-----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, AbbxOX1EnviwpWD7+LoHqQt9cR4Dd7TFToSmytY+XHDMZyol5poBtABvg43ehpe/ wnoc0lzDQaxxEH/FgGXKLQ== 0000810536-98-000010.txt : 19980518 0000810536-98-000010.hdr.sgml : 19980518 ACCESSION NUMBER: 0000810536-98-000010 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 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: SEC FILE NUMBER: 001-09566 FILM NUMBER: 98621683 BUSINESS ADDRESS: STREET 1: 201 W THIRD ST CITY: DOVER STATE: OH ZIP: 44622 BUSINESS PHONE: 2163647777 MAIL ADDRESS: STREET 1: 201 W THIRD STREET CITY: DOVER STATE: OH ZIP: 44622 10-Q 1 03/31/1998 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 March 31, 1998 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 May 1, 1998, 10,602,845 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 March 31, 1998, December 31, 1997 and March 31, 1997 Consolidated Statements of Operations and Comprehensive 4 Earnings for the three months ended March 31, 1998 and 1997 Consolidated Statements of Cash Flows for the three 5 months ended March 31, 1998 and 1997 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) Item 6. Exhibits and Reports on Form 8-K 18 Signatures 19
2 PART I - FINANCIAL STATEMENTS Item 1. Financial Statements FirstFed Financial Corp. and Subsidiary Consolidated Statements of Financial Condition (Dollars in thousands, except per share data)
March 31, December 31, March 31, 1998 1997 1997 ----------- ------------ ------------ Assets Cash and cash equivalents $ 107,601 $ 163,135 $ 135,623 Investment securities, available-for-sale (at fair value) 49,218 48,910 84,780 Mortgage-backed securities, available-for-sale (at fair value) 658,598 676,058 711,286 Loans receivable, held-for-sale (market value of $70,936, $40,800, and $6,959) 70,349 40,382 6,949 Loans receivable, net 3,057,735 3,104,782 3,063,345 Accrued interest and dividends receivable 26,968 26,990 27,280 Real estate 6,469 10,257 13,223 Office properties and equipment, net 10,715 9,868 9,384 Investment in Federal Home Loan Bank (FHLB) stock, at cost 69,605 68,592 63,408 Other assets 10,086 11,141 14,459 ----------- ------------ ------------ $ 4,067,344 $ 4,160,115 $ 4,129,737 =========== ============ ============ Liabilities Deposits $ 2,157,502 $ 1,943,647 $ 2,033,787 FHLB advances and other borrowings 1,050,500 1,364,000 1,223,000 Securities sold under agreements to repurchase 570,794 577,670 628,921 Accrued expenses and other liabilities 56,009 52,011 48,879 ----------- ------------ ------------ 3,834,805 3,937,328 3,934,587 =========== ============ ============ Commitments and Contingent Liabilities Stockholders' Equity Common stock, par value $.01 per share; authorized 25,000,000 shares; issued 11,515,838, 11,511,138, and 11,483,922 shares, outstanding 10,592,414, 10,587,618, and 10,560,402 shares 115 115 115 Additional paid-in capital 29,726 29,628 29,147 Retained earnings - substantially restricted 215,208 207,065 189,133 Loan to employee stock ownership plan (1,766) (1,744) (2,159) Treasury stock, at cost, 923,520 shares (11,885) (11,885) (11,885) Accumulated other comprehensive earnings - unrealized gain (loss) on securities available-for-sale, net of taxes 1,141 (392) (9,201) ----------- ------------ ------------ 232,539 222,787 195,150 ----------- ------------ ------------ $ 4,067,344 $ 4,160,115 $ 4,129,737 =========== ============ ============
See accompanying notes to consolidated financial statements. 3 FirstFed Financial Corp. and Subsidiary Consolidated Statements of Operations and Comprehensive Earnings (Dollars in thousands, except per share data)
