-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RpMFe2DkmEdadOiHwFcXmYqcn9AIPKqLCe2FFYYqoOXLt8sXC9HSHp8QaRF1qp5W bCKTCW/A8zySzSW0Ow4wlw== 0000810536-95-000024.txt : 19951119 0000810536-95-000024.hdr.sgml : 19951119 ACCESSION NUMBER: 0000810536-95-000024 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951114 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRSTFED FINANCIAL CORP CENTRAL INDEX KEY: 0000810536 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 954087449 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09566 FILM NUMBER: 95592436 BUSINESS ADDRESS: STREET 1: 401 WILSHIRE BLVD CITY: SANTA MONICA STATE: CA ZIP: 90401 BUSINESS PHONE: 3103196000 MAIL ADDRESS: STREET 2: 401 WILSHIRE BLVD CITY: SANTA MONICA STATE: CA ZIP: 90401 10-Q 1 9/30/95 10-Q FILING ============================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended September 30, 1995 OR TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 1-9566 FirstFed Financial Corp. (Exact name of registrant as specified in its charter) Delaware 95-4087449 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 401 Wilshire Boulevard Santa Monica, California 90401-1490 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (310) 319-6000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ----- ----- As of November 1, 1995, 10,610,402 shares of the Registrant's $.01 par value common stock were outstanding. ============================================================================
FirstFed Financial Corp. Index Page Part I. Financial Information ---- Item 1. Financial Statements Consolidated Statements of Financial Condition 3 as of September 30, 1995, December 31, 1994 and September 30, 1994 Consolidated Statement of Operations for the three 4 month and nine month periods ended September 30, 1995 and 1994 Consolidated Statement of Cash Flows for the nine 5 month periods ended September 30, 1995 and 1994 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial 7 Condition and Results of Operations Part II. Other Information (omitted items are inapplicable) 17 Item 6. Exhibits and Reports on Form 8-K Signatures 18
2 PART I - FINANCIAL STATEMENTS Item 1. Financial Statements --------------------
FirstFed Financial Corp. and Subsidiary Consolidated Statements of Financial Condition (Dollars in thousands except share and per share amounts) September 30, December 31, September 30, 1995 1994 1994 Assets -------------- ------------ ------------- Cash $ 34,300 $ 35,853 $ 20,457 Investment securities, held to maturity (market of $85,267, $79,316, and $83,898) 86,384 84,052 87,344 Loans receivable 3,052,652 3,041,910 3,013,965 Mortgage-backed securities, held to maturity (market of $846,359, $791,930, and $727,322) 844,893 821,317 746,656 Loans receivable, held for sale (market of $36,270, $30,399, and $24,162) 35,860 30,399 24,162 Accrued interest and dividends receivable 29,566 24,420 22,629 Real estate 21,172 17,081 18,886 Office properties and equipment, net 8,668 9,211 9,441 Investment in Federal Home Loan Bank (FHLB) stock, at cost 58,161 56,061 55,361 Other assets 18,520 37,110 32,167 ------------ ------------ ------------ $ 4,190,176 $ 4,157,414 $ 4,031,068 ============ ============ ============ Liabilities Deposits $ 2,182,918 $ 2,298,914 $ 2,206,294 FHLB advances and other borrowings 1,010,000 913,700 968,700 Securities sold under agreements to repurchase 739,268 691,121 627,800 Deferred income taxes - 6,324 - Accrued expenses and other liabilities 67,635 62,668 47,352 ------------ ------------ ------------ 3,999,821 3,972,727 3,850,146 ------------ ------------ ------------ Commitments and Contingencies Stockholders' Equity Common stock, par value $.01 per share; authorized 25,000,000 shares; issued 11,405,522 11,395,492, and 11,385,897 shares, outstanding 10,609,002, 10,598,972, and 10,589,377 shares 114 114 114 Additional paid-in capital 28,160 28,061 27,506 Retained earnings - substantially restricted 174,873 169,186 166,140 Loan to employee stock ownership plan (2,960) (2,842) (3,006) Treasury stock, at cost, 796,520 shares (9,832) (9,832) (9,832) ------------ ------------ ----------- 190,355 184,687 180,922 ------------ ------------ ----------- $ 4,190,176 $ 4,157,414 $ 4,031,068 ============ ============ =========== See accompanying notes to consolidated financial statements.
