-----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, I7PP+qBK37M3bLBtN2ku8Bxl4XFzHXVoIcbMByR5G381P/AWLsfmwVjVFsrtkeUV 7A29bTuXzH+2pDl712qVSA== 0000810536-99-000003.txt : 19990517 0000810536-99-000003.hdr.sgml : 19990517 ACCESSION NUMBER: 0000810536-99-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990514 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: 99622618 BUSINESS ADDRESS: STREET 1: 401 WILSHIRE BOULEVARD CITY: SANTA MONICA STATE: CA ZIP: 90401-1490 BUSINESS PHONE: 3103196000 MAIL ADDRESS: STREET 1: 401 WILSHIRE BOULEVARD CITY: SANTA MONICA STATE: CA ZIP: 90401-1490 10-Q 1 FORM 10-Q FOR FIRSTFED FINANCIAL CORP. 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, 1999 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) (ZipCode) 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 April 30, 1999, 19,321,619 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 as of March 31, 1999, December 31, 1998 and March 31, 1998 3 Consolidated Statements of Operations and Comprehensive Earnings for the three months ended March 31, 1999 and 1998 4 Consolidated Statements of Cash Flows for the three months ended March 31, 1999 and 1998 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 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) (Unaudited) March 31, December 31, March 31, 1999 1998 1998 Assets Cash and cash equivalents $ 424,253 $ 126,280 $ 107,601 Investment securities, available-for-sale (at fair value) 106,831 64,333 49,218 Mortgage-backed securities, available-for-sale (at fair value) 525,937 556,679 658,598 Loans receivable, held-for-sale (fair value of $24,354, $16,602 and $70,936) 24,251 16,450 70,349 Loans receivable, net 2,760,907 2,791,771 3,057,735 Accrued interest and dividends receivable 22,381 23,476 26,968 Real estate 5,754 4,791 6,469 Office properties and equipment, net 11,957 11,819 10,715 Investment in Federal Home Loan Bank (FHLB) stock, at cost 73,694 72,700 69,605 Other assets 8,926 8,829 10,086 $3,964,891 $3,677,128 $ 4,067,344 Liabilities Deposits $2,155,879 $2,135,909 $ 2,157,502 FHLB advances and other borrowings 1,074,000 764,000 1,050,500 Securities sold under agreements to repurchase 453,531 471,172 570,794 Accrued expenses and other liabilities 45,687 49,047 56,009 3,729,097 3,420,128 3,834,805 Commitments and Contingent Liabilities Stockholders' Equity Common stock, par value $.01 per share; authorized 25,000,000 shares; issued 23,261,359 23,075,266, and 23,031,676 shares, outstanding 19,418,919, 21,127,426 and 21,184,636 shares(1) 233 231 230 Additional paid-in capital 31,004 29,965 29,611 Retained earnings - substantially restricted 250,611 241,694 215,208 Loan to employee stock ownership plan (1,827) (833) (1,766) Treasury stock, at cost, 3,842,440, 1,947,840 and 1,847,040 shares(1) (44,150) (13,354) (11,885) Accumulated other comprehensive gain(loss), net of taxes (77) (703) 1,141 235,794 257,000 232,539 $3,964,891 $3,677,128 $ 4,067,344
(1) All per share amounts have been adjusted to reflect the two-for-one stock split declared June 25, 1998. 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) (Unaudited) Three Months Ended March 31, 1999 1998 Interest income: Interest on loans $ 54,007 $ 61,676 Interest on mortgage-backed securities 7,609 11,532 Interest and dividends on investments 3,121 2,747 Total interest income 64,737 75,955 Interest expense: Interest on deposits 22,664 24,022 Interest on borrowings 16,908 25,482 Total interest expense 39,572 49,504 Net interest income 25,165 26,451 Provision for loan losses - 2,500 Net interest income after provision for losses 25,165 23,951 Non-interest income: Loan and other fees 1,285 40 Gain on sale of loans 583 659 Real estate operations, net 302 532 Other operating income 963 1,024 Total non-interest income 3,133 2,255 Non-interest expense 12,588 11,990 Earnings before income taxes 15,710 14,216 Income tax provision 6,795 6,073 Net earnings $ 8,915 $ 8,143 Other comprehensive earnings - unrealized gain on securities available-for-sale, net of taxes 626 1,533 Comprehensive earnings $ 9,541 $ 9,676 Earnings per share: Basic $ 0.43 $ 0.38 Diluted $ 0.43 $ 0.38 Weighted average shares outstanding: Basic 20,553,809 21,180,912 Diluted 20,715,099 21,598,224 (1) All per share amount have been adjusted to reflect the two-for-one stock split declared June 25, 1998. See accompanying notes to consolidated financial statements. 4 FirstFed Financial Corp. and Subsidiary Consolidated Statements of Cash Flows (Dollars in thousands) (Unaudited)