Three Months Ended March 31, ------------------- 1998 1997 ---- ---- Interest income: Interest on loans $ 61,676 $ 57,813 Interest on mortgage-backed securities 11,532 12,636 Interest and dividends on investments 2,747 3,236 ---------- --------- Total interest income 75,955 73,685 ---------- --------- Interest expense: Interest on deposits 24,022 22,898 Interest on borrowings 25,482 26,755 ---------- ---------- Total interest expense 49,504 49,653 ---------- ---------- Net interest income 26,451 24,032 Provision for loan losses 2,500 6,000 ---------- ---------- Net interest income after provision for losses 23,951 18,032 ---------- ---------- Non-interest income: Loan and other fees 40 1,496 Gain on sale of loans 659 5 Real estate operations, net 532 631 Other operating income 1,024 770 ---------- ---------- Total non-interest income 2,255 2,902 ---------- ---------- Non-interest expense 11,990 11,911 ---------- ---------- Earnings before income taxes 14,216 9,023 Income tax provision 6,073 3,855 ---------- ---------- Net earnings $ 8,143 $ 5,168 ========== ========== Other comprehensive earnings - unrealized gain (loss) on securities available-for-sale, net of taxes 1,533 (5,011) ---------- ---------- Comprehensive earnings $ 9,676 $ 157 ========== ========== Earnings per share: Basic $ 0.77 $ 0.49 ========== ========== Diluted $ 0.75 $ 0.48 ========== ========== Weighted average shares outstanding: Basic 10,590,456 10,542,665 ========== ========== Diluted 10,799,112 10,681,821 ========== ==========
See accompanying notes to consolidated financial statements. 4 FirstFed Financial Corp. and Subsidiary Consolidated Statements of Cash Flows (Dollars in thousands)
Three Months Ended March 31, -------------------- 1998 1997 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 8,143 $ 5,168 Adjustments to reconcile net earnings to net cash provided by operating activities: Net change in loans-held-for-sale (29,967) (754) Provision for loan losses 2,500 6,000 Provision for REO losses 277 125 Valuation adjustments on real estate sold 276 376 Amortization of fees and discounts (243) (272) Negative amortization on Loans (678) (701) (Increase) decrease in interest and dividends receivable 22 (370) Increase in interest payable 3,903 2,494 Other (5,162) (4,938) --------- --------- Total adjustments (29,072) 1,960 --------- --------- Net cash provided by (used in) operating activities (20,929) 7,128 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Loans made to customers net of principal collection on loans 40,639 (32,108) Loans repurchased under recourse arrangements (126) (4,561) Proceeds from sales of real estate owned 8,185 14,809 Principal reduction of mortgage-backed securities held for sale 20,076 15,936 Purchase of investment securities held for sale (11,045) (28,300) Proceeds from maturities and principal payments on investment securities held for sale 10,870 12,519 Other (1,146) 350 --------- --------- Net cash provided by (used in) investing activities 67,453 (21,355) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in savings deposits 213,855 76,339 Net decrease in short term borrowings (660,376) (88,561) Net increase in long term borrowings 340,000 - Other 4,463 (330) --------- --------- Net cash used in financing activities (102,058) (12,552) --------- --------- Net decrease in cash and cash equivalents (55,534) (26,779) Cash and cash equivalents at beginning of period 163,135 162,402 --------- --------- Cash and cash equivalents at end of period $ 107,601 $ 135,623 ========= =========
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 so as not to make the information presented 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 per share and weighted average shares outstanding for the 1997 first quarter have been restated to reflect the adoption of Statement of Financial Accounting Standards No. 128. Basic earnings per share is based on the weighted average shares of common stock outstanding for the period while diluted earnings per share gives effect to all dilutive potential common shares that were outstanding during part or all of the period. 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. In 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"), which establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. Accordingly, for both the 1998 and 1997 periods, the Consolidated Statements of Operations have been expanded to include other comprehensive earnings in arriving at comprehensive earnings and, accordingly, have been renamed Consolidated Statements of Operations and Comprehensive Earnings. Neither net earnings nor earnings per share has been affected by the adoption of SFAS No. 130. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Financial Condition At March 31, 1998, FirstFed Financial Corp. (the "Company"), holding company for First Federal Bank of California and its subsidiaries (the "Bank"), had consolidated assets totaling $4.1 billion, compared to $4.2 billion at December 31, 1997 and $4.1 billion at March 31, 1997. The Bank's primary market area is Los Angeles County. The Southern California economy has continued to improve from the economic recession which began earlier in the decade. According to The UCLA Anderson Forecast, March 1998 Report (the "UCLA Report"), since 1997 California has generated jobs at a rate of over 3% annually which should reduce the state unemployment rate to below 6% in 1998. The UCLA Report forecasts that growth in state employment and real personal income should continue to support strong growth in the real estate industry over the next three years. It also forecasts that home values in Los Angeles County should rise between 3.3% and 6.0% through the end of 1999. Consistent with the improvement in the real estate market, net loan charge-offs declined to $465 thousand for the first three months of 1998 compared to $3.7 million for the first three months of 1997. The ratio of non-performing assets to total assets was 0.89% as of March 31, 1998, compared to 0.95% at December 31, 1997 and 1.73% at March 31, 1997. (See "Non- performing Assets" for further discussion.) The Bank's general valuation allowances for loans totaled $63.4 million at March 31, 1998 compared to $61.2 million at December 31, 1997 and $51.8 million at March 31, 1997. The Bank also maintains valuation allowances for impaired loans which totaled $9.6 million at March 31, 1998 compared to $9.8 million at December 31, 1997 and $13.2 million at March 31, 1997. Loan originations increased by 73% to $151.3 million in the 1998 first quarter compared to $87.7 million in the 1997 first quarter. Included in the 1998 increase were $81.1 million, or 54% of the total, of fixed rate loans compared to $851 thousand, or 1% of the total, of the 1997 increase. The 1998 increase in fixed rate loans contributed to a large rise in loan sales. (See "Sources of Funds" for further discussion.) The Bank's portfolio of loans and mortgage-backed securities remained at $3.8 billion as of March 31, 1998, the same level as at December 31, 1997 and March 31, 1997. The loan portfolio has remained constant during the first quarter of 1998 because loan originations were offset by loan sales and principal reductions on loans and mortgage-backed securities. 7 The following table shows the components of the Bank's portfolio of loans and mortgage-backed securities by collateral type for the periods indicated:
March 31, December 31, March 31, 1998 1997 1997 ----------- ------------ ----------- (Dollars in thousands) REAL ESTATE LOANS: First trust deed residential loans: One unit $ 1,450,088 $ 1,440,761 $ 1,305,199 Two to four units 351,109 351,175 344,855 Five or more units 1,199,592 1,217,577 1,266,426 ----------- ------------ ----------- Residential loans 3,000,789 3,009,513 2,916,480 OTHER REAL ESTATE LOANS: Commercial and industrial 192,714 196,575 208,795 Second trust deeds 15,339 15,441 17,259 Other 4,428 6,303 6,392 ----------- ------------ ----------- Real estate loans 3,213,270 3,227,832 3,148,926 NON-REAL ESTATE LOANS: Manufactured housing 1,086 1,154 1,414 Deposit accounts 1,117 1,644 1,132 Consumer 342 185 90 ----------- ------------ ----------- Loans receivable 3,215,815 3,230,815 3,151,562 LESS: General valuation allowances- loan portfolio 63,404 61,237 51,821 Valuation allowances - impaired loans 9,643 9,775 13,217 Unrealized loan fees 14,684 14,639 16,230 ----------- ------------ ----------- Net loans receivable 3,128,084 3,145,164 3,070,294 FHLMC AND FNMA MORTGAGE- BACKED SECURITIES: Secured by single family dwellings 639,907 657,342 692,391 Secured by multi-family dwellings 18,691 18,716 18,895 ----------- ----------- ----------- Mortgage-backed securities 658,598 676,058 711,286 ----------- ----------- ----------- TOTAL $ 3,786,682 $ 3,821,222 $ 3,781,580 =========== =========== ===========