3
FirstFed Financial Corp. and Subsidiary Consolidated Statements of Operations (Dollars in thousands except per share amounts) Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- 1995 1994 1995 1994 ------ ------ ------ ------ Interest income: Interest on loans $ 59,508 $ 47,881 $172,814 $135,894 Interest on mortgage-backed securities 15,487 8,811 41,608 26,420 Interest and dividends on investments 3,553 2,850 10,194 7,333 -------- -------- -------- -------- Total interest income 78,548 59,542 224,616 169,647 Interest expense: Interest on deposits 27,599 22,636 81,948 64,175 Interest on borrowings 29,584 18,282 86,479 43,411 -------- -------- -------- -------- Total interest expense 57,183 40,918 168,427 107,586 -------- -------- -------- -------- Net interest income 21,365 18,624 56,189 62,061 Provision for loan losses 6,173 3,000 17,376 82,700 -------- -------- -------- -------- Net interest income (loss) after provision for losses 15,192 15,624 38,813 (20,639) -------- -------- -------- -------- Other income (expense): Loan and other fees 1,252 1,820 4,562 5,179 Gain (loss) on sale of loans and mortgage-backed securities (2,125) (20) (1,864) 504 Real estate operations, net 72 1,240 1,399 2,201 Other operating income 546 434 1,661 1,155 -------- -------- -------- -------- Total other income (expense) (255) 3,474 5,758 9,039 -------- -------- -------- -------- Non-interest expense 11,342 11,653 34,224 35,497 -------- -------- -------- -------- Earnings (loss) before income taxes 3,595 7,445 10,347 (47,097) Income tax provision (benefit) 1,611 3,287 4,660 (19,587) -------- -------- -------- -------- Net earnings (loss) $ 1,984 $ 4,158 $ 5,687 $(27,510) ======== ======== ======== ======== Earnings (loss) per share $ 0.19 $ 0.39 $ 0.53 $ (2.61) ======== ======== ======== ======== Weighted average shares outstanding for earnings per share calculation 10,662,633 10,643,738 10,653,978 10,532,732 ========== ========== ========== ========== See accompanying notes to consolidated financial statements.
4
FirstFed Financial Corp. and Subsidiary Consolidated Statement of Cash Flows (Dollars in thousands) Nine Months Ended September 30, ------------------------ 1995 1994 --------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings (loss) $ 5,687 $ (27,510) Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Provision for loan losses 17,376 82,700 Amortization of fees and discounts (576) (1,284) Net change in loans held for sale (5,696) (3,918) Valuation adjustments on real estate sold (889) (7,342) Increase in interest and dividends receivable (5,146) (2,920) (Increase) decrease in negative amortization (3,630) 129 Increase (decrease) in interest payable 3,215 (550) Change in income taxes 4,667 (16,366) Other 4,362 710 --------- ---------- Net cash provided by operating activities 19,370 23,649 --------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Loans made to customers and principal reduction on loans (115,681) (471,746) Loans repurchased (18,699) (17,915) Loans purchased - (59,166) Proceeds from sales of real estate 46,098 66,181 Purchase of investment securities (13,095) (2,348) Principal reductions on mortgage-backed securities 36,144 67,937 Proceeds from maturities and principal payments on investment securities 10,675 18,693 Purchase of FHLB stock - (15,085) Other 4,460 (5,838) --------- ---------- Net cash used by investing activities (50,098) (419,287) --------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Net decrease in savings deposits (115,996) (99,186) Net increase in short term borrowings 407,647 610,851 Proceeds from long term borrowings - 100,000 Repayment of long term borrowings (263,200) (207,500) Other 724 (5,561) --------- ---------- Net cash provided by financing activities 29,175 398,604 --------- ---------- Net increase (decrease) in cash and cash equivalents (1,553) 2,966 Cash and cash equivalents at beginning of period 35,853 17,491 --------- ---------- Cash and cash equivalents at end of period $ 34,300 $ 20,457 ========= ========== See accompanying notes to consolidated financial statements.
5 FirstFed Financial Corp. and Subsidiary Notes to Consolidated Financial Statements 1-. The unaudited financial statements included herein have been prepared by the Registrant pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of the Registrant, 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 generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The Registrant 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 Registrant'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-. Earnings (loss) per share were computed by dividing net earnings or loss by the weighted average number of shares of common stock outstanding for the period, plus the effect of stock options, if dilutive. Weighted average shares outstanding for the earnings per share calculation were 10,662,633 for the three months ended September 30, 1995 and 10,643,738 for the three months ended September 30, 1994. Weighted average shares outstanding for the earnings (loss) per share calculation were 10,653,978 for the nine-month period ended September 30, 1995 and 10,532,732 for the nine-month period ended September 30, 1994. 3-. For purposes of reporting cash flows on the "Consolidated Statement of Cash Flows", cash and cash equivalents include cash, overnight investments and securities purchased under agreements to resell which mature within 90 days or less. 4-. The Bank adopted Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan," ("SFAS No. 114") effective January 1, 1994. SFAS No. 114 requires the measurement of impaired loans based on the present value of expected future cash flows discounted at the loan's effective interest rate, or at the loan's observable market price or at the fair value of its collateral. SFAS No. 114 does not apply to large groups of homogeneous loans that are collectively reviewed for impairment. For the Bank, loans collectively reviewed for impairment include all single family loans less than $500 thousand and multi-family loans less than $750 thousand. The adoption of SFAS No. 114 did not result in material additions to the Bank's provision for loan losses. Prior to the adoption of SFAS No. 114, the Bank considered the transfer of specific allowances from general valuation allowances to be "charge-offs." Pursuant to SFAS No. 114, the Bank now considers these transfers as valuation allowances for impairment. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Financial Condition At September 30, 1995, FirstFed Financial Corp., (the "Company"), holding company for First Federal Bank of California and its subsidiaries (the "Bank"), had consolidated assets totaling $4.2 billion, comparable to the asset level as of December 31, 1994 and 4% greater than the asset level as of September 30, 1994. Due to the continued weakness in the Southern California real estate markets, loan originations have decreased in 1995. Asset growth from the September 30, 1994 level resulted from loan originations, primarily in the fourth quarter of 1994. The economic recession, which has persisted in Southern California since mid-1990, is beginning to show some signs of improvement during 1995. According to the UCLA Business Forecast for California, September, 1995 Report (the "UCLA Report"), California is outpacing the nation in the areas of payroll employment and merchandise exports. There has also been improvement in statewide taxable sales and bank loans to businesses and consumers. Despite the improvement in some areas of the California economy, Southern California real estate continues to be depressed by the recession. The UCLA Report states that multi-family housing permits, new construction and new single family homes sales have declined further in 1995 compared to the already deflated levels of 1994. Some signs of stabilization have occurred in recent months. According to sources quoted in the UCLA Report, sales of existing single family homes were nearly the same in July as they were in June of 1995 (though nearly 10% below July, 1994 sales). Also, sales prices for existing homes have increased in recent months. The recession, combined with riots, earthquakes and other natural disasters, has negatively impacted the Company's results over the last three years. The weakness in the Southern California real estate market has impacted the credit quality of the Bank's loan portfolio, creating a need for larger provisions for loan losses. Provisions for loan losses were $17 million for the first nine months of 1995 compared to $83 million for the first nine months of 1994. The Bank recorded provisions for loan losses totaling $6 million for the third quarter of 1995, down from $8 million for the second quarter of 1995. The Bank also recorded $2 million in additional loss provisions in the third quarter of 1995 (recorded as a loss on the sale of loans) for loans previously sold with recourse. Due to the large provisions recorded in the first and second quarters of 1994, a provision of only $3 million was necessary for the third quarter of 1994. For the first nine months of 1995, loan charge-offs were $18 million compared to $24 million for the first nine months of 1994. Loan charge-offs were $7 million for the third quarter of 1995 compared to $5 million for the third quarter of 1994. Charge-offs during 1995 and 1994 were due primarily to losses on multi-family loans which have been particularly affected in the on-going recession. The ratio of non-performing assets to total assets was 2.19% as of September 30, 1995, compared to 2.23% at December 31, 1994 and 3.03% at September 30, 1994. Real estate acquired by foreclosure at September 30, 1995 increased 14% from September 30, 1994 and 26% from December 31, 1994. Loans delinquent greater than 90 days decreased 32% at September 30, 1995 compared to the level one year ago and 7% compared to the level at December 31, 1994. (See "Non-performing Assets" for further discussion.) The Bank's general valuation allowances were $38 million at September 30, 1995 compared to $55 million at December 31, 1994 and $70 million at September 30, 1994. The decrease in general valuation allowances is consistent with the decline in loan charge-offs and non-performing assets compared to last year. 7 The Bank also maintains valuation allowances for impaired loans which totaled $26 million at September 31, 1995 compared to $24 million at December 31, 1994 and $26 million at September 31, 1994. Transfers to the allowance for impaired loans totaled $2 million and $17 million, respectively, for the third quarter and first nine months of 1995 compared to $6 million and $31 million, respectively, for the third quarter and first nine months of 1994. Prior to 1994, transfers to loan allowances for impaired loans were considered as charge-offs by the Bank. The Bank's portfolio of loans, including mortgage-backed securities, as of September 30, 1995 totaled $3.9 billion, comparable to the December 31, 1994 level. Mortgage-backed securities generally have the same experience with respect to prepayment, repayment, delinquencies and other factors of the Bank's loan portfolio. The following table shows the components of the Bank's portfolio of loans and mortgage-backed securities by collateral type for the periods indicated:
September 30, December 31, September 30, 1995 1994 1994 ------------- ------------ ------------- (Dollars in thousands) REAL ESTATE LOANS: First trust deed residential loans: One unit $ 1,229,844 $ 1,192,251 $ 1,165,578 Two to four units 354,548 350,718 356,931 Five or more units 1,341,541 1,357,251 1,361,724 ----------- ----------- ----------- Residential loans 2,925,933 2,900,220 2,884,233 OTHER REAL ESTATE LOANS: Commercial and industrial 222,308 246,340 244,564 Second trust deeds 18,558 20,401 21,587 Other 3,471 4,793 4,768 ----------- ----------- ----------- Real estate loans 3,170,270 3,171,754 3,155,152 NON-REAL ESTATE LOANS: Manufactured housing 2,118 2,439 2,533 Deposit accounts 1,618 1,301 1,150 Consumer 469 506 548 ----------- ----------- ----------- Loans receivable 3,174,475 3,176,000 3,159,383 LESS: General valuation allowances- loan portfolio 37,938 55,353 69,625 Valuation allowances - impaired loans 25,695 23,887 26,432 Unrealized loan fees 22,330 24,451 25,199 ----------- ----------- ----------- Net loans receivable 3,088,512 3,072,309 3,038,127 FHLMC AND FNMA MORTGAGE- BACKED SECURITIES: Secured by single family dwellings 820,047 794,126 719,018 Secured by multi-family dwellings 24,846 27,191 27,638 ----------- ----------- ----------- Mortgage-backed securities 844,893 821,317 746,656 ----------- ----------- ----------- TOTAL $ 3,933,405 $ 3,893,626 $ 3,784,783 =========== =========== ===========
The Bank originates primarily single family loans in Southern California. Recently, loan originations have been impacted by the decrease in real estate sales activity due to the recession. Loan originations decreased by 67% in the first nine months of 1995 compared to the first nine months of 1994. Management decided to de-emphasize the origination of multi-family loans starting in the fourth quarter of 1994 because market pricing did not fully compensate the Bank for the risks associated with this type of lending. This decision contributed to the decrease in loan originations in 1995. 8 The one year GAP ratio (the difference between rate-sensitive assets and liabilities repricing within one year or less as a percentage of total assets) was a positive $383 million or 9.13% at the end of the third quarter. In comparison, the one year GAP ratio was a positive $636 million or 15.79% as of September 30, 1994 and $574 million or 13.81% of total assets as of December 31, 1994. The positive one year GAP decreased during the first nine months of 1995 due to an increase in certificates of deposit maturing in less than one year. Over 94% of the Bank's loans adjust based upon monthly changes in the Eleventh District Cost of Funds Index ("COFI Index"). Since the majority of the Bank's loans are monthly adjustables, the Bank's one year GAP position varies primarily based upon the remaining terms of its savings and borrowings. The longer the term of the Bank's liabilities, the more positive the one year GAP. A positive GAP normally benefits a financial institution in times of increasing interest rates. However, the Bank's net interest income typically declines during periods of increasing interest rates because of the three month time lag before changes in the COFI Index can be implemented with respect to the Bank's loans. In order to diversify its loan portfolio, starting in 1995, the Bank began emphasizing the origination of adjustable rate loans based upon the one month London Interbank Overseas Rate ("LIBOR"). Deposits, including interest credited, were $2.2 billion, as of September 30, 1995 and September 30, 1994. As of December 31, 1994, deposits were slightly higher at $2.3 billion. The decrease in savings resulted from increased competition from institutions offering promotional accounts in the Bank's market areas and decreased customer demand for deposits from national brokerage houses. Borrowings increased to $1.7 billion as of September 30, 1995, from $1.6 billion as of September 30, 1994 and as of December 31, 1994. The Bank's capital as of September 30, 1995 exceeded the minimum amounts required by its primary regulatory agency, the Office of Thrift Supervision ("OTS"). The Bank was required to maintain tangible capital of at least 1.5% of adjusted total assets, core capital of at least 3% of adjusted total assets, and risk-based capital of at least 8% of risk-weighted assets. The Bank's core and tangible capital ratios were both 5.5% and the risk-based capital ratio was 10.6% at September 30, 1995. These ratios meet the OTS' requirements necessary to be deemed well capitalized. Results of Operations The Company reported consolidated net earnings of $2.0 million for the third quarter of 1995 compared to net earnings of $4.2 million for the third quarter of 1994. The decrease in quarterly net earnings resulted from a $3.2 million increase in the provision for loan losses in the third quarter of 1995 compared to the same quarter of the prior year. The increased provisions were partially offset by a 15% increase in net interest income and a 3% decline in non-interest expense compared to the third quarter of the prior year. For the first nine months of 1995, the Company reported consolidated net earnings of $5.7 million compared to a net loss of $27.5 million for the first nine months of 1994. Results for the first nine months of 1994 were adversely impacted by a $82.7 million provision for loan losses due to weakness in the Southern California real estate market and estimated losses from the January 17, 1994 earthquake. Although the Company has reported positive results throughout 1995, its level of earnings has continued to be impacted by weakness in the Southern California real estate market, primarily in the area of multi-family housing. Multi-family loans comprised 34% of loans and mortgage-backed securities as of September 30, 1995. The value of multi-family properties has declined due to a weak rental market resulting in increased vacancies and lower rents. Upon foreclosure, or when a loan becomes a non-accrual loan, the properties securing the loans are recorded at fair value less the estimated costs to sell. 9 Management is unable to predict future levels of loan loss provisions. Among other things, future loan loss provisions are based on the level of loan charge-offs, transfers to allowances for impaired loans, foreclosure activity, and the severity and duration of the economic recession in Southern California. For the first nine months of 1995, loan charge-offs were $18 million compared to $24 million for the first nine months of 1994. The lower charge-off levels in 1995 resulted primarily from improvement in non-performing loans. (See "Non-performing Assets" for further discussion.) Transfers to valuation allowances for impaired loans were considered as charge-offs prior to 1994. These transfers totaled $2 million and $17 million for the third quarter and first nine months of 1995 compared to $6 million and $31 million for the third quarter and first nine months of 1994. Listed below is a summary of the activity in general valuation allowances applicable to the Bank's loan portfolio during the periods indicated:
Nine Months Ended September 30, -------------------------------- 1995 1994 ----------- ------------ (Dollars in thousands) Beginning general valuation allowances $ 55,353 $ 40,669 Provision for loan losses 17,376 82,700 Charge-offs, net of recoveries: Single family (5,474) (7,709) Multi-family (14,092) (21,452) Commercial 2,066 5,210 Non-real estate - (100) ---------- ----------- Total charge-offs (17,500) (24,051) Transfers to liability account for loans sold with recourse (503) 942 Transfers (to) from valuation allowances for impaired loans: Single family (187) (187) Multi-family (14,093) (22,403) Commercial (2,508) (8,045) ---------- ----------- Total transfers to valuation allowances for impaired loans (16,788) (30,635) ---------- ----------- Ending general valuation allowances $ 37,938 $ 69,625 ========== ===========
The ratio of general valuation allowances to the Bank's assets with loss exposure (primarily loans and real estate owned) was 1.18% at the end of the third quarter of 1995, compared to 1.73% as of December 31, 1994 and 2.19% as of September 30, 1994. The Bank also maintains an allowance for loans sold with recourse, recorded as a liability. This allowance was 4.13% of loans sold with recourse as of September 30, 1995, compared to 2.86% as of December 31, 1994 and 1.87% as of September 30, 1994. The balance of loans sold with recourse totaled $281 million, $305 million and $310 million as of September 30, 1995, December 31, 1994 and September 30, 1994, respectively. The Bank has not entered into any new recourse arrangements since 1989. The Company's net interest income increased 15% in the third quarter of 1995 compared to the third quarter of 1994 and decreased 9% in the first nine months of 1995 compared to the first nine months of 1994. The Company's interest rate margin increased in the third quarter, yet decreased for the first nine months compared to the same periods of last year. The Federal Reserve increased interest rates seven times throughout 1994 and the first quarter of 1995. Interest rates began to moderate in the second quarter of 1995 and the Federal Reserve decreased interest rates early in the third quarter. The Company's 10 interest rate margin improved to 1.92% in the third quarter of 1995 from 1.85% in the third quarter of 1994. Interest expense for the third quarter and first nine months of 1995 includes $1.5 million and $4.4 million of interest expense, respectively, on the $50 million in 10-year notes issued by the Company in September of 1994. The following table sets forth: (i) the average daily dollar amounts of and average yields earned on loans, mortgage-backed securities and investment securities, (ii) the average daily dollar amounts of and average rates paid on savings and borrowings, (iii) the average daily dollar differences, (iv) the interest rate spreads, and (v) the effective net spreads for the periods indicated.
During the Nine Months Ended September 30, During the Three Months Ended September 30, ------------------------------------------ ------------------------------------------- 1995 1994 1995 1994 -------------------- ----------------- --------------------- ----------------- (Dollars in thousands) Average dollar amount of and average yield earned on: Loans and mortgage-backed securities $ 3,946,865 7.24% $ 3,506,748 6.17% $ 3,955,711 7.58% $ 3,633,745 6.24% Investment securities (1) 177,437 5.58 143,525 4.89 180,826 5.60 153,123 4.98 ----------- ----------- ----------- ----------- Interest-earning assets 4,124,302 7.17 3,650,273 6.12 4,136,537 7.49 3,786,868 6.19 Average dollar amount of and average rate paid on: Deposits 2,256,933 4.86 2,284,289 3.76 2,213,907 4.95 2,265,502 3.97 Borrowings 1,809,352 6.36 1,288,785 4.47 1,852,989 6.30 1,465,343 4.91 ----------- ----------- ----------- ----------- Interest-bearing liabilities 4,066,285 5.52 3,573,074 4.01 4,066,896 5.57 3,730,845 4.34 Average dollar difference between interest-earning assets and ----------- ----------- ----------- ----------- interest-bearing liabilities $ 58,017 $ 77,199 $ 69,641 $ 56,023 =========== =========== =========== =========== ----- ----- ----- ----- Interest rate spread 1.65% 2.11% 1.92% 1.85% ===== ===== ===== ===== Effective net spread (2) 1.73% 2.19% 2.02% 1.91% ===== ===== ===== =====
