2007. 10 Lending Activities The following table summarizes loan originations by property type for the periods indicated: Nine months ended September 30, 2005 2004 -------------- --------------- (In thousands) Single family $ 3,321,379 $ 1,972,121 Multi-family and commercial 390,520 487,271 Other (1) 35,615 61,915 ------------ ------------- Total $ 3,747,514 $ 2,521,307 ============ ============= (1) Includes consumer loans and commercial business loans. The following table shows the components of our portfolio of loans (including loans held for sale) by collateral type at the dates indicated: September 30, December 31, 2004 September 30, 2005 2004 ------------------ ---------------- ----------------- (In thousands) REAL ESTATE LOANS First trust deed residential loans One-to-four units $ 6,873,628 $ 4,585,962 $ 3,727,516 Five or more units 1,938,436 1,825,564 1,703,413 ------------------ ---------------- ----------------- Residential loans 8,812,064 6,411,526 5,430,929 OTHER REAL ESTATE LOANS Commercial and industrial 295,558 324,805 313,475 Second trust deeds 6,555 5,466 6,018 Other 4,448 20,902 19,028 ------------------ ---------------- ----------------- Real estate loans 9,118,625 6,762,699 5,769,450 NON-REAL ESTATE LOANS Deposit accounts 396 491 526 Commercial business loans 81,977 58,869 55,742 Consumer 60,303 60,677 57,940 ------------------ ---------------- ----------------- Loans receivable 9,261,301 6,882,736 5,883,658 LESS: General valuation allowances - loan portfolio 93,594 78,675 75,681 Valuation allowances - impaired loans - 496 496 Deferred loan origination costs, net (63,422) (34,380) (18,458) ------------------ ---------------- ----------------- 9,231,129 6,837,945 5,825,939 LESS: Loans held for sale 14,870 - - ------------------ ---------------- ----------------- Net loans receivable 9,216,259 6,837,945 5,825,939 ================== ================ =================
11 The following table summarizes loan originations by type of index for the periods indicated: Nine months ended September 30, 2005 2004 -------------- ---------------- (In thousands) Adjustable: CODI $ 3,037,519 $ 1,656,298 12MAT 508,687 703,389 COFI 168,758 79,496 LIBOR 600 - Other 31,010 58,792 Fixed: 940 3,723 Hybrid (1) - 19,609 ------------ -------------- Total $ 3,747,514 $ 2,521,307 ============ ============== (1) These loan types are adjustable rate loans with initial fixed interest rate periods ranging from 3 to 7 years.
At September 30, 2005, 95.9% of our loan portfolio was invested in adjustable rate products. Loans that adjust monthly based on the 3-Month Certificate of Deposit Index ("CODI") comprised 54.9% of the loan portfolio. Loans that adjust monthly based on the 12-month average U.S. Treasury Security rate ("12MAT") comprised 24.2% of the loan portfolio. Loans that adjust monthly based on the Federal Home Loan Bank ("FHLB") Eleventh District Cost of Funds Index ("COFI") comprised 12.2% of the loan portfolio. Loans that adjust monthly based on the London Inter-Bank Offering Rate ("LIBOR") and other indices comprised 4.6% of the loan portfolio. The following table summarizes single family loan originations by documentation type for the periods indicated: Nine months ended September 30, 2005 2004 -------------- --------------- (In thousands) Verified Income/Verified Asset $ 544,375 $ 328,767 Stated Income/Verified Asset 1,124,049 588,369 Stated Income/Stated Asset 1,216,061 870,961 No Income/No Asset 436,894 184,024 ------------ ------------- Total $ 3,321,379 $ 1,972,121 ============ =============
Loans that allow for a reduced level of documentation at origination are an increasing percentage of loans originated in our market areas. On Stated Income/Stated Asset ("SISA") loans, the borrower includes information on his/her level of income and assets that is not subject to verification. On Stated Income/Verified Assets ("SIVA") loans, the borrower includes information on his/her level of income, but his/her assets are verified. For No Income/No Asset ("NINA") loans, the borrower is not required to submit information on his/her level of income or assets. The Bank attempts to mitigate the inherent risk of making reduced documentation loans by evaluating the other credit characteristics of the loans, such as the creditworthiness of the borrower and the loan to value ratio based on the collateral's appraised value at the origination date. The underwriting of these loans is based on the borrower's credit score, credit history and the value of the collateral. 