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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from N/A to
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
Securities registered pursuant to Section 12(b) of the Act:
Common Stock $0.01 par value
(Title of Class)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
The approximate aggregate market value of the voting stock held by
non-affiliates of the Registrant as of February 14, 2001: $482,840,220.
The number of shares of Registrant's $0.01 par value common stock outstanding
as of February 14, 2001: 17,249,459
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for Annual Meeting of Stockholders, April 25,
2001 (Parts III & IV).
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (sub-section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of Registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of the Form 10-K or any amendment to this Form 10-K. [X]
FirstFed Financial Corp.
Index
Page
Part I Item 1 Business.......................................... 3
Item 2. Properties........................................ 20
Item 3. Legal Proceedings................................. 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Part II Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters............................... 21
Item 6. Selected Financial Data........................... 22
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............... 23
Item 8. Financial Statements and Supplementary Data....... 42
Notes to Consolidated Financial Statements........ 46
Independent Auditors' Report...................... 74
Item 9. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure............... 75
Part III
Item 10. Directors and Executive Officers of the Registrant 75
Item 11. Executive Compensation............................ 75
Item 12. Security Ownership of Certain Beneficial Owners and
Management........................................ 75
Item 13. Certain Relationships and Related Transactions.... 75
Part IV Item 14. Exhibits, Consolidated Financial Statement
Schedules, and Reports on Form 8K................. 76
Signatures......................................................... 77
Power of Attorney.................................................. 78
2
PART I
ITEM 1--BUSINESS
General Description
FirstFed Financial Corp., a Delaware corporation ["FFC," and
collectively with its sole and wholly owned subsidiary, First Federal Bank of
California (the "Bank"), the "Company"], was incorporated on February 3,
1987. Since September 22, 1987, FFC has operated as a savings and loan
holding company engaged primarily in the business of owning the Bank. Because
the Company does not presently engage in any significant independent business
operations, substantially all earnings and performance figures herein reflect
the operations of the Bank.
The Bank was organized in 1929 as a state-chartered savings and loan
association, and, in 1935, converted to a federal mutual charter. In February
1983 the Bank obtained a federal savings bank charter, and, in December 1983,
converted from mutual to stock ownership.
The principal business of the Bank is attracting savings and checking
deposits from the general public, and using such deposits, together with
borrowings and other funds, to make real estate, business and consumer loans.
At December 31, 2000, the Company had assets totaling $4.4 billion,
compared to $3.9 billion at December 31, 1999 and $3.7 billion at December
31, 1998. The Company recorded net earnings of $38.5 million for 2000,
compared to net earnings of $33.3 million for 1999 and $34.6 million for
1998. Results for 1999 included an extraordinary item of $2.2 million from a
loss recorded on the early extinguishment of debt. Net earnings before
extraordinary items totaled $35.4 million for the year ended December 31,
1999.
The Bank derives its revenues principally from interest on loans and
investments, loan origination fees and servicing fees on loans sold. Its
major items of expense are interest on deposits and borrowings, and general
and administrative expense.
As of February 14, 2001, the Bank operated 25 retail savings branches,
all located in Southern California. Permission to operate all full-service
branches must be granted by the Office of Thrift Supervision ("OTS"). In
addition to the retail branches, the Bank has a retail call center which
conducts transactions with deposit customers by telephone.
The Bank's principal loan market is Southern California. The Bank has
a residential lending group which includes a retail lending division with
three loan offices, a wholesale loan office, a correspondent lending group,
and "LENDFFB", a loan origination group which operates primarily by telephone.
The Bank has three wholly-owned subsidiaries: Seaside Financial
Corporation, Oceanside Insurance Agency, Inc. and Santa Monica Capital Group,
all of which are California corporations. See "Subsidiaries."
Current Operating Environment
The Company's operating results are significantly influenced by
national and regional economic conditions, monetary and fiscal policies of
the federal government, housing demand and affordability, and general levels
of interest rates.
The Bank's primary market is the Los Angeles County area of Southern
California. The economic climate in Southern California remains strong,
despite signs of weakness in Northern California due to a slowdown in the
high-tech or "new economy" industries. According to the UCLA Anderson
Forecast for December, 2000 ("UCLA Forecast"), "New economy' employment is
less important in the South than the North." It continues, "The southern
region of the state is less concentrated with new economy technology jobs and
yet it is a vibrant contributor to the California economy. Labor markets are
fully utilized, consumer spending is prolific, export markets are breaking
records, and wages are rising sharply in most Southern California counties
through the end of calendar 2000."
The real estate market in the greater Los Angeles area continues to
improve, but at an increasingly slower pace. According to the UCLA Forecast,
home values in the Los Angeles County area increased by 8.1% during 1998,
6.1% in 1999 and 5.4% in 2000. Increases of 5.0% and 3.9% are predicted for
2001 and 2002, respectively.
Consistent with the strong real estate climate in the greater Los
Angeles area, the Bank's non-performing assets declined to 0.19% of total
assets at the end of 2000 from 0.40% at the end of 1999 and 0.84% at the end
of 1998.
The Bank monitors the sufficiency of the collateral supporting its loan
portfolio based on many factors including the property location, the date of
loan origination and the original loan-to-value ratio. The Bank adjusts its
general allowance for anticipated loan losses as a result of these
3
evaluations. No provision for loan losses was necessary during 2000 or
1999. A $7.2 million provision for loan losses was recorded in 1998.
The ratio of the general valuation allowance to the Bank's assets with
loss exposure (the Bank's loan portfolio, real estate owned, loan
commitments, and potential loan buybacks) was 1.81% at the end of 2000
compared to 2.15% at the end of 1999 and 2.26% at the end of 1998. The
decline in the ratio over the last three years is due to asset growth. See
"Business - Loan Loss Experience Summary" for additional information.
The Bank also maintains a separate valuation allowance for impaired
loans and a repurchase liability for loans sold with recourse. See "Business
- - Loan Loss Experience Summary" for additional information regarding
valuation allowances for these loans.
Current Interest Rate Environment. Due to signs of a slowdown in
economic activity at the national level, the Federal Reserve Board ("FRB")
decreased interest rates in January of 2001. This is in contrast to 2000 and
1999 when the FRB increased interest rates three times during each year.
The Bank's interest rate margin typically decreases in an increasing
interest rate environment, (savings and borrowing costs increase immediately
while the loan portfolio yield stays approximately the same or increases
slowly). The reverse is true during periods of decreasing interest rates.
Changes in interest rates have a moderate impact on the Bank's loan portfolio
due to the interest rate adjustment features of its loans. There is also a
time lag before changes in interest rates can be implemented with respect to
the Bank's loan portfolio due to operational and regulatory constraints.
These constraints do not allow the Bank to pass through monthly changes in
the primary index utilized for the majority of its adjustable rate loan
customers for a period of ninety days.
The Bank's interest rate margin decreased to 2.37% in 2000 from 2.50%
in 1999 because the cost of its deposits and borrowings increased more
quickly than the rates earned on its loan portfolio. The increase to 2.50%
in 1999 from 2.43% in 1998 is because, although interest rates increased
during 1999, the increases impacted only the last half of the year. It is
expected that the Bank's interest rate spread will improve during the first
part of the year 2001 as a result of the recent decrease in interest rates
announced by the FRB. See "Asset-Liability Management" and "Components of
Earnings - Net Interest Income" in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for additional information.
Competition. The Bank experiences strong competition in attracting and
retaining deposits and originating real estate loans. It competes for
deposits with many of the nation's largest savings institutions and
commercial banks that have significant operations in Southern California.
The Bank also competes for deposits with credit unions, thrift and loan
associations, money market mutual funds, issuers of corporate debt securities
and the government. In addition to the rates of interest offered to
depositors, the Bank's ability to attract and retain deposits depends upon
the quality and variety of services offered, the convenience of the Bank's
locations and its financial strength as perceived by depositors.
The Bank competes for real estate loans primarily with savings
institutions, commercial banks, mortgage banking companies and insurance
companies. The primary factors in competing for loans are interest rates,
loan fees, interest rate caps, interest rate adjustment provisions and the
quality and extent of service to borrowers and mortgage brokers.
Environmental Concerns. In certain circumstances, such as if it
actively participates in the management or operation of a property securing
its loans, the Bank could have liability for any properties found to have
pollutant or toxic features. Environmental protection laws are strict and
impose joint and several liability on numerous parties. It is possible for
the cost of cleanup of environmental problems to exceed the value of the
security property. The Bank has adopted environmental underwriting
requirements when considering loans secured by properties which appear to
have environmentally high risk characteristics (e.g. commercial, industrial
and construction of all types, which may contain friable asbestos or lead
paint hazards). These requirements are intended to minimize the risk of
environmental hazard liability. The Bank's policies are also designed to
avoid the potential for liability imposed on lenders who assume the
management of a property.
Business Concentration. The Bank has no single customer or group of
customers, either as depositors or borrowers, the loss of any one or more of
which would have a material adverse effect on the Bank's operations or
earnings prospects.
Yields Earned and Rates Paid. Net interest income, the major component
of core earnings for the Bank, depends primarily upon the difference between
the combined average yield earned on the loan and investment security
portfolios and the combined average interest rate paid on deposits and
borrowings, as well as the relative balances of interest-earning assets and
interest-bearing liabilities. See "Management's Discussion and Analysis of
4
Financial Condition and Results of Operations - Overview and Components of
Earnings - Net Interest Income" for further analysis and discussion.
Lending Activities
General. The Bank's primary lending activity has been the origination
of loans for the purpose of enabling borrowers to purchase, refinance or
construct improvements on residential real property. The loan portfolio
primarily consists of loans made to homebuyers and homeowners on the security
of single family dwellings and multi-family dwellings. The loan portfolio
also includes loans secured by commercial and industrial properties.
For an analysis of loan portfolio composition and an analysis of the
types of loans originated, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Balance Sheet Analysis - Loan
Portfolio and Loan Composition."
Origination and Sale of Loans. The Bank employs loan officers on an
incentive compensation basis to obtain qualified applicants for loans. The
Bank also derives business from other sources such as mortgage brokers,
borrower referrals, direct telephone sales and clients from its retail
banking branches.
Loan originations were $1.1 billion in 2000, $944.1 million in 1999,
and $637.0 million in 1998. Loan origination volume has improved over the
last three years due to an increase in real estate activity in the Bank's
market areas. The above amounts include loan purchases totaling $139.5
million during 2000 and $122.8 million during 1999.
Loans sold totaled $9.5 million in 2000, $133.0 million in 1999 and
$379.6 million in 1998. For the year ended December 31, 2000, $10.9 million
in loans were originated for sale compared to $120.6 million for 1999 and
$382.4 million in 1998. Loans originated for sale totaled 1%, 14% and 60% of
loan originations during 2000, 1999 and 1998, respectively. The decrease is
due to borrower preference for adjustable rate loans, which the Bank
originates to hold in its portfolio.
Loans held-for-sale at December 31, 2000, 1999 and 1998 were $2.2
million, $2.3 million and $16.5 million, respectively, constituting 0.06%,
0.08% and 0.59%, respectively, of the Bank's total loans at such dates.
Loans originated for sale are recorded at the lower of cost or fair
value. The time from origination to sale typically takes up to 30 days.
During this time period the Bank may be exposed to price adjustments as a
result of fluctuations in market interest rates.
The Bank structures mortgage-backed securities with loans from its loan
portfolio for use in collateralized borrowing arrangements. In exchange for
the improvement in credit risk when the mortgage-backed securities are
formed, guarantee fees are paid to the Federal Home Loan Mortgage Corporation
("FHLMC") or the Federal National Mortgage Association ("FNMA"). No loans
were converted into mortgage-backed securities during 2000, 1999 or 1998.
All loans underlying mortgage-backed securities were originated by the Bank.
Therefore, mortgage-backed securities generally have the same experience with
respect to prepayment, repayment, delinquencies and other factors as the
remainder of the Bank's portfolio.
The portfolio of mortgage-backed securities was recorded at fair value
as of December 31, 2000, 1999 and 1998. Negative fair value adjustments of
$1.9 million, $6.6 million and $413 thousand, net of taxes, were recorded in
stockholders' equity at December 31, 2000, 1999 and 1998, respectively, for
mortgage-backed securities.
The Bank serviced $322.3 million in loans for other investors as of
December 31, 2000. $146.5 million of these loans were sold under recourse
arrangements. The Bank has an additional $13.2 million in loans that were
formed into mortgage-backed securities with recourse features, but were still
owned by the Bank as of December 31, 2000. Due to regulatory requirements,
the Bank maintains capital for loans sold with recourse as if those loans had
not been sold. The Bank had been active in these types of transactions in the
past, but has not entered into any new recourse arrangements since 1989 when
a change in the capital regulations took effect. Loans sold with recourse
are analyzed in determining the adequacy of the repurchase liability. The
decrease in the principal balance of loans sold with recourse to $146.5
million at the end of 2000 from $178.7 million at the end of 1999 and $203.0
million at the end of 1998 is due to loan amortization, payoffs and
foreclosures.
Interest Rates, Terms and Fees. The Bank makes residential adjustable
mortgage loans ("AMLs") with 30 and 40 year terms and interest rates which
adjust each month based upon the Federal Home Loan Bank's Eleventh District
Cost of Funds Index ("Index"). (See "Asset-Liability Management" in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations.") While the monthly payment adjusts annually, the maximum annual
change in the payment is limited to 7.5%. Any additional interest due as a
result of a rising Index is added to the principal balance of the loan
5
("negative amortization"). Payments are adjusted every five years without
regard to the 7.5% limitation to provide for full amortization during the
balance of the loan term. Although the interest rates are adjusted monthly,
these loans have maximum interest rates which can be charged ranging from 400
to 750 basis points above their initial interest rate. Generally, these loans
may be assumed at any time during their term provided that the person
assuming the loan meets the Bank's credit standards and enters into a
separate written agreement with the Bank. Additionally, the new borrower is
required to pay assumption fees customarily charged for similar transactions.
The Bank offers two primary AML products based on the Index, the "COFI
ONE" and the "COFI THREE." The initial interest rate on the COFI THREE is
below-market for the first three months of the loan term. The COFI ONE has no
below-market initial interest rate but starts with a pay rate similar to the
COFI THREE. This results in immediate negative amortization but allows the
loan to earn at the fully indexed interest rate immediately. The difference
in negative amortization on these two products is minor. The Bank also
originates adjustable rate loans based on the one year U.S. Treasury Security
and 12-month average U.S. Treasury Security rates.
Under current portfolio loan programs, the Bank normally lends no more
than 95% of a single family property's appraised value at the time of loan
origination. In addition, the Bank has special Community Reinvestment Act
loan programs in which it lends up to 95% of the property's appraised value.
The Bank generally requires that borrowers obtain private mortgage
insurance on loans in excess of 80% of the appraised property value. On
certain loans originated for the portfolio, the Bank charges premium rates
and/or fees in exchange for waiving the insurance requirement. Management
believes that the additional rates and fees that the Bank receives for these
loans compensate for the additional risk associated with this type of loan.
Subsequent to the origination of a portfolio loan, the Bank may purchase
private mortgage insurance with its own funds. Under certain mortgage
insurance programs the Bank acts as co-insurer and participates with the
insurer in absorbing any future loss. As of December 31, 2000, 1999 and
1998, loans with co-insurance totaled $212.6 million, $176.7 million and
$206.5 million, respectively. Loans over 80% loan-to-value, for which there
was no private mortgage insurance, totaled $268.2 million at December 31,
2000, $274.2 million at December 31, 1999 and $265.0 million at December 31,
1998.
Because AML loan-to-value ratios may increase above those established
at the time of loan origination due to negative amortization, the Bank rarely
lends in excess of 90% of the appraised value on AMLs. When the Bank does
lend in excess of 90% of the appraised value, additional fees and higher
rates are charged. The amount of negative amortization recorded by the Bank
increases during periods of rising interest rates. As of December 31, 2000,
negative amortization on all loans serviced by the Bank was immaterial.
Although regulations permit a maximum loan term of 40 years for real
estate secured home loans and 30 years for other real estate loans, the
majority of the Bank's real estate loans provide for a maximum maturity
period of 30 years or less. Loans with 40-year terms constituted 6%, 8% and
4% of loan originations during 2000, 1999 and 1998, respectively.
The following table shows the contractual remaining maturities of the
Bank's loans at December 31, 2000:
Loan Maturity Analysis
Maturity Period
>1 Year
Total 1 Year To 5 >5-10 >10-20 >20-30 >30
Balance or Less Years Years Years Years Years
(Dollars In Thousands)
Interest rate sensitive loans:
AMLs............... $3,659,398 $58,621 $306,791 $505,735 $1,543,524 $1,140,103 $ 104,624
Fixed-rate loans... 29,874 645 3,307 5,161 8,522 10,995 1,244
Commercial loans... 12,608 7,652 4,956 - - - -
Consumer and other loans 11,784 10,479 1,058 242 5 - -
Total.............. $3,713,664 $77,397 $316,112 $511,138 $1,552,051 $1,151,098 $ 105,868
6
Non-accrual, Past Due, Impaired and Restructured Loans
The Bank establishes allowances for delinquent interest equal to the
amount of accrued interest on all loans 90 days or more past due or in
foreclosure. This practice effectively places such loans on non-accrual
status for financial reporting purposes.
The following is a summary of non-accrual loans for which delinquent
interest allowances had been established as of the end of each of the periods
indicated:
% of % of % of % of % of
2000 Total 1999 Total 1998 Total 1997 Total 1996 Total
(Dollars In Thousands)
Non-accrual Loans:
Single family.......... $5,603 89% $9,626 70% $12,270 42% $16,799 49% $25,602 35%
Multi-family........... 662 11 3,995 29 13,005 44 15,785 46 44,754 62
Commercial............. - - 225 1 4,040 14 1,533 5 2,223 3
Total Non-accrual
Loans.............. $6,265 100% $13,846 100% $29,315 100% $34,117 100% $72,579 100%
The allowance for delinquent interest, based on loans past due more
than 90 days or in foreclosure, totaled $511 thousand, $720 thousand, $1.9
million, $1.8 million and $4.2 million at December 31, 2000, 1999, 1998, 1997
and 1996, respectively.
The Bank's modified loans result 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
December 31, 2000, the Bank had modified loans totaling $9.6 million, net of
loan loss allowances of $1.9 million. This compares with modified loans
totaling $7.4 million, net of loan loss allowances of $2.6 million as of
December 31, 1999 and $11.0 million, net of loan loss allowances of $3.3
million as of December 31, 1998. No modified loans were 90 days or more
delinquent as of December 31, 2000, 1999 or 1998.
Statement of Financial Accounting Standards No. 114, "Accounting by
Creditors for Impairment of a Loan" ("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.
Pursuant to 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 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.
Valuation allowances for impaired loans totaled $1.8 million, $2.6
million and $7.6 million as of December 31, 2000, 1999 and 1998,
respectively. The following is a summary of impaired loans, net of valuation
allowances for impairment, for the periods indicated:
December 31,
2000 1999 1998
(Dollars In Thousands)
Non-accrual loans ..... $ - $ 2,079 $ 5,934
Modified loans......... 8,770 6,534 5,976
Other impaired loans... - 2,820 5,613
$ 8,770 $ 11,433 $ 17,523
7
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. As of December 31, 2000 and
December 31, 1999, impaired loans totaling $5.1 million and $3.9 million,
respectively, had no valuation allowances established. All impaired loans as
of December 1998 had valuation allowances established. The following summary
details impaired loans measured using the present value of expected future
cash flows discounted at the effective interest rate of the loan and impaired
loans measured using the fair value method for the periods indicated:
December 31,
2000 1999 1998
(Dollars In Thousands)
Present value method. $ - $ - $ 1,067
Fair value method ... 8,770 11,433 16,456
Total impaired loans. $ 8,770 $ 11,433 $ 17,523
The present value of an impaired loan's expected future cash flows will
change from one reporting period to the next because of the passage of time
and also may change because of revised estimates in the amount or timing of
those cash flows. The Bank records the entire change in the present value of
the expected future cash flows as an impairment valuation allowance, which
may necessitate an increase in the provision for loan losses. Similarly, the
fair value of the collateral of an impaired collateral-dependent loan may
change from one reporting period to the next. The Bank also records a change
in the measure of these impaired loans as an impairment valuation allowance,
which may necessitate an adjustment to the provision for loan losses.
The following is an analysis of the activity in the Bank's valuation
allowance for impaired loans during the periods indicated (dollars in
thousands):
Balance at December 31, 1996.. $ 12,350
Provision for loan losses... 7,345
Net charge-offs............. (9,920)
Balance at December 31, 1997.. 9,775
Provision for loan losses... 640
Net charge-offs............. (2,781)
Balance at December 31, 1998.. 7,634
Provision for loan losses... -
Net charge-offs............. (5,038)
Balance at December 31, 1999.. 2,596
Provision for loan losses... -
Net charge-offs............. (804)
Balance at December 31, 2000.. $ 1,792
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 2000, 1999 and
1998 was $8.8 million, $11.4 million and $17.5 million, respectively. The
amount of interest income recognized from impaired loans during 2000, 1999
and 1998 was $706 thousand, $1.0 million and $1.3 million, respectively,
under the cash basis method of accounting. Interest income that was
recognized under the accrual basis method of accounting for 2000, 1999 and
1998 totaled $712 thousand, $997 thousand and $1.3 million, respectively.
The table below shows the Bank's net investment in non-accrual loans
determined to be impaired, by property type, as of the periods indicated:
December 31,
2000 1999 1998
(Dollars In Thousands)
Single family ....... $ - $ 987 $ -
Multi-family......... - 1,092 5,456
Commercial........... - - 478
$ - $ 2,079 $ 5,934
8
Loan Loss Experience Summary. The Bank maintains a general valuation
allowance to absorb possible future losses that may be realized on its loan
portfolio. The allowance is reviewed and adjusted at least quarterly based
upon a number of factors, including asset classifications, economic trends,
industry experience, industry and geographic concentrations, estimated
collateral values, management's assessment of credit risk inherent in the
portfolio, historical loss experience and the Bank's underwriting practices.
The following is an analysis of the activity in the Bank's general loan
valuation allowance for the periods indicated:
Year Ended December 31,
2000 1999 1998 1997 1996
(Dollars In Thousands)
Beginning General Loan Valuation
Allowance................ $69,954 $67,638 $61,237 $54,900 $42,876
Provision for Loan Losses.. - - 6,560 13,155 23,768
Charge-Offs, Net of Recoveries:
Single Family............ (767) (342) (1,497) (5,633) (8,845)
Multi-Family............. 1,692 2,650 1,354 2,341 (2,448)
Commercial............... (105) 111 (32) 482 240
Non-Real Estate.......... 35 (103) 16 226 9
Total Net Recoveries (Charge-Offs) 855 2,316 (159) (2,584) (11,044)
Transfer to Liability Account for
Loans Sold with Recourse - - - (4,234) -
Transfer to Real Estate General
Valuation Allowance...... - - - - (700)
Ending General Loan Valuation
Allowance.......... $70,809 $69,954 $67,638 $61,237 $54,900
The Bank also maintains a repurchase liability for loans sold with
recourse, which is included in "Accrued expenses and other liabilities" in
the Company's Statement of Financial Condition. The activity in the
repurchase liability for loans sold with recourse for 2000, 1999, 1998, 1997
and 1996 is presented below (dollars in thousands):
Balance at December 31, 1995.............. $ 9,050
Net charge-offs........................... (652)
Balance at December 31, 1996.............. 8,398
Transfer from general valuation allowance. 4,234
Net recoveries............................ 397
Balance at December 31, 1997.............. 13,029
Net charge-offs........................... (483)
Balance at December 31, 1998.............. 12,546
Net recoveries............................ 278
Balance at December 31, 1999.............. 12,824
Net recoveries............................ -
Balance at December 31, 2000.............. $ 12,824
The Bank's total general valuation allowance for loans (including the
repurchase liability for loans sold with recourse) was 2.06% of total assets
with loss exposure (including loans sold with recourse) at December 31, 2000,
2.41% at December 31, 1999, 2.51% at December 31, 1998, 2.12% at December 31,
1997 and 1.86% at December 31, 1996. Depending on the economy and real estate
markets in which the Bank operates, increases in the general valuation
allowance may be required in future periods. In addition, various regulatory
agencies, as an integral part of their examination process, periodically
review the Bank's general valuation allowance. These agencies may require the
Bank to establish additional general valuation allowances based on their
judgment of the information available at the time of their examination.