Three Months Ended March 31, 1999 1998 CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 8,915 $ 8,143 Adjustments to reconcile net earnings to net cash provided by operating activities: Net change in loans-held-for-sale (7,801) (29,967) Provision for loan losses - 2,500 Provision for REO losses 4 277 Valuation adjustments on real estate sold (786) 276 Amortization of fees and discounts (243) (243) Decrease in deferred premium on sale of loans 65 1,495 Decrease in interest and dividends receivable 1,095 22 Increase (decrease)in interest payable (2,835) 3,903 Increase in other assets (537) (1,226) Decrease in accrued expenses and other liabilities (7,442) (6,109) Total adjustments (18,480) (29,072) Net cash used in operating activities (9,565) (20,929) CASH FLOWS FROM INVESTING ACTIVITIES: Loans made to customers net of principal collection on loans 28,662 40,639 Loans repurchased (1,042) (126) Proceeds from sales of real estate 4,958 8,185 Principal reductions on mortgage-backed securities Held for sale 32,024 20,076 Proceeds from maturities and principal payments on investment securities 1,338 10,870 Purchase of investment securities (43,795) (11,045) Other (2,946) (1,146) Net cash provided by investing activities 19,199 67,453 CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in savings deposits 19,970 213,855 Net increase (decrease) in short term borrowings 292,359 (660,376) Increase in long term borrowings - 340,000 Treasury stock purchases (30,790) - Other 6,800 4,463 Net cash provided by (used) in financing activities 288,339 (102,058) Net increase (decrease) in cash and cash equivalents 297,973 (55,534) Cash and cash equivalents at beginning of period 126,280 163,135 Cash and cash equivalents at end of period $ 424,253 $ 107,601
See accompanying notes to consolidated financial statements. 5 FirstFed Financial Corp. and Subsidiary Notes to Consolidated Financial Statements (Unaudited) 1. The unaudited 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 generally accepted accounting principles 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. Earnings per share were computed by dividing net earnings by the weighted average number of shares of common stock outstanding for the period, plus the effect of stock options, if dilutive. The Board of Directors of FirstFed Financial Corp. declared a two-for-one stock split on June 25, 1998 to shareholders of record on July 15, 1998. The additional shares were distributed on July 30, 1998. All per share computations have been adjusted for the stock split. 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 of the date of purchase. 4. Recent Accounting Pronouncements In June of 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS No. 133"), which establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires recognition of all derivatives as either assets or liabilities in the statement of financial condition and the measurement of those instruments at fair value. Recognition of changes in fair value will be recognized into income or as a component of other comprehensive income depending upon the type of the derivative and its related hedge, if any. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Management has not yet determined the impact of implementing this statement on its financial condition or results of operations. In October of 1998, the FASB issued Statement of Financial Accounting Standards No. 134, "Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise" ("SFAS No. 134".) SFAS No. 134 requires that, after the securitization of a mortgage loan held for sale, an entity engaged in mortgage banking activities classify the resulting mortgage-backed security as a trading security. SFAS No. 134 further requires that, after the securitization of mortgage loans, an entity engaged in mortgage banking activities classify the resulting mortgage-backed securities or other related interests based on its ability and intent to sell or hold those investments. SFAS No. 134 conforms the subsequent accounting for securities retained after the securitization of mortgage loans by a mortgage banking enterprise with the subsequent accounting for securities retained after the securitization of other types of assets by a non-mortgage banking enterprise. SFAS 134 No. was effective the first quarter of 1999. The implementation of this statement did not have a material affect on the Company's financial condition or results of operations. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Financial Condition At March 31, 1999, FirstFed Financial Corp. (the "Company"), holding company for First Federal Bank of California and its subsidiaries (the "Bank"), had consolidated assets totaling $4.0 billion, compared to $3.7 billion at December 31, 1998 and $4.1 billion at March 31, 1998. The growth in total assets during the first quarter of 1999 is attributable to an increase in short term investments as borrowed funds grew faster than necessary to fund the Bank's loan portfolio. Over the next three quarters, the Company will monitor the level of liquidity that could be required due to the Year 2000 issue, and will make appropriate changes in the level of borrowings needed through the end of 1999. The Bank's primary market area is Southern California, which remains strong economically. According to UCLA Anderson Forecast for California, March 1999 Report, home prices in the Los Angeles County area are expected to increase by 5.7% during 1999. The improved economy and real estate market positively impacted several areas of the Bank's operations during the first quarter of 1999. The ratio of non-performing assets to total assets decreased to 0.55% as of March 31, 1999 from 0.84% as of December 31, 1998 and 0.89% as of March 31, 1998. (See "Non-performing Assets" for further discussion.) Net loan charge-offs decreased to $449 thousand during the first three months of 1999 compared to $465 thousand during the same period of 1998. The Bank's general valuation allowance was $69.1 million or 2.34% of total loans and real estate owned with loss exposure at March 31, 1999. This compares with $68.1 million or 2.26% as of December 31, 1998 and $63.9 million or 1.92% at March 31, 1998. The Bank also maintains valuation allowances for impaired loans, which totaled $5.9 million at March 31, 1999, $7.6 million at December 31, 1998 and $9.6 million at March 31, 1998. The Bank's portfolio of loans, including mortgage-backed securities, decreased to $3.3 billion as of March 31, 1999 from $3.4 billion at December 31, 1998 and $3.8 billion at March 31, 1998. 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. No new mortgage-backed securities were created with the Bank's loans during the first quarter of 1999 or 1998. The mortgage-backed securities portfolio, classified as available-for-sale, was recorded at fair value as of March 31, 1999. An unrealized gain of $330 thousand, net of taxes, was reflected in stockholders equity as of March 31, 1999. This compares to a net unrealized loss of $413 thousand as of December 31, 1998. 7 The following table shows the components of the Bank's portfolio of loans (including loans held for sale) and mortgage-backed securities by collateral type as of the dates indicated:
March 31, December 31, March 31, 1999 1998 1998 (Dollars in thousands) REAL ESTATE LOANS: First trust deed residential loans: One to four units $1,552,422 $1,565,105 $ 1,801,197 Five or more units 1,111,805 1,127,228 1,199,592 Residential loans 2,664,227 2,692,333 3,000,789 OTHER REAL ESTATE LOANS: Commercial and industrial 180,329 181,772 192,714 Second trust deeds 14,585 15,357 15,339 Other - - 4,428 Real estate loans 2,859,141 2,889,462 3,213,270 NON-REAL ESTATE LOANS: Manufactured housing 819 893 1,086 Deposit accounts 932 1,002 1,117 Consumer 2,294 1,167 342 Loans receivable 2,863,186 2,892,524 3,215,815 LESS: General valuation allowances- loan portfolio 68,644 67,638 63,404 Valuation allowances - impaired loans 5,901 7,634 9,643 Unrealized loan fees 3,483 9,031 14,684 Net loans receivable 2,785,158 2,808,221 3,128,084 FHLMC AND FNMA MORTGAGE- BACKED SECURITIES (at fair value): Secured by single family dwellings 508,465 539,079 639,907 Secured by multi-family dwellings 17,472 17,600 18,691 Mortgage-backed securities 525,937 556,679 658,598 TOTAL $3,311,095 $3,364,900 $3,786,682