Because the Bank structures mortgage-backed securities with loans from its own portfolio, mortgage-backed securities generally have the same experience with respect to prepayment, repayment, delinquencies and other factors as the remainder of the Bank's loan portfolio. The mortgage-backed securities portfolio, classified as available- for-sale, was recorded at fair value as of March 31, 1998. A positive fair value adjustment of $1.4 million, net of taxes, was reflected in stockholders' equity as of March 31, 1998. This represents a $1.5 million increase from the negative $78 thousand adjustment at December 31, 1997. The investment securities portfolio, classified as available-for- sale, was recorded at fair value as of March 31, 1998. A negative fair value adjustment of $297 thousand, net of taxes, was reflected in stockholders' equity as of March 31, 1998. This represents a $17 thousand decrease from the negative $314 thousand adjustment at December 31, 1997. 8 Asset/Liability Management The one year GAP (the difference between rate-sensitive assets and liabilities repricing within one year or less) was a positive $481 million or 11.83% of total assets at the end of the first quarter of 1998. In comparison, the one year GAP ratio was a positive $172 million or 4.14% of total assets as of December 31, 1997 and a positive $215 million or 5.22% of total assets as of March 31, 1997. Since over 94% of the Bank's loans adjust based upon monthly changes in the Federal Home Loan Bank Eleventh District Cost of Funds Index ("COFI Index"), 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. The increased one year GAP as of March 31, 1998 resulted from a $340 million increase in long term borrowings. A positive GAP normally benefits a financial institution in times of increasing interest rates However, because there is a three month time lag before changes in the COFI Index can be implemented with respect to the Bank's loans, the Bank's net interest income typically declines during periods of increasing interest rates. Capital Capital regulations established by the OTS to ensure capital adequacy require the Bank to maintain minimum amounts and percentages of total capital to risk-weighted assets. The most recent notification from the OTS indicated that the Bank was well capitalized under the applicable regulatory requirements. The following table summarizes the Bank's actual capital and required capital as of March 31, 1998:
Tangible Core Risk-based Capital Capital Capital -------- ------- ---------- (Dollars in thousands) Actual Capital: Amount $267,505 $267,505 $296,903 Ratio 6.59% 6.59% 12.81% Minimum required capital: Amount $ 60,932 $121,864 $186,322 Ratio 1.50% 3.00% 8.00% Well capitalized required capital: Amount - $203,107 $231,789 Ratio - 5.00% 10.00%
Pursuant to the Board of Directors' authorization in 1987, the Company may repurchase up to 10% of its shares of common stock that were outstanding as of December 31, 1987. No shares were repurchased during the first quarter of 1998 or during 1997. As of March 31, 1998, 137,000 shares remained eligible for repurchase. Results of Operations The Company reported consolidated net earnings of $8.1 million for the first quarter of 1998 compared to net earnings of $5.2 million for the first quarter of 1997. The improved earnings resulted primarily from a $3.5 million decrease in the loan loss provision and a $2.4 million increase in net interest income. 