10-Q 1 q0606.txt 10-Q JUNE 30, 2006 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended June 30, 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) (310) 319-6000 (Registrant's telephone number, including area code) 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, or 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 August 1, 2006, 16,606,647 shares of the Registrant's $.01 par value common stock were outstanding. ================================================================================ FirstFed Financial Corp. Index Report on Form 10-Q For the Quarterly Period Ended June 30, 2006 Page Part I. Financial Information Item 1. Financial Statements Consolidated Balance Sheets as of June 30, 2006, December 31, 2005 and June 30, 2005 3 Consolidated Statements of Income for the three and six months ended June 30, 2006 and 2005 4 Consolidated Statements of Cash Flows for the six months ended June 30, 2006 and 2005 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 3. Quantitative and Qualitative Disclosures About 24 Market Risk Item 4. Controls and Procedures 24 Part II. Other Information (omitted items are inapplicable) Item 6. Exhibits 25 Signatures 26 Exhibits 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 27 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 28 32.1 Certification of Chief Executive Officer pursuant to 18 USC Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 29 32.2 Certification of Chief Financial Officer pursuant to 18 USC Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 30
PART I - FINANCIAL STATEMENTS Item 1. Financial Statements FirstFed Financial Corp. and Subsidiary Consolidated Balance Sheets (In thousands, except share data) (Unaudited) June 30, December 31, June 30, 2006 2005 2005 ------------- ------------- ------------- ASSETS Cash and cash equivalents $ 77,690 $ 93,192 $ 52,356 Investment securities, available-for-sale (at fair value) 313,878 294,017 192,652 Mortgage-backed securities, available-for-sale (at fair value) 64,791 74,254 85,351 Loans receivable, held for sale (fair value $50,469,$2,893 and $8,842) 49,926 2,873 8,768 Loans receivable, net of allowances for loan losses of $103,875, $97,558 and $86,594 9,413,935 9,678,260 8,680,970 Accrued interest and dividends receivable 55,232 48,973 36,916 Real estate held for investment -- -- 669 Office properties and equipment, net 16,429 15,759 15,508 Investment in Federal Home Loan Bank (FHLB) stock, at cost 206,649 205,696 163,227 Other assets 56,139 43,925 42,252 ------------- ------------- ------------- $ 10,254,669 $ 10,456,949 $ 9,278,669 ============= ============= ============= LIABILITIES Deposits $ 5,517,702 $ 4,371,657 $ 3,980,714 FHLB advances 2,909,000 4,155,500 3,426,913 Securities sold under agreements to repurchase 1,000,000 1,163,684 1,230,978 Senior debentures 100,000 100,000 50,000 Accrued expenses and other liabilities 92,119 95,269 73,814 ------------- ------------- ------------- 9,618,821 9,886,110 8,762,419 ------------- ------------- ------------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Common stock, par value $.01 per share; authorized 100,000,000 shares; issued 23,799,999, 23,761,825 and 23,737,495 shares; outstanding 16,605,403, 16,567,229 and 16,542,899 shares 238 238 237 Additional paid-in capital 46,860 44,147 41,800 Retained earnings 704,362 640,900 589,379 Unreleased shares to employee stock ownership plan (594) (1,104) (2,515) Treasury stock, at cost, 7,194,596 shares (113,776) (113,776) (113,776) Accumulated other comprehensive (loss) income, net of taxes (1,242) 434 1,125 ------------- ------------- ------------- 635,848 570,839 516,250 ------------- ------------- ------------- $ 10,254,669 $ 10,456,949 $ 9,278,669 ============= ============= ============= The accompanying notes are an integral part of these consolidated financial statements.