The investment securities portfolio, classified as available-for-sale, was recorded at fair value as of March 31, 1999. An unrealized loss of $407 thousand, net of taxes, was reflected in stockholders' equity as of March 31, 1999. This compares to an unrealized loss of $290 thousand, net of taxes, as of December 31, 1998. Asset/Liability Management Market risk is the risk of loss from adverse changes in market prices and rates. The Company's market risk arises primarily from interest rate risk inherent in its lending and deposit taking activities. Management actively monitors its interest rate risk exposure. The Company does not engage in trading activities. Nothing has occurred since December 31, 1998 that materially affects the Company's market risk. 8 The one year GAP (the difference between rate-sensitive assets and liabilities repricing within one year or less) was a positive $282.8 million or 7.13% of total assets at March 31, 1999. In comparison, the one year GAP was a positive $393.7 million or 10.71% of total assets as of December 31, 1998 and a positive $481.0 million or 11.83% of total assets as of March 31, 1998. Over 93% of the Bank's rate-sensitive assets reprice within one year. Therefore, the Bank's one year GAP generally varies based upon the extent to which the maturities of its deposits and borrowings exceed one year. The decrease in the one year GAP from December 31, 1998 to March 31, 1999 is due to an increase in short term borrowings. 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 a three month time lag before changes in the FHLB Eleventh District Cost of Funds Index (the "Index") can be implemented with respect to the Bank's loans. Capital Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and percentage of total capital to risk-weighted assets. The Bank meets the standards necessary to be deemed well capitalized under the applicable regulatory requirements. The following table summarizes the Bank's actual capital and required capital as of March 31, 1999:
Tangible Core Risk-based Capital Capital Capital (Dollars in thousands) Actual Capital: Amount $281,283 $281,283 $308,313 Ratio 7.07% 7.07% 14.50% Minimum required capital: Amount $ 59,644 $159,050 $170,092 Ratio 1.50% 4.00% 8.00% Well capitalized required capital: Amount - $198,813 $212,615 Ratio - 5.00% 10.00%
During the first three months of 1999, the Company repurchased 1,894,600 shares of its common stock at an average price of $16.25 per share. The repurchases were made pursuant to 5% repurchase authorizations made by the Board of Directors on October 21, 1998, February 25, 1999, and April 21, 1999. Currently 1,219,497 shares remain eligible for repurchase. Year 2000 Issue The Year 2000 issue arises because many computer systems identify dates using only the last two digits of the year. These systems are unable to distinguish between dates in the year 2000 and dates in the year 1900. If not corrected, these systems could fail or provide incorrect information after December 31, 1999 or when using dates after December 31, 1999. Any such failure of the Bank's systems could have a material adverse impact on the Company and its ability to process customer transactions or to provide customer service. Over the course of the past two years, the Bank has developed a process for addressing the Year 2000 issue for the Bank's major computer systems and applications. An internal committee was formed to address the issue and a formal project plan was developed. The Company has identified and prioritized systems, software and equipment with the potential for being affected by the Year 2000 issue. All significant vendors have been contacted regarding their Year 2000 readiness. In each case where the Bank is vulnerable to a third party's failure to remedy its own Year 2000 issues, the Bank is continuing to develop contingency plans to utilize other vendors or alternative work flows if adequate response and verification is not received from the vendor in a timely fashion. 