10-Q 1 q0306ascii.txt FIRST QUARTER, MARCH 2006 ================================================================================ 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, 2006 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 a large accelerated filer, an accelerated filer, a non accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer [ ] 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 May 1, 2006 16,603,695 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 March 31, 2006, 3 December 31, 2005 and March 31, 2005 Consolidated Statements of Income for the three 4 months ended March 31, 2006 and 2005 Consolidated Statements of Cash Flows for the 5 three months ended March 31, 2006 and 2005 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial 10 Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About 22 Market Risk Item 4. Controls and Procedures 22 Part II. Other Information (omitted items are inapplicable) Signatures 24 Exhibits 31.1 Certification of Chief Executive Officer 25 pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Officer 26 pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of Chief Executive Officer 27 pursuant to 18 USC Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification of Chief Financial Officer 28 pursuant to 18 USC Section 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) March 31, March 31, 2006 December 31, 2005 (Unaudited) 2005 (Unaudited) ------------- ------------- ------------- ASSETS Cash and cash equivalents $ 57,899 $ 93,192 $ 43,444 Investment securities, available-for-sale (at fair value) 338,143 294,017 225,260 Mortgage-backed securities, available-for-sale (at fair value) 69,296 74,254 90,597 Loans receivable, held for sale (fair value $97,208, $2,893 and $0) 96,250 2,873 -- Loans receivable, net of allowance for loan 9,680,194 9,678,260 7,824,493 losses of $101,433, $97,558 and $83,075 Accrued interest and dividends 50,990 48,973 30,629 receivable Real estate held for investment -- -- 656 Office properties and equipment, net 15,828 15,759 15,699 Investment in Federal Home Loan Bank (FHLB) stock, at cost 207,952 205,696 158,350 Other assets 52,736 43,925 31,575 ------------- ------------ ------------- $ 10,569,288 $ 10,456,949 $ 8,420,703 ============= ============ ============= LIABILITIES Deposits $ 5,046,661 $ 4,371,657 $ 3,803,795 FHLB advances 3,755,000 4,155,500 2,998,813 Securities sold under agreements to repurchase 966,000 1,163,684 1,059,700 Senior debentures 100,000 100,000 -- Accrued expenses and other 98,377 95,269 63,062 liabilities ------------- ------------ ------------- 9,966,038 9,886,110 7,925,370 ------------- ------------ ------------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Common stock, par value $.01 per share; authorized 100,000,000 shares; issued 23,796,866, 23,761,825 and 23,717,797 shares, outstanding 16,602,270, 16,567,229 and 16,523,201 shares 238 238 237 Additional paid-in capital 46,581 44,147 41,414 Retained earnings 671,853 640,900 567,694 Unreleased shares to employee stock ownership plan (895) (1,104) (799) Treasury stock, at cost, 7,194,596 shares (113,776) (113,776) (113,776) Accumulated other comprehensive (loss) income, net of taxes (751) 434 563 ------------- ------------ ------------- 603,250 570,839 495,333 ------------- ------------ ------------- $ 10,569,288 $ 10,456,949 $ 8,420,703 ============= ============ ============= 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 March 31, --------------------------- 2006 2005 ----------- ------------- Interest and dividend income Interest on loans (1) $ 162,588 $ 89,857 Interest on mortgage-backed securities 706 728 Interest and dividends on investments 6,506 3,816 ----------- ------------- Total interest income 169,800 94,401 ----------- ------------- Interest expense Interest on deposits 38,914 17,354 Interest on borrowings 56,068 24,226 ----------- ------------- Total interest expense 94,982 41,580 ----------- ------------- Net interest income 74,818 52,821 Provision for loan losses 3,900 3,750 ----------- ------------- Net interest income after provision for loan losses 70,918 49,071 ----------- ------------- Non-interest income Loan servicing and other fees (1) 710 84 Banking service fees 1,575 1,323 Gain on sale of loans 145 -- Real estate operations, net (108) 248 Other operating income 161 97 ----------- ------------- Total non-interest income 2,483 1,752 ----------- ------------- Non-interest expense Salaries and employee benefits 12,294 12,173 Occupancy 2,638 2,295 Advertising 164 92 Amortization of core deposit intangible 499 499 Federal deposit insurance 144 116 Legal 468 516 Other operating expense 3,709 3,176 ----------- ------------- Total non-interest expense 19,916 18,867 ----------- ------------- Income before income taxes 53,485 31,956 Income taxes 22,532 13,464 ----------- ------------- Net income $ 30,953 $ 18,492 =========== ============= Net income $ 30,953 $ 18,492 Other comprehensive loss, net of taxes (1,185) (324) ----------- ------------- Comprehensive income $ 29,768 $ 18,168 =========== ============= Earnings per share Basic $ 1.87 $ 1.12 =========== ============= Diluted $ 1.83 $ 1.10 =========== ============= Weighted average shares outstanding Basic 16,572,844 16,502,945 ============= ============= Diluted 16,895,022 16,885,989 ============= ============= (1) Reflects the reclassification of prepayment fees and late payment charges to interest income from non-interest income. 