9 For the 1998 quarter, loan charge-offs, net of recoveries, were $465 thousand compared to $3.7 million for the 1997 quarter. The lower charge-off levels in 1998 resulted primarily from improved real estate prices compared to the first quarter of 1997. (See "Non-performing Assets" for further discussion.) Loan Loss Allowances Due to continuing improvement of real estate conditions in Southern California, $2.5 million was provided for loan losses in the first quarter of 1998 compared to $6.0 million in the first quarter of 1997. 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, foreclosure activity, and management's perceptions of economic trends in Southern California. Listed below is a summary of the activity in the general valuation allowance and the valuation allowance for impaired loans for the Bank's loan portfolio during the periods indicated:
Three Months Ended March 31, 1998 --------------------------------- General Impaired Valuation Valuation Allowance Allowance Total ---------- ---------- -------- (Dollars in thousands) Balance at December 31, 1997 $ 61,237 $ 9,775 $ 71,012 Provision for loan losses 1,975 525 2,500 Charge-offs: Single family (723) - (723) Multi-family (138) (43) (181) Commercial (29) - (29) Non-real estate (1) - (1) ---------- ---------- -------- Total charge-offs (891) (43) (934) Recoveries 469 - 469 Impaired loan recoveries 614 (614) - ---------- ---------- -------- Net charge-offs 192 (657) (465) ---------- ---------- -------- Balance at March 31, 1998 $ 63,404 $ 9,643 $ 73,047 ========== ========== ========
Three Months Ended March 31, 1997 --------------------------------- General Impaired Valuation Valuation Allowance Allowance Total ----------- ---------- -------- (Dollars in thousands) Balance at December 31, 1996 $ 54,900 $ 12,350 $ 67,250 Provision for loan losses 3,874 2,126 6,000 Charge-offs: Single family (1,858) (3) (1,861) Multi-family (1,705) (1,256) (2,961) ---------- ---------- -------- Total charge-offs (3,563) (1,259) (4,822) Recoveries 844 - 844 ---------- ---------- -------- Net charge-offs (2,719) (1,259) (3,978) Transfer to valuation allowance for loans sold with recourse (4,234) - (4,234) ---------- ---------- -------- Balance at March 31, 1997 $ 51,821 $ 13,217 $ 65,038 ========== ========== ========
10 The Bank also maintains a valuation allowance for loans sold with recourse, recorded as a liability. This allowance was 6.06% of loans sold with recourse as of March 31, 1998, compared to 5.97% as of December 31, 1997 and 5.74% as of March 31, 1997. The balance of loans sold with recourse totaled $215.0 million, $218.1 million and $224.7 million as of March 31, 1998, December 31, 1997 and March 31, 1997, respectively. The Bank has not entered into any new recourse arrangements since 1989. Listed below is a summary of the activity in the valuation allowance for loans sold with recourse during the periods indicated:
Three Months Ended March 31, ---------------------------- 1998 1997 ---- ---- (Dollars in thousands) Balance at beginning of period $ 13,029 $ 8,398 Charge-offs - - Recoveries - 268 Transfers from general loan valuation allowance - 4,234 --------- --------- Balance at end of period $ 13,029 $ 12,900 ========= =========
The following table summarizes the activity in the general valuation allowance for real estate acquired by foreclosure during the periods indicated:
Three Months Ended March 31, ---------------------------- 1998 1997 ---- ---- (Dollars in thousands) Balance at beginning of period $ 500 $ 520 Provision for losses 277 125 Charge-offs (277) (244) --------- --------- Balance at end of period $ 500 $ 401 ========= =========
Net Interest Income The Company's interest rate spread increased to 2.34% for the 1998 first quarter from 2.09% for the 1997 first quarter. The COFI Index (on a lagged basis) determines the yield on over 94% of the Bank's loan portfolio and was 0.12% higher during the first three months of 1998 compared to the same period of 1997. A lower balance in non-performing loans and a higher yielding loan portfolio more than offset the 0.04% increase in the Bank's cost of funds in the first quarter of 1998 compared to the first quarter of 1997. 11 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.