12 The average borrower FICO score and average loan-to-value ratio on single family loan originations were 715 and 74%, respectively, for the first nine months of 2005, compared to 704 and 75% for the comparable 2004 period. At September 30, 2005, approximately 10%, 31% and 37% of our single family loan portfolio was comprised of NINA, SIVA and SISA loans, respectively. This compares to 6%, 27% and 39% of our single family loan portfolio being NINA, SIVA and SISA loans, respectively, at September 30, 2004. Our portfolios of multi-family and other real estate loans all require full documentation by the borrowers. Our adjustable rate products allow negative amortization to occur when a borrower's monthly payment is not large enough to pay the monthly interest accruing on the loan. Negative amortization, which results when unpaid interest earned by the Bank is added to borrowers' loan balances, totaled $37.6 million at September 30, 2005, $5.6 million at December 31, 2004 and $3.5 million at September 30, 2004. Negative amortization increased by $17.2 million during the third quarter of 2005 and $32.0 million during the first nine months of 2005. Negative amortization has increased over the last four quarters due to rising interest rates, the origination of loans with low initial pay rates and an increasing number of single family loans that allow for fixed payment periods of three to five years. The portfolio of single family loans with fixed payment periods of three to five years was $2.7 billion at September 30, 2005, $1.6 billion at December 31, 2004 and $1.1 billion at September 30, 2004. Negative amortization as a percentage of all single family loans with fixed payment periods (one to five years) totaled 0.55% at September 30, 2005, 0.12% as of December 31, 2004 and 0.10% as of September 30, 2004. The amount of negative amortization that may occur in the loan portfolio is uncertain and is influenced by a number of factors outside of our control, including changes in the underlying index, the amount and timing of borrowers' monthly payments, and unscheduled principal payments. If the applicable index were to increase and remain at relatively high levels, the amount of deferred interest occurring in the loan portfolio would be expected to trend higher, absent other mitigating factors such as increased prepayments or borrowers making monthly payments that meet or exceed the amount of interest then accruing on their mortgage loan. Similarly, if the index were to decline and remain at relatively low levels, the amount of negative amortization occurring in the loan portfolio would be expected to trend lower. Our non-performing assets to total assets ratio was 0.07% at September 30, 2005, compared to 0.07% at December 31, 2004 and 0.02% at September 30, 2004. (See "Non-performing Assets" for further discussion.) We recorded net loan charge-offs of $1.0 million and $1.3 million for the third quarter of 2005 and first nine months of 2005. This compares to net loan recoveries of $231 thousand and $443 thousand during the third quarter and first nine months of 2004. Due to growth in the loan portfolio, we recorded loan loss provisions of $8.0 million and $15.8 million during the third quarter and first nine months of 2005, but no provision was recorded for the comparable 2004 periods. Allowances for loan losses (including general valuation allowances and valuation allowances for impaired loans) totaled $93.6 million or 1.01% of gross loans at September 30, 2005. This compares with $79.2 million or 1.15% at December 31, 2004 and $76.2 million or 1.29% at September 30, 2004. The mortgage-backed securities portfolio, classified as available-for-sale, was recorded at fair value as of September 30, 2005. An unrealized gain of $230 thousand, net of taxes, was recorded in stockholders' equity as of September 30, 2005. This compares to net unrealized gains of $420 thousand as of December 31, 2004 and $684 thousand as of September 30, 2004. The investment securities portfolio, classified as available-for-sale, was recorded at fair value as of September 30, 2005. An unrealized gain of $225 thousand, net of taxes, was reflected in stockholders' equity as of September 30, 2005. This compares to net unrealized gains of $467 thousand as of December 31, 2004 and a net unrealized loss of $427 thousand as of September 30, 2004. 