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) Three months ended March 31, -------------------------------- 2006 2005 -------------- --------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 30,953 $ 18,492 Adjustments to reconcile net income to net cash provided by operating activities: Net change in loans held-for-sale (93,377) -- Depreciation and amortization 530 428 Provision for loan losses 3,900 3,750 Amortization of fees and premiums/discounts 12,822 1,933 Increase in interest income accrued in excess of borrower payments (35,909) (4,855) Gain on sale of loans (145) -- Decrease in servicing asset 14 16 FHLB stock dividends (2,256) (1,292) Change in taxes 23,505 14,667 Increase in interest and dividends receivable (2,017) (6,514) (Decrease) increase in interest payable (11,022) 8,840 Amortization of core deposit intangible asset 499 499 Decrease (increase) in other assets 1,742 (2,094) Increase in accrued expenses and other liabilities 2,064 2,577 -------------- --------------- Total adjustments (99,650) 17,955 -------------- --------------- Net cash (used in) provided by operating activities (68,697) 36,447 -------------- --------------- CASH FLOWS FROM INVESTING ACTIVITIES: Loans made to customers and principal collections on loans, net 13,520 (972,906) Net changes in unearned loan fees (10,972) (15,477) Proceeds from maturities and principal payments of investment securities, available-for-sale 19,302 24,883 Principal reductions on mortgage-backed securities, available for sale 4,945 6,302 Purchase of investment securities, available for sale (65,481) -- Purchases of FHLB stock -- (13,633) Purchases of premises and equipment (599) (246) -------------- --------------- Net cash used by investing activities (39,285) (971,077) CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposits 675,004 42,630 Net (decrease) increase in short term borrowings (568,184) 986,913 Net decrease in long term borrowings (30,000) (120,000) Net decrease in advanced payments by borrowers for taxes and insurance (6,338) (782) Other 2,207 970 -------------- --------------- Net cash provided by financing activities 72,689 909,731 -------------- --------------- Net decrease in cash and cash equivalents (35,293) (24,899) Cash and cash equivalents at beginning of period 93,192 68,343 -------------- --------------- Cash and cash equivalents at end of period $ 57,899 $ 43,444 ============== =============== 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. Effective January 1, 2006, the Company adopted a change in financial reporting practice implemented by the Office of Thrift Supervision (OTS), the Bank's primary regulator. The OTS changed its financial reporting practice for classifying loan prepayment fees and late payment charges to record them as interest income rather than non-interest income. This adjustment by the OTS led to a change in industry practice in the reporting of loan prepayment fees and late payment charges. Accordingly, the Consolidated Statements of Income for the first quarters of 2006 and 2005 have been updated to include these fees with interest income. This change results in loan prepayment fees being classified in the same category as the amortization of deferred origination costs. Prepayment fees are designed to reimburse the Bank for loan origination costs if the loan pays off early. The reclassification of these fees had no impact on net income, but did affect key financial data, such as the yield on interest-earning assets, the interest rate spread and the effective net spread. Prepayment fees were $7.4 million during the first three months of 2006 and $2.6 million during the first three months of 2005. Late payment charges were $325 thousand during the first three months of 2006 and $190 thousand during the first three months of 2005. 5. Effective January 1, 2006, the Company adopted the fair value provisions of SFAS No. 123R, Share-Based Payments, using the modified prospective transition method described in SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure. Prior to January 1, 2006, the Company used 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 was 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, prior to January 1, 2006, the Company had adopted only the disclosure requirements of SFAS No. 123. 6 Currently, under the modified prospective transition method, the fair value recognition provision applies only to new awards or awards modified after January 1, 2006. Additionally, the fair value of existing unvested awards at the date of adoption is recorded as compensation expense over the period which an employee is required to provide service in exchange for the award, which, for the Company, is the vesting period of the options. The results from prior periods have not been restated. As a result of adopting this statement, the Company recorded stock-based compensation expense of $403 thousand net of tax for the first quarter of 2006. The total tax benefit recognized for stock-based compensation was $67 thousand. At March 31, 2006 the Company had two share-based compensation programs, the 1994 Stock Option and Appreciation Rights Plan ("1994 Plan") and the 1997 Non-employee Directors Stock Incentive Plan ("1997 Plan"). The compensation costs that have been charged against income for both plans totaled $470 thousand during the