9
The following table details the general valuation allowance (including
the repurchase liability for loans sold with recourse) stratified by loan
type for the periods indicated:
% of % of % of % of %of
2000 Total 1999 Total 1998 Total 1997 Total 1996 Total
(Dollars In Thousands)
Real Estate Loans:
Single Family.... $44,586 53% $30,343 37% $27,611 34% $21,583 29% $15,355 24%
Multi-Family. 26,430 32 47,005 57 47,264 59 45,029 61 44,078 70
Commercial... 6,868 8 5,255 6 5,247 7 6,658 9 3,587 6
Non-Real Estate Loans. 5,779 7 175 - 62 - 996 1 278 -
Total ...... $83,633 100% $82,778 100% $80,184 100% $74,266 100% $63,298 100%
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Asset Quality Ratios" for an analysis of the Bank's
general valuation allowances as a percentage of non-accrual loans, the total
loan portfolio and total loans with loss exposure.
The Company recorded net loan loss recoveries of $51 thousand during
2000. During the previous four years, charge-offs, including net charge-offs
from the general valuation allowance, impaired loan allowance, and the
repurchase liability for loans sold with recourse totaled $2.4 million, $3.4
million, $12.1 million and $37.5 million for 1999, 1998, 1997 and 1996,
respectively, representing 0.08%, 0.09%, 0.39% and 1.21% of the average loan
portfolio for such periods. Charge-offs have improved due to improvement in
the Southern California economy and real estate market.
Any increase in charge-offs would adversely impact the Company's future
loan loss provisions and earnings.
Potential Problem Loans. The Bank also had $6.7 million, $6.9 million
and $16.6 million in potential problem real estate loans as of December 31,
2000, December 31, 1999 and December 31, 1998, respectively. These are loans
that do not meet the criteria of impaired or non-performing loans but have
displayed some past or present weakness. If the weakness is not corrected,
the loan could eventually result in a loss to the Bank.
The Bank's Asset Classification Committee meets at least quarterly to
review and monitor the condition of the loan portfolio. Additionally, a
special workout group of the Bank's officers meets at least monthly to
resolve delinquent loan situations and to initiate actions enforcing the
Bank's rights in security properties pending foreclosure and liquidation.
Non-performing Assets. For a further discussion of non-performing
assets, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Non-Performing Assets."
Generally, loans greater than 60 days delinquent are placed into
foreclosure and a valuation allowance is established, if necessary. The Bank
acquires title to the property in most foreclosure actions in which the loan
is not reinstated by the borrower. Once real estate is acquired in settlement
of a loan, the property is recorded at fair value less estimated costs to
sell.
Following the acquisition of foreclosed real estate ("REO"), the Bank
evaluates the property and establishes a plan for marketing and disposing of
the property. After inspecting the property, the Bank determines whether the
property may be disposed of in its present condition or if repairs,
rehabilitation or improvements are necessary.
The following table provides information regarding the Bank's REO
activity for the periods indicated:
Real Estate Owned Activity
Year Ended December 31,
2000 1999 1998
(Dollars In Thousands)
Beginning Balance......... $ 2,202 $ 4,755 $ 10,218
Additions................. 5,050 10,831 17,096
Sales..................... (5,095) (13,384) (22,559)
Ending Balance............ $ 2,157 $ 2,202 $ 4,755
Other Interest-Earning Assets. The Bank owned no contractually
delinquent interest-earning assets other than loans as of December 31, 2000.
10
Investment Activities
Savings institutions are required by federal regulations to maintain a
minimum ratio of liquid assets that may be invested in certain government and
other specified securities. This level is adjusted from time to time in
response to prevailing economic conditions and as a means of controlling the
amount of available mortgage credit. At December 31, 2000, the regulatory
liquidity requirement was 4.00% and the Bank's liquidity percentage was 4.37%.
It is the Bank's policy to maintain liquidity investments at a modest
level and to use available cash to originate mortgages that normally command
higher yields. Therefore, interest income on investments generally represents
approximately 5% of total revenues.
The following table summarizes the total investment portfolio at
historical cost by type at the end of the periods indicated:
December 31,
2000 1999 1998 1997 1996
(Dollars In Thousands)
U.S. Treasury Securities $ 300 $ 300 $ 300 $ 300 $ 301
U.S. Agency Securities 38,185 38,167 28,156 48,142 49,989
Collateralized Mortgage
Obligations ("CMOs") 98,562 115,704 36,380 1,009 8,776
137,047 154,171 64,836 49,451 59,066
Unrealized loss on
securities available-for-sale (510) (2,976) (503) (541) (157)
$136,537 $151,195 $ 64,333 $48,910 $ 58,909
Weighted average yield on
interest-earnings invest-
ments end of period. 5.99% 5.86% 5.38% 5.17% 5.98%
The following is a summary of the maturities of U.S government and
agency securities at amortized cost as of December 31, 2000:
Maturity
Total Historical
Within 1 Year 1-5 Years Value
Weighted Weighted Weighted Average
Average Average Average Maturity
Amount Yield Amount Yield Amount Yield Yrs/Mos
(Dollars In Thousands)
U.S. Treasury
Securities....... $ - -% $ 300 6.33% $ 300 6.33% 1/3
U.S. Agency Securities 10,000 5.38 28,185 5.01 38,185 5.11 0/11
$ 10,000 5.38% $ 28,485 5.02% $ 38,485 5.12% 0/11
The Bank's collateralized mortgage obligations all have expected maturities
within five years.
11
Sources of Funds
General. The Bank's principal sources of funds are savings deposits,
advances from the Federal Home Loan Bank of San Francisco ("FHLBSF") and
securities sold under agreements to repurchase.
Deposits. The Bank obtains deposits through three different sources: 1)
its retail branch system, 2) phone solicitations by designated employees, and
3) national brokerage firms.
Deposits acquired through telemarketing efforts are typically placed
with the Bank by professional money managers and represented 2%, 3% and 5% of
total deposits at December 31, 2000, 1999 and 1998, respectively. The level
of telemarketing deposits varies based on yields available to depositors on
other investment instruments and the depositors' perception of the Bank's
creditworthiness.
Deposits acquired through national brokerage firms represented 18%, 22%
and 23% of total deposits at December 31, 2000, 1999 and 1998, respectively.
Any fees paid to deposit brokers are amortized over the term of the deposit.
Based on historical renewal percentages, management believes that these
deposits are a stable source of funds. Institutions meeting the regulatory
capital standards necessary to be deemed well-capitalized are not required to
obtain a waiver from the FDIC in order to accept brokered deposits. See
"Management's Discussion and Analysis - Capital Resources and Liquidity."
Deposits obtained through the retail branch system were $1.7 billion at
December 31, 2000, $1.6 billion at December 31, 1999 and $1.5 billion at
December 31, 1998. Retail deposits comprised 80% of total deposits at December
31, 2000, 75% of total deposits at December 31, 1999 and 72% at December 31,
1998. The increase in retail deposits during 2000 was the result of two branch
purchases during the year. Deposits totaling $168.5 million were acquired at
the end of the first quarter. As of December 31,2000, $145.7 million of these
deposits remained. The Bank has concentrated its marketing efforts over the
last several years on the attraction and retention of non-term accounts. As a
result, the percentage of fixed-term certificates of deposit in the Bank's
savings deposits has decreased from 71% as of December 31, 1998 from 62% as
of December 31, 1999 to 57% as of December 31, 2000.
The following table shows the average balances and average rates paid on
deposits by deposit type for the periods indicated:
During the Year Ended December 31,
2000 1999 1998
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
(Dollars In Thousands)
Passbook Accounts $ 81,330 1.98% $ 82,634 1.96% $ 84,711 2.04%
Money Market Deposit Accounts. 501,084 4.63 380,971 4.17 251,866 3.89
Interest-bearing Checking Accounts 128,678 1.19 109,928 1.07 102,367 1.04
Fixed Term Certificate Accounts 1,421,835 5.20 1,492,179 4.59 1,682,080 5.06
$ 2,132,927 4.70% $ 2,065,712 4.22% $ 2,121,024 4.61%
The following table shows the maturity distribution of jumbo
certificates of deposit ($100,000 and greater) as of December 31, 2000
(dollars in thousands):
Maturing in:
1 month or less...................... $ 41,401
Over 1 month to 3 months............. 50,860
Over 3 months to 6 months............ 60,373
Over 6 months to 12 months........... 61,921
Over 12 months....................... 421
Total.............................. $ 214,976
Based on historical renewal percentages at maturity, management
believes that jumbo certificates of deposit are a stable source of funds. For
additional information with respect to deposits, see Note 8 of the Notes to
Consolidated Financial Statements.
12
The following tables set forth information regarding the amount of
deposits in the various types of savings programs offered by the Bank at the
end of the years indicated and the balances and average rates for those dates:
December 31,
2000 1999 1998
Amount % Amount % Amount %
(Dollars In Thousands)
Variable rate non-term accounts:
Money market deposit accounts
(weighted average rate of 4.79%,
4.34% and 3.91%)......... $ 537,475 25% $ 446,771 22% $ 293,159 14%
Interest-bearing checking accounts
(weighted average rate of 1.22%
1.06% and 1.06%)......... 140,151 6 111,366 5 108,211 5
Passbook accounts (2.00%, 2.00%
and 2.01%)............... 80,536 4 78,547 4 84,132 4
Non-interest bearing checking
Accounts................. 176,059 8 144,310 7 137,822 6
934,221 43 780,994 38 623,324 29
Fixed-rate term certificate accounts:
Under six month term (weighted
average rate of 5.26%, 5.21%
and 4.18%)............... 61,954 3 113,324 5 62,642 3
Six month term (weighted average
rate of 6.41%, 5.68% and 5.14%) 282,922 13 322,696 16 301,313 14
Nine month term (weighted average of
6.74%, 5.73% and 5.42%).. 240,598 11 250,460 12 438,443 21
One year to 18 month term (weighted
average rate of 6.11%, 4.99% and
5.14%)................... 367,603 17 284,464 14 263,291 12
Two year or 30 month term (weighted
average rate of 5.83%, 5.13% and
5.28%)................... 31,685 2 19,081 1 23,015 1
Over 30 month term (weighted
average rate of 5.49%, 5.33%
and 5.79%)............... 31,088 1 36,529 2 103,030 5
Negotiable certificates of $100,000
and greater, 30 day to one year terms
(weighted average rate of 6.19%,
5.20% and 5.08%)......... 214,976 10 253,809 12 320,851 15
1,230,826 57 1,280,363 62 1,512,585 71
Total deposits (weighted average
rate of 4.90%, 4.42% and 4.36%) $2,165,047 100% $2,061,357 100% $2,135,909 100%
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, Federal Home Loan Bank ("FHLB") borrowings
and securities sold under agreements to repurchase. As the cost of each
source of funds fluctuates from time to time, the Bank seeks funds from the
lowest cost source until the relative cost changes. As the costs 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 a change
in incremental use of any one of the specific sources of funds at a given
time to be material.
Borrowings. The FHLB System functions as a source of credit to
financial institutions that are members of a regional Federal Home Loan Bank.
The Bank may apply for advances from the FHLBSF secured by the FHLBSF capital
stock owned by the Bank, certain of the Bank's mortgages and other assets
(principally obligations issued or guaranteed by the United States government
or agencies thereof). Advances can be requested for any sound business
purpose which an institution is authorized to pursue. Any institution not
meeting the qualified thrift lender test will be subject to restrictions on
its ability to obtain advances from the FHLBSF. See "Summary of Material
Legislation and Regulation - Qualified Thrift Lender Test." In granting
advances, the FHLBSF also considers a member's creditworthiness and other
relevant factors.
13
Total advances from the FHLBSF were $1.6 billion at December 31, 2000
at a weighted average rate of 6.42%. This compares with advances of $1.2
billion at December 31, 1999 and $714 million at December 31, 1998 with
weighted average rates of 5.91% and 5.43%, respectively. The level of FHLB
borrowings increased because they were often the lowest cost source of funds
available to the Bank. The Bank has credit availability with the FHLBSF,
which allows it to borrow up to 50% of its assets or approximately $2.2
billion at December 31, 2000.
The Bank enters into sales of securities under agreements to repurchase
(reverse repurchase agreements) which require the repurchase of the same
securities. The agreements are treated as borrowings in the Company's
Consolidated Statements of Financial Condition. There are certain risks
involved with doing these types of transactions. In order to minimize these
risks, the Bank's policy is to enter into agreements only with well-known
national brokerage firms that meet their regulatory capital requirements.
Borrowings under reverse repurchase agreements totaled $294.1 million at
December 31, 2000 at a weighted average rate of 6.65% and were secured by
mortgage-backed securities with principal balances totaling $312.4 million.
Borrowings under reverse repurchase agreements totaled $363.6 million at
December 31, 1999 and $471.2 million at December 31, 1998 at weighted average
rates of 5.76% and 5.37%, respectively. The decrease in borrowings under
agreements to repurchase over the last three years is due to paydowns of the
underlying mortgage-backed securities.
The Company redeemed its $50 million senior unsecured 11.75% notes
during 1999. The premium and related costs of $2.2 million, net of taxes,
were recorded as a loss on early extinquishment of debt, which is shown as an
extraordinary item in the Consolidated Statements of Operations and
Comprehensive Earnings for 1999.
Borrowings from all sources totaled $1.9 billion, $1.5 billion, and
$1.2 billion at weighted average rates of 6.46%, 5.88%, and 5.66% at December
31, 2000, 1999, and 1998, respectively. The increased borrowings during 2000
were necessary to fund asset growth due to loan originations and purchases.
The Bank's portfolio of short term borrowings includes short-term
variable rate credit advances and FHLB advances due in less than one year
from the FHLBSF, securities sold under agreements to repurchase and other
short term borrowings. The following schedule summarizes short term
borrowings for the last three years:
Maximum
Month-End
Outstanding
Balance
End of Period During the Average Period
Outstanding Rate Period Outstanding Rate
(Dollars In Thousands)
2000
Short term FHLB Advances........... $ 957,000 6.58% $1,250,000 $1,065,000 6.38%
Securities sold under agreements to repurchase 294,110 6.65 355,995 322,593 6.39
1999
Short term FHLB Advances........... $ 920,000 5.97% $ 920,000 $ 545,000 5.49%
Securities sold under agreements to repurchase 363,635 5.76 469,655 390,691 5.22
1998
Short term FHLB Advances........... $ 200,000 5.57% $1,035,000 $ 554,167 5.70%
Securities sold under agreements to repurchase. 471,172 5.37 576,514 514,498 5.55
Other short term borrowings........ - - 5,500 3,250 5.73
Other Sources
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Sources of Funds" for a discussion of other funding
sources.
Subsidiaries
The Bank has three wholly-owned subsidiaries: Seaside Financial
Corporation ("Seaside"), Oceanside Insurance Agency, Inc. ("Oceanside"), and
Santa Monica Capital Group ("SMCG"), all of which are California
corporations. SMCG is an inactive corporation.
As of December 31, 2000, the Bank had invested an aggregate of $203
thousand (primarily equity) in Seaside, Oceanside and SMCG. Revenues and
operating results of these subsidiaries accounted for less than 1% of
consolidated revenues in 2000 and no material change is presently foreseen.
14
Real Estate Development Activities. Seaside has not been involved in
any real estate development activity for the last several years and there are
no plans for future real estate projects. Therefore, no gains or losses on
real estate development activities were recorded during 2000, 1999 or 1998.
Seaside, from time-to-time, will purchase individual properties for
investment and sell them for a gain. Income from this activity totaled $590
thousand during 2000.
Seaside continues to hold one condominium unit, which is rented to the
Bank for use by its employees. At December 31, 2000, Seaside's investment in
the remaining unit totaled $32 thousand. There were no loans outstanding
against the property at December 31, 2000. The unit is located in Southern
California.
Trustee Activities. Seaside acts as trustee on the Bank's deeds of
trust. Trustee fees for this activity amounted to $65 thousand, $165 thousand
and $274 thousand in 2000, 1999 and 1998, respectively. The decrease in
trustee fees over the last three years is consistent with the decrease in
loan foreclosure activity.
Insurance Brokerage Activities. Oceanside engages in limited insurance
agent activities. Income to date from this source has been insignificant.
Oceanside operates as a licensed life insurance agent for the purpose of
receiving commissions on the sale of fixed and variable rate annuities and
mutual funds conducted in the Bank's offices by a licensed third party
vendor. Independent Financial Securities, Inc. ("IFS"), a registered
broker-dealer, conducts its sales activities in the Bank's branch offices and
the Bank receives a percentage of the commissions on such sales through its
licensed insurance agency, Oceanside. During 2000, 1999 and 1998, Oceanside
received commission income of $290 thousand, $451 thousand and $263 thousand,
respectively, from the sale of non-insured investment products by IFS.
Additionally, Oceanside receives insurance commissions from the sale of
insurance to its borrowers. Commissions received from this activity totaled
$444 thousand in 2000 and $64 thousand in 1998. There was no commission
income recorded during 1999.
Employees
As of December 31, 2000, the Bank had a total of 451 full time
equivalent employees, including 106 part-time employees. No employees were
represented by a collective bargaining group. At present, the Company has no
employees who are not also employees of the Bank. The Bank provides its
regular full-time employees with a comprehensive benefits program that
includes basic and major medical insurance, long-term disability coverage,
sick leave, a 401(k) plan and a profit sharing employee stock ownership plan.
The Bank considers its employee relations to be excellent.
Summary of Material Legislation and Regulations
General. FFC, as a savings and loan holding company, is registered
with and subject to regulation and examination by, the Office of Thrift
Supervision ("OTS"). The Bank, which is a federally chartered savings bank
and a member of the FHLBSF, is subject to regulation and examination by the
OTS with respect to most of its business activities, including, among others,
lending activities, capital standards, general investment authority, deposit
taking and borrowing authority, mergers and other business combinations,
establishment of branch offices, and permitted subsidiary investments and
activities. The Bank's deposits are insured by the FDIC through the SAIF.
As insurer, the FDIC is authorized to conduct examinations of the Bank. The
Bank is also subject to Federal Reserve Board regulations concerning reserves
required to be maintained against deposits.
As a member of the FHLB System, the Bank is required to own capital
stock in its regional FHLB, the FHLBSF, in an amount at least equal to the
greater of 1% of the aggregate principal amount of its unpaid residential
mortgage loans, home purchase contracts and similar obligations at the end of
each year, or 5% of its outstanding borrowings from the FHLBSF. The Bank was
in compliance with this requirement, with an investment of $80.9 million in
FHLBSF stock at December 31, 2000.
The FHLBSF serves as a source of liquidity for the member institutions
within its assigned region, the FHLB Eleventh District. It is funded
primarily from proceeds derived from the sale of consolidated obligations of
the FHLB System. It makes advances to members in accordance with policies
and procedures established by the Federal Housing Finance Board and the Board
of Directors of the FHLBSF. At December 31, 2000, the Bank's advances from
the FHLBSF amounted to $1.6 billion, or 39% of the Company's total funding
sources (deposits and borrowings).
The FHLBs provide funds for the resolution of troubled savings
institutions and are required to contribute to affordable housing programs
through direct loans or interest subsidies on advances targeted for community
investment and low and moderate income housing projects. These contributions
have adversely affected the level of dividends that the FHLBs have paid to
its members. These contributions also could have an adverse effect on the
value of FHLB stock in the future. For the year ended December 31, 2000,
dividends paid by the FHLBSF to the Bank totaled approximately $5.3 million.
15
Financial Services Modernization Legislation. On November 12, 1999,
the Gramm-Leach-Bliley Act of 1999 (the"Act") was signed into law. The Act
makes significant changes to the operations of financial services companies.
It repealed key provisions of the 66-year old "Glass-Steagall Act" by
repealing prohibitions on affiliations among banks, securities firms and
insurance companies. It authorizes a broad range of financial services to be
conducted by these types of companies within a new structure known as a
"financial holding company" ("FHC"). The FHC may engage in a number of
activities deemed to be new activities, such as securities underwriting and
dealing activities, insurance underwriting and sales activities, merchant
banking and equity investment activities, and "incidental" and
"complementary" non-financial activities. While the Act specifies so-called
"functional regulation," various federal and state regulators will have
continued authority over certain activities of FHCs and other regulated
financial institutions. However, the Federal Reserve Board will be the
principal regulator for FHCs. These changes do not directly affect the
Company, although they are likely to dramatically affect the business
activities of many of the Company's financial institution competitors.
Other provisions of the Act also may have an impact on the Company and
the Bank. The Act limits the ability of commercial entities to obtain
thrift charters. Commencing with applications filed on and after May 5,
1999, entities seeking control of a savings association will be required to
conform their activities to those permitted for financial holding companies.
Existing thrift holding companies that control only one insured institution
(such as the Company) are "grandfathered" with respect to their ability to
continue their activities. However, future sales of the savings institution
subsidiary of such a unitary thrift holding company will be limited to
companies and entities that limit their activities to those permitted for
financial holding companies.
The Act establishes a federal right to the confidential treatment of
nonpublic personal information about consumers. These provisions of the Act
require disclosure of privacy policies to consumers and, in some
circumstances, will allow consumers to prevent disclosure of certain personal
information to a nonaffiliated third party. The OTS and other banking
regulatory agencies issued final rules to implement these provisions of the
Act on May 10, 2000. The rules were effective November 13, 2000, and
compliance is mandatory starting on July 1, 2001. Pursuant to these rules, a
financial institution must provide:
- initial notices to customers (as defined in the rules) about the
institution's privacy policies, describing the circumstances under
which the institution may disclose nonpublic personal information to
nonaffiliated third parties and affiliates;
- annual notices of the institution's privacy policies to all customers;
and
- a reasonable method for customers to "opt out" of disclosure to
nonaffiliated third parties (except where disclosure is required or
otherwise permitted by law).
These new rules will affect how consumer information is transmitted
through diversified financial companies and conveyed to outside vendors. It
is not possible at this time to assess the impact of the privacy provisions
on the Company's operations. However, because the Company does not sell or
give its customer information to outside third parties or its affiliates
except under very limited circumstances (e.g., providing customer information
to the Company's data processing provider or to third party providers of
financial services under certain types of narrow joint marketing
arrangements), it is not anticipated that the new rules will have a
significant impact on the Company's results of operations or financial
condition.
The Act revised the Community Reinvestment Act (the "CRA", as discussed
in more detail below) by, among other things, requiring all insured
depository institution members of a FHC to hold at least a satisfactory CRA
rating in order to conduct new financial activities authorized by the Act.
On December 21, 2000, the federal bank regulatory agencies approved
final rules required by the Act for annual reporting and public disclosure of
certain written agreements ("covered agreements") between insured depository
institutions and nongovernental entities that are made in connection with
fulfillment of CRA. A covered agreement must be made public by being placed
immediately in the institution's public CRA file and disclosed annually as
part of the CRA statement. These new requirements are not expected to have a
material impact on the Company's operations.
The Act also significantly amends the Federal Home Loan Bank System, by
modifying membership requirements in local FHLBs to permit membership to be
voluntary for both thrift and bank members. The Act changed corporate
governance of the FHLBs by eliminating the right of the Federal Housing
Finance Board to select the management of the local FHLBs, and returning that
authority to the boards of directors of the FHLBs. Additionally, the
obligations of the FHLBs to repay federal borrowings to finance the thrift
bailout has been restructured from a fixed dollar amount to a fixed
percentage of the FHLBs' annual net earnings.