FirstFed Financial Corp. and Subsidiary Consolidated Statements of Income (Dollars in thousands, except per share data) (Unaudited) Three months ended June 30, Six months ended June 30, --------------------------- --------------------------- 2006 2005 2006 2005 ------------ ------------ ------------ ------------ Interest and dividend income: Interest on loans (1) $ 170,914 $ 108,983 $ 333,502 $ 198,840 Interest on mortgage-backed securities 717 698 1,423 1,426 Interest and dividends on investments 6,934 3,742 13,440 7,558 ------------ ------------ ------------ ------------ Total interest income 178,565 113,423 348,365 207,824 ------------ ------------ ------------ ------------ Interest expense: Interest on deposits 51,026 20,667 89,940 38,021 Interest on borrowings 53,623 34,360 109,691 58,586 ------------ ------------ ------------ ------------ Total interest expense 104,649 55,027 199,631 96,607 ------------ ------------ ------------ ------------ Net interest income 73,916 58,396 148,734 111,217 Provision for loan losses 2,500 4,000 6,400 7,750 ------------ ------------ ------------ ------------ Net interest income after provision for loan losses 71,416 54,396 142,334 103,467 ------------ ------------ ------------ ------------ Other income: Loan servicing and other fees (1) 619 178 1,329 262 Banking service fees 1,625 1,445 3,200 2,768 Gain on sale of loans 1,938 -- 2,083 -- Real estate operations, net 245 27 137 275 Other operating income 195 110 356 207 ------------ ------------ ------------ ------------ Total other income 4,622 1,760 7,105 3,512 ------------ ------------ ------------ ------------ Non-interest expense: Salaries and employee benefits 11,798 11,582 24,092 23,755 Occupancy 2,591 2,480 5,229 4,775 Advertising 635 260 799 352 Amortization of core deposit intangible 498 499 997 998 Federal deposit insurance 138 131 282 247 Legal 265 557 733 1,073 Other operating expense 3,491 3,177 7,200 6,353 ------------ ------------ ------------ ------------ Total non-interest expense 19,416 18,686 39,332 37,553 ------------ ------------ ------------ ------------ Income before income taxes 56,622 37,470 110,107 69,426 Income taxes 24,113 15,785 46,645 29,249 ------------ ------------ ------------ ------------ Net income $ 32,509 $ 21,685 $ 63,462 $ 40,177 ============ ============ ============ ============ Net income $ 32,509 $ 21,685 $ 63,462 $ 40,177 Other comprehensive income, net of taxes (491) 562 (1,676) 238 ------------ ------------ ------------ ------------ Comprehensive income $ 32,018 $ 22,247 $ 61,786 $ 40,415 ============ ============ ============ ============ Earnings per share: Basic $ 1.96 $ 1.31 $ 3.83 $ 2.44 ============ ============ ============ ============ Diluted $ 1.92 $ 1.29 $ 3.75 $ 2.38 ============ ============ ============ ============ Weighted average shares outstanding: Basic 16,594,058 16,510,775 16,586,062 16,496,890 ============ ============ ============ ============ Diluted 16,904,414 16,871,375 16,902,458 16,868,365 ============ ============ ============ ============ (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.
FirstFed Financial Corp. and Subsidiary Consolidated Statements of Cash Flows (In thousands) (Unaudited) Six months ended June 30, ------------------------------- 2006 2005 -------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 63,462 $ 40,177 Adjustments to reconcile net income to Net cash provided by operating activities: Net change in loans held-for-sale (47,053) (8,768) Depreciation and amortization 1,067 912 Provision for loan losses 6,400 7,750 Amortization of fees and premiums/discounts 25,804 4,736 Increase in interest income accrued in excess of borrower payments (73,738) (14,915) Gain on sale of loans (2,083) -- Decrease in servicing asset 29 33 FHLB stock dividends (953) (2,902) Change in taxes (14,249) (11,042) Increase in interest and dividends receivable (6,259) (12,801) Increase in interest payable 5,859 18,589 Amortization of core deposit intangible asset 997 998 Decrease in other assets (6,025) 2,700 Increase (decrease) in accrued expenses and other liabilities (2,160) 2,414 -------------- -------------- Total adjustments (112,364) (12,296) -------------- -------------- Net cash (used in) provided by operating activities (48,902) 27,881 -------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Loans made to customers and principal collections on loans, net 142,745 (1,813,355) Loan sales 185,263 -- Net change in unearned loan fees (16,606) (27,702) Proceeds from maturities and principal payments of investment securities, available-for-sale 42,692 58,194 Principal reductions on mortgage-backed securities, available for sale 9,438 11,787 Purchase of investment securities, available for sale (65,481) -- Purchases of FHLB stock -- (16,900) Purchases of premises and equipment (1,737) (539) -------------- -------------- Net cash provided by (used in) investing activities 296,314 (1,788,515) CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposits 1,146,045 219,549 Net increase (decrease) in short term borrowings (1,355,184) 1,721,291 Net decrease in long term borrowings (55,000) (205,000) Net increase in advanced payments by borrowers for taxes and insurance 135 3,156 Other 1,090 5,651 -------------- -------------- Net cash (used in) provided by financing activities (262,914) 1,744,647 Net decrease in cash and cash equivalents (15,502) (15,987) Cash and cash equivalents at beginning of period 93,192 68,343 -------------- -------------- Cash and cash equivalents at end of period $ 77,690 $ 52,356 ============== ============== The accompanying notes are an integral part of these consolidated financial statements.