first quarter of 2006. At March 31, 2006 the number of shares authorized for option awards under both plans totaled 2,505,181. Options under each plan are generally granted with an exercise price equal to the market price of the Company's stock at the date of grant. Options granted under the 1994 Plan usually vest over a six year period and have a maximum contractual term of 10 years. Options granted to non-employee directors under the 1997 Plan vest in one year and have a maximum contractual term of 10 years. The fair value of each grant has been estimated as of the grant date using the Black-Scholes option valuation model. The expected life is estimated based on the actual weighted average life of historical exercise activity of the grantee population. The volatility factors are based on the historical volatilities of the Company's stock over the expected life of the options. The risk-free interest rate is the implied yield available on zero coupons (U.S. Treasury Rate) at the grant date with a remaining term equal to the expected life of the options. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by employees who receive stock incentive awards, and subsequent events are not indicative of the reasonableness of the original estimates of fair value made by the Company. The following weighted average assumptions were used for grants during the first quarter of 2006: expected volatility of 30%; risk-free interest rate of 4.5%; and expected average life of 6.6 years. The weighted average fair value of options granted during the first quarter of 2006 under the 1994 Plan was $24.30 and the weighted average fair value for options granted under the 1997 Plan was $22.72. The Company has elected to recognize forfeitures in the year of occurrence. The following is a summary of stock option transactions during the first quarter of 2006: Weighted Weighted Average Aggregate Average Remaining Intrinsic Shares Exercise Contractual Value Stock Options: (000) Price Term (000) ----------------------------------------------------------------------------------------- Outstanding at January 1, 2006 758,081 $29.68 Granted 180,115 57.68 Exercised (35,041) 23.42 Forfeited (8,336) 54.05 ----------- Outstanding at March 31, 2006 894,819 $35.59 4.64 $21,574 =========== Exercisable at March 31, 2006 421,492 $22.68 6.58 $16,750 ===========
The total intrinsic value of options exercised during the first quarter of 2006 was $1.3 million. Cash received from options exercised during the first quarter of 2006 totaled $821 thousand. 7 A summary of the Company's non-vested shares as of March 31, 2006 is presented below: Weighted Average Shares Grant-Date Non-vested shares: (000) Fair Value ------------------------------------------------------------------------ Non-vested at January 1, 2006 367,899 $14.37 Granted 180,115 $23.51 Vested (66,351) $11.03 Forfeited (8,336) $16.78 ------------- Non-vested at March 31, 2006 473,327 $16.42 =============
As of March 31, 2006, the unrecognized cost related to non-vested share-based compensation plans totaled $4.2 million. The pro-forma disclosure below is provided for the quarter ended March 31, 2005, because the Company did not adopt SFAS 123R until January 1, 2006 (in thousands, except per share data): Net income as reported........... $ 18,492 ------------ Deduction: Total stock-based compensation expense determined under fair-value-based method for all rewards, net of tax............. (195) ------------ Pro-forma net income........... $ 18,297 ============ Earnings per share: Basic: As reported.................... $ 1.12 Pro-forma...................... $ 1.11 Diluted: As reported.................... $ 1.10 Pro-forma...................... $ 1.09
The fair value of each option grant was estimated as of the grant date using the Black-Scholes option pricing model with the following weighted average assumptions for grants during the first quarter of 2005: expected volatility of 31%; risk-free interest rate of 4.2%; and expected average life of 5.5 years. The weighted average grant-date fair value for options granted during the first quarter of 2005 was $14.30. The Company recognized forfeitures in the year of occurrence. 8 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 March 31, ----------------------------- 2006 2005 ----------- ------------ (In thousands,) Quarterly Expense Service cost..................... $ 73 $ 141 Interest cost.................... 196 167 Amortization of net loss........ 112 57 Amortization of prior service cost -- 4 ----------- ------------ Net period benefit cost...... $ 381 $ 369 =========== ============ Weighted Average Assumptions Discount rate ................. 5.50% 5.75% Rate of compensation increase.. 4.00% 4.00% Expected return on plan assets. N/A N/A