13 Asset/Liability Management Market risk is the risk of loss from adverse changes in market prices and interest rates. Our market risk arises primarily from the interest rate risk inherent in our lending and liability funding activities. Our interest rate spread typically decreases during periods of increasing interest rates because there is a three-month time lag before changes in COFI, and a two-month time lag before changes in 12MAT, CODI and LIBOR, can be implemented with respect to our adjustable rate loans. Therefore, during periods immediately following interest rate increases, our cost of funds tends to increase faster than the yield earned on our adjustable rate loan portfolio. The reverse is true during periods immediately following interest rate decreases. The composition of our financial instruments that are subject to market risk has not changed materially since December 31, 2004. The one year GAP (the difference between rate-sensitive assets and liabilities repricing within one year or less) was a positive $347.2 million or 3.52% of total assets at September 30, 2005. In comparison, the one year GAP was a positive $653.7 million or 8.75% of total assets at December 31, 2004. The decrease in GAP at September 30, 2005 from December 31, 2004 was attributable to an increase in short-term borrowings to fund adjustable rate loans. 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 our actual capital and required capital at September 30, 2005: Tier 1 Risk-based Tangible Core Capital Risk- based Capital Capital Capital -------------- -------------- --------------- -------------- (Dollars in thousands) Actual Capital: Amount $ 557,402 $ 557,402 $ 557,402 $ 624,464 Ratio 5.66% 5.66% 10.44% 11.70% FIRREA minimum required capital: Amount $ 147,674 $ 393,799 $ - $ 427,077 Ratio 1.50% 4.00% -% 8.00% FIRREA well capitalized required capital: Amount $ - $ 492,248 $ 320,308 $ 533,846 Ratio -% 5.00% 6.00% 10.00%
The above capital ratios include a $25.0 million additional investment in the Bank by FirstFed Financial Corp. during the third quarter of 2005. There were no repurchases of common stock during the first nine months of 2005. Common stock repurchases during the year 2004 amounted to 696,900 shares of company stock at an average market price of $40.25 per share. There remain 1,472,079 shares eligible for repurchase under our stock repurchase program as of October 28, 2005. 14 Loan Loss Allowances Listed below is a summary of activity in our general valuation allowance and the valuation allowance for impaired loans during the periods indicated: Nine Months Ended September 30, 2005 ----------------- -- ---------------- -- ------------- General Impaired Valuation Valuation Allowances Allowances Total ----------------- ---------------- ------------- (In thousands) Balance at December 31, 2004 $ 78,675 $ 496 $ 79,171 Provision for loan losses 14,650 1,100 15,750 Charge-offs: Single family (5) - (5) Commercial - (1,596) (1,596) ----------------- ---------------- ------------- Total charge-offs (5) (1,596) (1,601) Recoveries 274 - 274 ----------------- ---------------- ------------- Net (charge-offs)/recoveries 269 (1,596) (1,327) ----------------- ---------------- ------------- Balance at September 30, 2005 $ 93,594 $ - $ 93,594 ================= ================ =============
Nine Months Ended September 30, 2004 ----------------- -- ---------------- -- ------------- General Impaired Valuation Valuation Allowances Allowances Total ----------------- ---------------- ------------- (In thousands) Balance at December 31, 2003 $ 75,238 $ 496 $ 75,734 Recoveries 443 - 443 ----------------- ---------------- ------------- Balance at September 30, 2004 $ 75,681 $ 496 $ 76,177 ================= ================ =============
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. Consolidated Statements of Income We reported consolidated net income of $23.4 million or $1.38 per diluted share of common stock and $63.5 million or $3.76 per diluted share of common stock for the third quarter and first nine months of 2005 compared to net income of $17.8 million or $1.06 per diluted share of common stock and $49.4 million or $2.88 per diluted share of common stock for the third quarter and first nine months of 2004. Income for the quarter and year-to-date periods increased due to growth in net interest income and an increase in loan prepayment fee income. Results for the third quarter of 2005 include a $1.9 million gain on the sale of real estate. Results for the third quarter of 2004 include a $5.4 million gain on the sale of loans, which resulted from the reversal of the valuation allowance for loans sold with recourse. 