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 second quarters of 2006 and 2005 have been updated to include these fees with interest income. The 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 $7.7 million and $15.1 million during the second quarter and first six months of 2006, respectively, and $4.1 million and $6.7 million during the second quarter and first six months of 2005, respectively. Late payment charges were $301 thousand and $626 thousand during the second quarter and first six months of 2006, respectively, and $221 thousand and $410 thousand during the second quarter and first six months of 2005, respectively. 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. The fair value recognition requirement 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 second quarter of 2006 and $806 thousand, net of tax, for the first six months of 2006. The tax benefit recognized for stock-based compensation expense was $67 thousand for the second quarter of 2006 and $134 thousand for the first six months of 2006. At June 30, 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 ("Directors 1997 Plan"). On April 26, 2006, the stockholders of the Company adopted the 2007 Non-employee Directors Restricted Stock Plan ("2007 Plan"). Upon registration of the 2007 Plan (expected to occur in the latter half of 2006), the Directors 1997 Plan will be terminated, and no new grants will be made under the Directors 1997 Plan. At June 30, 2006, the number of shares authorized for option awards under the 1994 Plan totaled 1,855,166. Options under each plan are 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, and these are used to estimate volatilities 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. There were no options granted during the second quarter of 2006. The following weighted average assumptions were used for options granted 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 following is a summary of stock option transactions during the quarter ended June 30, 2006: Weighted Weighted Average Aggregate Average Remaining Intrinsic Exercise Contractual Value Stock Options: Shares Price Term (In thousands) --------------------------------------------------------------------------------------------------- Outstanding at April 1, 2006 894,819 $35.70 Granted -- -- Exercised (3,133) 20.89 Forfeited (20,986) 51.77 ----------- ---------- Outstanding at June 30, 2006 870,700 35.37 6.04 $19,633 =========== ========== =========== ===========
The following is a summary of stock option transactions during the six months ended June 30, 2006: Weighted Weighted Average Aggregate Average Remaining Intrinsic Exercise Contractual Value Stock Options: Shares Price Term (In thousands) --------------------------------------------------------------------------------------------------- Outstanding at January 1, 2006 758,081 $29.70 Granted 180,115 58.73 Exercised (38,174) 23.21 Forfeited (29,322) 51.37 ----------- ---------- Outstanding at June 30, 2006 870,700 35.37 6.04 $19,633 =========== ========== =========== =========== Exercisable at June 30, 2006 452,948 19.70 3.90 $17,197 =========== ========== =========== ===========
The total intrinsic value of options exercised during the second quarter and first six months of 2006 was $133 thousand and $1.4 million, respectively. Cash received from options exercised during the second quarter and first six months of 2006 totaled $65 thousand and $886 thousand, respectively. A summary of the Company's non-vested shares during the quarter ended June 30, 2006 is presented below: Weighted Average Grant-Date Non-vested shares: Shares Fair Value -------------------------------------------------------------------- Non-vested at April 1, 2006 438,738 $18.73 Granted -- -- Vested -- -- Forfeited (20,986) 20.58 ----------- Non-vested at June 30, 2006 417,752 $18.64 ===========
A summary of the Company's non-vested shares during the six months ended June 30, 2006 is presented below: Weighted Average Grant-Date Non-vested shares: Shares Fair Value -------------------------------------------------------------------- Non-vested at January 1, 2006 367,899 $14.37 Granted 180,115 24.05 Vested (100,940) 12.30 Forfeited (29,322) 20.20 ----------- Non-vested at June 30, 2006 417,752 $18.64 ===========
As of June 30, 2006, the unrecognized cost related to non-vested share-based compensation plans totaled $3.9 million. The pro-forma disclosure below is provided for the second quarter and first six months of 2005 because the Company did not adopt SFAS 123R until January 1, 2006 (in thousands, except per share data): Three Months Ended Six Months Ended June 30, 2005 June 30, 2005 ----------------- ----------------- Net income as reported............ $ 21,685 $ 40,177 Deduction: Total stock-based compensation expense determined under fair-value-based method for all awards, net of tax............... (366) (561) ----------------- ----------------- Pro-forma net income............. $ 21,319 $ 39,616 ================= ================= Earnings per share: Basic: As reported..................... $ 1.31 $ 2.44 Pro-forma....................... $ 1.29 $ 2.40 Diluted: As reported..................... $ 1.29 $ 2.38 Pro-forma....................... $ 1.26 $ 2.35