The Company does not expect any significant changes to the amounts previously disclosed as contributions for benefits payments. 7. Recent Accounting Pronouncements In March 2006, SFAS Statement No. 156 Accounting for Servicing of Financial Assets, was issued. This statement amends FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities, which requires that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable. The Company has not sold any loans or financial assets that have resulted in the recognition of any servicing assets or liabilities since this statement was adopted. In February 2006, SFAS Statement No. 155 Accounting for Certain Hybrid Financial Instruments, was issued. This statement amends FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, and No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities. This statement's objective with respect to Statement 133 is to permit fair value re-measurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation. It also eliminated the guidance in Statement 133 Implementation Issue No. D1, "Application of Statement 133 to Beneficial Interest in Securitized Financial Assts," which provided that beneficial interest in securitized financial assets is not subject to the provisions of Statement 133. The primary objective of this statement with respect to Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, is to eliminate a restriction on the passive derivative instrument that a qualified special-purpose entity (SPE) may hold. The Company has no derivative instruments or hedging activity within the scope of this statement. 9 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 2005 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, 2005, 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 we expect, believe or anticipate will or may occur in the future, are forward-looking statements. These statements are based on certain assumptions and analyses made by us in light of our experience and perception of historical trends, current conditions, expected future developments and other factors we believe are appropriate in the circumstances. These forward-looking statements are subject to various factors, many of which are beyond our 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 we conduct our 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. We make no guarantees or promises regarding future results and assume no responsibility to update such forward-looking statements. 10 Consolidated Balance Sheets At March 31, 2006, FirstFed Financial Corp. ("Company"), the holding company for First Federal Bank of California and its subsidiaries ("Bank"), had consolidated stockholders' equity of $603.3 million compared to $570.8 million at December 31, 2005 and $495.3 million at March 31, 2005. Consolidated total assets at March 31, 2006 were $10.6 billion, comparable to $10.5 billion at December 31, 2005 and 26% more than $8.4 billion at March 31, 2005. Asset growth slowed during the first quarter of 2006 as loan originations fell to $725.8 million from $1.1 billion during the fourth quarter of 2005 and $1.3 billion during the first quarter of 2005. Loan originations fell during the first quarter due to a leveling off of real estate and refinancing activity in the areas where the Bank lends. Also, there was a reduction in demand for adjustable rate loans due to a rise in short term interest rates. Loan payoffs and principal reductions totaled $624.8 million during the first quarter of 2006 compared to $635.0 million during the fourth quarter of 2005 and $339.1 million during the first three months of 2005. Brokered deposits were used most often to fund asset growth during the first quarter because they were the least costly source of funds on an all-in cost basis. 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 April 25, 2006, the median price of a single family home in California rose to $561 thousand in March of 2006, up 13% from the level one year ago and 5% from the level during February of 2006. Many economists believe that California real estate prices can not continue at these record levels. The UCLA Anderson Forecast for California March 2006 report ("UCLA Report") forecasts only a 6% increase in the median price of a residential home in 2006 compared to 2005 and no increase in the median price during 2007 over 2006. According to the UCLA Report, the leading indicator of a cooling real estate market is a reduction in unit sales. According to CAR, unit sales of existing single family homes decreased 15% during March of 2006 compared to the level one year ago and sales of new single family homes decreased 7% compared to the level one year ago. As a result of lower unit sales, the inventory of unsold homes (the number of months needed to deplete the supply of homes on the market at the current sales rate) increased to 4.8 months during March of 2006 from 2.2 during March of 2005. So far the slower unit sales have not resulted in a discernible drop in real estate prices in California, although the rate of home price appreciation appears to be slowing in some areas. Lending Activities The following table summarizes loan originations by property type for the periods indicated: Three months ended March 31, ----------------------------- 2006 2005 ----------- ------------ (In thousands) Single family $ 645,923 $ 1,153,401 Multi-family and commercial 69,257 154,068 Other (1) 10,586 9,436 ---------- ----------- Total $ 725,766 $ 1,316,905 ========== ===========
(1) Includes consumer loans and commercial business loans. 11 The following table summarizes single family loan originations by documentation type for the periods indicated: Three months ended March 31, ---------------------------- 2006 2005 ----------- ---------- (In thousands) Verified Income/Verified Asset $ 112,442 $ 198,705 Stated Income/Verified Asset 159,538 383,537 Stated Income/Stated Asset 244,475 424,571 No Income/No Asset 129,468 146,588 ---------- ------------ Total $ 645,923 $ 1,153,401 ========== ============