Savings and Loan Holding Company Regulations. The activities of
savings and loan holding companies are governed by the Home Owners" Loan Act,
as amended. Pursuant to that statute, the Company is subject to certain
16
restrictions with respect to its activities and investments.
A savings and loan holding company, like FFC, which controls only one
savings association, is exempt from restrictions on the conduct of unrelated
business activities that are applicable to savings and loan holding companies
that control more than one savings association. The restrictions on multiple
savings and loan holding companies are similar to the restrictions on the
conduct of unrelated business activities applicable to bank holding companies
under the Bank Holding Company Act. The Company would become subject to these
restrictions if it were to acquire control of another savings association or
if the Bank were to fail to meet its qualified thrift lender ("QTL") test.
See "Qualified Thrift Lender Test."
The OTS may impose restrictions when it has reasonable cause to believe
that the continuation of any particular activity by a savings and loan
holding company constitutes a serious risk to the financial safety, soundness
or stability of such holding company's savings institution. Specifically, the
OTS may, as necessary, (i) limit the payment of dividends by the savings
institution; (ii) limit transactions between the savings institution and its
holding company or its affiliates; and (iii) limit any activities of the
savings institution that create a serious risk that the liabilities of the
holding company and its affiliates may be imposed on the savings
institution. Any such limits will be issued in the form of a directive
having the effect of a cease-and-desist order.
Regulatory Capital Requirements. The capital regulations of the OTS
(the "Capital Regulations") require, federally insured institutions such as
the Bank to meet certain minimum capital requirements. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations
Capital Resources and Liquidity Capital Requirements." The OTS may
establish, on a case-by-case basis, individual minimum capital requirements
for a savings institution which vary from the requirements that would
otherwise apply under the Capital Regulations.
The OTS has adopted rules based upon five capital tiers:
well-capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized. An institution falls into
one of these classifications depending primarily on its capital ratios. The
Bank is considered to be "well capitalized" for purposes of these capital
measures.
Insurance of Accounts. The FDIC administers two separate deposit
insurance funds. The Bank Insurance Fund ("BIF") insures the deposits of
commercial banks and other institutions that were insured by the FDIC prior
to the enactment of the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA"). The Savings Association Insurance Fund
("SAIF") insures the deposits of savings institutions which were insured by
the Federal Savings and Loan Insurance Corporation ("FSLIC") prior to the
enactment of FIRREA. The Bank's deposits are insured by the SAIF. The FDIC
is authorized to increase deposit insurance premiums if it determines such
increases are appropriate to maintain the reserves of either the SAIF or the
BIF or to fund the administration of the FDIC. In addition, the FDIC is
authorized to levy emergency special assessments on BIF and SAIF members.
The FDIC has implemented a risk-based assessment system, under which an
institution's deposit insurance assessment is based on the probability that
the deposit insurance fund will incur a loss with respect to the institution,
the likely amount of any such loss, and the revenue needs of the deposit
insurance fund. Under the risk-based assessment system, a savings
institution is categorized into one of three capital categories: well
capitalized, adequately capitalized, and undercapitalized. A savings
institution is also categorized into one of three supervisory subgroup
categories based on examinations by the OTS.
The FDIC may terminate the deposit insurance of any insured depository
if the FDIC determines, after a hearing, that the institution has engaged or
is engaging in unsafe or unsound practices, is in an unsafe or unsound
condition to continue operations or has violated any applicable law,
regulation or order or any condition imposed in writing by the FDIC. The
FDIC may also suspend deposit insurance temporarily during the hearing
process if the institution has no tangible capital (which may be calculated
under certain conditions by including goodwill). In addition, FDIC
regulations provide that any insured institution that falls below a 2%
minimum leverage ratio will be subject to FDIC deposit insurance termination
proceedings unless it has submitted, and is in compliance with, a capital
plan with its primary federal regulator and the FDIC.
The OTS also imposes assessments and examination fees on savings
institutions. OTS assessments for the Bank were $568 thousand in 2000, $567
thousand in 1999 and $599 thousand in 1998.
Liquidity. Federal regulations currently require a savings institution
to maintain a monthly average daily balance of liquid assets (including cash,
certain time deposits, bankers' acceptances and specified United States
government, state or federal agency obligations) equal to at least 4% of: (i)
the average daily balance of its net withdrawable accounts and short-term
borrowings during the preceding calendar quarter or (ii) the ending balance
of its net withdrawable accounts as of the end of the preceding calendar
quarter. This liquidity requirement may be changed from time to time by the
OTS to any amount within the range of 4% to 10% of such accounts and
17
borrowings depending upon economic conditions and the deposit flows of member
institutions Monetary penalties may be imposed for failure to meet these
liquidity ratio requirements. The Bank's liquidity ratio for the quarter
ended December 31, 2000 was 4.37%, which exceeded the applicable requirements.
Community Reinvestment Act. The Community Reinvestment Act ("CRA")
requires each savings institution, as well as commercial banks and certain
other lenders, to identify the communities served by the institution's
offices and to identify the types of credit the institution is prepared to
extend within those communities. The CRA also requires the OTS to assess an
institution's performance in meeting the credit needs of its identified
communities as part of its examination of the institution, and to take such
assessments into consideration in reviewing applications with respect to
branches, mergers and other business combinations, including acquisitions by
savings and loan holding companies. An unsatisfactory CRA rating may be the
basis for denying such an application and community groups have successfully
protested applications on CRA grounds. In connection with its assessment of
CRA performance, the OTS assigns CRA ratings of "outstanding,"
"satisfactory," "needs to improve" or "substantial noncompliance." The Bank
was rated "satisfactory" in its last CRA examination, which was conducted in
1998. For examinations in 1997 and thereafter, institutions are evaluated
based on: (i) performance in lending in their assessment areas; (ii) the
provision of deposit and other community services in their assessment areas;
and (iii) the investment in housing-related and other qualified community
investments. An institution that is found to be deficient in its performance
in meeting its community's credit needs may be subject to enforcement
actions, including cease and desist orders and civil money penalties.
Restrictions on Dividends and Other Capital Distributions. During the
first quarter of 1999, the OTS changed its regulations governing capital
distributions. Those changes, which became effective on April 1, 1999,
require that savings associations controlled by savings and loan holding
companies (such as the Bank) file a 30-day advance notice of a proposed
capital distribution. The OTS may disapprove a notice if it finds that (a)
the savings association will be undercapitalized, significantly
undercapitalized or critically undercapitalized following the distribution,
(b) the proposed capital distribution raises safety and soundness concerns;
or (c) the proposed distribution violates a prohibition contained in a
statute, regulation or agreement between the savings association and the OTS
(or FDIC) or a condition imposed by an OTS condition or approval.
Under these new regulations, savings associations which are not
controlled by a savings and loan holding company may pay capital
distributions during a calendar year, without notice or application to the
OTS, equal to net income for the applicable calendar year plus retained net
income for the two prior calendar years. Under certain circumstances, such
savings associations must file applications for approval of a proposed
distribution. The new regulations also require a 30-day advance notice to be
filed for proposed capital distributions that would result in the savings
association being less than well-capitalized or that involve the reduction or
retirement of the savings association's stock.
During 2000, the Bank paid a total of $10.0 million in capital
distributions to the Company.
Limits on Types of Loans and Investments. Federal savings institutions
are authorized, without quantitative limits, to make loans on the security of
liens upon residential real property and to invest in a variety of
instruments such as obligations of, or fully guaranteed as to principal and
interest by, the United States; stock or bonds of the FHLB; certain
mortgages, obligations, or other securities which have been sold by FHLMC or
FNMA; and certain securities issued by, or fully guaranteed as to principal
and interest by, the Student Loan Marketing Association and the Government
National Mortgage Association. Certain other types of loans or investments
may be acquired subject to quantitative limits: secured or unsecured loans
for commercial, corporate, business, or agricultural purposes, loans on the
security of liens upon nonresidential real property, investments in personal
property, consumer loans and certain securities such as commercial paper and
corporate debt, and construction loans without security.
Savings institutions are subject to the same loans-to-one borrower
("LTOB") restrictions that are applicable to national banks, with limited
provisions for exceptions. In general, the national bank standard restricts
loans to a single borrower to no more than 15% of a bank's unimpaired capital
and surplus, plus an additional 10% if the loan is collateralized by certain
readily marketable collateral. The Bank's loans were within the LTOB
limitations at December 31, 2000.
Savings institutions and their subsidiaries are prohibited from
acquiring or retaining any corporate debt security that, at the time of
acquisition, is not rated in one of the four highest rating categories by at
least one nationally recognized statistical rating organization. The Bank
has no impermissible equity investments in its investment portfolio.
Safety and Soundness Standards. OTS regulations contain "safety and
soundness" standards covering various aspects of the operations of savings
institutions. The guidelines relate to internal controls, information systems
and internal audit systems, loan documentation, credit underwriting, interest
rate exposure, asset growth, executive compensation, maximum ratios of
18
classified assets to capital, and minimum earnings sufficient to absorb
losses without impairing capital. If the OTS determines that a savings
institution has failed to meet the safety and soundness standards, it may
require the institution to submit to the OTS, and thereafter comply with, a
compliance plan acceptable to the OTS describing the steps the institution
will take to attain compliance with the applicable standard and the time
within which those steps will be taken.
Federal regulations contain a number of measures intended to promote
early identification of management problems at depository institutions and to
ensure that regulators intervene promptly to require corrective action by
institutions. The Bank's annual management report on the effectiveness of
internal control standards and compliance with certain designated laws will
be made available in March of 2001.
Prompt Corrective Action. The "prompt corrective action" regulations
require insured depository institutions to be classified into one of five
categories based primarily upon capital adequacy, ranging from "well
capitalized" to "critically undercapitalized." These regulations require,
subject to certain exceptions, the appropriate federal banking agency to take
"prompt corrective action" with respect to an institution which becomes
"undercapitalized" and to take additional actions if the institution becomes
"significantly undercapitalized" or "critically undercapitalized."
Only "well capitalized" institutions may obtain brokered deposits
without a waiver. An "adequately capitalized" institution can obtain
brokered deposits only if it receives a waiver from the FDIC. An
"undercapitalized" institution may not accept brokered deposits under any
circumstances. The Bank met the "well-capitalized" standards during 2000 and
was eligible to accept brokered deposits without a waiver.
Qualified Thrift Lender Test. In general, the QTL test requires that
65% of an institution's portfolio assets be invested in "qualified thrift
investments" (primarily loans, securities and other investments related to
housing), measured on a monthly average basis for nine out of every 12 months
on a rolling basis. Any savings institution that fails to meet the QTL test
must either convert to a bank charter or become subject to national bank-type
restrictions on branching, business activities, and dividends, and its
ability to obtain FHLB advances is affected. The Bank met the QTL test at
December 31, 2000, with 98% of its portfolio assets comprised of "qualified
thrift investments."
Transactions with Affiliates. Federal savings institutions are subject
to the provisions of Sections 23A and 23B of the Federal Reserve Act.
Section 23A restricts loans or extensions of credit to, or investments in,
or certain other transactions with, affiliates and as to the amount of
advances to third parties collateralized by the securities or obligations of
affiliates. Section 23B generally requires that transactions with affiliates
must be on a non-preferential basis. Federal savings institutions may not
make any extension of credit to an affiliate which is engaged in activities
not permitted by bank holding companies, and may not invest in securities
issued by an affiliate (except with respect to a subsidiary). The Company is
an "affiliate" of the Bank for the purposes of these provisions.
Transactions with Insiders. Federal savings institutions are subject
to the restrictions of Sections 22(g) and (h) of the Federal Reserve Act
which, among other things, restrict the amount of extensions of credit which
may be made to executive officers, directors, certain principal shareholders
(collectively "insiders"), and to their related interests. When lending to
insiders, a savings association must follow credit underwriting procedures
that are not less stringent than those applicable to comparable transactions
with persons outside the association. The amount that a savings association
can lend in the aggregate to insiders (and to their related interests) is
limited to an amount equal to the association's core capital and surplus.
Insiders are also prohibited from knowingly receiving (or knowingly
permitting their related interests to receive) any extensions of credit not
authorized under these statutes.
Federal Reserve System. Federal Reserve Board regulations require
savings institutions to maintain non-interest bearing reserves against their
transaction accounts. The reserve for transaction accounts as of December
31, 2000 was 0% of the first $5 million of such accounts, 3% of the next
$39.3 million of such accounts and 10% (subject to adjustment by the Federal
Reserve Board between 8% and 14%) of the balance of such accounts. The Bank
is in compliance with these requirements.
Taxation. The Company, the Bank and its subsidiaries file a
consolidated federal income tax return on a calendar year basis using the
accrual method. The maximum marginal federal tax rate is currently 35%.
The Bank is required to use the specific charge-off method of accounting
for debts for all periods beginning after 1995. Prior to that date, the Bank
used the reserve method of accounting for bad debts. The Consolidated
Statements of Financial Condition at December 31, 2000 and 1999 do not include
a liability of $5,356,000 related to the adjusted base year bad debt reserve.
This reserve was created when the Bank was on the reserve method.
19
These reserves are subject to recapture if: (1) the Bank fails to
qualify as a "bank" for federal income tax purposes; (2) certain
distributions are made with respect to the stock of the Bank; (3) the bad
debt reserves are used for any purpose other than to absorb bad debt losses;
or (4) there is a change in federal tax law. Management does not expect for
any of these events to occur.
To the extent that distributions by the Bank to the Company that are
permitted under federal regulations exceed the Bank's earnings and profits
(as computed for federal income tax purposes), such distributions would be
treated for tax purposes as being made out of the Bank's base year reserve
and would thereby constitute taxable income to the Bank in an amount equal to
the lesser of the Bank's base year reserve or the amount which, when reduced
by the amount of income tax attributable to the inclusion of such amount in
gross income, is equal to the amount of such distribution. At December 31,
2000, the Bank's earnings and profits (as computed for federal income tax
purposes) were approximately $291.6 million.
For state tax purposes, the Bank is allowed an addition to its tax bad
debt reserves in an amount necessary to fill up to its tax reserve balance
calculated using the experience method.
At December 31, 2000, the Bank had $47.7 million in gross deferred tax
assets. No valuation allowance was established because management believes
that it is more likely than not that the deferred tax assets will be
realized. Gross deferred tax liabilities totaled $36.2 million at December
31, 2000.
The Bank is subject to an alternative minimum tax if such tax is larger
than the tax otherwise payable. Generally, alternative minimum taxable
income is a taxpayer's regular taxable income, increased by the taxpayer's
tax preference items for the year and adjusted by computing certain
deductions in a special manner which negates the acceleration of such
deductions under the regular tax. The adjusted income is then reduced by an
exemption amount and is subject to tax at a 20% rate. No alternative minimum
taxes were applicable to the Bank for tax years 2000, 1999 or 1998.
California tax laws generally conform to federal tax laws. For
California franchise tax purposes, federal savings banks are taxed as
"financial corporations" at a rate 2% higher than that applicable to
non-financial corporations because of exemptions from certain state and local
taxes. The tax rate for 2000, 1999 and 1998 was 10.84%. The Franchise Tax
Board ("FTB") has not yet announced the rate for 2001.
The Internal Revenue Service ("IRS") has completed examinations of the
Company's consolidated federal income tax returns for tax years up to and
including 1992. Adjustments made by the IRS related to temporary differences
as to the recognition of certain taxable income and expense items. While the
Company had provided deferred taxes for federal and state purposes, the
changes in the period of recognition of certain income and expense items
resulted in interest due to the IRS and FTB. During 1998, the Company paid
$598 thousand in interest to the IRS and FTB and reversed $300 thousand in
accrued interest. During 1999 and 2000, the Company reversed interest
accruals totaling $150 thousand and $350 thousand, respectively. There was
no remaining interest accrual as of December 31, 2000.
ITEM 2--PROPERTIES
At December 31, 2000, the Bank owned the building and the land for
seven of its branch offices, owned the building but leased the land for three
additional offices, and leased its remaining offices. Properties leased by
the Bank include its home and executive offices located in a 12-story office
tower in downtown Santa Monica and a general services and corporate
operations office building in Santa Monica. For information concerning
rental obligations, see Note 6 of the Notes to Consolidated Financial
Statements.
ITEM 3--LEGAL PROCEEDINGS
The Company is involved as a plaintiff or defendant in various legal
actions incident to its business, none of which are believed by management to
be material to the Company.
ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
20
PART II
ITEM 5--MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
(a) Market Information. The Company's common stock is traded on the
New York Stock Exchange ("NYSE") under the symbol "FED." Included in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" is a chart representing the range of high and low stock prices
for the Company's common stock for each quarterly period for the last five
years.
(b) Holders. As of February 14, 2001, 17,249,459 shares of Company
common stock, representing approximately 840 record stockholders were
outstanding, which total does not include the number of stockholders whose
shares are held in street name.
(c) Dividends. As a publicly traded company, the Company has no
history of dividend payments on its common stock. However, the Company may in
the future adopt a policy of paying dividends, depending on its net earnings,
financial position and capital requirements, as well as regulatory
restrictions, tax consequences and the ability of the Company to obtain a
dividend from the Bank for payment to stockholders. OTS regulations limit
amounts that the Bank can pay as a dividend to the Company. No dividend may
be paid if the Bank's net worth falls below regulatory requirements. (See
"Business - Summary of Material Legislation and Regulations" for other
regulatory restrictions on dividends.) The Board of Directors of the Bank
declared and paid to the Company $10.0 million in dividends during 2000,
$99.6 million in 1999 and $5.9 million in 1998. The dividends paid during
2000 were for the purpose of repurchasing 821,500 shares of Company common
stock. Dividends paid during 1999 were for the purpose of repurchasing
3,298,150 shares of Company common stock and servicing and paying off the
Company's $50 million in senior unsecured 11.75% notes, which were redeemed
on December 30, 1999. Dividends paid during 1998 were for the purpose of
servicing the $50 million in senior notes.
21
ITEM 6--SELECTED FINANCIAL DATA
Selected financial data for the Company is presented below:
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
FIVE YEAR CONSOLIDATED SUMMARY OF OPERATIONS
2000 1999 1998 1997(1) 1996(1)
(Dollars In Thousands, Except Per Share Data)
For the Year Ended December 31:
Interest income...... $ 314,320 $ 260,001 $ 289,769 $ 299,220 $ 297,178
Interest expense..... 206,505 161,031 186,491 204,226 198,031
Net interest income.. 107,815 98,970 103,278 94,994 99,147
Provision for loan losses - - 7,200 20,500 35,155
Other income......... 7,747 12,688 13,657 10,218 10,915
Non-interest expense. 48,265 49,159 48,924 44,151 59,175
Earnings before income taxes 67,297 62,499 60,811 40,561 15,732
Income taxes......... 28,832 27,052 26,182 17,461 7,488
Earnings before extra-
ordinary items..... 38,465 35,447 34,629 23,100 8,244
Extraordinary item
Loss on early extinquishment
of debt, net of taxes - (2,195) - - -
Net earnings........ 38,465 33,252 34,629 23,100 8,244
Basic earnings per share
EPS before extraordinary item 2.23 1.84 1.63 1.09 0.39
Extraordinary item - (.11) - - -
EPS after extraordinary item 2.23 1.73 1.63 1.09 0.39
Dilutive earnings per share
EPS before extraordinary item 2.20 1.83 1.60 1.07 0.39
Extraordinary item - (.12) - - -
EPS after extraordinary item 2.20 1.71 1.60 1.07 0.39
End of Year:
Loans receivable, net (2). 3,629,284 3,060,547 2,808,221 3,145,164 3,048,469
Mortgage-backed securities 374,405 428,641 556,679 676,058 746,006
Investment securities 136,537 151,195 64,333 48,910 58,909
Total assets......... 4,365,242 3,872,051 3,677,128 4,160,115 4,143,852
Deposits............. 2,165,047 2,061,357 2,135,909 1,943,647 1,957,448
Borrowings........... 1,873,110 1,532,635 1,235,172 1,941,670 1,940,482
Liabilities.......... 4,097,800 3,640,918 3,420,128 3,937,328 3,949,302
Stockholders' equity. 267,442 231,133 257,000 222,787 194,550
Book value per share(1) 15.52 12.82 12.16 10.52 9.24
Tangible book value per share 14.98 12.78 12.10 10.43 9.11
Selected Ratios:
Return on average assets 0.93% 0.94% 0.88% 0.56% 0.20%
Return on average equity 15.85% 14.91% 14.40% 11.25% 4.22%
Ratio of non-performing
assets to total assets 0.19% 0.40% 0.84% 0.95% 1.77%
Other Data:
Number of Bank full service
branches.................. 25 24 24 24 25
(1) All per share amounts have been adjusted for the two-for-one stock split
declared June 25, 1998.
(2) Includes loans held for sale.
Also see summarized results of operations on a quarterly basis for
2000, 1999 and 1998 in Note 15 of the Notes to Consolidated Financial
Statements.
22
ITEM 7--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The Company's results of operations are primarily affected by its
levels of net interest income, provisions for loan losses, non-interest
income, non-interest expense and income taxes. The Company's results are
strongly influenced by the Southern California economy in which it operates.
Net earnings of $38.5 million or $2.20 per share were recorded in
2000, compared to net earnings of $33.3 million or $1.71 per share in 1999
and net earnings of $34.6 million or $1.60 per share in 1998. All per
share amounts are presented on a diluted basis and have been adjusted for
the two for one stock split declared June 25, 1998.
The increase in net earnings from 1999 to 2000 was due to higher net
interest income, which resulted from growth in interest-earning assets. The
decrease in net earnings from 1998 to 1999 was attributable to the $2.2
million loss on early extinguishment of debt, net of taxes resulting from the
redemption of the Company's $50 million senior unsecured 11.75% notes.
No loan loss provision was recorded in 2000 or 1999, but a $7.2
million provision was recorded in 1998. The Southern California economy and
real estate market has remained strong over the last few years. As a
result, net loan charge-offs declined from $3.4 million in 1998 to $2.4
million in 1999. Net loan loss recoveries totaling $51 thousand were
recorded during 2000.
Certain key financial ratios for the Company are presented below:
Average
Return on Return on Equity to
Average Average Average
Assets Equity Assets
2000...... .93% 15.85% 5.85%
1999...... .94 14.91 6.29
1998...... .88 14.40 6.09
1997...... .56 11.25 4.95
1996...... .20 4.22 4.61
Non-performing assets (primarily loans 90 days past due or in
foreclosure plus foreclosed real estate) decreased to $8.3 million or 0.19%
of total assets as of December 31, 2000 from to $15.4 million or 0.40% of
total assets at December 31, 1999 and $30.7 million or 0.84% of total assets
at December 31, 1998. The decreasing amount of real estate owned over the
last several years is due to lower balances of delinquent loans and
decreased foreclosures in the improved Southern California real estate
markets.
The Company repurchased common shares totaling 821,500 and 3,298,150
during 2000 and 1999, respectively. As of February 14, 2001, 889,016 shares
remain eligible for repurchase under the Compan's authorized repurchase
program. No additional shares have been purchased thus far during 2001.
At December 31, 2000 the Bank's regulatory risk-based capital ratio
was 11.39% and its tangible and core capital ratios were 5.84%. The Bank
met the regulatory capital standards necessary to be deemed
"well-capitalized" at December 31, 2000.
23
The Bank's deposits are insured by the SAIF up to a maximum of
$100,000 for each insured depositor. The Bank's FDIC insurance premiums were
$538 thousand during 2000 and $1.2 million during both 1999 and 1998. The
lower premiums paid in 2000 were due to a drop in the deposit insurance
assessment rate from 6.3 basis points in 1998 and 5.9 basis points in 1999
to 2.07 basis points in 2000, due to an improvement in the Bank's regulatory
rating.
Risks and Uncertainties
In the normal course of business, the Company encounters two
significant types of risk: economic risk and regulatory risk.
ECONOMIC RISK
There are two main components of economic risk: credit risk and market
risk (which includes interest rate risk.)
Credit Risk
Credit risk is the risk of default in the Company's loan portfolio
that results from a borrower's inability to make contractually required
payments. See "Loan Loss Provisions" and "Non-performing Assets."