9 The Bank's major computer applications are owned and operated by third party vendors. Therefore, the Bank's challenge is to ensure that its vendors are ready for the Year 2000 or have plans to become ready before the Year 2000. Because the Bank had plans to convert its major data processing to new systems during 1997 and 1998, requirements for Year 2000 compliance were included in all major systems contracts. Contractual arrangements with the Bank's major data processing vendors provide for regular monitoring of the vendors Year 2000 projects, substantial system compliance by the end of 1998 and testing and verification in early 1999. During 1998 and the first four months of 1999, the Bank completed testing for substantially all of the significant data processing systems deemed to be critical to the Bank. The remediation process is complete for these systems and no material problems have arisen during the testing process. The Bank's process of testing and verifying the Year 2000 readiness of the systems provided by third parties will continue through the middle of 1999, as system modifications are made and further testing of interfaces and less critical systems continues. Because of the third party nature of its major data processing relationships, the Bank has not borne any programming costs of making its systems Year 2000-ready. All of these costs will be borne by the vendors. The Bank's major cost of becoming Year 2000-ready is related to staff and management time spent planning, monitoring and testing the systems. Therefore, Year 2000 issues are expected to have an immaterial impact on the Company's results of operations, liquidity and capital expenditures. Results of Operations The Company reported consolidated net earnings of $8.9 million for the first quarter of 1999 compared to net earnings of $8.1 million for the first quarter of 1998. Earnings improved due to the fact that no loan loss provision was recorded during the first quarter of 1999. Due to the moderate level of charge-offs over the last two years, sufficient general loan loss allowances had already been provided. Also, earnings improved because loan and other fees increased to $1.3 million as of March 1999 from $40 thousand as of March 1998. A $1.4 million provision for the impairment of the Bank's servicing assets was recorded during the first quarter of 1998. Offsetting the improved earings was a $598 thousand increase in non-interest expense for the first quarter of 1999 compared to the first quarter of 1998. The additional expenses resulted from an increase in compensation and related employee benefits due to the expansion of the Bank's business lines. 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 the economic climate in Southern California. 10 Loan Loss Allowances 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, 1999 General Impaired Valuation Valuation Allowances Allowances Total (Dollars in thousands) Balance at December 31, 1998 $ 67,638 $ 7,634 $ 75,272 Charge-offs: Single family (83) - (83) Multi-family - (1,181) (1,181) Commercial - (552) (552) Total charge-offs (83) (1,733) (1,816) Recoveries 1,089 - 1,089 Net charge-offs 1,006 (1,733) (727) Balance at March 31, 1999 $ 68,644 $ 5,901 $ 74,545 Three Months Ended March 31, 1998 General Impaired Valuation Valuation Allowances Allowances 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 Adjustments and reclassifications 614 (614) - Net charge-offs 192 (657) (465) Balance at March 31, 1998 $ 63,404 $ 9,643 $ 73,047
The Bank also maintains a valuation allowance for loans sold with recourse, recorded as a liability. This allowance was 6.44% of loans sold with recourse as of March 31, 1999, compared to 6.18% as of December 31, 1998 and 6.06% as of March 31, 1998. The balance of loans sold with recourse totaled $199 million, $203 million and $215 million as of March 31, 1999, December 31, 1998 and March 31, 1998, 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: 11 Three Months Ended March 31, 1999 1998 (Dollars in thousands) Balance at beginning of period $ 12,456 $ 13,029 Recoveries 278 - Balance at end of period $ 12,824 $ 13,029 The following table summarizes the activity in the general valuation allowance for real estate acquired by foreclosure for the periods indicated: Three Months Ended March 31, 1999 1998 (Dollars in thousands) Balance at beginning of period $ 500 $ 500 Provision for losses 4 277 Charge-offs (4) (277) Balance at end of period $ 500 $ 500 Net Interest Income The Company's interest rate margin increased to 2.58% for the first quarter of 1999 from 2.34% for the first quarter of last year. The Index (on a lagged basis) determines the yield on over 92% of the loan portfolio. The Index in effect during the three months ended March 31, 1999 decreased by 0.25% compared to the same period of the prior year. However, during the same time period, the Company's average cost of funds decreased by 0.49%. The Company's interest rate margin also benefited from a lower level of delinquent loans compared to the prior year. Loans delinquent greater than 90 days decreased to $17.9 million as of March 31, 1999 from $29.3 million as of the beginning of the year. 