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. The average borrower FICO score and average loan-to-value ratio on single family loan originations were 720 and 73%, respectively, for the first quarter of 2006, compared to 713 and 73% for the comparable 2005 period. At March 31, 2006, approximately 11%, 32% and 38% of our single family loan portfolio was comprised of NINA, SIVA and SISA loans, respectively. This compares to 9%, 30% and 38% of our single family loan portfolio being NINA, SIVA and SISA loans, respectively, at March 31, 2005. Our portfolios of multi-family and other real estate loans all require full documentation by the borrowers. The following table summarizes loan originations by type of index for the periods indicated: Three months ended March 31, 2006 2005 --------- ------------ (In thousands) Adjustable: CODI $ 115,992 $ 1,084,007 12MAT 192,320 198,847 COFI 405,822 24,315 Other 10,587 9,436 Fixed: 1,045 300 ---------- ------------ Total $ 725,766 $ 1,316,905 ========== ============
At March 31, 2006, 96.4% 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 62.9% of the adjustable rate loan portfolio. Loans that adjust monthly based on the 12-month average U.S. Treasury Security rate ("12MAT") comprised 17.9% of the adjustable rate loan portfolio. Loans that adjust monthly based on the Federal Home Loan Bank ("FHLB") Eleventh District Cost of Funds Index ("COFI") comprised 13.8% of the adjustable rate loan portfolio. Loans that adjust monthly based on the London Inter-Bank Offering Rate ("LIBOR") and other indices comprised 1.8% of the adjustable rate loan portfolio. 12 Our adjustable rate products allow for negative amortization 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 $98.5 million at March 31, 2006, $62.6 million at December 31, 2005 and $10.3 million at March 31, 2005. Negative amortization increased by $35.9 million during the first quarter of 2006. This compares to an increase of $25.0 million during the fourth quarter of 2005 and $4.9 million in the first quarter of 2005. Negative amortization has increased over the last several quarters due to rising interest rates and an increasing number of single family loans that allow for fixed payment periods of one to five years. The portfolio of single family loans with one-year fixed payment periods totaled $4.7 billion at March 31, 2006, $4.6 billion at December 31, 2005 and $3.1 billion at March 31, 2005. The portfolio of single family loans with three-to-five year fixed payment periods totaled $2.5 billion at March 31, 2006, $2.7 billion at December 31, 2005 and $2.1 billion at March 31, 2005. Negative amortization as a percentage of all single family loans that are susceptible to negative amortization totaled 1.32% at March 31, 2006 compared to 0.86% at December 31, 2005 and 0.19% at March 31, 2005. 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. The following table shows the components of our loan portfolio (including loans held for sale) by type at the dates indicated: March 31, December 31, March 31, 2006 2005 2005 ------------- -------------- ------------- (In thousands) REAL ESTATE LOANS First trust deed residential loans One-to-four units $ 7,477,938 $ 7,361,476 $ 5,503,994 Five or more units 1,945,334 1,942,021 1,905,146 ------------- ------------- ------------- Residential loans 9,423,272 9,303,497 7,409,140 OTHER REAL ESTATE LOANS Commercial and industrial 246,653 257,560 315,483 Construction 3,862 4,910 -- Second trust deeds 4,868 6,505 5,230 Other -- -- 3,615 ------------- ------------- ------------- Real estate loans 9,678,655 9,572,472 7,733,468 NON-REAL ESTATE LOANS Deposit accounts 502 595 488 Commercial business loans 78,019 80,186 65,386 Consumer 54,221 57,399 60,329 ------------- ------------- ------------- Loans receivable 9,811,397 9,710,652 7,859,671 LESS: General valuation allowances - loan portfolio 101,433 97,558 82,579 Valuation allowances - impaired loans -- -- 496 Deferred loan origination costs, net (66,480) (68,039) (47,897) ------------ ------------- ------------- Net loans receivable $ 9,776,444 $ 9,681,133 $ 7,824,493 ============= ============= =============
13 Our non-performing assets to total assets ratio was 0.07% at March 31, 2006, compared to 0.05% at December 31, 2005 and 0.08% at March 31, 2005. (See "Non-performing Assets" for further discussion.) We recorded net loan charge-offs of $25 thousand and $36 thousand for the first quarter of 2006 and fourth quarter of 2005, respectively. This compares to net loan loss recoveries of $159 thousand during the first quarter of 2005. A $3.9 million loan loss provision was recorded during the first quarter of 2006. This compares to a provision of $4.0 million during the fourth quarter of 2005 and $3.8 million during the first quarter of 2005. Allowances for loan losses (including general valuation allowances and valuation allowances for impaired loans) totaled $101.4 million or 1.03% of gross loans at March 31, 2006. This compares with $97.6 million or 1.00% at December 31, 2005 and $82.6 million or 1.05% at March 31, 2005. The mortgage-backed securities portfolio, classified as available-for-sale, was recorded at fair value as of March 31, 2006. An unrealized gain of $100 thousand, net of taxes, was recorded in stockholders' equity as of March 31, 2006. This compares to net unrealized gains of $108 thousand as of December 31, 2005 and $327 thousand as of March 31, 2005. The investment securities portfolio, classified as available-for-sale, was recorded at fair value as of March 31, 2006. An unrealized loss of $851 thousand, net of taxes, was reflected in stockholders' equity as of March 31, 2006. This compares to net unrealized gains of $327 thousand as of December 31, 2005 and net unrealized gain of $235 thousand as of March 31, 2005. 