The determination of the allowance for loan losses and the valuation
of real estate collateral are based on estimates that are susceptible to
changes in the economic environment and market conditions. No loan loss
provision was recorded during 2000. A downward turn in the current economic
climate could increase the likelihood of losses due to credit risks. This
could create the need for additional loan loss provisions.
Market Risk
Market risk is the risk of loss from unfavorable changes in market
prices and interest rates. The Bank's market risk arises primarily from the
interest rate risk inherent in its lending and deposit taking activities.
See "Asset-Liability Management" for additional information relating
to market risk.
REGULATORY RISK
Regulatory risk is the risk that the regulators will reach different
conclusions than management regarding the financial position of the Company.
The OTS examines the Bank's financial results annually. The OTS reviews the
allowance for loan losses and may require the Bank to adjust the allowance
based on information available at the time of their examination.
OTHER RISKS
Inflation
Inflation substantially impacts the financial position and operations
of financial intermediaries, such as banks and savings institutions. These
entities primarily hold monetary assets and liabilities and, as such, can
experience significant purchasing power gains and losses over relatively
short periods of time. In addition, interest rate changes during
inflationary periods change the amounts and composition of assets and
liabilities held by financial intermediaries and could result in regulatory
pressure for an additional equity investment.
Pending Lawsuits
The Bank has been named as a defendant in various lawsuits, none of
which is expected to have a materially adverse effect on the Company.
24
COMPONENTS OF EARNINGS
Net Interest Income
Net interest income is the primary component of the Company's
earnings. The chief determinants of net interest income are the dollar
amounts of interest-earning assets and interest-bearing liabilities and the
interest rates earned or paid thereon. The greater the excess of average
interest-earning assets over average interest-bearing liabilities, the more
beneficial the impact on net interest income. The excess of average
interest-earning assets over average interest-bearing liabilities was $148.2
million in 2000, $144.4 million in 1999 and $131.7 million in 1998. The
increase over the last two years was due to improvement in asset quality and
asset growth.
The Company's net interest income is also impacted by a three-month
time lag before changes in the cost of funds can be passed along to monthly
adjustable rate loan customers. Savings and borrowing costs adjust to market
rates immediately while it takes several months for the loan yield to
adjust. This time lag decreases the Company's net interest income during
periods of rising interest rates. The reverse is true during periods of
declining interest rates. See "Asset-Liability Management" for further
discussion.
The following table sets forth the components of interest-earning
assets and liabilities, the excess of interest-earning assets over
interest-bearing liabilities, the yields earned and rates paid and net
interest income for the periods indicated:
2000 1999 1998
(Dollars In Thousands)
Average loans and mortgage-backed
securities (1)......... $3,793,351 $3,328,723 $3,638,628
Average investment securities 176,476 204,741 148,871
Average interest-earning assets 3,969,827 3,533,464 3,787,499
Average savings deposits 2,132,927 2,065,712 2,121,024
Average borrowings...... 1,688,738 1,323,362 1,534,820
Average interest-bearing liabilities 3,821,665 3,389,074 3,655,844
Excess of interest-earning assets
over interest-bearing liabilities $ 148,162 $ 144,390 $ 131,655
Yields earned on average interest
earning assets......... 7.77% 7.26% 7.54%
Rates paid on average interest-
bearing liabilities.... 5.40 4.76 5.11
Net interest rate spread 2.37 2.50 2.43
Effective net spread.... 2.57 2.69 2.60
Total interest income... $ 308,487 $ 256,335 $ 285,395
Total interest expense.. 206,473 161,160 186,890
102,014 95,175 98,505
Total other items (2)... 5,801 3,795 4,773
Net interest income..... $ 107,815 $ 98,970 $ 103,278
(1) Non-accrual loans were included in the average dollar amount of loans
outstanding, but no income was recognized during the period that each such
loan was on non-accrual status.
(2 )Includes dividends on FHLB stock and other miscellaneous items.
The yield on earning assets increased to 7.77% in 2000 from 7.26% in
1999 due a 53 basis point increase in the Index which determines the yield
on over 85% of the Bank's loan portfolio. However, the Bank's cost of funds
increased by 64 basis points due to the interest rate increases by the
Federal Reserve at the end of 1999 and throughout 2000. The yield on
earning assets decreased to 7.26% in 1999 from 7.54% in 1998 due to a 34
basis point decrease in the Index. The Bank's cost of funds decreased by 35
basis points in 1999 compared to 1998 due to lower market interest rates
during the first half of 1999 compared to 1998.
25
The table below sets forth certain information regarding changes in
the interest income and interest expense of the Bank for the periods
indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes
attributable to (i) changes in volume (changes in average balance multiplied
by old rate) and (ii) changes in rates (changes in rate multiplied by prior
year average balance):
Year Ended Year Ended
December 31, 2000 December 31, 1999
Versus Versus
December 31, 1999 December 31, 1998
Change Due To Change Due To
Rate Volume Total Rate Volume Total
(Dollars In Thousands)
Interest Income:
Loans and mortgage-backed
Securities.......... $35,723 $16,485 $52,208 $(8,949) $(23,073) $(32,022)
Investments.......... (1,629) 1,339 (290) 207 2,754 2,961
Total interest income 34,094 17,824 51,918 (8,742) (20,319) (29,061)
Interest Expense:
Deposits............. 2,910 10,037 12,947 (8,058) (2,499) (10,557)
Borrowings.......... 22,176 10,191 32,367 (3,269) (11,905) (15,174)
Total interest expense 25,086 20,228 45,314 (11,327) (14,404) (25,731)
Change in net interest income 9,008 (2,404) 6,604 2,585 (5,915) (3,330)
Change in other items (1) 2,241 (978)
Total change in net interest
income including other items $ 8,845 $ (4,308)
(1) Includes dividends on FHLB stock and other miscellaneous
items.
Note: Changes in rate/volume (change in rate multiplied by the change in
average volume) have been allocated to the change in rate or the change in
volume based upon the respective percentages of the combined totals.
26
Interest Rate Spreads and Yield on Average Interest-Earning Assets
Year Ended December 31,
2000 1999 1998 1997 1996
During End of During End of During End of During End of During End of
Period Period Period Period Period Period Period Period Period Period
Weighted average yield
on loans and mortgage-
backed securities.......... 7.85% 8.15% 7.37% 7.31% 7.63% 7.48% 7.49% 7.48% 7.44% 7.47%
Weighted average yield
on investment portfolio(1) 6.11 5.63 5.41 5.69 5.29 5.14 5.40 6.06 5.71 5.98
Weighted average yield
on all interest-earning
assets....................... 7.77 8.04 7.26 7.25 7.54 7.39 7.40 7.42 7.36 7.45
Weighted average rate
paid on deposits........... 4.70 4.90 4.22 4.42 4.61 4.36 4.70 4.66 4.76 4.67
Weighted average rate
paid on borrowings and
FHLB advances............. 6.29 6.46 5.59 5.88 5.81 5.66 5.86 5.91 5.85(4) 5.77
Weighted average rate
paid on all interest-
bearing liabilities........ 5.40 5.62 4.76 5.04 5.11 4.84 5.27 5.28 5.25 5.22
Interest rate spread(2)..... 2.37 2.42 2.50 2.21 2.43 2.55 2.13 2.14 2.11 2.23
Effective net spread(3).... 2.57 2.69 2.60 2.28 2.24
(1) Dividends on FHLB stock and miscellaneous interest income were not
considered in this analysis
(2) Weighted average yield on all interest-earning assets less weighted
average rate paid on all interest-bearing liabilities
(3) Net interest income (the difference in the dollar amounts of interest
earned and paid) divided by average interest-earning assets
(4) Excludes effect of IRS accrued interest reversal.
27
Loss Provision
The Company did not record a loan loss provision during 2000 or 1999 but
recorded a loan loss provision of $7.2 million in 1998. No provision was
recorded during the last two years because, based on analysis done by
management, existing allowances were sufficient to cover the credit risks
inherent in the loan portfolio. Non- performing assets decreased to $8.3
million in 2000 from $15.4 million in 1999 and $30.7 million in 1998 due to
improvement in the economy and real estate markets in which the Bank operates.
The Bank has a policy of providing for general valuation allowances,
unallocated to any specific loan, but available to offset any loan losses. The
allowance is maintained at an amount that management believes adequate to
cover estimable and probable loan losses. The Company also maintains
valuation allowances for impaired loans and loans sold with recourse. See
"Allowances for Loan Losses." Management performs regular risk assessments
of the Bank's loan portfolio to maintain appropriate valuation allowances.
Additional loan loss provisions may be required to the extent that charge-offs
are recorded against the valuation allowance for impaired loans, the general
valuation allowance, or the valuation allowance for loans sold with recourse.
The Company recorded net loan loss recoveries of $51 thousand during
2000. This compares with net loan charge-offs totaling $2.4 million in 1999
and $3.4 million in 1998. The recoveries recorded during 2000 resulted from
cash payments by borrowers on loans that had been previously charged-off.
The charge-offs during 1999 represented 0.08% of average loans outstanding
and the charge-offs during 1998 represented 0.09% of average loans
outstanding. Charge-offs primarily result from declines in the value of the
underlying collateral of the non-performing loans.
Non-interest Income
Loan servicing and other fees were $2.8 million in 2000, $4.2 million
in 1999 and $4.2 million in 1998. The lower fees earned over the last three
years are the result of decreased fees earned on loans serviced for other
lenders. Fees earned during 2000 and 1998 included adjustments of $500
thousand and $1.4 million, respectively, to provide for impairment of the
Bank's servicing asset. These provisions were due to accelerated payoffs
and prepayments of loans serviced for others. Also, late charge and
prepayment penalty fees decreased in 2000 compared to 1999.
Gain on sale of loans was $64 thousand in 2000, $1.2 million in 1999
and $4.1 million in 1998. The decrease in gain on sale of loans is due to a
reduction in loans originated for sale in the rising interest rate
environment for fixed rate mortgages during the second half of 1999 and
throughout 2000.
Real estate operations resulted in a net gain of $594 thousand in
2000, $3.2 million in 1999 and $1.2 million in 1998. Real estate operations
include gain on sale of foreclosed properties, operational income and
expenses during the holding period, and recoveries of prior losses on real
estate sold.
Non-interest Expense
The ratio of non-interest expense to average total assets for 2000 was
1.17% compared with 1.30% for 1999. The decrease from 1999 to 2000 is
mostly attributable to decreases in legal expenses and federal deposit
insurance, offset by additional expenses associated with goodwill
amortization and increased data processing costs.
Salary and benefit costs were approximately the same during 1999 and
2000. Increases in compensation and incentive costs during 2000 were offset
by a decrease in bonus and other benefit costs during the same year. Salary
and benefit costs increased 3% in 1999 compared to 1998 due to higher salary
costs, incentive costs and bonus expenses.
Occupancy expense increased slightly in 2000 compared to 1999 due to
the acquisition of two branches from another financial institution. One
branch was closed and its deposits were transferred to one of the acquired
branches. Occupancy expense decreased 7% in 1999 compared to 1998 because
1998 expense included market adjustments on leased properties no longer
occupied by the Bank.
Other operating expenses increased slightly in 2000 compared to 1999
due to increases in data processing costs associated with the creation of
the Bank's new web page and internet site. Also, goodwill amortization
increased substantially to $2.0 million in 2000 from $452 thousand in 1999
due to the write off of goodwill associated with the closed branch and a
re-evaluation of goodwill on a second branch location. In contrast, legal
expenses decreased substantially from $3.5 million in 1999 to $632 thousand
in 2000.
In 1999, other operating expenses increased to $11.5 million from
$11.4 million in 1998 due to an increase in legal costs to $3.5 million in
1999 from $1.5 million in 1998. The increase in legal expenses during 1999
was the result of higher than normal defense cases that were resolved during
that year. Offsetting the increase in legal costs during 1999 was a decrease
in data processing cost to $1.9 million in 1999 from $3.4 million in 1998.
1998 data processing costs were inflated due to the Bank's conversion to a
new computer system during that year.
28
The following table details the components of non-interest expense for
the periods indicated:
Non-Interest Expense
Year Ended December 31,
2000 1999 1998 1997 1996
(Dollars In Thousands)
Salaries and Employee Benefits:
Salaries............. $17,354 $16,631 $16,035 $15,157 $15,749
Incentive compensation 1,987 1,677 1,478 883 556
Payroll taxes........ 1,486 1,607 1,455 1,371 1,389
Employee benefit insurance 1,320 1,220 1,069 1,048 1,137
Bonus compensation... 920 1,583 1,335 1,100 1,000
Profit sharing....... 1,200 1,100 1,000 501 500
Pension.............. - - - - 241
SERP................. 906 988 795 628 506
401(k)............... 354 299 235 392 -
Other salaries and benefits 917 1,559 2,409 1,660 850
26,444 26,664 25,811 22,740 21,928
Occupancy:
Rent................. 4,539 4,395 5,105 4,351 4,270
Equipment............ 2,318 2,145 1,855 1,336 959
Maintenance costs.... 571 469 344 450 477
Other occupancy...... 603 850 1,189 741 583
8,031 7,859 8,493 6,878 6,289
Other Operating Expense:
Insurance............ 541 430 362 345 381
Goodwill............. 1,965 452 565 839 915
Data processing...... 2,488 1,930 3,359 2,539 945
Contributions........ 518 299 509 412 401
Professional services 301 8 259 373 420
Legal expenses....... 632 3,516 1,479 1,309 412
Supervisory exam..... 568 567 599 610 611
Other operating costs 4,822 4,334 4,288 3,439 4,086
11,835 11,536 11,420 9,866 8,171
Federal Deposit Insurance:
Deposit insurance premiums... 538 1,236 1,241 1,872 5,418
SAIF special assessment - - - - 15,007
538 1,236 1,241 1,872 20,425
Advertising.......... 1,417 1,864 1,959 2,795 2,362
Total.............. $48,265 $49,159 $48,924 $44,151 $59,175
Non-interest expense as
% of average assets. 1.17% 1.30% 1.24% 1.06% 1.43%(1)
(1) The expense ratio for 1996 includes the special SAIF assessment.Excluding
the SAIF assessment, the ratio would have been 1.06%.
29
BALANCE SHEET ANALYSIS
Consolidated assets at the end of 2000 were $4.4 billion, representing a
13% increase from $3.9 billion at the end of 1999 and a 19% increase from $3.7
billion at the end of 1998. Assets have increased over the last two years due
to strong loan originations, which totaled $1.1 billion in 2000 and $944.1
million in 1999. Year 2000 originations included $139.5 million in loan
purchases and 1999 originations included loan purchases of $122.8 million.
Loan Portfolio
At the end of 2000, over 85% of the Bank's loans had adjustable interest
rates based on monthly changes in the Index. As part of its asset-liability
management strategy, the Bank has maintained the level of adjustable loans in
its portfolio at over 90% for several years. Management believes that the high
level of adjustable rate mortgages will help insulate the Bank from
fluctuations in interest rates, notwithstanding the several month time lag
between a change in its monthly cost of funds and a corresponding change in
its loan yields. See "Asset - Liability Management."
The Bank also originates loans with initial fixed interest rates with
periods ranging from 3 to 10 years. By policy, the Bank will either match the
fixed rate period of these loans with borrowings for the same term or will
hold an amount up to $150 million of unmatched fixed rate loans in its
portfolio. Management believes that the limited origination of fixed-rate
loans will enhance the Company's overall return on assets and improve loan
origination in this economy. Loans originated under this limited program
totaled $75.9 million in 2000 compared to $205.7 million in 1999.
In 2000, 1999 and 1998, the Bank placed $3.9 million, $9.9 million and
$21.3 million, respectively, in mortgages with other lenders under fee
arrangements, which amount is not included in loan originations. In 2000,
loans made on the security of single family properties (one to four units)
comprised 61% of the dollar amount of new loan originations. Loans made on the
security of multi-family properties (five or more units) comprised 31% of new
originations. Loans made on the security of commercial real estate properties
comprised 7% of new loan originations. Business loans originated by the
commercial lending units totaled $11.8 million. Adjustable rate mortgages
comprised 90% of new loan activity during 2000 compared with 63% during 1999
and 49% in 1998.
The following table details loan originations and loan purchases by loan
type for the periods indicated:
Loan Originations and Purchases by Type
Year Ended December 31,
2000 1999 1998 1997 1996
(Dollars In Thousands)
Single Family (one to four units) $ 658,808 $779,698 $594,763 $430,223 $239,866
Multi-Family............ 333,466 118,622 37,720 48,033 57,414
Commercial Real Estate.. 70,807 37,744 383 2,551 5,568
Commercial Business Loans 11,759 7,768 1,733 - -
Other................... 6,170 301 2,428 444 -
Total................. $1,081,010 $944,133 $637,027 $481,251 $302,848
Loans originated upon the sale of the Bank's real estate owned were $645
thousand or .06% of total originations in 2000. All of these loans were
originated based on the security of multi-family properties.
From time to time, the Bank converts loans into mortgage-backed
securities for use in securitized borrowings (reverse repurchase agreements).
No loans were converted into mortgage-backed securities during 2000, 1999 or
1998. Securitized loans have a lower risk weighting for regulatory risk-based
capital purposes. In exchange for the enhanced credit risk associated
with mortgage-backed securities, the Bank pays guarantee fees to FHLMC and/or
FNMA.
The Bank's adjustable rate loan products often provide for first year
monthly payments that are lower than the fully-indexed interest and principal
due. Any interest not fully paid by such lower first year payments is added to
the principal balance of the loan. This causes negative amortization until
payments increase to cover interest and principal repayment shortfalls. Due to
negative amortization,loan-to-value ratios may increase above those calculated
at the inception of the loan.
30
The Bank does not normally lend in excess of 90% of the appraised
collateral value on adjustable mortgage loans ("AMLs"). Where the Bank does
lend in excess of 90% of the appraised value, additional fees and rates are
charged. Mortgage insurance is required on loans in excess of 80% or premium
rates and/or fees are charged if the mortgage insurance requirement is waived.
Subsequent to the origination of a loan, the Bank may purchase private
mortgage insurance with its own funds. Loans originated under this program for
which there is no private mortgage insurance totaled $268.2 million at
December 31, 2000 compared to $274.2 million at December 31, 1999 and $265.0
million at December 31, 1998. See "Business - Interest Rates, Terms and Fees."
Loan Composition
Loans based on the security of single family properties (one to four
units) comprise the largest category of the Bank's loan portfolio
(including mortgage-backed securities). The loan portfolio also includes
loans secured by multi-family and commercial properties. At December 31, 2000,
approximately 62% of the loan and mortgage-backed securities portfolio
consisted of first liens on single family properties. First liens on
multi-family properties comprised approximately 32% of the portfolio, and
first liens on commercial properties represented approximately 5% of the
portfolio. Commercial business loans and consumer loans represent less than
1% of the loan portfolio as of December 31, 2000.
Multi-family and commercial real estate loans are considered more
susceptible to market risk than single family loans and higher interest rates
and fees are charged to borrowers for these loans. Approximately 31% of loan
originations in 2000 were multi-family loans compared to 13% in 1999 and 6% in
1998. Multi-family loans originated upon the sale of REO were 0.1%, 0.4% and
1% of total loan originations during 2000, 1999 and 1998, respectively.
The Bank has loss exposure on certain loans sold with recourse. These
loans are substantially all secured by multi-family properties. Loans sold
with recourse totaled $146.5 million as of December 31, 2000, $178.7 million
as of December 31,1999 and $203.0 million as of December 31, 1998. Although no
longer owned by the Bank, these loans are evaluated for the purposes of
computing the repurchase liability and measuring risk exposure for regulatory
capital. Under the Bank's current policy, it no longer enters into loans
sold with recourse agreements.
31
The following table sets forth the composition of the Bank's portfolio
of loans and mortgage-backed securities for each of the last five years:
Loan Portfolio Composition
December 31,
2000 1999 1998 1997 1996
(Dollars In Thousands)
REAL ESTATE LOANS:
First trust deed residential loans:
One to four units........ $ 2,158,940 $ 1,813,783 $ 1,564,392 $ 1,801,608 $ 1,621,497
Five or more units....... 1,308,440 1,123,308 1,127,228 1,217,577 1,277,634
Residential loans.......... 3,467,380 2,937,091 2,691,620 3,019,185 2,899,131
OTHER REAL ESTATE LOANS
Commercial and industrial 217,619 183,194 181,772 196,575 210,953
Second trust deeds....... 8,453 13,489 15,357 15,441 17,497
Other.................... - - - 6,303 2,137
Real estate loans...... 3,693,542 3,133,774 2,888,749 3,237,504 3,129,718
NON-REAL ESTATE LOANS:
Manufactured housing..... 391 613 893 1,154 1,480
Deposit accounts......... 576 683 1,002 1,644 1,042
Commercial business loans 12,600 8,140 1,259 - -
Consumer................. 6,555 593 621 185 236
Loans receivable....... 3,713,664 3,143,803 2,892,524 3,240,487 3,132,476
LESS:
General valuation allowance 70,809 69,954 67,638 61,237 54,900
Impaired loan valuation allowance 1,792 2,596 7,634 9,775 12,350
Unrealized loan fees..... 11,779 10,706 9,031 24,311 16,757
Net loans receivable (1) 3,629,284 3,060,547 2,808,221 3,145,164 3,048,469
FHLMC AND FNMA MORTGAGE-
BACKED SECURITIES:
Secured by single family dwellings 360,210 412,469 539,079 657,342 715,286
Secured by multi-family dwellings 14,195 16,172 17,600 18,716 20,189
Mortgage-backed securities 374,405 428,641 556,679 676,058 735,475
TOTAL................ $ 4,003,689 $ 3,489,188 $ 3,364,900 $ 3,821,222 $ 3,783,944
(1) Includes loans held for sale.
32
ASSET QUALITY
Asset Quality Ratios
The following table sets forth certain asset quality ratios of the Bank
for the periods indicated:
December 31,
2000 1999 1998 1997 1996
Non-performing Loans to Loans Receivable(1) .17% .42% .90% .91% 1.89%
Non-performing Assets to Total Assets(2) .19% .40% .84% .95% 1.77%
Loan Loss Allowances to Non-performing
Loans(3).......................... 1132.19% 509.74% 242.09% 193.38% 94.27%
General Loss Allowances to Assets
with Loss Exposure(4)............. 1.81% 2.15% 2.26% 1.86% 1.73%
General Loss Allowances to Total Assets with
Loss Exposure(5).................. 2.06% 2.41% 2.51% 2.12% 1.86%
(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
repurchase liability 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 repurchase liability
for loans sold with full or limited recourse. The Bank's assets with loss
exposure includes its loan portfolio, real estate owned, loan commitments,
and potential loan buybacks but excludes mortgage-backed securities.
(5) The Bank's general valuation allowances, repurchase liability 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.
33
NON-PERFORMING ASSETS
Non-performing assets, as defined by the Bank, include loans delinquent
over 90 days or in foreclosure, real estate acquired in settlement of loans,
and other loans less than 90 days delinquent but for which collectibility is
questionable.
The table below details the amounts of non-performing assets by type of
collateral. Also shown is the ratio of non-performing assets to total assets.