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 Three Months Ended March 31, 1999 1998 (Dollars in thousands) Average loans and mortgage-backed securities $ 3,305,734 $3,808,076 Average investment securities 184,181 139,578 Average interest-earning assets 3,489,915 3,947,654 Average savings deposits 2,154,218 2,073,406 Average borrowings 1,219,095 1,744,666 Average interest-bearing liabilities 3,373,313 3,818,072 Excess of interest-earning assets over interest-bearing liabilities $ 116,602 $ 129,582 12 Yields earned on average interest earning assets 7.33% 7.58% Rates paid on average interest- bearing liabilities 4.75 5.24 Net interest rate spread 2.58 2.34 Effective net spread(1) 2.74 2.51 Total interest income $ 63,965 $ 74,802 Total interest expense 39,572 49,504 24,393 25,298 Total other items(2) 772 1,153 Net interest income $ 25,165 $ 26,451 (1) The effective net spread is a fraction, the denominator of which is the average dollar amount of interest-earning assets, and the numerator of which is net interest income(excluding stock dividends and miscellaneous interest income). (2) Includes Federal Home Loan Bank Stock dividends and other miscellaneous items. Non-Interest Income and Expense Loan and other fees were $1.3 million for the first quarter, compared to $40 thousand for the same period of 1998. During the first quarter of 1998, the Bank recorded a $1.4 million provision for impairment of the Bank's servicing assets. Gain on the sale of loans results primarily from loan fees recognized at the time of sale and decreased to $583 thousand for the first quarter of 1999 from $659 thousand for the same period of the prior year. The volume of loans sold totaled $57.8 million during the first quarter of 1999 compared to $60.7 million for the same period of the prior year. The decrease in loans sold results from a decrease in loans originated for sale. Real estate operations resulted in net gains of $302 thousand for the first quarter of 1999. This compares to net gains of $532 thousand for the same period of the prior year. Real estate operations include gains and losses on the sale of foreclosed properties as well as operational income and expense during the holding period. Gains on sale typically result from the recovery of excess valuation allowances associated with foreclosed properties sold. Non-interest expense increased to $12.6 million during the first quarter of 1999 compared to $12.0 million for the same period of the prior year. The increase in non-interest expense was a result of increased compensation and related employee benefits due to the expansion of the Bank's business lines. The ratio of non-interest expense to average assets increased to 1.32% of average assets for the first quarter of 1999 from 1.17% during the comparable 1998 period. The increased ratio was attributable to both the increase in non-interest expense and a decrease in average assets in the first quarter of 1999 compared to the same period of last year. 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 $17.9 million at March 31, 1999 compared to $29.3 million at December 31, 1998 and $34.8 million at March 31, 1998. 13 The amount of interest that has been provided for loans 90 days or more delinquent or in foreclosure was $1.1 million at March 31, 1999, $1.9 million at December 31, 1998 and $1.9 million at March 31, 1998. The Bank has debt 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 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 March 31, 1999, the Bank had modified loans totaling $14.3 million, net of loan loss allowances totaling $3.4 million. Modified loans totaling $253 thousand were 90 days delinquent as of March 31, 1999. Pursuant to Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" ("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, disclosed net of valuation allowances, include non-accrual major loans (single family loans with an outstanding principal amount greater than or equal to $500 thousand and multi-family and commercial real estate loans with an outstanding principal amount greater than or equal to $750 thousand), 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, as of the dates indicated: March 31, December 31, March 31, 1999 1998 1998 (Dollars in thousands) Non-accrual loans $ 3,711 $ 5,934 $ 10,752 Modified loans 5,946 5,976 8,184 Other impaired loans 5,574 5,613 6,380 $ 15,231 $ 17,523 $ 25,316 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. 