Three Months Ended March 31, ---------------------------- 1998 1997 ---- ---- (Dollars In thousands) Average loans and mortgage-backed securities $ 3,808,076 $ 3,785,302 Average investment securities 139,578 167,209 ----------- ----------- Average interest-earning assets 3,947,654 3,952,511 ----------- ----------- Average savings deposits 2,073,406 1,986,081 Average borrowings 1,744,666 1,865,609 ----------- ----------- Average interest-bearing liabilities 3,818,072 3,851,690 ----------- ----------- Excess of interest-earning assets over interest-bearing liabilities $ 129,582 $ 100,821 =========== =========== Yields earned on average interest earning assets 7.58% 7.29% Rates paid on average interest- bearing liabilities 5.24 5.20 Interest rate spread 2.34 2.09 Effective net spread (1) 2.51 2.23 Total interest income $ 74,802 $ 72,085 Total interest expense 49,504 49,653 ----------- ----------- 25,298 22,432 Total other items (2) 1,153 1,600 ----------- ----------- Net interest income $ 26,451 $ 24,032 =========== ===========
- ----------------------------------------- (1) The effective net spread is a fraction, the denominator of which is the average dollar amount of interest-earning assets, and the numerator of which is net interest income (excluding stock dividends and miscellaneous interest income). (2) Includes Federal Home Loan Bank Stock and other miscellaneous items, including interest on California tax refunds at March 31, 1997. Non-Interest Income and Expense Loan and other fees decreased to $40 thousand for the 1998 first quarter from $1.5 million for the 1997 first quarter primarily due to a $1.4 million provision for impairment of the Bank's servicing assets. The servicing assets are normally amortized over the expected lives of the loans being serviced. The provision, recorded as an adjustment to loan servicing fees in the current quarter, reflects the impact of higher expected prepayment rates on the existing mortgage portfolio due to lower interest rates on fixed rate mortgages. A net gain of $659 thousand and $5 thousand on sale of loans were recognized for the first quarters of 1998 and 1997, respectively. The volumes of loans sold during the 1998 first quarter and the 1997 first quarter were $60.7 million and $1.2 million, respectively. 12 Real estate operations produced net gains of $532 thousand and $631 thousand for the first quarters of 1998 and 1997, respectively. Gains result primarily from the recovery of excess valuation allowances associated with foreclosed properties sold. Other operating income increased 33% to $1.0 million in the 1998 first quarter compared to $770 thousand in the 1997 first quarter, primarily due to a $301 thousand increase in fees earned by the retail branches. Total non-interest expense increased slightly during the first quarter of 1998 to $12.0 million compared to $11.9 million for the 1997 period. Expenses rose primarily due to investments being made in new operating systems and the development of new business lines and higher incentive compensation costs on larger loan volume and deposit growth. The expense-to-assets ratio was 1.17% of average assets for the 1998 quarter, up from 1.15% for the 1997 quarter. Non-accrual, Past Due, Impaired 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 $34.8 million at March 31, 1998 compared to $34.1 million at December 31, 1997 and $71.8 million at March 31, 1997. The amount of interest that has been reserved for loans 90 days or more delinquent or in foreclosure was $1.9 million at March 31, 1998, $1.8 million at December 31, 1997 and $4.3 million at March 31, 1997. The Bank's modified loans resulted primarily 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. If the borrower is unable to return to scheduled principal and interest payments at the end of the modification period, foreclosure proceedings are initiated or the modification period may be extended. As of March 31, 1998, the Bank had modified loans totaling $13.4 million, net of loan loss allowances of $3.9 million compared with $16.7, net of loan loss allowances of $4.1 million, at December 31, 1997 and $13.5 million, net of loan loss allowances of $3.9 million, at March 31, 1997. Pursuant to Statement of Financial Accounting Standards No. 114 ("SFAS No. 114"), a loan is considered 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. The following is a summary of impaired loans, net of valuation allowances for impairment, for the periods indicated:
March 31, December 31, March 31, 1998 1997 1997 ---------- ------------ ---------- (Dollars in thousands) Non-accrual loans $ 10,752 $ 8,260 $ 22,959 Modified loans 8,184 8,090 6,628 Other impaired loans 6,380 9,335 18,226 ---------- ------------ ---------- $ 25,316 $ 25,685 $ 47,813 ========== ============ ==========
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 13 evaluated for impairment, including residential mortgage loans, are not subject to the application of SFAS No.114. 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 a probable 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 impaired 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:
March 31, December 31, March 31, 1998 1997 1997 ---------- ------------ ---------- (Dollars in thousands) Present value method $ 1,068 $ 1,067 $ 4,063 Fair value method 24,248 24,618 43,750 ---------- ------------ ---------- Total impaired loans $ 25,316 $ 25,685 $ 47,813 ========== ============ ==========
Impaired loans for which there were no valuation allowances established totaled $2.5 million, $2.5 million and $6.7 million as of March 31, 1998, December 31, 1997, and March 31, 1997, respectively. See "Results of Operations" for an analysis of activity in the valuation allowance for impaired loans. 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:
March 31, December 31, March 31, 1998 1997 1997 ---------- ------------ ---------- (Dollars in thousands) Single family $ 847 $ 856 $ 3,272 Multi-family 9,426 6,893 18,102 Commercial 479 511 1,585 ---------- ------------ ---------- $ 10,752 $ 8,260 $ 22,959 ========== ============ ==========
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 quarters ended March 31, 1998, December 31, 1997 and March 31, 1997 was $25,342,000, $24,259,000 and $46,559,000, respectively. The amount of interest income recognized for impaired loans during the quarters ended March 31, 1998, December 31, 1997 and March31, 1997 was $367,000, $433,000 and $588,000, respectively, under the cash basis method of accounting. Interest income recognized under the accrual basis method of accounting for the quarters ended March 31, 1998, December 31, 1997 and March 31, 1997 totaled $367,000, $433,000 and $574,000, respectively. There were no commitments to lend additional funds to borrowers whose loan terms have been modified. 14 Asset Quality The following table sets forth certain asset quality ratios of the Bank at the periods indicated:
March 31, December 31, March 31, 1998 1997 1997 --------- ------------ --------- Non-Performing Loans to Loans Receivable (1) 0.92% 0.91% 1.85% Non-Performing Assets to Total Assets (2) 0.89% 0.95% 1.73% Loan Loss Allowances to Non-Performing Loans (3) 196.31% 193.38% 90.78% General Loss Allowances to Assets with Loss Exposure (4) 1.92% 1.86% 1.63% General Loss Allowances to Total Assets with Loss Exposure (5) 2.18% 2.12% 1.90%
- --------------------------------- (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 plus loans sold with recourse, but exclude mortgage- backed securities. 15 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. An analysis of non-performing assets as of the periods indicated follows:
March 31, December 31, March 31, 1998 1997 1997 ---------- ------------ ---------- (Dollars in thousands) Real estate acquired by foreclosure: Single family $ 4,552 $ 5,806 $ 8,897 Multi-family 1,541 4,034 3,806 Commercial 785 826 809 Other 52 52 - Less: General valuation allowance (500) (500) (401) --------- ----------- ---------- Total real estate acquired by foreclosure 6,430 10,218 13,111 --------- ----------- ---------- Non-accrual loans: Single family 16,862 16,799 21,652 Multi-family 16,057 15,785 46,913 Commercial 1,867 1,533 3,246 Other - - 21 Less: Valuation allowances (1) (4,885) (4,738) (13,385) --------- ----------- ---------- Total non-accrual loans 29,901 29,379 58,447 --------- ----------- ---------- Total non-performing assets $ 36,331 $ 39,597 $ 71,558 ========= =========== ==========
- ------------------------------------- (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 March 31, 1998 decreased 37% compared to December 31, 1997 and 51% compared to March 31, 1997 as a result of the continuing improvement in the Southern California real estate market. Properties are selling more quickly and property values are increasing compared to last year. Non-accrual loans, net of valuation allowances, at March 31, 1998, were comparable to the December 31, 1997 level and decreased 49% compared to the March 31, 1997 level. The decrease in non- accrual loans since the first quarter of 1997 is primarily the result of an overall decline in loan delinquencies due to an improvement in the Southern California economy. 