Non-Performing Assets
December 31,
2000 1999 1998 1997 1996
$ % $ % $ % $ % $ %
(Dollars In Thousands)
Real Estate Owned:
Single Family..... $ 2,507 30.21% $ 1,069 6.93% $ 3,946 12.84% $ 5,806 14.66% $ 6,840 9.32%
Multi-Family...... - .00 1,483 9.62 1,309 4.26 4,034 10.19 7,339 10.00
Commercial and Industrial - - - - - - 826 2.09 673 .92
Less: General Valuation
Allowance...... (350) (4.22) (350) (2.27) (500) (1.63) (500) (1.26) (521) (.71)
Other............. - - - - - - 52 .13 - -
Total Real Estate
Owned............ 2,157 25.99 2,202 14.28 4,755 15.47 10,218 25.81 14,331 19.53
Non-Performing Loans:
Single Family..... 5,603 67.51 9,626 62.41 12,270 39.92 16,799 42.43 25,602 34.89
Multi-Family...... 662 7.98 3,995 25.90 13,005 42.31 15,785 39.86 44,754 60.98
Commercial and Industrial - - 225 1.46 4,040 13.14 1,533 3.87 2,223 3.03
Other............. - - - - - - - - - -
Less Valuation
Allowances....... (123) (1.48) (625) (4.05) (3,332) (10.84) (4,738) (11.97) (13,522) (18.43)
Total Non-Performing
Loans............ 6,142 74.01 13,221 85.72 25,983 84.53 29,379 74.19 59,057 80.47
Total............. $ 8,299 100.00% $15,423 100.00% $30,738 100.00% $39,597 100.00% $ 73,388 100.00%
Ratio of Non-Performing
Assets To Total Assets: .19% .40% .84% .95% 1.77%
34
The decrease in non-performing loans for the last several years is due
to reductions in delinquent loans and non-performing loans due to continued
strength in the Southern California real estate markets.
Single family non-performing loans are primarily due to factors such as
layoffs and decreased incomes. Multi-family and commercial non-performing
loansare attributable primarily to factors such as declines in occupancy rates
and decreased real estate values. The Bank actively monitors the status of
all non-performing loans.
Impaired loans totaled $8.8 million, $11.4 million and $17.5 million,
net of related allowances of $1.8 million, $2.6 million and $7.6 million as
of December 31, 2000, 1999 and 1998, respectively. See "Business - Risk
Elements" for a further discussion of impaired loans.
The Bank's modified loans result primarily from temporary
modifications of principal and interest payments. Under these arrangements,
loan terms are typically reduced to no less than a required monthly interest
payment. Any loss of revenues under the modified terms would be immaterial
to the Bank. If the borrower is unable to return to scheduled principal and
interest payments at the end of the modification period, foreclosure
procedures are initiated, or, in certain circumstances, the modification
period is extended. As of December 31, 2000, the Bank had modified loans
totaling $9.6 million, net of loan loss allowances of $1.9 million. This
compares with $7.4 million and $11.0 million, net of allowances, as of
December 31, 1999 and December 31, 1998, respectively. Modified loans
included as impaired loans totaled $8.8 million, $6.5 million and $6.0
million, net of valuation allowances, as of December 31, 2000, 1999 and
1998, respectively. No modified loans were 90 days or more delinquent as of
December 31, 2000, 1999 or 1998.
Allowances for Loan Losses
For an analysis of the changes in the loan loss allowances, see
"Business - Risk Elements." At December 31, 2000, the general valuation
allowance was $70.8 million or 1.81% of the Bank's loans with loss exposure.
This compares to 2.15% at the end of 1999 and 2.26% at the end of 1998. In
addition to the general valuation allowance and the allowance for impaired
loans mentioned above, the Bank also maintains a repurchase liability for
loans sold with recourse. This repurchase liability amounted to 8.75%, 7.18%
and 6.18% of loans sold with recourse at December 31, 2000, 1999 and 1998,
respectively. Management considers the current level of loss allowances
adequate to cover the Bank's loss exposure at this time. However, there can
be no assurance that future additions to loan loss allowances will not be
required.
35
CAPITAL RESOURCES AND LIQUIDITY
Liquidity Requirements
Federal regulations currently require a savings institution to maintain
a monthly average daily balance of liquid assets (including cash, certain
time deposits, bankers' acceptances and specified United States government,
state or federal agency obligations) equal to at least 4% of: (i) the average
daily balance of its net withdrawable accounts and short-term borrowings
during the preceding calendar quarter or (ii) the ending balance of its net
withdrawable accounts as of the end of the preceding calendar quarter. The
liquidity requirement may be changed from time-to-time by the OTS to any
amount within the range of 4% to 10% of such accounts and borrowings
depending upon economic conditions and the deposit flows of member
institutions. Effective December 1, 1997, the OTS reduced this liquidity
requirement to 4% from 5%. The OTS also gave institutions the option of
using a quarterly average calculation or an end of quarter calculation of the
liquidity base and removed the requirement of maintaining a monthly average
balance of short-term liquid assets equal to at least 1% of the average daily
balance of its net withdrawable accounts and short term borrowings. Monetary
penalties may be imposed for failure to meet these liquidity ratio
requirements. The Bank's liquidity ratio for the quarter ended December 31,
2000 was 4.37%, which exceeded the applicable requirements.
External Sources of Funds
External sources of funds include savings deposits, loan sales,
advances from the FHLBSF and reverse repurchase agreements ("reverse
repos"). For purposes of funding asset growth, the source or sources of
funds with the lowest total cost for the desired term are generally selected.
The incremental source of funds used most often during 2000 and 1999 was
advances from the FHLBSF.
Deposits obtained from national brokerage firms ("brokered deposits")
are considered a source of funds similar to a borrowing. In evaluating
brokered deposits as a source of funds, the cost of these deposits, including
commission fees, is compared to other funding sources. Brokered deposits were
$381.2 million at December 31, 2000. This compares to $445.9 million at
December 31, 1999 and $494.2 million at December 31, 1998.
Deposits at retail savings offices were $1.7 billion as of December 31,
2000 compared to $1.6 billion at December 1999 and $1.5 billion at December
31, 1998. The retail deposits have increased only slightly over the last
three years due to the availability of alternative investments paying higher
returns to customers and intense competition for deposits by other financial
institutions.
The Bank also solicits deposits through telemarketing efforts.
Telemarketing deposits are obtained by the Bank's employees via telephone,
from depositors outside of the Bank's normal service areas. Telemarketing
deposits decreased by 24% to $49.1 million at the end of 2000. This compares
with $64.5 million at the end of 1999 and $115.6 million at the end of 1998.
The level of telemarketing deposits varies based on the activity of
investors, who are typically professional money managers. The availability of
telemarketing deposits also varies based on the investors' perception of the
Ban's creditworthiness.
Reverse repurchase agreements are short term borrowings secured by
mortgage-backed securities. These borrowings decreased 19% to $294.1 million
at the end of 2000 from $363.6 million at the end of 1999 and $471.2 million
at the end of 1998. Borrowings under reverse repurchase agreements have
decreased over the last three years due to prepayments of the underlying
collateral. The Bank has not securitized any mortgage loans for use in
collateralized borrowings for several years.
FHLB advances increased to $1.6 billion at the end of 2000 from $1.2
billion at the end of 1999 and $714 million at the end of 1998. FHLB
advances increased during 2000 and 1999 because these were often the lowest
cost source funds available to the Bank and this funding source was used most
often to fund new loan growth.
Loan sales were $9.5 million in 2000. This compares to $133.0 million
during 1999 and $379.6 million during 1998. Loan sales decreased
substantially in 2000 and 1999 due to increased interest rates on fixed rate
mortgages during the second half of 1999 and during 2000, which resulted in a
decrease in demand for 15-year and 30-year fixed rate loans, which are only
originated by the Bank for sale.
36
Internal Sources of Funds
Internal sources of funds include scheduled loan principal payments,
loan payoffs, and positive cash flows from operations. Principal payments
were $560.5 million in 2000 compared to $670.5 million in 1999 and $658.0
million in 1998. Principal payments include both amortization and
prepayments and are a function of real estate activity and the general level
of interest rates. Prepayment activity was very high in 1999 due to
refinancing activity into fixed rate loans, which were available to borrowers
at favorable interest rates for the first half of 1999. The decrease in
prepayments during 2000 compared to 1999 is due to higher interest rates on
fixed rate loans that decreased refinancing activity.
Capital Requirements
Current OTS regulatory capital standards require that the Bank maintain
tangible capital of at least 1.5% of total assets, core capital of 4.0% of
total assets, and risk-based capital of 8.0% of total assets, risk-weighted.
Among other things, failure to comply with these capital standards will
result in restrictions on asset growth and necessitate the preparation of a
capital plan, subject to regulatory approval. Generally, any institution with
a risk-based capital ratio in excess of 10% and a core capital ratio greater
than 5% is considered well capitalized for regulatory purposes. Institutions
who maintain this capital level can take in brokered deposits at their
discretion, and if they achieve a sufficient ranking on their regulatory
examination, may be assessed a lower deposit insurance rate.
Management presently intends to maintain its capital position at levels
above those required by regulators to ensure operating flexibility and growth
capacity for the Bank. The Bank's capital position is actively monitored by
management. The Bank met the regulatory capital standards to be deemed
"well-capitalized" for purposes of the various regulatory measures of capital
including the prompt corrective action regulations.
To be considered "well capitalized" for purposes of the prompt
corrective action requirements the Bank must maintain the capital ratios as
set forth in the table below:
December 31, 2000
Amount %
(Dollars In Thousands)
Core capital requirement......... $218,236 5.00%
Bank's core capital.............. 254,974 5.84
Excess core capital............ $ 36,738 0.84%
Tier 1 risk-based capital requirement $151,091 6.00%
Bank's tier 1 risk-based capital. 254,974 10.13
Excess tier 1 risk-based capital $103,883 4.13%
Risk-based capital requirement... $251,818 10.00%
Bank's risk-based capital........ 286,937 11.39
Excess risk-based capital...... $ 35,119 1.39%
37
ASSET-LIABILITY MANAGEMENT
The Bank's primary objective in managing interest rate risk is to
minimize the adverse impact of changes in interest rates on the Bank's net
interest income and capital, while, at the same time, adjusting the Bank's
asset-liability mix to achieve the most favorable impact on earnings.
The Bank's asset-liability management policy is designed to improve the
balance between the maturities and repricings of interest-earning assets and
interest-bearing liabilities in order to better insulate net earnings from
interest rate fluctuations. Under this program, the Bank emphasizes the
funding of monthly adjustable mortgages with short term savings and
borrowings and matching the maturities of these assets and liabilities. The
Bank also match funds a limited amount of fixed rate loans with initial fixed
interest periods ranging from 3 to 10 years.
The majority of the Bank's assets are monthly adjustable rate mortgages
with interest rates that fluctuate based on changes in the FHLBSF Eleventh
District Cost of Funds Index ("Index"). These mortgages constitute over 85%
of the loan portfolio at the end of 2000. Comparisons over the last several
years show that a change in the Bank's cost of funds generally correlates
with changes in the Index. The Bank does not use any futures, options or
swaps in its asset-liability strategy.
Assets and liabilities that are subject to repricing are considered
rate sensitive. The mis-match in the repricing of rate sensitive assets and
liabilities is referred to as a company's "GAP." The GAP is positive if
rate-sensitive assets exceed rate-sensitive liabilities. Generally, a
positive GAP benefits a company during periods of increasing interest rates.
The reverse is true during periods of decreasing interest rates. However,
because the Index lags changes in market interest rates by three months while
the Bank's short-term savings and borrowing costs adjust immediately, the
Bank's net interest income initially decreases during periods of rising
interest rates and increases during periods of declining interest rates.
In order to minimize the impact of rate fluctuations on earnings,
management's goal is to keep the one-year GAP at less than 20% of total
assets (positive or negative). At December 31, 2000, the Company's one-year
GAP was $515.3 million or 11.8% of total assets. This compares with positive
GAP ratios of 2.81% and 13.0% of total assets at December 31, 1999 and
December 31, 1998, respectively.
Another measure of interest rate risk, that is required to be performed
by OTS-regulated institutions, is an analysis specified by OTS Thrift
Bulletin TB-13a, "Management of Interest Rate Risk, Investment Securities,
and Derivatives Activities". Under this regulation, which became effective
December 1, 1998 and replaced TB-13, institutions are required to establish
limits on the sensitivity of their net interest income and net portfolio
value to changes in interest rates. Such changes in interest rates are
defined as instantaneous and sustained movements in interest rates in 100
basis point increments. In addition, the Bank monitors the impact of the
same changes in interest rates on its interest income. The following table
shows the estimated impact of a parallel shift in interest rates on the
Bank's portfolio value at December 31, 2000 and December 31, 1999:
Percentage
Change in Interest Rates Change in Net Portfolio Value(1)
(In Basis Points) 2000 1999
+300................ (8)% (15)%
+200................ (4)% (10)%
+100................ (2)% (6)%
-- 100................ (2)% 2%
-- 200................ (4)% 5%
-- 300................ (2)% 13%
(1)The percentage change represents the projected change in the net
portfolio value of the Bank in a stable interest rate environment
versus the net portfolio value in the various rate scenarios. The OTS
defines net portfolio value as the present value of expected cash flows
from existing assets minus the present value of expected cash flows
from existing liabilities.
The percentage change in net portfolio value is affected by many
different factors. While the Bank's exposure to interest rate risk has
not changed significantly since 1999, a combination of factors resulted in
net portfolio values as of December 31, 2000 that were lower than those as of
December 31, 1999. The mix of funding sources used to fund the Bank's asset
growth during 2000 was different from that used during 1999. Additionally, as
of December 31, 1999, certain loans within the Bank's loan portfolio had
reached lifetime floors in the decreasing interest rate scenarios. However,
due to higher interest rates, no floors were reached in the December 31, 2000
calculations. As a result, lower net portfolio values were calculated for
December 31, 2000 compared to December 31, 2000.
38
The following chart shows the interest sensitivity of the Company's
assets and liabilities by repricing period at December 31, 2000 and the
consolidated GAP position as a percentage of total assets at that time:
INTEREST-SENSITIVITY GAP
Balances Balances Balances Balances
Repricing Repricing Repricing Repricing
Total Within Within Within After
Balance 0-3 Months 4-12 Months 1-5 Years 5 Years
(Dollars In Thousands)
Interest-Earning Assets:
FHLB interest bearing deposits $ 15,245 $ 15,245 $ - $ - $ -
Investment Securities...... 169,537 47,323 41,135 81,079 -
Mortgage-backed Securities. 374,405 372,755 137 897 616
Loans Receivable........... 3,629,284 3,200,656 27,917 296,410 104,301
Total Interest-Earning
Assets................ $4,188,471 $3,635,979 $ 69,189 $ 378,386 $ 104,917
Interest-Bearing Liabilities:
Demand Accounts........... $ 758,162 $ 758,162 $ - $ - $ -
Fixed Rate Term Certificate 1,230,826 464,787 715,862 49,362 815
Borrowings:
FHLB Advances........... 1,579,000 285,000 672,000 557,000 65,000
Reverse Repurchase
Agreements....... 294,110 118,115 175,995 - -
Other Borrowings........ - - - - -
Total Interest-Bearing
Liabilities....... $3,862,098 $1,626,064 $ 1,563,857 $ 606,362 $ 65,815
Interest-Sensitivity Gap..... $ 326,373 $2,009,915 $(1,494,668) $(227,976) $ 39,102
Interest-Sensitivity Gap as a
Percentage of Total Assets. 46.04% (34.24)% (5.22)% 0.90%
Cumulative Interest-Sensitivity Gap $2,009,915 $ 515,247 $ 287,271 $ 326,373
Cumulative Interest-Sensitivity
Gap as a Percentage of Total
Assets.................... 46.04% 11.80 % 6.57 % 7.48%
39
The following table shows the fair value and contract terms of the Bank's
interest-earning assets and interest-bearing liabilities as of December 31,
2000 categorized by type and expected maturity for each of the next five
years and thereafter:
Expected Maturity Date as of December 31, (1)
There- Total Fair
2001 2002 2003 2004 2005 after Balance Value
(Dollars In Thousands)
Interest Earning Assets
Loans Receivable:
Adjustable Rate Loans:
Single family $227,327 $237,813 $221,947 $196,290 $170,288 $1,094,351 $2,148,016 $2,191,467
Average interest rate 8.15% 8.19% 8.21% 8.21% 8.21% 8.22% 8.21%
Multi-family 90,251 92,034 92,476 90,985 83,833 849,777 1,299,356 1,327,018
Average interest rate 8.18% 8.20% 8.20% 8.23% 8.21% 8.22% 8.21%
Commercial and Industrial 14,721 16,084 21,292 21,665 18,256 114,014 206,032 213,293
Average interest rate 8.59% 8.60% 8.21% 8.77% 8.78% 8.64% 8.64%
Fixed Rate Loans:
Single family 1,175 1,116 1,046 891 747 3,093 8,068 8,106
Average interest rate 8.64% 8.49% 8.39% 8.38% 8.33% 7.83% 8.21%
Multi-family 1,143 1,403 1,496 1,373 1,549 6,960 13,924 14,175
Average interest rate 9.15% 8.98% 8.93% 8.95% 8.84% 8.26% 8.60%
Commercial and Industrial 1,561 1,438 1,364 2,754 510 4,377 12,004 12,480
Average interest rate 9.28% 8.92% 8.84% 8.58% 8.93% 9.09% 8.94%
Business Loans 7,644 1,848 1,410 1,561 137 - 12,600 12,626
Average interest rate 10.89% 10.48% 10.25% 10.25% 10.25% - 10.67%
Consumer loans 6,634 652 20 22 24 170 7,522 7,599
Average interest rate 13.40% 13.33% 10.25% 10.25% 10.25% 10.25% 13.30%
Mortgage-backed
Securities:
Adjustable 49,676 43,661 38,349 33,659 29,520 181,062 375,927 372,711
Average interest rate 6.60% 6.60% 6.60% 6.60% 6.60% 6.60% 6.60%
Fixed 348 303 263 228 197 355 1,694 1,694
Average interest rate 8.56% 8.56% 8.56% 8.56% 8.56% 8.50% 8.55%
Investment Securities 75,880 47,328 20,033 21,315 20,736 - 185,292 184,782
Average interest rate 5.00% 5.53% 6.22% 6.22% 6.22% - 5.54%
Total Interest-Earning
Assets $476,360 $443,680 $399,696 $370,743 $325,797 $2,254,159 $4,270,435 $4,345,951
Interest-Bearing Liabilities
Deposits:
Checking Accounts $ 137,761 $ - $ - $ - $ - $ - $ 137,761 $ 137,761
Average interest rate 0.43% - - - - - 0.43%
Savings Accounts 620,401 - - - - - 620,401 620,401
Average interest rate 4.43% - - - - - 4.43%
Certificate Accounts 1,180,649 32,336 9,425 3,195 4,406 815 1,230,826 1,229,886
Average interest rate 6.17% 5.99% 5.77% 5.19% 5.44% 5.21% 6.16%
Borrowings:
FHLB Advances 957,000 345,000 62,000 130,000 20,000 65,000 1,579,000 1,590,817
Average interest rate 6.58% 6.37% 6.24% 5.78% 5.83% 5.87% 6.42%
Reverse repurchase
agreements 294,110 - - - - - 294,110 294,435
Average interest rate 6.65% - - - - - 6.65%
Total Interest-Earning
Liabilities $3,189,921 $377,336 $ 71,425 $133,195 $ 24,406 $ 65,815 $3,862,098 $3,873,300
(1) Expected maturities are contractual maturities adjusted for
prepayments of principal. The Bank uses certain assumptions to estimate
fair values and expected maturities. For assets, expected maturities are
based upon contractual maturity, projected repayments and prepayments of
principal. The prepayment experience used is based on the Bank's historical
experience. The Bank's average CPR (Constant Prepayment rate) is 12% for
the single family portfolio and 6% for its multi-family and commercial real
estate portfolios. The Bank used estimated deposit runoff based on
available industry information.
40
STOCK PRICES
The common stock of FirstFed Financial Corp. is traded on the New York
Stock Exchange under the trading symbol "FED." The quarterly high and low
information presented below is based on information supplied by the New York
Stock Exchange.
The Company has never declared or paid a cash dividend. The Company's
Board of Directors declared a two-for-one stock split on June 25, 1998 to
stockholders of record on July 15, 1998. The additional shares were
distributed on July 30, 1998.
The Company repurchased 821,500 shares of its common stock during 2000
and 3,298,150 shares of its common stock during 1999. As of February 14,
2001, there remain 889,016 shares eligible for repurchase.
PRICE RANGE OF COMMON STOCK
First Quarter Second Quarter Third Quarter Fourth Quarter
High Low High Low High Low High Low
2000 $16.63 $11.88 $14.56 $11.69 $23.00 $14.06 $33.13 $21.31
1999 18.00 15.56 20.00 15.31 17.81 15.00 18.50 12.81
1998 21.19 15.94 26.41 20.41 26.94 14.75 18.56 14.13
1997(1) 14.00 10.75 15.53 11.25 17.44 15.38 19.75 17.50
1996(1) 7.94 6.19 8.75 7.75 9.88 8.38 12.13 9.75
(1) All amounts have been adjusted for the stock split declared June 25,
1998.
FORWARD LOOKING STATEMENTS
The preceding Management's Discussion and Analysis of the Company's
Financial Condition and Results of Operations contain certain
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, which provides a "safe harbor" for these types
of statements. This Annual Report on form 10-K contains forward-looking
statements which reflect the current views of the Company's and the Bank's
management with regard to future events and financial performance. These
forward looking statements are subject to certain risks and uncertainties
including those identified herein which could cause actual results to differ
materially form historical results or those anticipated. Forward-looking
terminology can be identified by the use of terms such as "may", "will",
"expect", "anticipate", "estimate", "should" or "continue" or other
variations or comparable terms. Readers should not place undue reliance on
these forward-looking statements, which speak only of their date. The
Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. The following factors could cause actual results to
differ materially from historical results or those anticipated: (1) the level
of demand for adjustable rate mortgages, which is affected by external
factors such as interest rates, the strength of the California economy and
Southern California economy in particular, and demographics of the lending
areas of the Bank, (2) fluctuations between consumer interest rates and the
cost of funds; (3) federal and state regulation of lending and other
operations, and (4) competition within the Bank's market areas.
Investors should carefully consider the risks in an evaluation of the
Company and its common stock. The risks and uncertainties described herein
are not the only ones facing the Company. Additional risks and
uncertainties, including but not limited to credit, economic, competitive,
governmental and financial factors affecting the Company's operations,
markets, financial products, and services and other factors discussed in the
Company's fillings with the Securities and Exchange Commission, may also
adversely impact and impair its business. If any of these risks actually
occur, the Company's business, results of operation, cash flows or financial
condition would likely suffer. In such case, the trading price of the
Company's common stock could decline, and an investor may lose all or part of
the money paid to buy such common stock.
41
ITEM 8--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except share data)
December 31, December 31,
ASSETS 2000 1999
Cash and cash equivalents $ 77,677 $ 101,807
Investment securities, available-for-sale
(at fair value) (Note 2) 136,537 151,195
Mortgage-backed securities, available-for-sale
(at fair value) (Notes 3 and 10) 374,405 428,641
Loans receivable, held-for-sale (fair value of
$2,246 and $2,324) (Note 4) 2,246 2,303
Loans receivable, net (Notes 4 and 9) 3,627,038 3,058,244
Accrued interest and dividends receivable 28,488 21,825
Real estate (Note 5) 2,189 2,236
Office properties and equipment, net (Note 6) 10,651 11,745
Investment in Federal Home Loan Bank
(FHLB) stock, at cost (Notes 7 and 9) 80,885 71,722
Other assets (Note 1) 25,126 22,333
$4,365,242 $3,872,051
LIABILITIES
Deposits (Note 8) $2,165,047 $2,061,357
FHLB advances (Notes 7 and 9) 1,579,000 1,169,000
Securities sold under agreements to repurchase
(Note 10) 294,110 363,635
Accrued expenses and other liabilities 59,643 46,926
4,097,800 3,640,918
COMMITMENTS AND CONTINGENT LIABILITIES
(Notes 4, 6 and 13)
STOCKHOLDERS' EQUITY (Notes 12 and 13)
Common stock, par value $.01 per share;
authorized 100,000,000 shares; issued 23,299,707
and 23,269,051 shares, outstanding
17,232,217 and 18,023,061 shares 233 233
Additional paid-in capital 32,540 31,561
Retained earnings - substantially restricted 313,411 274,946
Unreleased shares to employee stock
ownership plan (841) (1,759)
Treasury stock, at cost,
6,067,490 and 5,245,990 shares (75,743) (65,568)
Accumulated other comprehensive loss,
net of taxes (2,158) (8,280)
267,442 231,133
$4,365,242 $3,872,051
See accompanying notes to consolidated financial statements.