15 Net Interest Income Net interest income increased to $56.0 million and $160.1 million during the third quarter and first nine months of 2005 compared to $38.9 million and $116.6 million during the same periods of last year. Net interest income increased primarily as a result of an increase in average interest-earning assets offset by a decrease in interest rate spreads. Average interest-earning assets increased by 61% during the third quarter of 2005 compared to the third quarter of 2004 and by 63% during the first nine months of 2005 compared to the first nine months of last year. The interest rate spread decreased to 2.26% during the third quarter of 2005 from 2.55% during the third quarter of 2004 and to 2.34% for the first nine months of 2005 from 2.77% during the first nine months of 2004. The reduction in interest rate spreads is attributable to higher rates paid on deposits and borrowings which exceeded the upward adjustments on our adjustable rate loan portfolio. The Federal Reserve has increased short term interest rates twelve times since June 2004. The interest rate spread for 2005 has also declined as we have experienced higher levels of loan payoffs during the period. As loans are paid off, any unamortized deferred loan origination costs associated with those loans are written off and recorded as a reduction in loan interest income. The Bank also receives loan prepayment fees on most loans that are repaid in the first three years. In many cases, the Bank has designed the prepayment fee to offset the expense of the loan origination costs. The loan prepayment fees are recorded as loan fee income, as discussed below under "Non-Interest Income and Expense". 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 deposits and borrowings, (iii) the average daily dollar differences, (iv) the interest rate spreads, and (v) the effective net spreads for the periods indicated: During the Nine Months Ended September 30, -------------------------------------- 2005 2004 --------------- ------------------ (Dollars in thousands) Average loans and mortgage-backed securities $ 8,280,204 $ 4,968,365 Average investment securities 224,120 242,345 --------------- ------------------ Average interest-earning assets 8,504,324 5,210,710 --------------- ------------------ Average savings deposits 3,967,244 2,798,348 Average borrowings 4,250,675 2,136,130 --------------- ------------------ Average interest-bearing liabilities 8,217,919 4,934,478 --------------- ------------------ Excess of interest-earning assets over interest-bearing liabilities $ 286,405 $ 276,232 =============== ================== Yields earned on average interest-earning assets 5.02% 4.61% Rates paid on average interest-bearing liabilities 2.68 1.84 Interest rate spread 2.34 2.77 Effective net spread (1) 2.43 2.87 Total interest income $ 320,188 $ 180,160 Total interest expense 165,180 68,096 --------------- ------------------ 155,008 112,064 Total other items (2) 5,132 4,502 --------------- ------------------ Net interest income $ 160,140 $ 116,566 =============== ==================
(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. 16 Non-Interest Income and Expense Loan servicing and other fees increased to $6.8 million and $14.2 million for the third quarter and first nine months of 2005, compared to $2.5 million and $6.9 million for the same periods of the prior year. A higher percentage of loans in the Bank's current portfolio are subject to prepayment fees than in the past. As a result, loan prepayment fees grew to $6.2 million and $12.8 million for the third quarter and first nine months of 2005, compared to $2.2 million and $5.8 million for the same periods of 2004. Real estate operations resulted in net income of $1.8 million and $2.1 million for the third quarter and first nine months of 2005, compared to a net loss of $24 thousand for the third quarter of 2004 and a net gain of $106 thousand during the first nine months of 2004. 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. Real estate operations for the third quarter and first nine months of 2005 include a $1.6 million gain on the sale of a property acquired in settlement of a judgment and a $327 thousand recovery resulting from the settlement of a judgment. Non-interest expense totaled $17.8 million and $55.3 million during the third quarter and first nine months of 2005, respectively, compared to $17.7 million and $48.3 million during the same periods of 2004. The increase in expenses during the first nine months of 2005 compared to the first nine months of 2004 results from higher incentive-based compensation and other operating costs associated with increased loan production. Non-interest expense during the third quarter of 2005 was comparable to the third quarter of 2004 because loan