- ---------------------------------- (1) Does not include Federal Home Loan Bank Stock. (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). Real estate operations produced net gains of $72 thousand and $1.4 million for the third quarter and first nine months of 1995, respectively. In comparison, the Bank recorded net gains of $1.2 million and $2.2 million for the third quarter and first nine months of 1994, respectively. Gains are the result of having conservatively estimated the fair value of the foreclosed properties sold. A net loss on sale of loans of $1 thousand and a net gain of $260 thousand were recognized for the first quarter and nine months of 1995, respectively, compared to a net loss of $20 thousand and a net gain of $504 thousand, respectively, for the third quarter and first nine months of 1994. During the third quarter of 1995, the Bank also recorded, as a loss on sale of loans, $2.1 million in additional allowances for loans previously sold with recourse. There were no such additional allowances during 1994. The volume of loans sold during the third quarter and the first nine months of 1995 was $8 million and $10 million, respectively. For the third quarter and nine months ended 1994, the volume of loans sold was $1 million and $43 million, respectively. Loans sold have been impacted by the reduced levels of real estate sales activity in the current recession. 11 Total non-interest expense decreased by 3% and 4% during the third quarter and first nine months of 1995, respectively, compared to the prior year periods. The expense-to-assets ratio was 1.07% of average assets for the third quarter of 1995, down from 1.20% for the same quarter of last year. On a nine-month comparative basis, the expense-to-assets ratio was 1.09% for 1995 compared to 1.25% for 1994. Management maintains ongoing programs to monitor the level of non-interest expense incurred by the Bank. Non-accrual, Past Due, Modified and Restructured Loans The Bank accrues interest earned but uncollected for every loan without regard to its contractual delinquency status but establishes a specific interest allowance for each loan which becomes 90 days or more past due or is in foreclosure. Loans on which delinquent interest allowances had been established (non- accrual loans) totaled $93 million at September 30, 1995 compared to $94 million at December 31, 1994 and $131 million at September 30, 1994. The additional amount of interest that would have been earned had there been no loans 90 days or more delinquent or in foreclosure was $5 million at September 30, 1995 and December 31, 1994 compared to $7 million at September 30, 1994. The Bank has debt restructurings which result from temporary modifications of principal and interest payments. Under these arrangements, loan terms are typically reduced to no less than a monthly interest payment required under the note. Any loss of revenues under the modified terms would be immaterial to the Bank. Generally, if the borrower is unable to return to scheduled principal and interest payments at the end of the modification period, foreclosure proceedings are initiated. As of September 30, 1995, the Bank had modified loans totaling $30 million, net of loan loss allowances totaling $5 million. No modified loans were 90 days or more delinquent as of September 30, 1995. Pursuant to SFAS No. 114, the Bank considers a loan to be impaired when management believes that it is probable that the Bank will be unable to collect all amounts due under the contractual terms of the loan. Estimated impairment losses are recorded as separate valuation allowances and may be subsequently adjusted based upon changes in the measurement of impairment. Impaired loans, which are disclosed net of valuation allowances, include non-accrual major loans (single family loans with an outstanding principal amount greater than or equal to $500,000 and multi-family and commercial real estate loans with an outstanding principal amount greater than or equal to $750,000), modified loans, and major loans less than 90 days delinquent in which full payment of principal and interest is not expected to be received. Valuation allowances for impairment totaled $26 million as of September 30, 1995, $24 million as of December 31, 1994 and $26 million as of September 30, 1994. The following is a summary of impaired loans, net of valuation allowances for impairment, for the periods indicated:
September 30, December 31, September 30, 1995 1994 1994 ------------- ------------ ------------- (Dollars in thousands) Non-accrual loans $ 27,635 $ 38,004 $ 44,437 Modified loans 22,249 41,635 50,059 Other impaired loans 34,738 28,637 22,600 ------------ ------------ ------------ $ 84,622 $ 108,276 $ 117,096 ============ ============ ============
The Bank evaluates loans for impairment whenever the collectibility of contractual principal and interest payments is questionable. Large groups of smaller balance homogenous loans that are collectively evaluated for impairment, including residential mortgage loans, are not subject to the application of SFAS No. 114. 12 When a loan is considered impaired, the Bank measures impairment based on the present value of expected future cash flows (over a period not to exceed 5 years) discounted at the loan's effective interest rate. However, if the loan is "collateral-dependent" or probable of foreclosure, impairment is measured based on the fair value of the collateral. When the measure of an impaired loan is less than the recorded investment in the loan, the Bank records an impairment allowance equal to the excess of the Bank's recorded investment in the loan over its measured value. The following summary details loans measured using the fair value method and loans measured based on the present value of expected future cash flows discounted at the effective interest rate of the loan for the periods indicated:
September 30, December 31, September 30, 1995 1994 1994 ------------- ------------ ------------- (Dollars in thousands) Fair value method $ 68,011 $ 77,245 $ 62,665 Present value method 16,611 31,031 54,431 ------------ ------------ ------------ Total impaired loans $ 84,622 $ 108,276 $ 117,096 ============ ============ ============
Impaired loans for which there were no valuation allowances established totaled $14 million, $22 million and $32 million as of September 30, 1995, December 31, 1994, and September 30, 1994, respectively. Listed below is a summary of the activity in the valuation allowance for losses applicable to impaired loans during the period indicated (dollars in thousands):
September 30, 1995 ------------- Beginning valuation allowances for impaired loans $ 23,887 Allocation from general valuation allowances 16,788 Charges to the allowances (1) (14,980) ----------- Ending valuation allowances for impaired loans $ 25,695 ===========