42
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE EARNINGS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(Dollars In Thousands, Except Per Share Data)
2000 1999 1998
Interest income:
Interest on loans..................... $274,720 $216,634 $238,171
Interest on mortgage-backed securities 24,448 28,700 39,462
Interest and dividends on investments. 15,152 14,667 12,136
Total interest income ............. 314,320 260,001 289,769
Interest expense:
Interest on deposits (Note 8) ....... 100,174 87,199 97,659
Interest on borrowings (Notes 9 and 10) 106,331 73,832 88,832
Total interest expense ............ 206,505 161,031 186,491
Net interest income ................... 107,815 98,970 103,278
Provision for loan losses (Note 4) ... - - 7,200
Net interest income after provision for
loan losses.............................. 107,815 98,970 96,078
Other income:
Loan servicing and other fees ....... 2,804 4,204 4,152
Gain on sale of loans................ 64 1,221 4,061
Real estate operations, net ......... 594 3,217 1,182
Other operating income............... 4,285 4,046 4,262
Total other income ............... 7,747 12,688 13,657
Non-interest expense:
Salaries and employee benefits (Note 13) 26,444 26,664 25,811
Occupancy (Note 6) .................. 8,031 7,859 8,493
Advertising ........................ 1,417 1,864 1,959
Federal deposit insurance .......... 538 1,236 1,241
Other operating expense ............. 11,835 11,536 11,420
Total non-interest expense ....... 48,265 49,159 48,924
Earnings before income taxes and extraordinary item.. 67,297 62,499 60,811
Income taxes (Note 11) ............... 28,832 27,052 26,182
Earnings before extraordinary item .... 38,465 35,447 34,629
Extraordinary item:
Loss on early extinguishment of debt, net of
taxes............................. - (2,195) -
Net earnings........................... $ 38,465 $ 33,252 $ 34,629
Other comprehensive earnings (loss)
Unrealized gain (loss) on mortgage-backed-
securities and securities
available-for-sale, net of taxes..... 6,122 (7,577) (311)
Comprehensive earnings................. $ 44,587 $ 25,675 $ 34,318
Earnings per share (Notes 12 and 15):
Basic EPS before extraordinary item $ 2.23 $ 1.84 $ 1.63
Extraordinary item................. - (.11) -
Basic EPS after extraordinary item. $ 2.23 $ 1.73 $ 1.63
Diluted EPS before extraordinary item $ 2.20 $ 1.83 $ 1.60
Extraordinary item................. - (.12) -
Diluted EPS after extraordinary item $ 2.20 $ 1.71 $ 1.60
See accompanying notes to consolidated financial statements.
43
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(Dollars In Thousands)
Accumulated
Other
Retained Comprehensive
Earnings Unreleased Loss
(Sub- Shares to Net of
Additional stantially ESOP Taxes
Common Paid-In Restricted) (Notes 12 Treasury (Notes 3
Stock Capital (Note 12) and 13) Stock and 4) Total
Balance, December 31, 1997. $115 $29,628 $207,065 $(1,744) $(11,885) $(392) $222,787
Exercise of employee stock options 1 452 - - - - 453
Net decrease in unreleased shares
to the ESOP............... - - - 911 - - 911
Stock split in form of stock dividend
(Note 12)................ 115 (115) - - - - -
Unrealized loss on securities
available-for-sale, net of taxes - - - - - (311) (311)
Common stock repurchased
(100,800) shares......... - - - - (1,469) - (1,469)
Net earnings 1998.......... - - 34,629 - - - 34,629
Balance, December 31, 1998. 231 29,965 241,694 (833) (13,354) (703) 257,000
Exercise of employee stock options 2 1,098 - - - - 1,100
Net increase in unreleased shares
to the ESOP............... - - - (926) - - (926)
Benefit from stock option tax
adjustment................ - 498 - - - - 498
Unrealized loss on securities
available-for-sale, net of taxes - - - - - (7,577) (7,577)
Common stock repurchased
(3,298,150) shares....... - - - - (52,214) - (52,214)
Net earnings 1999.......... - - 33,252 - - - 33,252
Balance, December 31, 1999. 233 31,561 274,946 (1,759) (65,568) (8,280) 231,133
Exercise of employee stock options - 793 - - - - 793
Net decrease in unreleased shares
to the ESOP............... - 186 - 918 - - 1,104
Benefit from stock option tax
adjustment................ - - - - - - -
Unrealized gain on securities
available-for-sale, net of taxes - - - - - 6,122 6,122
Common stock repurchased
(821,500) shares......... - - - - (10,175) - (10,175)
Net earnings 2000.......... - - 38,465 - - - 38,465
Balance, December 31, 2000. $233 $32,540 $313,411 $ (841) $(75,743) $(2,158) $267,442
See accompanying notes to consolidated financial statements.
44
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(Dollars In Thousands)
2000 1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings........................ $ 38,465 $ 33,252 $ 34,629
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Net change in loans held-for-sale. 57 14,147 23,932
Depreciation and amortization..... 1,874 2,193 981
Provision for losses on loans..... - - 7,200
Provision (benefit) for losses on real estate owned - (54) 572
Valuation adjustments on real estate sold (491) (2,542) (6,591)
Amortization of fees and discounts 1,703 (597) (1,549)
Decrease in servicing asset....... 905 318 2,059
Change in deferred taxes.......... (323) (1,643) (6,988)
Decrease in tax interest accrual.. (350) (150) (881)
(Increase) decrease in interest and dividends
receivable....................... (6,663) 1,651 3,514
Increase (decrease) in interest payable 11,298 (6,819) 2,775
Amortization of goodwill.......... 1,964 452 565
Increase in other assets.......... (5,179) (2,767) (5,158)
Increase (decrease) in accrued expenses and
other liabilities................ 675 (2,074) 2,487
Total adjustments............... 5,470 2,115 22,918
Net cash and cash equivalents
provided by operating activities 43,935 35,367 57,547
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans made to customers and principal collections
on loans........................... (434,026) (149,842) 288,360
Loans repurchased under recourse arrangements (240) (1,242) (1,765)
Loans purchased..................... (14,077) (121,522) -
Proceeds from sales of real estate owned 5,290 15,980 29,150
Proceeds from maturities and principal payments
of investment securities available-for-sale 20,589 6,809 23,892
Principal reductions of mortgage-backed
securities available-for-sale...... 62,332 117,440 118,801
Purchases of investment securities
available-for-sale................. (3,547) (96,300) (39,061)
Redemption (purchase) of FHLB stock. (4,079) 4,823 -
Other............................... (1,205) (5,536) 1,104
Net cash from acquisitions.......... 32,866 - -
Net cash and cash equivalents
provided (used) by investing activities (336,097) (229,390) 420,481
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits. (64,767) (74,552) 192,262
Net increase (decrease) in short term borrowings 340,475 347,463 (706,498)
Repayment of long-term borrowings... - (50,000) -
Purchases of treasury stock......... (10,175) (52,214) (1,469)
Other............................... 2,499 (1,147) 822
Net cash and cash equivalents
provided (used) by financing activities 268,032 169,550 (514,883)
Net decrease in cash and cash
equivalents........................ (24,130) (24,473) (36,855)
Cash and cash equivalents at beginning of year 101,807 126,280 163,135
Cash and cash equivalents at end of year $ 77,677 $ 101,807 $ 126,280
See accompanying notes to consolidated financial statements.
45
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
The following is a summary of the significant accounting policies of
FirstFed Financial Corp. ("Company") and its wholly-owned subsidiary First
Federal Bank of California ("Bank").
The preparation of the Company's financial statements in conformity
with Generally Accepted Accounting Principles ("GAAP") requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date
of the financial statements and the reported operations of the Company for
the periods presented. Actual results may differ from those estimates
calculated by management.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its subsidiary, the Bank. The Bank maintains 25 full-service
savings branches in Southern California. The Bank's primary business consists
of attracting retail deposits from the general public and originating loans
secured by mortgages on residential real estate. All significant
inter-company balances and transactions have been eliminated in
consolidation. Certain items in the 1998 and 1999, consolidated financial
statements have been reclassified to conform to the 2000 presentation.
Statement of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include
cash, overnight investments and securities purchased under agreements to
resell with maturities within 90 days of the date of purchase.
Financial Instruments
GAAP requires the disclosure of the fair value of financial
instruments, whether or not recognized on the Statement of Financial
Condition, whenever it is practicable to estimate the value. A significant
portion of the Bank's assets and liabilities are financial instruments as
defined under GAAP. Fair values, estimates and assumptions are set forth in
Note 16, Fair Value of Financial Instruments.
Risks Associated with Financial Instruments
The credit risk of a financial instrument is the possibility that a
loss may result from the failure of another party to perform in accordance
with the terms of the contract. The most significant credit risk associated
with the Bank's financial instruments is concentrated in its loans
receivable. Additionally, the Bank is subject to credit risk on certain loans
sold with recourse. The Bank has established a system for monitoring the
level of credit risk in its loan portfolio and for loans sold with recourse.
The market risk of a financial instrument is the possibility that
future changes in market prices may reduce the value of a financial
instrument or increase the contractual obligations of the Bank. The Bank's
market risk is concentrated in its portfolios of loans receivable and real
estate acquired by foreclosure. When a borrower fails to meet the
contractual requirements of his or her loan agreement, the Bank is subject to
the market risk of the collateral securing the loan. Likewise, the Bank is
subject to the volatility of real estate prices with respect to real estate
acquired by foreclosure. The Bank's securities available-for-sale are traded
in active markets. The value of these securities is susceptible to the
fluctuations of the market.
46
(1) Summary of Significant Accounting Policies (continued)
Interest Rate Risk
Financial instruments are subject to interest rate risk to the extent
that they report on a frequency, degree or basis that varies from market
pricing. The Bank is subject to interest rate risk to the degree that its
interest-earning assets reprice on a different frequency or schedule than its
interest-bearing liabilities. A majority of the Bank's loans receivable and
mortgage-backed securities reprice based on the Federal Home Loan Bank
Eleventh District Cost of Funds Index (the "Index"). The repricing of the
Index tends to lag market interest rates. The Bank closely monitors the
pricing sensitivity of its financial instruments.
Concentrations of Credit Risk
Concentrations of credit risk would exist for groups of borrowers when
they have similar economic characteristics that would cause their ability to
meet contractual obligations to be similarly affected by changes in economic
or other conditions. The ability of the Bank's borrowers to repay their
commitments is contingent on several factors, including the economic
condition in the borrowers' geographic area and the individual financial
condition of the borrowers. The Company generally requires collateral or
other security to support borrower commitments on loans receivable. This
collateral may take several forms. Generally, on the Bank's mortgage loans,
the collateral will be the underlying mortgaged property. The Bank's lending
activities are primarily concentrated in Southern California. The Bank does
not have significant exposure to any individual customer.
Securities Purchased under Agreements to Resell
The Bank invests in securities purchased under agreements to resell
("repurchase agreements"). The Bank obtains collateral for these agreements,
which normally consists of U.S. treasury securities or mortgage-backed
securities guaranteed by agencies of the U.S. government. The collateral is
held in the custody of a trustee, who is not a party to the transaction. The
duration of these agreements is typically 1 to 30 days. The Bank deals only
with nationally recognized investment banking firms as the counterparties to
these agreements. The Bank's investment in repurchase agreements consisted
solely of securities purchased under agreements to resell identical
securities.
Investments and Mortgage-Backed Securities
The Bank's investment in securities principally consists of U.S.
Treasury and agency securities and mortgage-backed securities. The Bank
creates mortgage-backed securities when it exchanges pools of its own loans
for mortgage-backed securities.
The Bank classifies its investment in securities as "held-to-maturity"
securities, "trading" securities and "available-for-sale" securities as
applicable.
The Bank classifies all of its investments and mortgage-backed
securities as "available-for-sale" based upon a determination that such
securities might be sold at a future date or that there may be foreseeable
circumstances under which the Bank would sell such securities.
Securities designated as available-for-sale are recorded at fair value.
Changes in the fair value of debt securities available-for-sale are included
in stockholders' equity as unrealized gains (losses) on securities
available-for-sale, net of taxes. Unrealized losses on available-for-sale
securities, reflecting a decline in value judged to be other than temporary,
are charged to earnings in the Consolidated Statements of Operations and
Comprehensive Earnings. Unrealized gains or losses on available-for-sale
securities are computed on a specific identification basis.
47
(1) Summary of Significant Accounting Policies (continued)
The Bank classifies all of its investments and mortgage-backed
securities as "available-for-sale" based upon a determination that such
securities might be sold at a future date or that there may be foreseeable
circumstances under which the Bank would sell such securities.
Securities designated as available-for-sale are recorded at fair value.
Changes in the fair value of debt securities available-for-sale are included
in stockholders' equity as unrealized gains (losses) on securities
available-for-sale, net of taxes. Unrealized losses on available-for-sale
securities, reflecting a decline in value judged to be other than temporary,
are charged to earnings in the Consolidated Statements of Operations and
Comprehensive Earnings. Unrealized gains or losses on available-for-sale
securities are computed on a specific identification basis.
The Bank did not hold any trading securities at December 31, 2000 or
1999.
Loans Held-for-Investment
The Bank's loan portfolio is primarily comprised of single family
residential loans (one to four units), and multi-family loans (five or more
units). Loans are generally recorded at the contractual amounts owed by
borrowers, less unearned interest and allowances for loan losses.
Loans Held-for-Sale
The Bank identifies loans that foreseeably may be sold prior to
maturity and classifies them as held-for-sale. These loans are carried at the
lower of amortized cost or fair value on an aggregate basis by type of asset.
For loans, fair value is calculated on an aggregate basis as determined by
current market investor yield requirements.
Impaired Loans
The Bank evaluates loans for impairment whenever the collectibility of
contractual principal and interest payments is questionable. A loan is
impaired when, based on current circumstances and events, a creditor will be
unable to collect all amounts contractually due under a loan agreement.
Large groups of smaller balance homogenous loans that are collectively
evaluated for impairment are not subject to the evaluation of impairment on
an individual basis.
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.
Non-Accrual Loans
The Bank establishes allowances for delinquent interest equal to the
amount of accrued interest on all loans 90 days or more past due or in
foreclosure. This practice effectively places such loans on non-accrual
status for financial reporting purposes. Loans are returned to accrual status
only when the ultimate collectibility of current interest is no longer in
doubt.
48
1) Summary of Significant Accounting Policies (continued)
Allowances for Loan Losses
The Bank maintains a general valuation allowance for loan losses for
the inherent risk in the loan portfolio which has yet to be specifically
identified. The allowance is not allocated to any specific loan. The
allowance is maintained at an amount that management believes adequate to
cover estimable and probable loan losses based on a risk analysis of the
current portfolio. Additionally, management performs periodic reviews of the
loan portfolio to identify potential problems and to establish impairment
allowances if losses are expected to be incurred. Additions to the allowances
are charged to earnings. The regulatory agencies periodically review the
allowances for loan losses and may require the Bank to adjust the allowances
based on information available to them at the time of their examination.
General allowances are provided for all loans, regardless of any
specific allowances provided. The determination of the Bank's general
allowance for loan losses is based on estimates that are affected by
changes in the regional or national economy and market conditions. The
Bank's management believes, based on economic and market conditions, that
the general allowance for loan losses is adequate as of December 31, 2000
and 1999. Should there be an economic or market downturn or if market
interest rates increase significantly, the Bank could experience a material
increase in the level of loan defaults and charge-offs.
Loan Origination Fees and Costs
Loan origination fees and certain direct loan origination costs are
deferred and recognized over the lives of the related loans as an
adjustment of loan yields using the interest method. When a loan is repaid
or sold, any unamortized net deferred fee balance is credited to income.
Gain or Loss on Sale of Loans
The Bank primarily sells its mortgage loans on a servicing released
basis and recognizes cash gains or losses immediately in its Statement of
Operations and Comprehensive Earnings. The Bank has previously sold mortgage
loans and loan participation's on a servicing retained basis with yield rates
to the buyer based upon the current market rates which may differ from the
contractual rate of the loans sold. Under GAAP, servicing assets or
liabilities and other retained interests are required to be recorded as an
allocation of the carrying amount of the loans sold based on the estimated
relative fair values of the loans sold and any retained interests, less
liabilities incurred. Servicing assets are evaluated for impairment based on
the asset's fair value. The Bank estimates fair values by discounting
servicing assets cash flows using discount and prepayment rates that it
believes market participants would use. The Bank had no such activity in
2000, 1999 and 1998.
Servicing assets arising from the sale of loans are included in other
assets and were $1,462,000 and $2,367,000 at December 31, 2000 and 1999,
respectively. No additional servicing assets were recorded in 2000, 1999 and
1998.
Goodwill
Loans acquired and deposits assumed in connection with branch
acquisitions are accounted for under the purchase method of accounting.
Assets and liabilities are recorded at their fair values as of the date of
the acquisition and the excess cost over fair values of the assets and
liabilities is classified as goodwill and is being amortized over a period of
7 years on a straight-line basis. At December 31, 2000, goodwill totaled
$9.3 million and had a weighted average remaining life of 6 years.
49
(1) Summary of Significant Accounting Policies (continued)
Real Estate
The Bank's real estate acquired in settlement of loans ("REO") consists
of property acquired through foreclosure proceedings or by deed in lieu of
foreclosure. Generally, all loans greater than 60 days delinquent are placed
into foreclosure and, if necessary, a valuation allowance is established.
The Bank acquires title to the property in most foreclosure actions that are
not reinstated by the borrower. Once real estate is acquired in settlement
of a loan, the property is recorded as REO at fair market value, less
estimated selling costs. The REO balance is adjusted for any subsequent
declines in fair value through a valuation allowance.
The recognition of gain on the sale of real estate is dependent on a
number of factors relating to the nature of the property, terms of sale, and
any future involvement of the Bank or its subsidiaries in the property sold.
If a real estate transaction does not meet certain down payment, cash flow
and loan amortization requirements, gain is deferred and recognized under an
alternative method.
Depreciation and Amortization
Depreciation of office properties and equipment is provided by use of
the straight-line method over the estimated useful lives of the related
assets. Amortization of leasehold improvements is provided by use of the
straight-line method over the lesser of the life of the improvement or the
term of the lease.
Securities Sold Under Agreements to Repurchase
The Company enters into sales of securities under agreements to
repurchase ("reverse repurchase agreements"). Reverse repurchase agreements
are treated as financing arrangements and, accordingly, the obligations to
repurchase the securities sold are reflected as liabilities in the
consolidated financial statements. The mortgage-backed securities
collateralizing reverse repurchase agreements are delivered to several major
brokerage firms who arranged the transactions. These securities are
reflected as assets in the Company's consolidated financial statements. The
brokerage firms may loan such securities to other parties in the normal
course of their operations and agree to return the identical securities to
the Company at the maturity of the agreements.
Income Taxes
The Company files a consolidated federal income tax return and a
combined California franchise tax report with the Bank and its subsidiaries.
The Bank accounts for income taxes using the asset and liability method. In
the asset and liability method, deferred tax assets and liabilities are
established as of the reporting date for the realizable cumulative temporary
differences between the financial reporting and tax return bases of the
Bank's assets and liabilities. The tax rates applied are the statutory rates
expected to be in effect when the temporary differences are realized or
settled.
Cash Flows
Cash and cash equivalents include short-term, highly liquid investments
that generally have an original maturity date of three months or less.
Non-cash investing transactions during 2000 include the acquisition of
$125,171,000 of loans and the assumption of $168,457,000 in deposits and the
recognition of $10,420,000 of intangible assets. A net total of $32,866,000
in cash was received related to the acquisition of certain branches.
50
(1) Summary of Significant Accounting Policies (continued)
Earnings Per Share
The Company reports both basic and diluted net earnings per share.
Basic net earnings per share is determined by dividing net earnings by the
average number of shares of common stock outstanding, while diluted net
earnings per share is determined by dividing net earnings by the average
number of shares of common stock outstanding adjusted for the dilutive effect
of common stock equivalents. Earnings per share have been adjusted to
reflect a two-for-one split during 1998.
Comprehensive Earnings
GAAP establishes standards for reporting and presentation of
comprehensive income and its components in a full set of financial
statements. Comprehensive earnings consists of net earnings and net
unrealized gains (losses) on securities available-for-sale and is presented
in the consolidated statements of operations and comprehensive earnings and
consolidated statements of stockholders' equity. The Statement requires only
additional disclosures in the consolidated statements; it does not affect the
Company's financial position or results of operations.
Segment Information and Disclosures
GAAP establishes standards to report information about operating
segments in annual financial statements and requires reporting of selected
information about operating segments in interim reports to stockholders. It
also establishes standards for related disclosures about products and
services, geographic areas and major customers. The Company manages its
business as one segment.
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. As amended by SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities-Deferral of the Effective Date
of FASB Statement No. 133." SFAS No. 133 is effective for all fiscal quarter
of all fiscal years beginning after June 15, 2000. The implementation of this
Statement has not had a material impact on the Company's financial position
or results of operations.
SFAS No. 140, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities," establishes accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities. Those standards are based on consistent
application of a financial-components approach that focuses on control. SFAS
No. 140 requires a debtor to (a) reclassify financial assets pledged as
collateral and report those assets in its statement of financial condition
separately from other assets no so encumbered if the secured party has the
right by contract or custom to sell or repledge the collateral and (b)
disclose assets pledged as collateral that have not been reclassified and
separately reported in the statement of financial condition. This statement
is effective for recognition and reclassification of collateral and for
disclosures relating to securitization transactions and collateral for fiscal
years ending after December 15, 2000. Disclosures about securitizations and
collateral accepted need not be reported for periods on or before December
15, 2000, for which financial statements are presented for comparative
purposes. On December 31, 2000, the Company implemented this statement
without a material impact on the Company.
51
2) Investment Securities
The amounts advanced under agreements to resell securities (repurchase
agreements) represent short-term investments. During the agreement period the
securities are maintained by the dealer under a written custodial agreement
that explicitly recognizes the Bank's interest in the securities. The Bank
had $33,000,000 and $67,000,000 in agreements to resell securities at
December 31, 2000 and 1999, respectively, which are classified as cash and
cash equivalents in the accompanying Consolidated Statements of Financial
Condition. Securities purchased under agreements to resell averaged
$5,333,000 and $76,705,000 during 2000 and 1999, and the maximum amounts
outstanding at any month end during 2000 and 1999 were $33,000,000 and
$252,000,000 respectively.
The Bank also had overnight deposits on hand with the Federal Home Loan
Bank of San Francisco which totaled $15,245,000 and $8,938,000, respectively,
as of December 31, 2000 and December 31, 1999.
Investment securities, available-for-sale, are recorded at fair value
and summarized below for the periods indicated:
2000
Gross Gross
Historical Unrealized Unrealized Fair
Cost Gains Losses Value
(Dollars In Thousands)
United States Government
and federal agency
obligations........... $ 38,485 $ 3 $ (424) $ 38,064
Collateralized
Mortgage Obligations.. 98,562 254 (343) 98,473
$137,047 $257 $ (767) $136,537
1999
Gross Gross
Historical Unrealized Unrealized Fair
Cost Gains Losses Value
(Dollars In Thousands)
United States Government
and federal agency
obligations........... $ 38,467 $ 1 $ (647) $ 37,821
Collateralized
Mortgage Obligations.. 115,704 - (2,330) 113,374
$154,171 $ 1 $(2,977) $151,195
Related maturity data for U.S. government and agency securities,
available-for-sale, is summarized below for the period indicated:
2000
Gross Gross
Historical Unrealized Unrealized Fair
Cost Gains Losses Value
(Dollars In Thousands)
Maturing within 1 year.. $ 10,000 $ - $ (16) $ 9,984
Maturing 1 to 5 years... 28,485 3 (408) 28,080
$ 38,485 $ 3 $ (424) $ 38,064
Collateralized Mortgage Obligations as of December 31, 2000 all have
expected maturities within five years. There were no sales of investment
securities during 2000, 1999 or 1998. Accrued interest on investments was
$1,257,000 and $1,215,000 at December 31, 2000 and 1999, respectively.