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 as of the dates indicated: March 31, December 31, March 31, 1999 1998 1998 (Dollars in thousands) Fair value method $ 14,163 $ 16,456 $ 24,248 Present value method 1,068 1,067 1,068 Total impaired loans $ 15,231 $ 17,523 $ 25,316 14 All impaired loans as of March 31, 1999 and December 31, 1998 had associated valuation allowances. Impaired loans for which there was no valuation allowance established totaled $2.5 million for the quarter ended March 31, 1998. 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 that were determined to be impaired by property type, as of the dates indicated: March 31, December 31, March 31, 1999 1998 1998 (Dollars in thousands) Single family $ - $ - $ 847 Multi-family 1,887 5,456 9,426 Commercial 1,824 478 479 $ 3,711 $ 5,934 $ 10,752 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. The average recorded investment in impaired loans during the quarters ended March 31, 1999, December 31, 1998, and March 31, 1998 was $15.3 million, $17.5 million and $25.3 million, respectively. The amount of interest income recognized on the cash basis for impaired loans during the quarters ended March 31, 1999, December 31, 1998 and March 31, 1998 was $263 thousand, $288 thousand and $367 thousand, respectively. Interest income recognized under the accrual basis for the quarters ended March 31, 1999, December 31, 1998 and March 31, 1998 was $282 thousand, $288 thousand and $367 thousand, respectively. Asset Quality The following table sets forth certain asset quality ratios of the Bank at the dates indicated: March 31, December 31, March 31, 1999 1998 1998 Non-Performing Loans to Loans Receivable (1) 0.56% 0.90% 0.92% Non-Performing Assets to Total Assets2) 0.55% 0.84% 0.89% Loan Loss Allowances to Non-Performing Loans (3) 393.79% 242.09% 196.31% General Loss Allowances to Assets with Loss Exposure (4) 2.34% 2.26% 1.92% General Loss Allowances to Total Assets with Loss Exposure (5) 2.60% 2.51% 2.18% 15 _______________________ (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 loan loss allowance, excluding general valuation allowances for loans sold with full or limited recourse. The Bank's assets with loss exposure include primary loans and real estate owned, but excludes 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 portfolio plus loans sold with recourse, but exclude mortgage-backed securities. 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 follows as of the dates indicated: March 31, December 31, March 31, 1999 1998 1998 (Dollars in thousands) Real estate owned: Single family $ 2,501 $ 3,946 $ 4,552 Multi-family 3,322 1,309 1,541 Commercial 395 - 785 Other - - 52 Less: General valuation allowance (500) (500) (500) Total real estate owned 5,718 4,755 6,430 Non-accrual loans: Single family 8,889 12,270 16,862 Multi-family 6,538 13,005 16,057 Commercial 2,473 4,040 1,867 Less: Valuation allowances (1) (1,844) (3,332) (4,885) Total non-accrual loans 16,056 25,983 29,901 Total non-performing assets $ 21,774 $ 30,738 $ 36,331 __________________________ (1) Includes valuation allowances for impaired loans and loss allowances on other non-performing loans requiring fair value adjustments. 16 Real estate owned at March 31, 1999 increased 20% compared to the December 31, 1998 level and decreased 11% compared to the March 31, 1998 level. The increase in the first quarter of 1999 compared to the prior year ended 1998 is due to the completion of foreclosure proceedings commenced in 1998 on three multi-family properties. Non-accrual loans, net of valuation allowances,at March 31,1999 decreased 38% compared to the level at December 31, 1998 due to reductions in delinquent loans of all loan types. Non-accrual loans, decreased 46% compared to March 31, 1998 due to substantial reductions in multi-family and single family delinquencies. Sources of Funds External sources of funds include savings 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 banking offices, telemarketing efforts, and national deposit brokers. 