- ------------------------------------ (1) Prior to 1994, these amounts were considered charge-offs at the time an impairment allowance was established. Cash payments received from impaired loans are recorded in accordance with the contractual terms of the loan. The principal portion of the payment is used to reduce the principal balance of the loan, whereas the interest portion is recognized as interest income. On certain modified loans where the Bank does not believe that it will receive all amounts due under the original contractual loan terms, the Bank records an allowance for interest received. The average recorded investment in impaired loans during the quarter ended September 30, 1995 was $84 million. The amount of interest income recognized for impaired loans during the quarter ended September 30, 1995 was $1 million under both the accrual method of accounting and the cash basis method of accounting. Prior to SFAS No. 114, the Bank had a policy of establishing valuation allowances for all loans deemed probable of foreclosure based on the fair value of the collateral. As a result, SFAS No. 114 had only a minor impact on the Bank's allowance for loan losses. 13 The table below shows the Bank's net investment in non-performing loans determined to be impaired, by property type, as of the periods indicated:
September 30, December 31, September 30, 1995 1994 1994 ------------- ------------ ------------- (Dollars in thousands) Single family $ 2,170 $ 2,140 $ 3,318 Multi-family 25,465 22,696 28,383 Commercial - 13,168 12,736 ----------- ----------- ---------- $ 27,635 $ 38,004 $ 44,437 =========== =========== ==========
Asset Quality The following table sets forth certain asset quality ratios of the Bank at the periods indicated:
September 30, December 31, September 30, 1995 1994 1994 ------------- ------------ ------------- Non-Performing Loans to Loans Receivable (1) 2.22% 2.39% 3.28% Non-Performing Assets to Total Assets (2) 2.19% 2.23% 3.03% Loan Loss Allowances to Non-Performing Loans (3) 64.92% 78.27% 73.95% General Loss Allowances to Assets with Loss Exposure (4) 1.18% 1.73% 2.19% General Loss Allowances to Total Assets with Loss Exposure (5) 1.40% 1.82% 2.17%
------------------------------------ (1) Non-performing loans are net of valuation allowances related to those loans. Loans receivable exclude mortgage-backed securities and are before deducting unrealized loan fees, general valuation allowances and valuation allowances for impaired loans. (2) Non-performing assets are net of valuation allowances related to those assets. (3) The Bank's loan loss allowances, including valuation allowances for non-performing loans and general valuation allowances but excluding general valuation allowances for loans sold by the Bank with full or limited recourse. Non-performing loans are before deducting valuation allowances related to those loans. (4) The Bank's general valuation allowances, excluding general valuation allowances for loans sold with full or limited recourse. The Bank's assets with loss exposure include primarily loans and real estate owned, but exclude mortgage-backed securities. (5) The Bank's general valuation allowances, including general valuation allowances for loans sold with full or limited recourse. Assets with loss exposure include the Bank's loan portfolio and real estate owned plus loans sold with recourse, but exclude mortgage-backed securities. 14 Non-performing Assets The Bank defines non-performing assets as loans delinquent over 90 days (non-accrual loans), loans in foreclosure and real estate acquired by foreclosure (real estate owned). An analysis of non-performing assets as of the periods indicated follows:
September 30, December 31, September 30, 1995 1994 1994 ------------- ------------ ------------- (Dollars in thousands) Real estate owned: Single family $ 7,599 $ 5,711 $ 8,851 Multi-family 8,642 10,647 9,579 Commercial 4,718 366 41 Other 92 - 55 -------- -------- -------- Total real estate owned 21,051 16,724 18,526 Non-performing loans: Single family 23,116 13,041 29,981 Multi-family 65,943 60,213 77,555 Commercial 3,677 20,986 23,240 Other 124 245 271 Valuation allowances (1) (22,347) (18,596) (27,289) -------- -------- -------- Total non-performing loans 70,513 75,889 103,758 -------- -------- -------- Total non-performing assets $ 91,564 $ 92,613 $122,284 ======== ======== ========
- ------------------------------------ (1) Includes valuation allowances for impaired loans and loss allowances on other non-performing loans requiring fair value adjustments. Real estate acquired by foreclosure at September 30, 1995 increased 14% compared to September 30, 1994 and 26% compared to December 31, 1994. Increases during 1995 were due to greater foreclosures on commercial and single-family properties offset by sales of multi-family real estate. Non-performing loans decreased 32% at September 30, 1995 compared to the level one year ago and 7% compared to the level at December 31, 1994. The decrease in non-performing loans during 1995 was primarily due to an increase in valuation allowances to record non-performing loans at fair value. Also, several large commercial loans were foreclosed upon and sold during the first nine months of 1995. Management continues to dedicate significant attention to resolving problem loans and disposing of foreclosed properties. Sales of foreclosed real estate totaled $14 million and $45 million for the third quarter and first nine months of 1995, respectively, compared to $23 million and $61 million, respectively for the third quarter and first nine months of 1994. 