52
(3) Mortgage-backed Securities
Mortgage-backed securities, available-for-sale, are due through the year
2035 and are summarized below for the periods indicated:
2000
Gross Gross
Historical Unrealized Unrealized Fair
Cost Gains Losses Value
(Dollars In Thousands)
FNMA........... $ 14,234 $ 17 $ (99) $ 14,152
FHLMC.......... 363,386 21 (3,154) 360,253
Total.......... $ 377,620 $ 38 $ (3,253) $ 374,405
1999
Gross Gross
Historical Unrealized Unrealized Fair
Cost Gains Losses Value
(Dollars In Thousands)
FNMA........... $ 16,601 $ 10 $ (390) $ 16,221
FHLMC.......... 423,351 21 (10,952) 412,420
Total.......... $ 439,952 $ 31 $(11,342) $ 428,641
There were no mortgage-backed securities created with loans originated
by the Bank in 2000, 1999 or 1998. There were no sales of mortgage-backed
securities during 2000, 1999 or 1998.
Accrued interest receivable related to mortgage-backed securities
outstanding at December 31, 2000 and 1999 totaled $4,945,000 and $4,135,000
respectively.
53
(4) Loans Receivable
Loans receivable are summarized as follows:
2000 1999
(Dollars In Thousands)
Real estate loans:
First trust deed residential loans:
One to four units.......... $2,158,940 $1,813,783
Five or more units......... 1,308,440 1,123,308
Residential loans.......... 3,467,380 2,937,091
Other real estate loans:
Commercial and industrial.. 217,619 183,194
Second trust deeds......... 8,543 13,489
Real estate loans............. 3,693,542 3,133,774
Non-real estate loans:
Manufactured housing......... 391 613
Deposit accounts............. 576 683
Business banking loans....... 12,600 8,140
Consumer..................... 6,555 593
Loans receivable......... 3,713,664 3,143,803
Less:
General loan valuation allowance 70,809 69,954
Valuation allowances for impaired loans 1,792 2,596
Unearned loan fees........... 11,779 10,706
Subtotal................. 3,629,284 3,060,547
Less:
Loans held-for-sale.......... 2,246 2,303
Loans receivable, net.... $3,627,038 $3,058,244
Loans serviced for others totaled $322,315,000, $377,661,000 and
$424,908,000 at December 31, 2000, 1999 and 1998, respectively.
The Bank had outstanding commitments to fund $150,276,000 in real
estate loans at December 31,2000. Of this total, $140,007,000 had variable
interest rates and $10,269,000 had fixed interest rates. The Bank had
outstanding commitments to sell real estate loans of $2,091,000 at December
31, 2000.
Accrued interest receivable related to loans outstanding at December
31, 2000 and 1999 totaled $21,619,000 and $16,220,000, respectively.
Loans delinquent greater than 90 days or in foreclosure were $6,265,000
and $13,846,000 at December 31, 2000 and 1999, respectively, and the related
allowances for delinquent interest were $511,000 and $720,000 respectively.
Loans originated upon the sale of real estate totaled $645,000,
$4,792,000 and $9,966,000 during 2000, 1999 and 1998, respectively.
See Note 9 for loans that were pledged as security for borrowings.
54
4) Loans Receivable (continued)
The following is a summary of the activity in general loan valuation
allowances and impaired valuation allowances for the periods indicated:
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................. 6,560 640 7,200
Charge-offs............................... (3,208) (2,781) (5,989)
Recoveries................................ 3,049 - 3,049
Balance at December 31, 1998.............. 67,638 7,634 75,272
Charge-off................................ (1,362) (5,038) (6,400)
Recoveries................................ 3,678 - 3,678
Balance at December 31, 1999.............. 69,954 2,596 72,550
Charge-offs............................... (1,443) (804) (2,247)
Recoveries................................ 2,298 - 2,298
Balance at December 31, 2000.............. $70,809 $ 1,792 $72,601
The Bank has loss exposure on certain loans sold with recourse. The
dollar amount of loans sold with recourse totaled $146,537,000 and
$178,723,000 at December 31, 2000 and 1999, respectively. The maximum
potential recourse liability totaled $32,177,000 and $33,674,000 at December
31, 2000 and December 31, 1999, respectively.
The Bank maintains a repurchase liability for loans sold with
recourse. This liability is included in accrued expenses and other
liabilities in the Consolidated Statements of Financial Condition. The
following is a summary of the activity in the repurchase liability for the
periods indicated (dollars in thousands):
Balance at December 31, 1997.............. $13,029
Charge-offs, net of recoveries. (483)
Balance at December 31, 1998.............. 12,546
Recoveries, net of charge-offs............ 278
Balance at December 31, 1999.............. 12,824
Recoveries, net of charge-offs............ -
Balance at December 31, 2000.............. $12,824
The following is a summary of impaired loans, net of valuation
allowances for impairment, for the periods indicated:
2000 1999
(Dollars In Thousands)
Non-accrual loans......................... $ - $ 2,079
Modified loans............................ 8,770 6,534
Other impaired loans..................... - 2,820
$ 8,770 $11,433
55
4) Loans Receivable (continued)
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 included
in the Bank's impairment allowances. At December 31, 2000, the total
recorded amount of loans for which impairment had been recognized in
accordance with SFAS No. 114 was $8,770,000 (after deducting $1,792,000 of
impairment allowances attributable to such loans). The Bank's impaired
non-accrual loans consist of single family loans with an outstanding
principal amount greater than or equal to $500,000 and multi-family loans
with an outstanding principal amount greater than or equal to $750,000.
As of December 2000 and December 1999, impaired loans totaling
$5,075,000 and $3,944,000, respectively, had no valuation allowances
established. All impaired loans as of December 31, 1998 had valuation
allowances established.
The average recorded investment in impaired loans during the years
ended December 31, 2000, 1999 and 1998 was $8,784,000, $11,448,000 and
$17,546,000 respectively. The amount of interest income recognized for
impaired loans during the years ended December 31, 2000, 1999 and 1998 was
$706,000, $1,045,000, and $1,289,000 respectively, under the cash basis
method of accounting. Interest income recognized under the accrual basis
method of accounting for the years ended December 31, 2000, 1999 and 1998
totaled $712,000, $997,000 and $1,287,000, respectively. There were no
commitments to lend additional funds to borrowers whose loan terms have been
modified.
(5) Real Estate
Real estate consists of the following:
2000 1999
(Dollars In Thousands)
Real estate acquired by
(or deed in lieu of) foreclosure ("REO").. $ 2,507 $ 2,552
Valuation allowance....................... (350) (350)
2,157 2,202
Real estate held-for-investment........... 32 34
Real estate, net........................ $ 2,189 $ 2,236
Listed below is a summary of the activity in the general valuation
allowance for real estate owned for the periods indicated (dollars in
thousands):
Balance at December 31, 1997.............. $ 500
Provision for losses on REO............... 572
Charge-offs............................... (572)
Balance at December 31, 1998.............. 500
Provision for losses on REO............... (54)
Charge-offs............................... (96)
Balance at December 31, 1999.............. 350
Provision for losses on REO............... -
Charge-offs............................... -
Balance at December 31, 2000.............. $ 350
56
5) Real Estate (continued)
The following table summarizes real estate operations, net:
For the Years Ended
December 31,
2000 1999 1998
(Dollars In Thousands)
Net income (loss) from operations:
Gain on sales of REO............... $ 949 $ 3,852 $ 3,320
Other REO operations............... (355) (635) (2,138)
Real estate operations, net .... $ 594 $ 3,217 $ 1,182
The Bank acquired $5,050,000, $10,831,000 and $17,096,000 of real
estate in settlement of loans during 2000, 1999 and 1998, respectively.
(6) Office Properties, Equipment and Lease Commitments
Office properties and equipment, at cost, less accumulated depreciation
and amortization, are summarized as follows:
2000 1999
(Dollars In Thousands)
Land...................................... $ 3,061 $ 3,061
Office buildings.......................... 4,603 4,592
Furniture, fixtures and equipment......... 15,129 15,089
Leasehold improvements.................... 10,076 9,495
Other..................................... 56 56
32,925 32,293
Less accumulated depreciation and amortization 22,274 20,548
$10,651 $ 11,745
The Bank is obligated under non-cancelable operating leases for periods
ranging from five to thirty years. The leases are for certain of the Bank's
office facilities. Approximately half of the leases for office facilities
contain five and ten year renewal options. Minimum rental commitments at
December 31, 2000 under all non-cancelable leases are as follows (dollars in
thousands):
2001................................ $ 4,057
2002................................ 3,956
2003................................ 3,760
2004................................ 3,334
2005................................ 3,124
Thereafter.......................... 8,750
$26,981
Rent payments under these leases were $4,278,000, $4,055,000 and
$4,325,000 for 2000, 1999 and 1998, respectively. Certain leases require the
Bank to pay property taxes and insurance. Additionally, certain leases have
rent escalation clauses based on specified indices.
57
(7) Federal Home Loan Bank Stock
The Bank's investment in FHLB stock at December 31, 2000 and 1999 was
$80,885,000 and $71,722,000, respectively. The FHLB provides a central
credit facility for member institutions. As a member of the FHLB system, the
Bank is required to own capital stock in the FHLBSF in an amount at least
equal to the greater of 1% of the aggregate principal amount of its unpaid
home loans, home purchase contracts and similar obligations at the end of
each calendar year, assuming for such purposes that at least 30% of its
assets were home mortgage loans, or 5% of its advances (borrowings) from the
FHLBSF. The Bank was in compliance with this requirement at December 31,
2000. The Bank's investment in FHLB stock was pledged as collateral for
advances from the FHLB at December 31, 2000 and 1999. The fair value of the
Bank's FHLB stock approximates book value due to the Bank's ability to redeem
such stock with the FHLB at par value. Accrued dividends on FHLB stock
totaled $1,178,000 and $975,000 as of December 31, 2000 and December 31,
1999, respectively.
(8) Deposits
Deposit account balances are summarized as follows:
2000 1999
Amount % Amount %
(Dollars In Thousands)
Variable rate non-term accounts:
Money market deposit accounts (weighted
average rate of 4.79% and 4.34%) $ 537,475 25% $ 446,771 22%
Interest-bearing checking accounts
(weighted average rate of 1.22% and
1.06%).......................... 140,151 6 111,366 5
Passbook accounts (weighted average
rate of 2.00% and 2.00%)........ 80,536 4 78,547 4
Non-interest bearing checking accounts 176,059 8 144,310 7
934,221 43 780,994 38
Fixed-rate term certificate accounts:
Under six-month term (weighted average
rate of 5.26% and 5.21%)........ 61,954 3 113,324 5
Six-month term (weighted average rate of
6.41% and 5.68%)................ 282,922 13 322,696 16
Nine-month term (weighted average rate of
6.74% and 5.73%)................ 240,598 11 250,460 12
One year to 18 month term (weighted
average rate of 6.11% and 4.99%) 367,603 17 284,464 14
Two year or 30 month term (weighted
average rate of 5.83% and 5.13%) 31,685 2 19,081 1
Over 30-month term (weighted average rate
of 5.49% and 5.33%)............ 31,088 1 36,529 2
Negotiable certificates of $100,000 and
greater, 30 day to one year terms (weighted
average rate of 6.19% and 5.20%) 214,976 10 253,809 12
1,230,826 57 1,280,363 62
Total Deposits (weighted average rate of
4.90% and 4.42%).............. $2,165,047 100% $2,061,357 100%
58
8) Deposits (continued)
Certificates of deposit, placed through five major national brokerage
firms, totaled $381,196,000 and $445,945,000 at December 31, 2000 and 1999,
respectively.
Cash payments for interest on deposits (including interest credited)
totaled $97,624,000, $90,604,000 and $93,793,000 during 2000, 1999 and 1998,
respectively. Accrued interest on deposits at December 31, 2000 and 1999
totaled $10,834,000 and $8,284,000, respectively, and is included in accrued
expenses and other liabilities in the accompanying Consolidated Statements of
Financial Condition.
The following table indicates the maturities and weighted average
interest rates of the Bank's deposits at December 31, 2000:
Non-Term There-
Accounts 2001 2002 2003 2004 after Total
(Dollars In Thousands)
Deposits at
December 31, 2000 $934,221 $1,180,649 $32,336 $9,425 $3,195 $ 5,221 $2,165,047
Weighted average
interest rates.. 3.11% 6.27% 5.99% 5.77% 5.19% 5.40% 4.90%
Interest expense on deposits is summarized as follows:
For the Years Ended
2000 1999 1998
(Dollars In Thousands)
Passbook accounts............. $ 1,611 $ 1,618 $ 2,050
Money market deposits and
interest-bearing checking accounts 24,709 17,035 9,308
Certificate accounts.......... 73,854 68,546 86,301
$100,174 $ 87,199 $ 97,659
59
(9) Federal Home Loan Bank Advances
Federal Home Loan Bank (FHLB) advances consist of the following:
2000 1999
(Dollars In Thousands)
Advances from the FHLB of San Francisco with a
weighted average interest rate of 6.42% and 5.91%,
respectively, secured by FHLB stock and certain
real estate loans with unpaid principal balances of
approximately $3.1 billion at December 31, 2000,
advances mature through 2010........ $1,579,000 $1,169,000
$1,579,000 $1,169,000
At December 31, 2000 and 1999, accrued interest payable on FHLB
advances totaled $8,687,000 and $706,000, respectively, which is included
in accrued expenses and other liabilities in the accompanying Consolidated
Statements of Financial Condition.
The Bank has a credit facility with the FHLB in the form of FHLB
advances and letters of credit which allow borrowings up to 50% of the
Bank's assets , as computed for regulatory purposes, or approximately
$2,181,000,000 at December 31, 2000 with terms up to 30 years.
The Company redeemed its $50,000,000 senior unsecured 11.75% notes
with premium and related costs totaling $2,195,000, net of taxes during
1999. The premium is disclosed as an extraordinary item in the
accompanying Consolidated Statements of Operations and Comprehensive Earnings.
The following is a summary of FHLB advance maturities at December
31, 2000 (dollars in thousands):
2001...................$ 957,000
2002................... 345,000
2003................... 62,000
2004................... 130,000
2005................... 20,000
2006................... 30,000
2008................... 10,000
2009................... 5,000
2010................... 20,000
$1,579,000
Cash payments for interest on borrowings (including reverse
repurchase agreements) totaled $77,621,000 , $77,372,000 and $101,757,000
during 2000, 1999 and 1998, respectively.
Interest expense on borrowings is comprised of the following for the
years indicated:
Year Ended December 31,
2000 1999 1998
(Dollars In Thousands)
FHLB Advances............... $ 85,603 $48,077 $ 53,116
Reverse Repurchase Agreements 21,041 20,396 29,915
10 Year Senior Unsecured Notes - 5,459 5,875
Other....................... (313) (100) (74)
$106,331 $73,832 $ 88,832
Other interest expense in 2000, 1999 and 1998 includes the reversal of
accrued interest due to the IRS. See Note 11.
60
(10) Securities Sold Under Agreements to Repurchase
The Bank enters into sales of securities under agreements to
repurchase (reverse repurchase agreements) which require the repurchase of
the same securities. Reverse repurchase agreements are treated as
financing arrangements, and the obligation to repurchase securities sold
is reflected as a borrowing in the Consolidated Statements of Financial
Condition. The mortgage-backed securities underlying the agreements were
delivered to the dealer who arranged the transactions or its trustee.
At December 31, 2000, $294,110,000 in reverse repurchase agreements
were collateralized by mortgage-backed securities with principal balances
totaling $311,840,000 and fair values totaling $308,836,000. At December
31, 1999, $363,635,000 in reverse repurchase agreements were
collateralized by mortgage-backed securities with principal balances
totaling $397,003,000 and fair values totaling $386,732,000.
The weighted average interest rates for borrowings under reverse
repurchase agreements were 6.65% and 5.76%, respectively , as of December
31, 2000 and December 31, 1999.
Securities sold under agreements to repurchase averaged $326,004,000
and $390,691,000 during 2000 and 1999, respectively, and the maximum
amounts outstanding at any month-end during 2000 and 1999 were
$355,995,000 and $469,655,000 respectively.
The following is a summary of maturities at December 31, 2000
(dollars in thousands):
Up to 30 days........... $ 28,180
30 to 90 days........... 89,935
Over 90 to 182 days..... 175,995
$294,110
Accrued interest on securities sold under agreements to repurchase
which is included in accrued expenses and other liabilities in the
accompanying Consolidated Statements of Financial Condition was $4,326,000
and $3,561,000 at December 31, 2000 and 1999, respectively.
(11) Income Taxes
Income taxes (benefit) consist of the following:
2000 1999 1998
(Dollars In Thousands)
Current:
Federal..................... $20,764 $20,093 $24,936
State....................... 8,391 8,602 8,234
29,155 28,695 33,170
Deferred:
Federal..................... 722 (456) (5,812)
State....................... (1,045) (1,187) (1,176)
(323) (1,643) (6,988)
Total:
Federal..................... 21,486 19,637 19,124
State....................... 7,346 7,415 7,058
$28,832 $27,052 $26,182
61
11) Income Taxes (continued)
A reconciliation of the statutory federal corporate income tax rate
to the Company's effective income tax rate follows:
2000 1999 1998
Statutory federal income tax rate 35.0% 35.0% 35.0%
Increase in taxes resulting from:
State franchise tax, net of federal income
tax benefit................... 7.3 7.7 7.5
Core deposit intangibles....... 0.3 0.1 0.1
Other, net.................... 0.2 0.5 0.5
Effective rate............... 42.8% 43.3% 43.1%
Cash payments for income taxes totaled $28,300,000, $29,609,000, and
$31,762,000 during 2000 , 1999, and 1998, respectively. The Company
received cash refunds totaling $667,000 and $48,000 during 2000 and 1998,
respectively. No refunds were received during 1999.
Current income taxes payable at December 31, 2000 were $530,000
compared to current tax receivables at December 31, 1999 and December 31,
1998 of $325,000 and $98,000, respectively.
Listed below are the significant components of the net deferred tax
(asset) and liability:
2000 1999
(Dollars In Thousands)
Components of the deferred tax asset:
Bad debts............................... $ (36,840) $ (35,371)
Pension expense......................... (3,886) (3,640)
State taxes............................. (3,021) (3,516)
IRS interest accrual.................... - (160)
Tax effect of unrealized loss on
securities available-for-sale.......... (1,567) (6,007)
Other................................... (2,339) (1,857)
Total deferred tax asset.............. (47,653) (50,551)
Components of the deferred tax liability:
Loan fees............................... 14,581 15,380
Loan sales.............................. 639 1,041
FHLB stock dividends.................... 18,049 16,011
Other................................... 2,956 2,573
Total deferred tax liability.......... 36,225 35,005
Net deferred tax asset.................... $ (11,428) $ (15,546)
The Company provides for recognition and measurement of deductible
temporary differences to the extent that it is more likely than not that
the deferred tax asset will be realized. The Company did not have a
valuation allowance for the deferred tax asset at December 31, 2000 and
1999, as it is more likely than not that the deferred tax asset will be
realized through loss carrybacks and the timing of future reversals of
existing temporary differences.
62
(11) Income Taxes (continued)
The Internal Revenue Service ("IRS") has examined the Company's
consolidated federal income tax returns for tax years up to and including
1992. The adjustments proposed by the IRS were primarily related to
temporary differences as to the recognition of certain taxable income and
expense items. While the Company had provided for deferred taxes for
federal and state purposes, the change in the period of recognition of
certain income and expense items resulted in interest due to the IRS and
Franchise Tax Board ("FTB"). During 1998, the Company paid $598,000 in
interest to the IRS and FTB and reversed an interest accrual of $300,000.
The Company reversed interest accruals totaling $350,000 and $150,000
during 2000 and 1999, respectively. There was no balance of accrued
interest payable for amended returns as of December 31, 2000.
The Bank is required to use the specific charge-off method of
accounting for debts for all periods beginning after 1995. Prior to that
date, the Bank used the reserve method of accounting for bad debts. The
Consolidated Statements of Financial Condition at December 31, 2000 and
1999 do not include a liability of $5,356,000 related to the adjusted base
year bad debt reserve. This reserve was created when the Bank was on the
reserve method.
(12) Stockholders' Equity and Earnings Per Share
The Company's stock charter authorizes 5,000,000 shares of serial
preferred stock. As of December 31, 2000 no preferred shares had been
issued.
The Company's Board of Directors declared a two-for-one stock split
on June 25, 1998 to stockholders of record on July 15, 1998. The
additional shares were distributed on July 30, 1998.
The following is the reconciliation of the numerators and denominators
of the basic and diluted earnings per share computations for the years
indicated:
For the Year Ended For the Year Ended For the Year Ended
December 31, 2000 December 31, 1999 December 31, 1998
Per Per Per
Earnings Shares Share Earnings Shares Share Earnings Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
(Dollars in thousands except per share data)
Basic EPS:
Earnings before
extraordinary item $38,465 17,372,225 $2.23 $35,447 19,234,869 $1.84 $34,629 21,181,859 $1.63
Unreleased shares (120,607) - -
Extraordinary item, net
of taxes...... - - - (2,195) - (.11) - - -
Net earnings.... $38,465 17,251,618 $2.23 $33,252 19,234,869 $1.73 $34,629 21,181,859 $1.63
Diluted EPS:
Earnings before
extraordinary item $38,465 17,372,225 $2.23 $35,447 19,234,869 $1.84 $34,629 21,181,859 $1.63
Unreleased shares (120,607) - -
Options-common stock
equivalents... 205,277 168,183 407,518
Earnings before
extraordinary item 38,465 17,456,895 2.20 35,447 19,403,052 1.83 34,629 21,589,377 1.60
Extraordinary item, net
of taxes...... - - - (2,195) - (.12) - - -
Net earnings.... $38,465 17,456,895 $2.20 $33,252 19,403,052 $1.71 $34,629 21,589,377 $1.60
63
(12) Stockholders' Equity and Earnings Per Share (continued)
Regulatory Capital
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory - and possibly additional
discretionary - actions by regulators that, if undertaken, could have a
direct material effect on the Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities and certain
off-balance sheet items as calculated under regulatory accounting practices.
The Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set forth
in the table below) of total and Tier I capital (as defined in the
regulations) to risk weighted assets (as defined). Management believes that
the Bank meets all capital adequacy requirements to which it is subject as of
December 31, 2000.
As of December 31, 2000, the most recent notification from the OTS
indicated that the Bank was well capitalized under the regulatory framework
for prompt corrective action. There are no conditions or events since
December 31, 2000 that management believes have changed the Bank's
classification.
The following table summarizes the Bank's regulatory capital and
required capital for the years indicated (dollars in thousands):
December 31, 2000
Tier 1
Tangible Core Risk-based Risk-based
Capital Capital Capital Capital
Actual Capital:
Amount...................... $254,974 $254,974 $254,974 $286,937
Ratio....................... 5.84% 5.84% 10.13% 11.39%
FIRREA minimum required capital:
Amount...................... $ 65,471 $174,588 - $201,454
Ratio....................... 1.50% 4.00% - 8.00%
FIDICIA well capitalized required capital:
Amount...................... - $218,236 $151,091 $251,818
Ratio....................... - 5.00% 6.00% 10.00%
December 31, 1999
Tier 1
Tangible Core Risk-based Risk-based
Capital Capital Capital Capital
Actual Capital:
Amount...................... $234,166 $234,166 $234,166 $262,178
Ratio....................... 6.02% 6.02% 10.65% 11.92%
FIRREA minimum required capital:
Amount...................... $ 58,390 $155,707 - $175,923
Ratio....................... 1.50% 4.00% - 8.00%
FIDICIA well capitalized required capital:
Amount...................... - $194,633 $131,942 $219,904
Ratio....................... - 5.00% 6.00% 10.00%
64
(12) Stockholders' Equity and Earnings Per Share (continued)
The payment of dividends is subject to certain federal income tax
consequences. Specifically, the Bank is capable of paying dividends to the
Company in any year without incurring tax liability only if such dividends
do not exceed both the tax basis current year earnings and profits and
accumulated tax earnings and profits as of the beginning of the year.