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 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 2005 was $19.34. 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 Six months ended June 30, June 30, ------------------------- ------------------------- 2006 2005 2006 2005 ----------- ------------ ------------ ----------- (In thousands) Service cost......................... $ 73 $ 141 $ 146 $ 282 Interest cost........................ 196 167 392 334 Amortization of net loss............. 112 57 224 114 Amortization of prior service cost... -- 4 -- 8 ----------- ------------ ------------ ----------- Net periodic benefit cost.......... $ 381 $ 369 $ 762 $ 738 =========== ============ ============ =========== Weighted Average Assumptions Discount rate........................ 5.50% 5.75% 5.50% 5.75% 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 as contributions for benefit 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 Assets," which provided that a 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. 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 internet 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. Consolidated Balance Sheets At June 30, 2006, FirstFed Financial Corp. ("Company"), the holding company for First Federal Bank of California and its subsidiaries ("Bank"), had consolidated stockholders' equity of $635.8 million compared to $570.8 million at December 31, 2005 and $516.3 million at June 30, 2005. Consolidated total assets at June 30, 2006 were $10.3 billion compared to $10.5 billion at December 31, 2005 and $9.3 billion at June 30, 2005. Assets decreased during the first six months of 2006 as loan originations fell to $1.3 billion from $2.6 billion during the first six months of 2005. Loan originations fell during 2006 due to a cooling in the California real estate market and modifications to our lending programs. 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 $1.4 billion during the first six months of 2006 compared to $780.8 million during the first six months of 2005. Because substantially all of our loans are collateralized by properties 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 California real estate market has experienced record levels of real estate activity during the last several years, but the activity has begun to slow during 2006. According to the California Association of Realtors ("CAR") report released July 25, 2006, home resale activity decreased 26% during June of 2006 compared to the level recorded during June of 2005. 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 6.2 months during June of 2006 from 2.5 during June of 2005. Even at the slower sales pace, the median price of a single family home in California has continued to increase during 2006. According to CAR, the median sales price of a single family home in California rose to $576 thousand during June of 2006, up 6% from the level during June of 2005 and up 2% from the previous month. The rapid increases in California real estate prices have cooled substantially over the last several months. The UCLA Anderson Forecast for California June 2006 report ("UCLA Report") predicts a flat housing market and a slower economy for the state. The UCLA Report forecasts this scenario based on a predicted rate of employment loss and the historical record showing that home prices do not usually fall in the absence of a higher rate of job loss. Lending Activities The following table summarizes total loan originations by property type for the periods indicated: Six months ended June 30, --------------------------- 2006 2005 ------------ ------------ (In thousands) Single family $ 1,158,306 $ 2,277,745 Multi-family and commercial 148,618 314,494 Other (1) 17,303 25,553 ------------ ------------ Total $ 1,324,227 $ 2,617,792 =========== ============ (1) Includes consumer loans and commercial business loans.
The following table summarizes single family loan originations by borrower documentation type for the periods indicated: Six months ended June 30, 2006 2005 ------------ ------------ (In thousands) Verified Income/Verified Asset $ 244,833 $ 396,295 Stated Income/Verified Asset 314,546 758,643 Stated Income/Stated Asset 366,718 809,102 No Income/No Asset 232,209 313,705 ------------ ------------ Total $ 1,158,306 $ 2,277,745 ============ ============
On Verified Income/Verified Asset loans ("VIVA"), the borrower includes information on his/her income and assets, which are then verified. Loans that allow for a reduced level of documentation at origination are a significant percentage of single family 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 and that information is not subject to verification; while information provided by the borrower on his/her assets is verified. For No Income/No Asset ("NINA") loans, the borrower is not required to submit information on his/her level of income or assets; however, all single family loans require full credit reports and appraisals. All multi-family loans and other real estate loans require full documentation by the borrowers. The following table shows the composition of our single family loan portfolio by borrower documentation type at the dates indicated: June 30, December 31, June 30, Documentation Type: 2006 2005 2005 -------------- -------------- -------------- (In thousands) Verified Income/Verified Asset $ 1,441,640 $ 1,444,640 $ 1,374,598 Stated Income/Verified Asset 2,287,280 2,361,778 1,927,622 Stated Income/Stated Asset 2,637,369 2,777,116 2,361,741 No Income/No Asset 834,472 777,942 637,534 -------------- -------------- -------------- Total $ 7,200,761 $ 7,361,476 $ 6,301,495 ============== ============== ==============
We attempt to mitigate the inherent risk of making reduced documentation loans by evaluating the other 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 creditworthiness of the borrower is based on the borrower's credit score ("FICO"), prior use of and repayment of credit, job history and stability. The average borrower FICO score and average loan-to-value ratio on single family loan originations were 720 and 73%, respectively, for the first six months of 2006, compared to 713 and 74%, respectively, for the comparable 2005 period. The following table shows the composition of our single family loan portfolio at the dates indicated by original loan-to-value ratio: June 30, December 31, June 30, Original LTV Ratio: 2006 2005 2005 -------------- -------------- -------------- (In thousands) <65% $ 1,403,038 $ 1,416,329 $ 1,209,605 65-70% 814,673 837,964 708,682 70-75% 907,344 931,461 819,733 75-80% 3,368,773 3,349,640 2,703,983 80-85% 140,333 162,115 169,807 85-90% 467,687 544,825 566,551 >90% 98,913 119,142 123,134 -------------- -------------- -------------- Total $ 7,200,761 $ 7,361,476 $ 6,301,495 ============== ============== ==============