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 banking offices increased by $16.8 million during the first quarter of 1999. The Bank is focusing its marketing efforts on attracting liquid accounts and short-term certificate of deposits. Retail deposits comprised 72% of total savings deposits as of March 31, 1999. Telemarketing deposits increased by $1.0 million during the first quarter of 1999. These deposits are normally large deposits from pension plans, managed trusts and other financial institutions. These deposit levels fluctuate based on the attractiveness of the Bank's rates compared to rates available to investors on alternative investments. Telemarketing deposits comprised 5% of total deposits at March 31, 1999. Deposits acquired from national brokerage firms ("brokered deposits") increased by $2.1 million during the first quarter of 1999. The Bank has used brokered deposits for over 15 years and considers these deposits a stable source of funds. Because the Bank has sufficient capital to be deemed "well-capitalized" under the standards established by the Office of Thrift Supervision, it may solicit brokered funds without special regulatory approval. At March 31,1999, brokered deposits comprised 23% of total deposits. Total borrowings increased by $292.4 million during the first quarter of 1999 due to a $310.0 million increase in advances from the FHLB, offset by payoffs of $17.6 million in repurchase agreements. Internal sources of funds include both principal payments and payoffs on loans and mortgage-backed securities, loan sales, and positive cash flows from operations. Principal payments include amortized principal and prepayments that are a function of real estate activity and the general level of interest rates. Total principal payments on loans and mortgage-backed securities were $186.9 million for the first quarter of 1999. This compares with principal payments of $131.1 million for the first quarter of 1998. Loan sales were $57.8 million for the first quarter of 1999, compared with sales of $60.7 million for the first quarter of 1998. The decrease is attributable to a reduction in loans originated for sale. 17 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form-8K (1) Underwriting Agreement filed as Exhibit 1 to Amendment No. 2 to Form S-3 dated September 7, 1994 and incorporated by reference. (3.1) Restated Certificate of Incorporation. (3.2) By-Laws filed as Exhibit (1)(a) to Form 8-A dated June 4,1987 and incorporated by reference. (4.1) Amended and Restated Rights Agreement dated as of June 25,1998, filed as Exhibit 4.1 to Form 8-A/A, dated June 25, 1998 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 filed as Exhibit 10.5 to Form 10-K for the fiscal year ended December 31, 1992 and incorporated by reference. (10.4) 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 incorporated by reference. (10.5) 1997 Non-employee Directors Stock Incentive Plan filed as Exhibit 1 to Form S-8 dated August 12, 1997 and incorporated by reference. (21) Registrant's sole subsidiary is First Federal Bank of California, a federal savings bank. (24) Power of Attorney (included at page 86). (b) Reports on Form 8-K The Company filed a current report on Form 8-K dated February 26, 1999 wherein the Board of Directors approved an expansion of the stock repurchase program. The increase authorized the Company to repurchase an additional 5% of the shares outstanding as of February 25, 1999. 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, 1999 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 EX-27 2 FDS --
9 This schedule contains summary financial information extracted from this company's Consolidated Statement of Operations and Consolidated Statement of Condition and is qualified in its entirety by reference to such financial statements. 1000 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 172,253 252,000 0 0 632,768 632,768 632,768 2,785,158 74,545 3,964,891 2,155,879 1,178,531 45,687 349,000 0 0 233 235,561 3,964,891 54,007 10,730 0 64,737 22,664 39,572 25,165 0 0 12,588 15,710 0 0 0 8,915 .43 .43 2.74 16,056 0 3,711 13,260 87,818 1,816 1,367 87,369 87,369 0 0
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