15 Sources of Funds External sources of funds include savings deposits, advances from the Federal Home Loan Bank of San Francisco ("FHLB"), securitized borrowings and unsecured term funds. Savings deposits are accepted from several sources: retail savings branches, the telemarketing department, and national deposit brokers. Not including $18 million and $54 million in interest credits during the third quarter and first nine months of 1995, respectively, total savings deposits decreased by $170 million during the first nine months of 1995 and $118 million during the third quarter. Retail deposits decreased by $86 million during the first nine months of 1995 and $3 million during the third quarter. Decreases were due to increased competition from other financial institutions offering promotional accounts in the Bank's market areas. The Bank instituted its own promotional accounts during the third quarter which helped stem the outflow of funds. Retail deposits comprised 67% of total savings deposits as of September 30, 1995. Telemarketing deposits increased by $3 million during the first nine months of 1995 and $25 million during the third quarter. These deposits are normally large deposits from pension plans and other managed trusts. Deposit levels fluctuate based on the attractiveness of the Bank's rates compared to rates available to investors on alternative investments. Telemarketing deposits comprised 10% of total deposits at September 30, 1995. Deposits acquired from national brokerage firms ("brokered deposits") decreased by $87 million during the first nine months of 1995 and $140 million for the third quarter of the year. Brokered deposits decreased during 1995 due to decreased customer demand and were replaced by borrowings, primarily from the FHLB. The Bank has used brokered deposits for over 10 years and considers these deposits a stable source of funds. Because the Bank has sufficient capital to be deemed "well-capitalized" by the Office of Thrift Supervision, it may solicit brokered funds without special regulatory approval. At September 30, 1995, brokered deposits comprised 23% of total deposits. Total borrowings increased by $144 million during the first nine months of 1995 due to additional borrowings of $48 million under reverse repurchase agreements, $88 million in advances from the FHLB, and $8 million in unsecured term funds. Total borrowings increased by $10 million during the third quarter of 1995, due to $3 million in additional borrowings of unsecured term funds and $12 million in advances from the FHLB. Reverse repurchase agreements decreased by $5 million during the third quarter of 1995. The cost of funds, operating margins and net earnings of the Bank associated with brokered and telemarketing deposits are generally comparable to the cost of funds, operating margins and net earnings of the Bank associated with retail deposits, FHLB borrowings and repurchase agreements. As the cost of each source of funds fluctuates from time to time, based on market rates of interest generally offered by the Bank and other depository institutions, the Bank seeks funds from the lowest cost source until the relative costs change. As the cost of funds, operating margins and net earnings of the Bank associated with each source of funds are generally comparable, the Bank does not deem the impact of its use of any one of the specific sources of funds at a given time to be material. Internal sources of funds include both principal payments and payoffs on loans, loan sales, and positive cash flows from operations. Principal payments include amortized principal and prepayments which are a function of real estate activity and the general level of interest rates. Total principal payments were $58 million and $152 million, respectively, for the third quarter and first nine months of 1995. This compares with principal payments of $70 million and $211 million, respectively, for the third quarter and first nine months of 1994. Loan sales decreased to $8 million and $10 million for the third quarter and the first nine months of 1995. This compares with loan sales of $869 thousand and $43 million, respectively for the third quarter and first nine months of 1994. 16 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K a) Exhibits (4.1) Shareholders' Rights Agreement filed as Exhibit 1 to Form 8-A, dated November 2, 1988 and incorporated by reference. (4.2) Indenture filed as Exhibit 4 to Amendment No. 3 to Form S-3 dated September 20, 1994 and incorporated by reference. (10.1) Deferred Compensation Plan filed as Exhibit 10.3 to Form 10-K for the fiscal year ended December 31, 1983 and incorporated by reference. (10.2) Bonus Plan filed as Exhibit 10(iii)(A)(2) to Form 10 dated November 2, 1993 and incorporated by reference. (10.3) Supplemental Executive Retirement Plan dated January 16, 1986 and filed as Exhibit 10.5 to Form 10-K for the fiscal year ended December 21, 1992 and incorporated by reference. (11.1) Computation of earnings per share. Part I hereof is incorporated by reference. b) Reports on Form 8-K No reports on Form 8-K were filed during the period ended September 30, 1995. 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FIRSTFED FINANCIAL CORP. ------------------------ Registrant Date: November 14, 1995 By /s/ WILLIAM MORTENSEN --------------------- William S. Mortensen Chairman of the Board and Chief Executive Officer By /s/ JAMES GIRALDIN ------------------ James P. Giraldin Chief Financial Officer and Executive Vice President 18 EX-27 2
9 This schedule contains summary financial information extracted from the Company's Consolidated Statements of Operations and Consolidated Statements of Financial Condition and is qualified in its entirety by reference to such financial statements. 9-MOS DEC-31-1995 SEP-30-1995 34,300 0 0 0 0 86,384 85,267 3,933,405 37,938 4,190,176 2,182,918 1,638,268 67,635 111,000 114 0 0 190,241 4,190,176 214,422 10,194 0 224,616 81,948 168,427 56,189 17,376 0 34,224 10,347 10,347 0 0 5,687 .53 .53 1.73 70,513 0 34,898 42,270 55,353 17,500 0 37,938 37,938 0 0
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