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, 2005. The one year GAP (the difference between rate-sensitive assets and liabilities re-pricing within one year or less) was a positive $245.1 million or 2.32% of total assets at March 31, 2006. In comparison, the one year GAP was a positive $233.3 million or 2.23% of total assets at December 31, 2005. 14 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 March 31, 2006: Tier 1 Risk- Tangible Core Risk-based based Capital Capital Capital Capital ----------- ------------ ------------ ----------- (Dollars in thousands) Actual Capital: Amount $ 684,410 $ 684,410 $ 684,410 $ 753,996 Ratio 6.48% 6.48% 12.37% 13.62% FDICIA minimum required capital: Amount $ 158,475 $ 422,599 $ -- $ 442,801 Ratio 1.50% 4.00% --% 8.00% FDICIA "well-capitalized" required capital: Amount $ -- $ 528,249 $ 332,100 $ 553,501 Ratio --% 5.0% 6.0% 10.0%
There were no additional investments in the Bank by FirstFed Financial Corp. during the first three months of 2006. During the first quarter of 2005 FirstFed Financial Corp. invested $20 million in the Bank. An additional $90 million was invested in the Bank during the remainder of 2005. There were no repurchases of common stock during the first three months of 2006 or 2005. There remain 1,472,079 shares eligible for repurchase under our stock repurchase program as of May 1, 2006. 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: Three Months Ended March 31, 2006 --------------------------------------------------- General Impaired Valuation Valuation Allowances Allowances Total -------------- -------------- -------------- (In thousands) Balance at December 31, 2005 $ 97,558 $ -- $ 97,558 Provision for loan losses 3,900 3,900 Charge-offs: Consumer (25) (25) ------------ ----------- ---------- Total charge-offs (25) -- (25) Recoveries -- -- -- ------------ ----------- ---------- Net (charge-offs)/recoveries (25) -- (25) ------------ ----------- ---------- Balance at March 31, 2006 $ 101,433 $ -- $ 101,433 ============ =========== ==========
15 Three Months Ended March 31, 2005 ------------------------------------------------- General Impaired Valuation Valuation Allowances Allowances Total -------------- -------------- -------------- (In thousands) Balance at December 31, 2004 $ 78,675 $ 496 $ 79,171 Provision for loan losses 3,750 -- 3,750 Charge-offs: Single family (5) -- (5) ------------ ----------- ----------- Total charge-offs (5) -- (5) Recoveries 159 -- 159 ------------ ----------- ----------- Balance at March 31, 2005 $ 82,579 $ 496 $ 83,075 ============ =========== ===========
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, other risks inherent in the loan portfolio, and the Southern California economy. Consolidated Statements of Income We reported consolidated net income of $31.0 million or $1.83 per diluted share of common stock during the first quarter of 2006 compared to $18.5 million or $1.10 per diluted share of common stock during the first quarter of 2005. Net income increased due to growth in net interest income which resulted from growth in average interest-earning assets during the first quarter of 2006 over the same period last year. Also, net interest income increased due to the inclusion of loan prepayment fees and late charges, which had been previously disclosed as non-interest income. Net Interest Income Net interest income increased to $74.8 million during the first quarter of 2006 from $52.8 million during the first quarter of 2005. The increase is primarily due to a 32% increase in average interest-earning assets during the first quarter of 2006 over the first quarter of 2005. Interest rate spreads were 2.70% and 2.58% for the first quarter of 2006 and the first quarter of 2005, respectively. The effective net spread was 2.89% for the first quarter of 2006 and 2.70% for the first quarter of 2005. Effective January 1, 2006, we adopted the change in financial reporting practice implemented by the Office of Thrift Supervision (OTS), our primary regulator. The OTS changed its financial reporting practice for classifying loan prepayment fees and late payment charges to record them as interest income rather than non-interest income. This adjustment by the OTS led to a change in industry practice in the reporting of prepayment fees and late payment charges. Accordingly, we have updated our Consolidated Statements of Income for 2006 and 2005 to include these fees with interest income. This change results in loan prepayment fees being classified in the same category as the amortization of deferred origination costs. Prepayment fees are designed to reimburse the Bank for loan origination costs if the loan pays off early. The reclassification of these fees had no impact on net income, but did affect key financial data, such as the yield on interest-earning assets, the interest rate spread and the effective net spread. The increase in interest rate spread and effective net spread during the first quarter of 2006 compared to the first quarter of 2005 resulted from the reclassification of loan prepayment fees and late fees to interest income on loans. Prior to the reclassification, the interest rate spread showed a decrease of 0.03% during the first quarter of 2006 compared to the first quarter of 2005. Loan prepayment fees were $7.4 million during the first three months of 2006 compared to $2.6 million during the first three months of 2005. A higher percentage of loans in the Bank's current loan portfolio are subject to prepayment fees than in the past. Prepayment fees are meant to compensate the Bank for the cost of originations. Late payment charges were $325 thousand during the first three months of 2006 compared to $190 thousand during the first three months of 2005. 