16 Sources of Funds External sources of funds include deposits from several sources, advances from the Federal Home Loan Bank of San Francisco ("FHLB"), securitized borrowings and unsecured term funds. Savings deposits are accepted from retail savings branches, a telemarketing department, and national deposit brokers. Including $17.2 million in interest credits during the 1998 first quarter, total savings deposits increased by $213.9 million during the first three months of 1998. 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 will seek 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. Deposits accepted by retail branches increased by $25.3 million during the first three months of 1998. The Bank continues to focus its marketing efforts on attracting liquid accounts and short term certificates of deposits. Retail deposits comprised 69% of total savings deposits as of March 31, 1998. Telemarketing deposits are obtained by the Bank's employees via telephone, from depositors outside of the Bank's normal service areas. Telemarketing deposits increased by $42.6 million during the first quarter of 1998. The level of telemarketing deposits varies based on the availability of higher yielding investments to investors, who are often professional money managers. The availability of telemarketing deposits also varies based on the investors' perception of the Bank's creditworthiness. Telemarketing deposits comprised 7% of total deposits at March 31, 1998. Deposits acquired from national brokerage firms ("brokered deposits") are considered a source of funds similar to borrowing. In evaluating brokered deposits as a source of funds, the cost of these deposits, including commission costs, is compared to other funding sources. Brokered deposits increased by $146.0 million during the 1998 first quarter. At March 31, 1998, brokered deposits comprised 24% of total deposits. Total borrowings decreased by $320.4 million during the first quarter of 1998 due to net payoffs of $315.0 million in FHLB advances and $6.9 million in borrowings under reverse repurchase agreements, partially offset by $1.5 million in additional unsecured term funds. Internal sources of funds include both principal payments and payoffs on loans and mortgage-backed securities, loan sales, and positive cash flows from operations. Principal payments include amortized principal and prepayments which are a function of real estate activity and the general level of interest rates. Total principal payments were $131.1 million for the first quarter of 1998. This compares with principal payments of $70.6 million for the first quarter of 1997. Loan sales increased to $60.7 million for the first quarter of 1998 compared with loan sales of $1.2 million for the first quarter of 1997 due to an increase in the amount of saleable product originated, primarily fixed rate loans. 17 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K a) Exhibits (3.) Certificate of Incorporation and By Laws filed as Exhibit (1)(a) to Form 8-A dated June 4, 1987 and incorporated by reference. (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. (10.4) Form of Change in Control Employment Agreement effective September 26, 1996 filed as Exhibit 10.4 to Form 10-Q for the quarter ended September 30, 1996 and incorporated by reference. (10.5) Form of Directors Stock Incentive Plan effective January 1, 1997 filed as Appendix A to Proxy Statement dated March 18, 1997 for Annual Meeting of Stockholders 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 March 31, 1998. 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FIRSTFED FINANCIAL CORP. ------------------------ Registrant Date: May 13, 1998 By /s/ BABETTE E. HEIMBUCH --------------------------- Babette E. Heimbuch President and Chief Executive Officer By /s/ DOUGLAS J. GODDARD --------------------------- Douglas J. Goddard Chief Financial Officer and Executive Vice President 19 EX-27 2
9 This schedule contains summary financial information extracted from the company's Consolidated Statement of Operations and Consolidated Statement of Financial Condition and is qualified in its entirety by reference to such financial statements. 0000810536 FIRSTFED FINANCIAL CORP. 1000 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 31,601 76,000 0 0 707,816 0 0 3,128,084 73,047 4,067,344 2,157,502 1,281,294 56,009 340,000 0 0 115 232,424 4,067,344 73,208 2,747 0 75,955 24,022 49,504 26,451 2,500 0 11,990 14,216 14,216 0 0 8,143 0.77 0.75 2.51 29,901 0 8,184 6,380 71,012 934 469 73,047 73,047 0 0
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