The following table shows the composition of our single family loan portfolio at the dates indicated by the FICO score of the borrower at origination: FICO Score at Origination: June 30, December 31, June 30, 2006 2005 2005 ------------- ------------- ------------- (In thousands) <620 $ 46,677 $ 53,059 $ 59,077 620-659 639,573 644,412 580,505 660-719 3,296,485 3,430,230 2,996,284 >720 3,164,583 3,171,315 2,597,544 Not Available 53,443 62,460 68,085 ------------- ------------- ------------- Total $ 7,200,761 $ 7,361,476 $ 6,301,495 ============= ============= =============
The following table summarizes total loan originations by type of index for the periods indicated: Six months ended June 30, ----------------------------- 2006 2005 ------------- ------------- (In thousands) Adjustable: CODI $ 127,858 $ 2,142,396 12MAT 352,809 367,963 COFI 805,050 83,967 Other 17,973 22,991 Hybrid and Fixed: 20,537 475 ------------- ------------- Total $ 1,324,227 $ 2,617,792 ============= =============
At June 30, 2006, 96.68% of our loan portfolio was invested in adjustable rate products. Loans with interest rates that adjust monthly based on the 3-Month Certificate of Deposit Index ("CODI") comprised 53.27% of the loan portfolio. Loans with interest rates that adjust monthly based on the 12-month average U.S. Treasury Security rate ("12MAT") comprised 19.24% of the loan portfolio. Loans with interest rates that adjust monthly based on the Federal Home Loan Bank ("FHLB") Eleventh District Cost of Funds Index ("COFI") comprised 22.48% of the loan portfolio. Loans with interest rates that adjust monthly based on the London Inter-Bank Offering Rate ("LIBOR") and other indices comprised 1.69% of the loan portfolio. Our adjustable rate loan products allow for negative amortization when a scheduled monthly payment is not sufficient 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 $136.4 million at June 30, 2006, $62.6 million at December 31, 2005 and $20.4 million at June 30, 2005. Negative amortization increased by $37.9 million and $73.7 million during the second quarter and first six months of 2006. This compares to increases of $10.0 million and $14.9 million during the second quarter and first six months of 2005. Negative amortization has increased over the last few quarters primarily due to rising interest rates. The portfolio of single family loans with a one-year fixed payment period totaled $4.9 billion at June 30, 2006, $4.6 billion at December 31, 2005 and $3.7 billion at June 30, 2005. The portfolio of single family loans with three-to-five year fixed payment periods totaled $2.3 billion at June 30, 2006 and $2.7 billion at December 31, 2005, and $2.6 billion at June 30, 2005. Negative amortization was 1.89% of all single family loans with fixed payment periods in the Bank's portfolio as of June 30, 2006. This compares to 0.86% at December 31, 2005 and 0.32% at June 30, 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 loans. 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: June 30, December 31, June 30, 2006 2005 2005 ------------- ------------- ------------- (In thousands) REAL ESTATE LOANS: First trust deed residential loans One-to-four units $ 7,200,761 $ 7,361,476 $ 6,301,495 Five or more units 1,930,261 1,942,021 1,968,034 ------------- ------------- ------------- Residential loans 9,131,022 9,303,497 8,269,529 OTHER REAL ESTATE LOANS: Commercial and industrial 238,071 257,560 301,016 Construction -- 4,910 -- Second trust deeds 3,333 6,505 5,128 Other 4,322 -- 3,834 ------------- ------------- ------------- Real estate loans 9,376,748 9,572,472 8,579,507 NON-REAL ESTATE LOANS: Deposit accounts 496 595 493 Commercial business loans 82,446 80,186 75,919 Consumer 49,145 57,399 62,810 ------------- ------------- ------------- Loans receivable 9,508,835 9,710,652 8,718,729 LESS: General valuation allowances - loan portfolio 103,875 97,558 85,494 Valuation allowances - impaired loans -- -- 1,100 Deferred loan origination costs, net (58,901) (68,039) (57,603) ------------- ------------- ------------- Net loans receivable $ 9,463,861 $ 9,681,133 $ 8,689,738 ============= ============= =============
Our non-performing assets to total assets ratio was 0.07% at June 30, 2006, compared to 0.05% at December 31, 2005 and 0.07% at June 30, 2005. (See "Non-performing Assets" for further discussion.) We recorded net loan charge-offs of $58 thousand and $83 thousand for the second quarter and first six months of 2006, respectively. This compares to net loan charge-offs of $486 thousand and $327 thousand during the second quarter and first six months of 2005, respectively. Allowances for loan losses (including general valuation allowances and valuation allowances for impaired loans) totaled $103.9 million or 1.09% of gross loans outstanding at June 30, 2006. This compares with $97.6 million or 1.00% at December 31, 2005 and $86.6 million or 0.99% at June 30, 2005. The mortgage-backed securities portfolio, classified as available-for-sale, was recorded at fair value as of June 30, 2006. An unrealized gain of $94 thousand, net of taxes, was recorded in stockholders' equity as of June 30, 2006. This compares to net unrealized gains of $108 thousand as of December 31, 2005 and $466 thousand as of June 30, 2005. The investment securities portfolio, classified as available-for-sale, was recorded at fair value as of June 30, 2006. An unrealized loss of $1.3 million, net of taxes, was reflected in stockholders' equity as of June 30, 2006. This compares to net unrealized gains of $327 thousand as of December 31, 2005 and net unrealized gain of $659 thousand as of June 30, 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 $424.8 million or 4.14% of total assets at June 30, 2006. In comparison, the one year GAP was a positive $445.2 million or 4.26% of total assets at December 31, 2005. (The December 31, 2005 dollar amounts and percentages have been adjusted to include FHLB stock, which was not initially included in interest-earning assets at the end of that period.) 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 June 30, 2006: Tier 1 Tangible Core Risk-based Risk-based Capital Capital Capital Capital ---------- ---------- ---------- ---------- (Dollars in thousands) Actual Capital: Amount $ 718,769 $ 718,769 $ 718,769 $ 786,283 Ratio 7.01% 7.01% 13.40% 14.66% FDICIA minimum required capital: Amount $ 153,848 $ 410,260 $ -- $ 429,178 Ratio 1.50% 4.00% -- 8.00% FDICIA "well-capitalized" required capital: Amount $ -- $ 512,825 $ 321,884 $ 536,473 Ratio -- 5.0% 6.0% 10.0%