16 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 Three Months Ended March 31, -------------------------------- 2006 2005 ------------- ------------- (Dollars in thousands) Average loans (1) $ 9,763,063 $ 7,315,647 Average investment securities 584,985 494,652 ------------- ------------- Average interest-earning assets 10,348,048 7,810,299 ------------- ------------- Average savings deposits 4,657,604 3,816,761 Average borrowings 5,177,816 3,578,534 ------------- ------------- Average interest-bearing liabilities 9,835,420 7,395,295 ------------- ------------- Excess of interest-earning assets over interest-bearing liabilities $ 512,628 $ 415,004 ============= ============= Yields earned on average interest-earning assets 6.56% 4.83% Rates paid on average interest-bearing liabilities 3.86 2.25 Interest rate spread 2.70 2.58 Effective net spread (2) 2.89 2.70 Total interest income $ 169,800 $ 94,401 Total interest expense 94,982 41,580 ------------- ------------- Net interest income $ 74,818 $ 52,821 ============= ============= (1) Non-accrual loans are included in the average dollar amount of loans outstanding; however, there was no income is included for the period, in which loans were on non-accrual status. (2) 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).
17 Non-Interest Income and Expense Loan servicing and other fees increased to $710 thousand during the first quarter of 2006 from $84 thousand during the first quarter of 2005. The increase is due to additional fees received for loans brokered to other companies, lower outside appraisal costs and additional fees earned on commercial loans. Real estate operations resulted in a net loss of $108 thousand during the first quarter of 2006 compared to net income of $248 thousand during the first quarter of 2005. The loss during 2006 is the result of legal and other fees associated with enforcing judgments and liens against borrowers. Real estate operations during the first quarter of 2005 included the sale of a property acquired in settlement of a judgment. Non-interest expense totaled $19.9 million during the first quarter of 2006 and $18.9 million during the first quarter of 2005. The increase in expenses during the first three months of 2006 compared to the first three months of 2005 resulted primarily from higher occupancy costs associated with the opening of two new retail branches and higher OTS assessments. The ratio of non-interest expense to average total assets fell to 0.76% for the first quarter of 2006 from 0.95% during the first quarter of 2005. The decrease in ratio was brought about a 26% increase in assets from the first quarter of 2005 compared to the first quarter of 2006. 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 $7.4 million at March 31, 2006, a slight increase from $6.9 million at March 31, 2005. The amount of interest allowance for loans 90 days or more delinquent or in foreclosure was $293 thousand as of March 31, 2006 and $310 thousand as of March 31, 2005. The decrease in the interest allowance at March 31, 2006 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 March 31, 2006, we had net modified loans totaling $2.0 million. No modified loans were 90 days or more delinquent at March 31, 2006. 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 $1.0 million, 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. 18 The following is a summary of impaired loans, net of valuation allowances for impairment, at the dates indicated: March 31, December 31, March 31, 2006 2005 2005 -------------- ------------- ------------- (In thousands) Non-accrual loans $ 4,315 $ 3,027 $ 4,546 ============== ============= =============
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 loans: At March 31, ------------------------------- 2006 2005 ------------ ----------- (In thousands) Impaired loans without a valuation allowance ................................ $ 4,315 $ 4,546 Impaired loans with a valuation allowance................................. $ -- $ 496 Valuation allowance related to impaired loans............................ $ -- $ 496
Three Months Ended -------------------------------------------------- March 31, December 31, March 31, 2006 2005 2005 ------------- ------------- ------------ (In thousands) Average investment in impaired loans $ 4,349 $ 3,703 $ 3,484 Interest income recognized on impaired loans..................... $ 107 $ 30 $ -- Interest income recognized on a cash basis on impaired loans............ $ 99 $ 29 $ --