Thirty days' prior notice to the OTS of the intent to declare
dividends is required for the declaration of such dividends by the Bank.
The OTS generally allows a savings institution which meets its fully
phased-in capital requirements to distribute without OTS approval
dividends up to 100% of the institution's net income for the applicable
calendar year plus retained net income for the two prior calendar years.
However, the OTS has the authority to preclude the declaration of any
dividends or adopt more stringent amendments to its capital regulations.
The Company may loan up to $6,000,000 to the Employee Stock
Ownership Plan ("ESOP") under a line of credit loan. At December 31, 2000
and 1999, the loan to the ESOP totaled $656,000 and $1,759,000,
respectively. Interest on the outstanding loan balance is due each
December 31. Interest varies based on the Bank's monthly cost of funds.
The average rates paid during 2000 and 1999 were 5.40% and 4.62%,
respectively.
On June 25, 1998, the Company adopted an Amended and Restated
Shareholder Rights Plan ("Rights Plan") which is designed to protect
shareholders from attempts to acquire control of the Company at an
inadequate price. Under the Rights Plan, the owner of each share of
Company stock received a dividend of one right ("Right") to purchase one
one-thousandth of a share of a new series of preferred stock for its
estimated long term value of $200.00. In the event of certain
acquisitions of 15% or more of the voting stock or a tender offer for 15%
or more of the voting stock of the Company, each holder of a Right who
exercises such Right will receive shares of the Company with a market
value equal to two times the exercise price of the Right. Also, in the
event of certain business combination transactions following the
acquisition by a person of 15% or more of the Company stock, each Rights
holder will have the right to receive upon exercise of the Right common
stock of the surviving company in such transaction having a market value
of two times the exercise price of the Right. The Company may redeem the
Rights at any time prior to such acquisition or tender offer should the
Board of Directors deem redemption to be in its stockholders' best
interests. The Amended and Restated Shareholder Rights Plan replaces the
previous Shareholder Rights Plan which, by its terms, expired on November
15, 1998.
65
13) Employee Benefit Plans
The Bank maintains a qualified defined contribution plan established
under Section 401 (k) of the Internal Revenue Code, as amended (the
"401(k) Plan"). Participants are permitted to make contributions on a
pre-tax basis, a portion of which is matched by the Bank. The 401(k) Plan
expense was $354,000 and $299,000 for 2000 and 1999, respectively.
The Bank has a Supplementary Executive Retirement Plan ("SERP")
which covers any individual employed by the Bank as its Chief Executive
Officer or Chief Operating Officer. The pension expense for the SERP was
$906,000, $988,000 and $795,000 in 2000, 1999 and 1998, respectively. The
SERP is unfunded.
The discount rate and rate of increase in future compensation levels
used in determining the actuarial value of benefit obligations were 7.25%
and 7.75%, respectively, as of December 31, 2000 and 1999. The discount
rate and rate of increase in future compensation levels used in
determining the pension cost for the SERP was 4.0% as of December 31, 2000
and 1999. The plan had no assets at December 31, 2000 or 1999.
The following table sets forth the funded status of the SERP and
amounts recognized in the Company's Statements of Financial Condition for
the years indicated:
2000 1999
(Dollars In Thousands)
Change in Benefit Obligation
Projected benefit obligation, beginning of the year $ 5,837 $ 6,472
Service cost.................................... 264 316
Interest cost................................... 441 411
Benefits paid................................... (287) (286)
Actuarial (gain)/loss........................... 339 (1,076)
Projected benefit obligation, end of the year... $ 6,594 $ 5,837
Change in Plan Assets
Funded status................................... $ (6,594) $ (5,837)
Unrecognized transition obligation.............. 63 125
Unrecognized prior service cost................. 553 688
Unrecognized (gain)/loss........................ 613 274
Net amount recognized........................... $ (5,365) $ (4,750)
Components of Net Periodic Benefit Cost
Service cost.................................... $ 264 $ 316
Interest cost................................... 441 411
Amortization of unrecognized transition obligation 62 63
Amortization of unrecognized prior service cost. 135 135
Amortization of unrecognized (gain)/loss........ - 60
Pension (income)/cost........................... $ 902 $ 985
The projected benefit obligation, accumulated benefit obligation, and
fair value of assets were $6,594,000, $5,255,000, and $0, respectively, at
December 31, 2000, and $5,837,000, $4,474,000, and $0 respectively, at
December 31, 1999.
66
(13) Employee Benefit Plans (continued)
The Bank has a profit sharing plan (the "ESOP") for all salaried
employees and officers who have completed one year of continuous service.
At December 31, 2000, the ESOP held 5.19% of outstanding stock of the
Company. Profit sharing expense for the years ended December 31, 2000, 1999
and 1998 was $1,778,000, $1,100,000 and $1,000,000, respectively. The amount
of the contribution made by the Bank is determined each year by the Board of
Directors, but is not to exceed 15% of the participants' aggregated
compensation. The Bank does not offer post retirement benefits under this
plan.
Stock Compensation Plans
At December 31, 2000, the Company had two stock-based compensation
programs, which are described below. The Company applies APB Opinion 25 and
related interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized for its stock compensation plans.
Stock Option Programs
Under the 1994 Stock Option and Stock Appreciation Rights Plan (the
"1994 Plan"), the Company may grant options to employees of the Bank for up
to 3,000,000 shares of common stock, subject to limitations set forth under
the 1994 Plan. Under the 1994 Plan, the exercise price of each option equals
the market value of the Company's stock on the date of the grant, and an
option's maximum term is 10 years. Options typically begin to vest on the
second anniversary date of the grant.
The Company also has a stock option plan for outside directors, the
1997 Non-employee Directors Stock Incentive Plan (the "Directors Stock
Plan"). The Directors Stock Plan provides for the issuance of up to 400,000
shares of common stock to non-employee directors of the Company. The
exercise price of each option equals the market value of the Company's stock
on the date of the grant, and an option's maximum term is 10 years plus one
month. Options typically vest 100% on the one year anniversary date of the
grant.
The fair value of each option grant is estimated on the date of the
grant using the Black-Scholes option pricing model with the following
weighted average assumptions used for grants in 2000, 1999 and 1998,
respectively: no dividend yield in any year; expected volatility of 37%, 38%
and 35%; risk free interest rates of 6.7%, 6.6% and 4.7%; and expected
average lives of 6 years in all three periods. The weighted-average grant
date fair value of options granted during the year are $23.75, $6.04 and
$7.85 for 2000, 1999 and 1998, respectively. The Company has elected to
recognize forfeitures in the year they occur.
Had compensation cost for the Company's stock-option programs been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of Statement of Financial Standards No.
123, "Accounting for Stock Based Compensation," the Company's net
earnings and earnings per share would have been reduced to the pro forma
amounts indicated below (all per share amounts have been adjusted for the
two-for-one stock split declared June 25, 1998):
67
13) Employee Benefit Plans (continued)
2000 1999 1998
(Dollars In Thousands, Except Per Share Data)
Before Extraordinary Items:
Earnings before
extraordinary items:
As reported..... $38,465 $35,447 $34,629
Pro forma....... $37,677 $35,085 $34,354
Earnings per share:
Basic:
As reported..... $2.23 $1.84 $1.63
Pro forma....... $2.18 $1.83 $1.62
Diluted:
As reported..... $2.20 $1.83 $1.60
Pro forma....... $2.16 $1.81 $1.59
After Extraordinary Items:
Net earnings:
As reported..... $38,465 $33,252 $34,629
Pro forma....... $37,677 $32,890 $34,354
Earnings per share:
Basic:
As reported..... $2.23 $1.73 $1.63
Pro forma....... $2.18 $1.71 $1.62
Diluted:
As reported..... $2.20 $1.71 $1.60
Pro forma....... $2.16 $1.70 $1.59
Pro forma net earnings and earnings per share reflect only options
granted since 1995. Therefore, the full impact of calculating compensation
cost for stock options under SFAS No. 123 is not reflected in the pro
forma net earnings per share amounts presented above because compensation
cost is reflected over the options' vesting period and compensation cost
for options granted prior to January 1, 1995 is not considered.
The following table summarizes information about stock option activity during
the periods indicated:
Options Outstanding 2000 1999 1998
(Weighted average option prices) (In Shares)
Beginning of year ($12.54, $9.84 and $7.85) 653,742 713,500 707,914
Granted ($13.13, $16.13 and $17.25) 187,275 181,130 168,790
Exercised ($7.04, $5.68 and $8.55). (30,656) (193,785) (52,990)
Canceled ($13.77, $13.64 and $8.99) (45,823) (47,103) (110,214)
End of Year ($12.83, $12.54 and $9.84) 764,538 653,742 713,500
Shares exercisable at December 31..
($11.22, $10.09 and $5.69)....... 252,121 193,684 291,560
68
(13) Employee Benefit Plans (continued)
Additional information with respect to stock options outstanding at
December 31, 2000 follows:
Price Ranges
($5.63 - $8.44) ($8.45 -$12.67) ($12.68- $17.25)
Options outstanding:
Number of outstanding shares......... 140,206 163,180 461,152
Weighted-average contractual life ... 4.10 6.08 8.15
Weighted-average exercise price ..... $6.91 $10.88 $15.32
Options exercisable:
Number of exercisable shares......... 99,563 71,036 81,522
Weighted-average exercise price ..... $6.88 $10.88 $16.81
Restricted Stock Plan
The Company also has a restricted stock plan. Under the 1991
Restricted Stock Plan (the "Restricted Stock Plan"), the Company may issue
shares of restricted stock to employees of the Company and its subsidiaries,
including officers and directors. A total of 1,000,000 shares have been
reserved for issuance under the Restricted Stock Plan. As of December 31,
2000 and 1999, 876,740 shares and 878,740 shares are available for grant. The
shares consist of previously issued shares reacquired by the Company. The
shares typically vest in increments of 25% per year, beginning on the fourth
anniversary of the grant date. As shares vest, they are released to the
recipient, at which time the recipient will recognize ordinary income equal
to the fair market value of the restricted stock at the time that the
restrictions lapse. During 2000 and 1999, 2,000 and 1,800 shares respectively
were issued under this program. Compensation costs related to shares granted
under the Restricted Stock Plan have been recorded in previous periods.
(14) Parent Company Financial Information
The following condensed parent company financial information should be
read in conjunction with the other Notes to the Consolidated Financial
Statements.
CONDENSED STATEMENTS OF FINANCIAL CONDITION
December 31,
2000 1999
(Dollars In Thousands)
Assets:
Cash........................... $ 3,531 $ 3,089
Fixed assets................... 491 -
Other assets................... 1,334 1,728
Investment in subsidiary....... 262,119 226,734
$267,475 $231,551
Liabilities and Stockholders' Equity:
Other liabilities.............. 33 418
Stockholders' equity......... 267,442 231,133
$267,475 $231,551
69
14) Parent Company Financial Information (continued)
Years Ended December 31,
CONDENSED STATEMENTS OF OPERATIONS AND 2000 1999 1998
COMPREHENSIVE EARNINGS (Dollars In Thousands)
Dividends received from Bank... $ 10,000 $ 99,554 $ 5,875
Equity in undistributed (distributed) net
earnings of subsidiary ....... 29,263 (60,508) 32,558
Other expense, net............. (798) (5,794) (3,804)
Net earnings................... $ 38,465 $ 33,252 $ 34,629
Other comprehensive earnings (loss), net
Net of taxes................... 6,122 (7,577) (311)
Comprehensive earnings......... $ 44,587 $ 25,675 $ 34,318
Years Ended December 31,
CONDENSED STATEMENTS OF CASH FLOWS 2000 1999 1998
(Dollars In Thousands)
Net Cash Flows from Operating Activities:
Net earnings........................ $ 38,465 $ 33,252 $ 34,629
Adjustments to reconcile net earnings to
net cash provided by operating
activities:
Equity in undistributed (distributed) net
net earnings of subsidiary......... (29,263) 60,508 (32,558)
Write-off deferred issuance cost.... - 1,332 -
Depreciation expense................ 89 - -
Other............................... - 1,326 (129)
Net cash provided by operating activities 9,291 96,418 1,942
Cash Flows from Investing Activities:
Increase in fixed assets............ (580) - -
(Increase) decrease in unreleased shares 918 (926) 911
Net cash (used) provided by investing
Activities......................... 338 (926) 911
Cash Flows from Financing Activities:
Repayment of long term borrowings... - (50,000) -
Premiums paid on early extinguishment of debt - (2,655) -
Purchase of treasury stock.......... (10,175) (52,214) (1,469)
Other............................... 988 - 482
Net cash provided (used by) financing activities (9,187) (104,869) (987)
Net increase in cash.................. 442 (9,377) 1,866
Cash at beginning of period........... 3,089 12,466 10,600
Cash at end of period................. $ 3,531 $ 3,089 $ 12,466
70
(15) Quarterly Results of Operations: (unaudited)
Summarized below are the Company's results of operations on a quarterly
basis for 2000, 1999 and 1998:
Provision Non- Basic Diluted
Interest Interest For Loan Other Interest Net Earnings Earnings
Income Expense Losses Income Expense Earnings Per Share Per Share
(Dollars In Thousands, Except Per Share Data)
First quarter
2000........ $ 71,102 $ 45,122 $ - $ 1,725 $ 12,245 $ 8,835 $ 0.50 $ 0.49
1999........ 64,737 39,572 - 3,133 12,588 8,915 0.43 0.43
1998........ 75,955 49,504 2,500 2,255 11,990 8,143 0.38 0.38
Second quarter
2000........ $ 76,455 $ 50,288 $ - $ 2,418 $ 12,570 $ 9,351 $ 0.54 $ 0.54
1999........ 63,697 38,478 - 4,157 13,113 9,103 0.47 0.47
1998........ 73,587 47,673 2,100 3,974 12,684 8,637 0.41 0.40
Third quarter
2000........ $ 81,980 $ 55,290 $ - $ 1,950 $ 12,276 $ 9,497 $ 0.55 $ 0.54
1999........ 63,671 39,376 - 2,813 11,990 8,358 0.44 0.44
1998........ 71,212 46,402 1,600 3,868 11,698 8,830 0.42 0.41
Fourth quarter
2000........ $ 84,783 $ 55,805 $ - $ 1,654 $ 11,174 $10,782 $ 0.63 $ 0.62
1999........ 67,896 43,605 - 2,585 11,468 6,876 0.38 0.37
1998........ 69,015 42,912 1,000 3,560 12,552 9,019 0.43 0.42
Total year
2000........ $ 314,320 $206,505 $ - $ 7,747 $ 48,265 $38,465 $ 2.23 $ 2.20
1999........ 260,001 161,031 - 12,688 49,159 33,252 1.73 1.71
1998........ 289,769 186,491 7,200 13,657 48,924 34,629 1.63 1.60
(16) Fair Value of Financial Instruments
The following table presents fair value information for financial
instruments for which a market exists. The fair values for these financial
instruments were estimated based upon prices published in financial
newspapers or quotations received from national securities dealers.
2000 1999
Carrying Carrying
Value Fair Value Value Fair Value
(Dollars In Thousands)
Mortgage-backed Securities ... $374,405 $374,405 $428,641 $428,641
US Government Securities ..... 38,064 38,064 37,821 37,821
Collateralized Mortgage Obligations 98,473 98,473 113,374 113,374
Loans Held-for-Sale .......... 2,246 2,246 2,303 2,303
71
16) Fair Value of Financial Instruments (continued)
The following table presents fair value information for financial
instruments shown in the Company's Consolidated Statements of Financial
Condition for which there is no readily available market. The fair values for
these financial instruments were calculated by discounting expected cash
flows. Because these financial instruments have not been evaluated for
possible sale and because management does not intend to sell these financial
instruments, the Company does not know whether the fair values shown below
represent values at which the respective financial instruments could be sold.
2000 1999
Calculated Calculated
Historical Fair Value Historical Fair Value
Cost Amount Cost Amount
(Dollars In Thousands)
Adjustable Loans:
Single Family .......... $2,148,016 $2,191,467 $1,798,072 $1,812,726
Multi-Family ........... 1,299,356 1,327,018 1,121,929 1,132,896
Commercial ............ 206,032 213,293 176,841 182,044
Fixed Rate Loans:
Single Family .......... 8,068 8,106 8,789 8,921
Multi-Family ........... 13,924 14,175 7,642 7,866
Commercial ............. 12,004 12,480 6,893 7,216
Consumer Loans............ 7,522 7,599 2,276 2,474
Business Loans............ 12,600 12,626 8,140 8,309
Non-Performing Loans ..... 6,142 6,142 13,221 13,221
Fixed-Term Certificate Accounts 1,230,826 1,229,886 1,280,363 1,275,921
Non-Term Deposit Accounts 758,162 758,162 636,684 636,684
Borrowings ............... 1,873,110 1,885,252 1,532,635 1,530,786
OFF-BALANCE SHEET:
Loans sold with recourse.. 146,537 149,655 178,723 177,899
GAAP specifies that fair values should be calculated based on the value
of one unit. The estimates do not necessarily reflect the price the Company
might receive if it were to sell the entire holding of a particular financial
instrument at one time.
Fair value estimates are based on the following methods and
assumptions, some of which are subjective in nature. Changes in assumptions
could significantly affect the estimates.
Cash and Cash Equivalents
The carrying amounts reported in the Consolidated Statements of
Financial Condition for this item approximate fair value.
Investment Securities and Mortgage-Backed Securities
Fair values are based on bid prices published in financial newspapers
or bid quotations received from national securities dealers.
72
(16) Fair Value of Financial Instruments (continued)
Loans Receivable
The portfolio is segregated into those loans with adjustable rates of
interest and those with fixed rates of interest. Fair values are based on
discounting future cash flows by the current rate offered for such loans with
similar remaining maturities and credit risk. The amounts so determined for
each loan category are reduced by the Bank's allowance for loans losses which
thereby takes into consideration changes in credit risk. As of December 31,
2000, the Bank had outstanding commitments to fund $150,276,000 in real
estate loans, which were substantially at fair value.
Non-performing Loans
The carrying amounts reported in the Consolidated Statements of
Financial Condition for this item approximate fair value.
Deposits
The fair value of deposits with no stated term, such as regular
passbook accounts, money market accounts and checking accounts, is defined by
SFAS No. 107 as the carrying amounts reported in the Consolidated Statements
of Financial Condition. The fair value of deposits with a stated maturity,
such as certificates of deposit, is based on discounting future cash flows by
the current rate offered for such deposits with similar remaining maturities.
Borrowings
For short-term borrowings, fair value approximates carrying value. The
fair value of long term borrowings is based on their interest rate
characteristics. For variable rate borrowings, fair value is based on
carrying values. For fixed rate borrowings, fair value is based on
discounting future contractual cash flows by the current interest rate paid
on such borrowings with similar remaining maturities.
73
INDEPENDENT AUDITORS' REPORT
The Board of Directors
FirstFed Financial Corp.
We have audited the accompanying consolidated statements of financial
condition of FirstFed Financial Corp. and subsidiary ("Company") as of
December 31, 2000 and 1999, and the related consolidated statements of
operations and comprehensive earnings, stockholders' equity and cash flows
for each of the years in the three-year period ended December 31, 2000. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of FirstFed
Financial Corp. and subsidiary as of December 31, 2000 and 1999, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America.
KPMG LLP
Los Angeles, California
January 25, 2001
74
ITEM 9--CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10--DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors and executive officers appearing on
pages 5 through 7 of the Proxy Statement for the Annual Meeting of
Stockholders dated April 25, 2001 is incorporated herein by reference.
ITEM 11--EXECUTIVE COMPENSATION
Information regarding executive compensation appearing on pages 8
through 11 of the Proxy Statement for the Annual Meeting of Stockholders
dated April 25, 2001 is incorporated herein by reference.
ITEM 12--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners
and management appearing on pages 2 and 3 of the Proxy Statement for the
Annual Meeting of Stockholders dated April 25, 2001 is incorporated herein by
reference.
ITEM 13--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a)Certain Relationships: None.
(b)Information regarding certain related transactions appearing on page 11
of the Proxy Statement for the Annual Meeting of Stockholders dated
April 25, 2001 is incorporated herein by reference.
75
PART IV
ITEM 14--EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8K
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
EXHIBIT
NUMBER
-------------
(3.1) Restated Certificate of Incorporation filed as Exhibit 3.1 to Form 10-K
for the fiscal year ended December 31, 1999 and incorporated by reference.
(3.2) By-laws filed as Exhibit (1)(a) to Form 8-A dated September 4,1987 and
incorporated by reference.
(4.1) Amended and Restated Rights Agreement dated as of September 25, 1998,
filed as Exhibit 4.1 to Form 8-A/A, dated September 25, 1998 and incorporated
by reference.
(10.1) Deferred Compensation Plan filed as Exhibit 10.3 to Form 10-Kfor 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
Amendment filed as Exhibit 10.3 10.4 for change of control to Form 10-Q for
the Quarter ended September 30, 2000 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 Amendment filed as Exhibit 10.5 to Form
10-Q for the Quarter ended September 30, 2000, and incorporated by reference.
(21) Registrant's sole subsidiary is First Federal Bank of California, a
federal savings bank.
(23) Independent Auditors' consent.
(24) Power of Attorney (included at page 78).
This 2000 Annual Report on Form 10-K and the Proxy Statement for the
Annual Meeting of Stockholders dated April 25, 2001 have already been
furnished to each stockholder of record who is entitled to receive copies
thereof. Copies of these items will be furnished without charge upon request
in writing by any stockholder of record on March 6, 2001 and any beneficial
owner of Company stock on such date who has not previously received such
material and who so represents in good faith and in writing to:
Corporate Secretary
FirstFed Financial Corp.
401 Wilshire Boulevard
Santa Monica, California 90401
Other exhibits will be supplied to any such stockholder at a charge
equal to the Company's cost of copying, postage, and handling.
(b) Reports on Form 8-K
The Company filed reports on Form 8-K during the quarter ended December
31, 2000 on the following dates: October 25, 2000, December 20, 2000 and
December 27, 2000. These reports are related to the release of the Company's
third quarter earnings and the disclosure of certain other financial data.
76
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.,
a Delaware corporation
By: /s/ Babette E. Heimbuch .
Babette E. Heimbuch
President and
Chief Executive Officer
Date: February 22, 2001
77
POWER OF ATTORNEY
Each person whose signature appears below hereby authorizes Babette E.
Heimbuch and Douglas J. Goddard, and each of them or either of them, as
attorney-in-fact to sign on his or her behalf as an individual and in every
capacity stated below, and to file all amendments to the Registrant's Form
10-K, and the Registrant hereby confers like authority to sign and file in
its behalf.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the 22nd day of February, 2001.
SIGNATURE TITLE
/s/ Babette E. Heimbuch Chief Executive Officer (Principal
Babette E. Heimbuch Executive Officer)
/s/ Douglas J. Goddard Executive Vice President and
Douglas J. Goddard Chief Financial Officer (Principal
Financial Officer)
/s/ Brenda J. Battey Senior Vice President and Controller
Brenda J. Battey (Principal Accounting Officer)
/s/ Christopher M. Harding Director
Christopher M. Harding
/s/ James L. Hesburgh Director
James L. Hesburgh
/s/ William S. Mortensen Chairman of the Board
William S. Mortensen
/s/ William G. Ouchi Director
William G. Ouchi
/s/ William P. Rutledge Director
William P. Rutledge
/s/ Charles F. Smith Director
Charles F. Smith
/s/ Steven L. Soboroff Director
Steven L. Soboroff
/s/ John R. Woodhull Director
John R. Woodhull
78