There were no additional investments in the Bank by the Company during the first six months of 2006. During the second quarter of 2005 the Company 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 six months of 2006 or 2005. There remain 1,472,079 shares eligible for repurchase under our stock repurchase program as of August 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: Six Months Ended June 30, 2006 ------------------------------------------ General Impaired Valuation Valuation Allowances Allowances Total ------------ ------------ ------------ (In thousands) Balance at December 31, 2005: $ 97,558 $ -- $ 97,558 Provision for loan losses 6,400 -- 6,400 Charge-offs: Consumer loans (60) -- (60) Commercial business loans (26) -- (26) ------------ ------------ ----------- Total charge-offs (86) -- (86) Recoveries 3 -- 3 ------------ ------------ ----------- Net (charge-offs)/recoveries (83) -- (83) ------------ ------------ ----------- Balance at June 30, 2006: $ 103,875 $ -- $ 103,875 ============ ============ ===========
Six Months Ended June 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 6,650 1,100 7,750 Charge-offs: Single family (5) -- (5) Commercial -- (496) (496) ------------ ------------ ----------- Total charge-offs (5) (496) (501) Recoveries 174 -- 174 ------------ ------------ ----------- Net (charge-offs)/recoveries 169 (496) (327) ============ ============ =========== Balance at June 30, 2005: $ 85,494 $ 1,100 $ 86,594 ============ ============ ===========
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 California economy. Consolidated Statements of Income We reported consolidated net income of $32.5 million or $1.92 per diluted share of common stock during the second quarter of 2006, compared to $21.7 million or $1.29 per diluted share of common stock during the second quarter of 2005. Net income increased during the second quarter of 2006 due to growth in net interest income, which resulted from growth in average interest-earning assets and an increase in loan prepayment fee income compared to the same quarter of 2005. Also, net income increased during the second quarter of 2006 compared to the same quarter of 2005 due to lower provisions for loan losses and gains recorded on the sale of loans. We reported consolidated net income of $63.5 million or $3.75 per diluted share of common stock during the first six months of 2006 compared to $40.2 million or $2.38 per diluted share of common stock during the first six months of 2005. Net income increased during the first six months of 2006 compared to the same period last year due to the same factors that increased quarterly earnings. Net Interest Income Net interest income increased to $73.9 million during the second quarter of 2006 from $58.4 million during the second quarter of 2005. The increase is primarily due to a 17% increase in average interest-earning assets during the second quarter of 2006 compared to the second quarter of 2005. Also, the interest rate spread increased by 10 basis points during the second quarter of 2006 compared to the second quarter of 2005 due to increased loan prepayment fee income. Net interest income for the first six months of 2006 increased to $148.7 million from $111.2 million during the first six months of 2005. The increase is primarily due to a 24% increase in average interest-earning assets during the first six months of 2006 compared to the first six months of 2005. The interest rate spread also increased by 10 basis points during the first six months of 2006 compared to the first six months of 2005 due to increased loan prepayment fee income. 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. A higher percentage of loans in the Bank's current loan portfolio are subject to prepayment fees than in the past. Loan prepayment fees increased to $7.7 million and $15.1 million during the second quarter and first six months of 2006, respectively. This compares to $4.1 million and 6.7 million during the second quarter and first six months of 2005, respectively. Late payment charges were $301 thousand and $626 thousand during the second quarter and first six months of 2006, respectively. This compares to $221 thousand and $410 thousand during the second quarter and first six months of 2005, respectively. 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 following table sets forth: (i) the average daily dollar amounts of and average yields earned on loans, mortgage-backed securities and investment securities, (ii) the average daily dollar amounts of and average rates paid on savings 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 Six Months Ended June 30, ------------------------------- 2006 2005 ------------- ------------- (Dollars in thousands) Average loans (1) $ 9,714,149 $ 7,812,139 Average investment securities 602,103 482,739 ------------- ------------- Average interest-earning assets 10,316,252 8,294,878 ------------- ------------- Average savings deposits 4,967,767 3,868,336 Average borrowings 4,807,607 3,992,055 ------------- ------------- Average interest-bearing liabilities 9,775,374 7,860,391 ------------- ------------- Excess of interest-earning assets over interest-bearing liabilities $ 540,878 $ 434,487 ============= ============= Yields earned on average interest-earning assets 6.75% 5.01% Rates paid on average interest-bearing liabilities 4.12 2.48 Interest rate spread 2.63 2.53 Effective net spread (2) 2.88 2.68 Total interest income $ 348,365 $ 207,824 Total interest expense 199,631 96,607 ------------- ------------- Net interest income $ 148,734 $ 111,217 ============= ============= (1) Non-accrual loans are included in the average dollar amount of loans outstanding; however, there was no income 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).