19 Asset Quality The following table sets forth certain asset quality ratios at the dates indicated: March 31, December 31, March 31, 2006 2005 2005 ------------- ------------ ------------- Non-performing loans to gross loans receivable (1) 0.08% 0.05% 0.09% Non-performing assets to total assets (2) 0.07% 0.05% 0.08% Loan loss allowances to non-performing loans (3) 1,367% 1,965% 1,213% Loan loss allowances to gross loans receivable 1.03% 1.00% 1.05% (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)Loan loss allowances include 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: March 31, December 31, March 31, 2006 2005 2005 -------------- ------------ --------------- (In thousands) Non-accrual loans: Single family $ 5,712 $ 3,569 $ 5,438 Multi-family 1,680 -- -- Other 28 1,397 1,413 -------------- ------------ --------------- Total non-accrual loans 7,420 4,966 6,851 -------------- ------------ --------------- Total non-performing assets $ 7,420 $ 4,966 $ 6,851 ============== ============ ===============
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. 20 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, the internet, and national deposit brokers. The cost of funds, operating margins and net income associated with brokered and telemarketing deposits are generally comparable to the all-in cost of funds, operating margins and net income associated with retail deposits, FHLB borrowings and repurchase agreements. The process of gathering deposits through the internet is in start-up mode and has somewhat higher costs than the other deposit sources. 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 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 to be material at a given time. Total savings deposits increased by $675.0 million during the first quarter of 2006. The increase in deposits for the first quarter of 2006 is primarily attributable to additional deposits acquired from national brokerage firms ("brokered deposits") and retail banking offices. Brokered deposits increased by $597.5 million during the first quarter of 2006. As brokered deposits were the lowest cost source of funds during the first quarter, they were used to replace borrowings from the FHLB. Brokered deposits comprised 45.0% and 32.0% of total deposits at March 31, 2006 and March 31, 2005. 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 $70.0 million during the first quarter of 2006. Retail deposits comprised 53.4% and 66.8% of total deposits as of March 31, 2006 and March 31, 2005. One new retail branch was opened during the first quarter of 2006. We are actively seeking to expand our sources of deposits through the establishment of additional branch offices. We are in various stages of negotiation for 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. Telemarketing deposits decreased by $19.6 million during the first quarter of 2006. 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 1.2% and 1.5% of total deposits at March 31, 2006 and March 31, 2005. We started accepting internet deposits in the later part of 2005 by posting our rates on internet rate boards. Deposits acquired during the first quarter of 2006 totaled $29.6 million compared to $2.4 million during the fourth quarter of 2005. Total borrowings decreased by $597.7 million during the first quarter of 2006. FHLB advances decreased by $400.5 million during the first quarter of 2006 because lower cost funds were available. Borrowings under reverse repurchase agreements decreased by $197.7 million during the first quarter of 2006 due to principal reductions and payoffs of the mortgage-backed securities used as collateral. Internal sources of funds include amortized principal payments that can vary based upon borrowers' option to adjust their loan payment amounts, as well as prepayments. The level of prepayment activity fluctuates based upon the availability of loans with lower interest rates and lower monthly payments. Loan payoffs and principal reductions totaled $624.8 million during the first quarter of 2006 compared to $339.1 million during the first quarter of 2005. 21 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 10 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. 22 PART II - OTHER INFORMATION Item 6. 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 and 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. 23 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 10, 2006 By:/s/ Douglas J. Goddard ------------------ Douglas J. Goddard Chief Financial Officer and Executive Vice President 24 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 am 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 10th day of May 2006. By:/s/ Babette E. Heimbuch ------------------- Babette E. Heimbuch Chief Executive Officer 25 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 am 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 10th day of May 2006. By:/s/ Douglas J. Goddard ------------------ Douglas J. Goddard Chief Financial Officer 26 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 March 31, 2006 (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 2002, 18 U.S.C. Section 1350. FIRSTFED FINANCIAL CORP. Registrant Date: May 10, 2006 By:/s/ Babette E. Heimbuch ------------------- Babette E. Heimbuch Chief Executive Officer 27 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 March 31, 2006 (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 2002, 18 U.S.C. Section 1350. FIRSTFED FINANCIAL CORP. Registrant Date: May 10, 2006 By:/s/ Douglas J. Goddard ------------------ Douglas J. Goddard Chief Financial Officer and Executive Vice President 28