originations and the costs thereon were approximately the same during the quarters. The ratio of non-interest expense to average total assets fell to 0.74% for the third quarter of 2005 compared to 1.18% for the third quarter of 2004. For the first nine months of 2005, the ratio of non-interest expense to total average assets decreased to 0.84% compared to 1.17% for the first nine months of 2004. The decreases are attributable to growth in average assets. Non-accrual, Past Due, Modified and Restructured Loans We accrue interest earned but uncollected for every loan without regard to its contractual delinquency status and establish a specific interest allowance for each loan which becomes 90 days or more past due or which is in foreclosure. Loans requiring delinquent interest allowances (non-accrual loans) totaled $6.7 million at September 30, 2005 compared to $5.0 million at December 31, 2004 and $1.4 million at September 30, 2004. The amount of interest allowance for loans 90 days or more delinquent or in foreclosure was $185 thousand, $256 thousand, and $190 thousand as of September 30, 2005, December 31, 2004, and September 30, 2004, respectively. The decrease in the interest allowance at September 30, 2005 is due to the fact that several loans in foreclosure were current or in prepaid status as of that date. We allow loan 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 us. 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. At September 30, 2005, we had net modified loans totaling $2.0 million. No modified loans were 90 days or more delinquent at September 30, 2005. We consider a loan impaired when management believes that it is probable that we 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, 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 expected to be received. 17 The following is a summary of impaired loans, net of valuation allowances for impairment, at the dates indicated: September 30, December 31, 2004 September 30, 2005 2004 ------------------- ------------------ ------------------- (In thousands) Non-accrual loans $ 2,722 $ 1,360 $ - Modified loans - - - ------------------- ------------------ ------------------- $ 2,722 $ 1,360 $ - =================== ================== ===================
We evaluate loans for impairment whenever the collectibility of contractual principal and interest payments is questionable. When a loan is considered impaired we measure 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, we record an impairment allowance equal to the excess of our recorded investment in the loan over its measured value. The following is a summary of information pertaining to impaired and non-accrual loans: At September 30, ----------------------------- 2005 2004 ------------- ------------- (In thousands) Impaired loans without a valuation allowance ........... $ 2,722 $ - Impaired loans with a valuation allowance............. $ - $ 496 Valuation allowance related to impaired loans........... $ - $ 496 Total non-accrual loans................................. $ 2,722 $ -
Three Months Ended ---------------------------------------------------------------- September 30, December 31, September 30, 2005 2004 2004 ------------------- ------------------ ----------------- (In thousands) Average investment in impaired loans.............. $ 2,893 $ 602 $ - Interest income recognized on impaired loans...... $ 37 $ 22 $ - Interest income recognized on a cash basis on impaired loans.................................. $ 29 $ 16 $ -
18 Asset Quality The following table sets forth certain asset quality ratios at the dates indicated: September 30, December 31, 2004 September 30, 2005 2004 ------------------- ------------------ ------------------- Non-performing loans to gross loans receivable (1) 0.07% 0.07% 0.02% Non-performing assets to total assets (2) 0.07% 0.07% 0.02% Loan loss allowances to non-performing loans (3) 1,393% 1,588% 5,560% Loan loss allowances to gross loans receivable (4) 1.01% 1.15% 1.29% -------------------------- (1) Loans receivable are before deducting unrealized loan fees (costs), general valuation allowances and valuation allowances for impaired loans. (2) Non-performing assets are net of valuation allowances related to those assets. (3) Our loan loss allowances, including general valuation allowances and valuation allowances for impaired loans. (4) Our general valuation allowances plus the allowance for impaired loans as a percentage of loans receivable before deducting unrealized loan fees (costs), general valuation allowances and valuation allowances for impaired loans.