Non-Interest Income and Expense Loan servicing and other fees increased to $619 thousand and $1.3 million, respectively, during the second quarter and first six months of 2006 compared to $178 thousand and $262 thousand, respectively, during the second quarter and first six months of 2005, respectively. The increases are due to additional fees received for loans brokered to other companies, lower outside appraisal costs and additional fees earned on commercial loans. Gains recorded on the sale of loans reached $1.9 million for the second quarter and $2.1 million for the first six months of 2006 due to loan sales of $170.2 million during the second quarter and $185.3 million during the first six months of 2006. During the second quarter we developed correspondent lending relationships with other financial institutions to originate and sell loan types that we do not keep in our portfolio. There were no loan sales during the first six months of 2005. Non-interest expense was $19.4 million and $39.3 million, respectively, during the second quarter and first six months of 2006 compared to $18.7 million and $37.6 million, respectively, during the second quarter and first six months of 2005. Expenses increased during the second quarter and first six months of 2006 compared to the prior year periods due to increased assessments by the OTS, higher operating losses at the retail branches, and advertising costs for internet deposits. Non-interest expense as a percentage of average total assets was 0.75% for both the second quarter and the first six months of 2006. This compares to percentages of 0.84% and 0.90% for the second quarter and the first six months of 2005, respectively. The ratios decreased during 2006 due 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 $6.8 million at June 30, 2006, an increase from $6.1 million at June 30, 2005. The amount of interest allowance for loans 90 days or more delinquent or in foreclosure was $328 thousand as of June 30, 2006 and $161 thousand as of June 30, 2005. The increase in the interest allowance at June 30, 2006 is due to an increase in loans in foreclosure and higher interest rates in 2006 compared to 2005. 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 June 30, 2006, we had net modified loans totaling $1.9 million. No modified loans were 90 days or more delinquent at June 30, 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. The following is a summary of impaired loans, net of valuation allowances for impairment, at the dates indicated: June 30, December June 30, 2006 31, 2005 2005 -------------- ------------- ------------- (In thousands) Non-accrual loans $ 4,334 $ 3,027 $ 300 Other impaired loans 2,879 -- -- -------------- ------------- ------------- $ 7,213 $ 3,027 $ 300 ============== ============= =============
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 June 30, --------------------- 2006 2005 ---------- --------- (In thousands) Impaired loans without a valuation allowance $ 7,213 $ -- Impaired loans with a valuation allowance $ -- $ 1,400 Valuation allowance related to impaired loans $ -- $ 1,100
For the Three Months Ended --------------------------------------------- June 30, December 31, June 30, 2006 2005 2005 ------------- ------------- ------------- (In thousands) Average investment in impaired loans $ 7,210 $ 3,703 $ 4,058 Interest income recognized on impaired loans $ 17 $ 30 $ 137 Interest income recognized on impaired loans using the cash basis of income recognition $ 64 $ 29 $ 137
Asset Quality The following table sets forth certain asset quality ratios at the dates indicated: June 30, December 31, June 30, 2006 2005 2005 ------------- ------------- ------------- Non-performing loans to gross loans receivable (1) 0.07% 0.05% 0.07% Non-performing assets to total assets (2) 0.07% 0.05% 0.07% Loan loss allowances to non-performing loans (3) 1,521% 1,965% 1,428% Loan loss allowances to gross loans receivable 1.09% 1.00% 0.99% (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: June 30, December June 30, 2006 31, 2005 2005 -------------- ------------ --------------- (In thousands) Non-accrual loans: Single family $ 5,129 $ 3,569 $ $4,198 Multi-family 1,680 -- 454 Other 20 1,397 1,413 -------------- ------------ --------------- Total non-accrual loans 6,829 4,966 6,065 -------------- ------------ --------------- Total non-performing assets $ 6,829 $ 4,966 $ $6,065 ============== ============ ===============
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 a strong real estate market in California. A slowdown in the California real estate market, such as what we have been experiencing during the first six months of 2006, could negatively impact our level of non-performing assets. According to CAR, it is taking longer to sell homes and the inventory of unsold homes has increased substantially since June of last year. However, at this time, real estate values remain at record high levels. The UCLA Forecast suggests that home prices will remain high until we see some weakness in the job market. Historically, single family non-performing loans have been attributable to factors such as job layoffs and decreased incomes. Historically, multi-family and commercial non-performing loans have been attributable to factors such as declines in occupancy rates, employment rates and rental values. Sources of Funds External sources of funds include savings deposits from several sources, advances from the FHLB of San Francisco, and securitized borrowings. Savings deposits are accepted from retail banking offices, national deposit brokers, telemarketing sources and the internet. 