Non-performing Assets We define 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 at the dates indicated: September 30, December 31, 2004 September 30, 2005 2004 -------------------- ------------------ ---------------------- (In thousands) Real estate owned: Single family $ - - - -------------------- ------------------ ---------------------- Total real estate owned - - - -------------------- ------------------ ---------------------- Non-accrual loans: Single family 6,718 4,590 1,364 Multi-family - 391 6 Other - 4 - -------------------- ------------------ ---------------------- Total non-accrual loans 6,718 4,985 1,370 -------------------- ------------------ ---------------------- Total non-performing assets 6,718 4,985 1,370 ==================== ================== ======================
Real estate owned and non-accrual loans, while varying from quarter to quarter, have remained at relatively low levels for the last few years due to the strong real estate market in California. A slowdown in the California real estate market would negatively impact our level of non-performing assets. 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. 19 Sources of Funds External sources of funds include savings deposits from several sources, advances from the Federal Home Loan Bank of San Francisco, and securitized borrowings. Savings deposits are accepted from retail banking offices, telemarketing sources, and national deposit brokers. The cost of funds, operating margins and our net income associated with brokered and telemarketing deposits are generally comparable to the cost of funds, operating margins and our net income 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 us and other depository institutions, we select funds from the lowest cost source until the relative costs change. As the cost of funds, operating margins and our net income associated with each source of funds are generally comparable; we do not deem the impact of our use of any one of the specific sources of funds at a given time to be material. Total savings deposits increased by $424.1 million and $643.6 million during the third quarter and first nine months of 2005. The increase in deposits for the third quarter and first nine months of 2005 is primarily attributable to additional deposits acquired from national brokerage firms ("brokered deposits"), additional retail banking offices and additional telemarketing deposits. Brokered deposits increased by $288.5 million and $482.8 million during the third quarter and first nine months of 2005. Brokered deposits comprised 38% and 20% of total deposits at September 30, 2005 and September 30, 2004. Because we have sufficient capital to be deemed "well-capitalized" under the standards established by the Office of Thrift Supervision, we may solicit brokered funds without special regulatory approval. Deposits accepted by retail banking offices increased by $67.4 million and $88.5 million during the third quarter and first nine months of 2005. Retail deposits comprised 59% and 79% of total deposits as of September 30, 2005 and September 30, 2004. Telemarketing deposits decreased by $68.1 million during the third quarter of 2005 and $72.3 million during the first nine months of 2005. These deposits are normally large deposits from pension plans, managed trusts and other financial institutions. These deposit levels fluctuate based on the attractiveness of our rates compared to returns available to investors on alternative investments. Telemarketing deposits comprised 3% and 1% of total deposits at September 30, 2005 and September 30, 2004. Total borrowings increased by $122.8 million and $1.6 billion during the third quarter and first nine months of 2005. FHLB advances increased by $228.0 million and $650.3 million during the third quarter and first nine months of 2005. Borrowings under reverse repurchase agreements decreased by $105.1 million during the third quarter but increased by $938.8 million during the first nine months of 2005. The decrease in borrowings under reverse repurchase agreements during the third quarter of 2005 was due to the principal reductions and payoffs of the mortgage-backed securities used as collateral for the borrowings. The increase in borrowings under reverse repurchase agreements during the first nine months of 2005 was due to availability of additional collateral after we securitized $1.3 billion of multi-family loans into mortgage-backed securities to act as collateral for these borrowings during the first quarter. On June 15, 2005, FirstFed Financial Corp. completed a $50 million offering of senior debentures due in 2015 with interest fixed at 5.65% for the first five years. As of September 30, 2005, $25 million of these funds had been invested in the Bank. The remaining proceeds will be used to finance the Bank's growth and for general corporate purposes. 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. Loan payoffs and principal reductions totaled $587.9 million and $1.4 billion for the third quarter and first nine months of 2005 compared to $358.3 million and $1.1 billion for the same periods of 2004. 20 We are actively seeking to expand our sources of deposits through the establishment of new branch offices. We entered into agreements to lease two additional facilities for branch offices during the first nine months of 2005 and we are in various stages of negotiation for five additional possible offices. We are continuing to evaluate these and other potential branch sites in the Southern California area. However, there can be no assurance that any of these evaluations will result in the establishment of additional branch offices. Item 3. Quantitative and Qualitative Disclosures about Market Risk See "Management's and Discussion and Analysis of Consolidated Balance Sheets and Consolidated Statements of Income- Asset/Liability Management" on page 9 hereof for Quantitative and Qualitative Disclosures about Market Risk. Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures Under SEC rules, we are required to maintain disclosure controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit 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, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. Our management, including our 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 as of the evaluation date, our disclosure controls and procedures were effective in alerting management to material information that may be required to be included in our public filings. In designing and evaluating the disclosure controls and procedures, management recognizes that any such controls and procedures can provide only reasonable assurance as to the control objectives. Management is required to apply its judgment in evaluating the cost-benefit relationship of such controls and procedures. Changes in Internal Controls There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. 21 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (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 June 30, 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 June 30, 2001, and incorporated by reference. (21) Registrant's sole subsidiary is First Federal Bank of California, a federal savings bank. (31.1) Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (31.2) Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (32.1) 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. (32.2) 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
We filed current reports on Form 8-K during the quarter ended September 30, 2005 on the following dates: July 28, 2005, August 18, 2005, and September 20, 2005. These reports are related to the release of our disclosure of certain other financial data. 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FIRSTFED FINANCIAL CORP. -------------------------- Registrant Date: November 8, 2005 By: /s/ Douglas J. Goddard ---------------------- Douglas J. Goddard Chief Financial Officer and Executive Vice President 23 EXHIBIT 31.1 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 consolidated balance sheets, consolidated statements of income and cash flows of the registrant as of, and for, the periods presented in this quarterly report; (4) The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (i) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (iii) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (iv) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; (5) The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors: (i) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (ii) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting; and (6) The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal control over financial reporting or in other factors that could significantly affect internal control over financial reporting subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated this 8th day of November 2005. By: /s/ Babette E. Heimbuch -------------------------- Babette E. Heimbuch Chief Executive Officer 24 EXHIBIT 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER I, Douglas J. 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 consolidated balance sheets, consolidated statements of income and cash flows of the registrant as of, and for, the periods presented in this quarterly report; (4) The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (i) Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (iii) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (iv) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; (5) The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors: (i) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (ii) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting; and (6) The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal control over financial reporting or in other factors that could significantly affect internal control over financial reporting subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated this 8th day of November 2005. By: /s/ Douglas Goddard ----------------------- Douglas Goddard Chief Financial Officer 25 EXHIBIT 32.1 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 September 30, 2005 (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 consolidated balance sheets and consolidated statements of income 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 2003, 18 U.S.C. Section 1350. FIRSTFED FINANCIAL CORP. ---------------------------- Registrant Date: November 8, 2005 By: /s/ Babette E. Heimbuch ------------------------- Babette E. Heimbuch Chief Executive Officer 26 EXHIBIT 32.2 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 September 30, 2005 (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 consolidated balance sheets and consolidated statements of income 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 2003, 18 U.S.C. Section 1350. FIRSTFED FINANCIAL CORP. ---------------------------- Registrant Date: November 8, 2005 By: /s/ Douglas J. Goddard ----------------------- Douglas J. Goddard Chief Financial Officer and Executive Vice President 27 -----END PRIVACY-ENHANCED MESSAGE-----