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. We do not deem our use of any specific source of funds to have a material impact on our operations because the cost of funds, operating margins and net income associated with all of the sources are comparable. Total savings deposits increased by $471.0 million and $1.1 billion during the second quarter and first six months of 2006. The increase in deposits during 2006 is primarily attributable to additional deposits acquired from national brokerage firms ("brokered deposits") and retail banking offices. Brokered deposits increased by $437.6 million and $1.0 billion during the second quarter and first six months of 2006, respectively. Because brokered deposits were the lowest cost source of funds during 2006, they were used to replace borrowings from the FHLB. Brokered deposits comprised 49% of total deposits at June 30, 2006. 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 at retail banking offices increased by $23.8 million and $93.7 million during the second quarter and first six months of 2006, respectively. Retail deposits comprised 49% of total deposits as of June 30, 2006. We are actively seeking to expand our sources of deposits through the establishment of additional branch offices. One new retail branch was opened during the first quarter of 2006 and one new retail branch was opened during the second quarter of 2006. We are at various stages of construction for two additional branch offices, which are expected to open during late 2006 or early 2007. 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 $10.4 million and $30.1 million during the second quarter and first six months of 2006, respectively. These are normally large deposits from pension plans, managed trusts and other financial institutions. The level of these deposits fluctuates based on the attractiveness of our rates compared to returns available to investors on alternative investments. Telemarketing deposits comprised 1% of total deposits at June 30, 2006. We started accepting internet deposits during the later part of 2005 by posting our rates on internet rate boards. Internet deposits increased by $20.1 million and $47.3 million during the second quarter and first six months of 2006, respectively. Due to the high cost of advertising and the higher rates paid for internet deposits, we continue to evaluate the cost effectiveness of these deposits. Internet deposits comprised 1% of total deposits as of June 30, 2006. Total borrowings decreased by $812.0 million and $1.4 billion during the second quarter and first six months of 2006, respectively. Because lower cost funds were available, FHLB advances decreased by $846.0 million and $1.2 billion during the second quarter and first six months of 2006, respectively. Borrowings under reverse repurchase agreements increased by $34.0 million during the second quarter due to the pledging of securities purchased during the first quarter. Borrowings under reverse repurchase agreements decreased by $163.7 million during the first six months of 2006 due to overall net payoffs of 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. We sold $170.2 million and $185.3 million in loans during the second quarter and first six months of 2006, respectively. The majority of these loan sales were made pursuant to correspondent lending relationships with various lenders to originate and sell loan types that we do not keep in portfolio. There were no loan sales during the first six months of 2005. Loan prepayments and principal reductions totaled $699.8 million and $1.4 billion during the second quarter and first six months of 2006, respectively, compared to $441.7 million and $780.8 million during the second quarter and first six months of 2005, respectively. 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 11 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. 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)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. (10.2)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. (10.3)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. (10.4)2007 Non-employee Directors Restricted Stock Plan filed as Appendix A to Schedule 14A, Proxy Statement for the Annual Stockholders' Meeting held on April 26, 2006. (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. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FIRSTFED FINANCIAL CORP. Registrant Date: August 8, 2006 By: /s/ Douglas J. Goddard ------------------ Douglas J. Goddard Chief Financial Officer and Executive Vice President 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 8th day of August, 2006. By: /s/ Babette E. Heimbuch ------------------- Babette E. Heimbuch Chief Executive Officer 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 8th day of August, 2006. By: /s/ Douglas J. Goddard ------------------ Douglas J. Goddard Chief Financial Officer 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 June 30, 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: August 8, 2006 By: /s/ Babette E. Heimbuch ------------------- Babette E. Heimbuch Chief Executive Officer 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 June 30, 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: August 8, 2006 By: /s/ Douglas J. Goddard ------------------ Douglas J. Goddard Chief Financial Officer and Executive Vice President