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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 2004
OR
| | TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
From the Transition Period From ________ 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 (I.R.S. Employer Identification No.)
of incorporation or organization)
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 | |
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes |X| No | |
As of November 1, 2004, 16,441,398 shares of the Registrant's $.01 par value
common stock were outstanding.
FirstFed Financial Corp.
Index
Page
Part I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of 3
September 30, 2004, December 31, 2003 and September 30,
2003
Consolidated Statements of Operations and Comprehensive 4
Earnings for the three and nine months ended September 30,
2004 and 2003
Consolidated Statements of Cash Flows for the nine months 5
ended September 30, 2004 and 2003
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 7
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
Item 4. Controls and Procedures 19
Part II. Other Information (omitted items are inapplicable)
Item 2. Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
Exhibits
31.1 Certification of Chief Executive Officer pursuant to 22
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to 23
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to 24
18 USC Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to 25
18 USC Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
2
PART I - FINANCIAL STATEMENTS
Item 1. Financial Statements
FirstFed Financial Corp. and Subsidiary
Consolidated Statements of Financial Condition
(In thousands, except share data)
September 30, September 30,
2004 December 31, 2003
(Unaudited) 2003 (Unaudited)
--------------- -------------- ---------------
ASSETS
Cash and cash equivalents $ 40,346 $ 54,318 $ 62,144
Investment securities, available-for-sale (at fair value) 274,419 116,411 63,559
Mortgage-backed securities, available-for-sale (at fair
value) 105,811 135,176 151,130
Loans receivable, held-for-sale (fair value $0, $494
and $1,517) -- 492 1,515
Loans receivable, net 5,825,939 4,373,620 4,106,131
Accrued interest and dividends receivable 20,847 16,941 17,205
Real estate owned, net -- 1,324 --
Real estate held for investment 1,606 -- --
Office properties and equipment, net 15,339 10,568 10,418
Investment in Federal Home Loan Bank (FHLB) stock, at
cost 123,525 87,775 80,243
Other assets 30,707 28,397 32,782
--------------- -------------- ---------------
$ 6,438,539 $ 4,825,022 $ 4,525,127
=============== ============== ===============
LIABILITIES
Deposits $ 3,251,892 $ 2,538,398 $ 2,504,692
FHLB advances 2,576,200 1,694,000 1,429,000
Securities sold under agreements to repurchase 111,224 122,622 129,220
Accrued expenses and other liabilities 41,044 33,435 41,917
--------------- -------------- ---------------
5,980,360 4,388,455 4,104,829
--------------- -------------- ---------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share;
authorized 100,000,000 shares;
issued 23,627,644, 23,543,339 and 23,509,436 shares;
outstanding 16,433,048, 17,045,643 and 17,011,740
shares 236 235 235
Additional paid-in capital 38,815 37,733 37,113
Retained earnings - substantially restricted 532,762 483,360 468,199
Unreleased shares to employee stock ownership plan (969) (125) (561)
Treasury stock, at cost, 7,194,596, 6,497,696 and
6,497,696 shares (113,776) (85,727) (85,727)
Accumulated other comprehensive earnings, net of taxes 1,111 1,091 1,039
--------------- -------------- ---------------
458,179 436,567 420,298
--------------- -------------- ---------------
$ 6,438,539 $ 4,825,022 $ 4,525,127
=============== ============== ===============
See accompanying notes to consolidated financial statements.
3
FirstFed Financial Corp. and Subsidiary
Consolidated Statements of Operations and Comprehensive Earnings
(Dollars in thousands, except per share data)
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
------------------------------ ------------------------------
2004 2003 2004 2003
------------- ------------- ------------- -------------
Interest income:
Interest on loans $ 60,821 $ 55,774 $ 174,335 $ 169,725
Interest on mortgage-backed
securities 777 1,221 2,583 4,277
Interest and dividends on investments 3,401 1,349 7,958 4,593
------------- ------------- ------------- -------------
Total interest income 64,999 58,344 184,876 178,595
------------- ------------- ------------- -------------
Interest expense:
Interest on deposits 10,485 9,179 27,614 30,433
Interest on borrowings 15,648 12,635 40,696 37,055
------------- ------------- ------------- -------------
Total interest expense 26,133 21,814 68,310 67,488
------------- ------------- ------------- -------------
Net interest income 38,866 36,530 116,566 111,107
Provision for loan losses -- -- -- --
------------- ------------- ------------- -------------
Net interest income after provision for
loan losses 38,866 36,530 116,566 111,107
------------- ------------- ------------- -------------
Other income:
Loan servicing and other fees 2,463 2,492 6,928 5,613
Retail office fees 1,411 1,366 4,127 3,663
Gain on sale of loans 5,403 1,689 5,434 2,382
Real estate operations, net (24) (49) 106 315
Other operating income 73 92 232 358
------------- ------------- ------------- -------------
Total other income 9,326 5,590 16,827 12,331
------------- ------------- ------------- -------------
Non-interest expense:
Salaries and employee benefits 11,066 7,997 29,681 25,026
Occupancy 2,359 2,087 6,438 6,057
Advertising expense 69 68 428 180
Amortization of core deposit
intangible 498 499 1,496 1,495
Federal deposit insurance 99 98 289 302
Legal 556 237 1,288 455
Other expense 3,047 2,536 8,707 7,552
------------- ------------- ------------- -------------
Total non-interest expense 17,694 13,522 48,327 41,067
------------- ------------- ------------- -------------
Earnings before income taxes 30,498 28,598 85,066 82,371
Income tax provision 12,626 10,395 35,664 33,057
------------- ------------- ------------- -------------
Net earnings $ 17,872 $ 18,203 $ 49,402 $ 49,314
============= ============= ============= =============
Net earnings $ 17,872 $ 18,203 $ 49,402 $ 49,314
Other comprehensive earnings (loss), net
of taxes 531 (817) 20 (1,162)
------------- ------------- ------------- -------------
Comprehensive earnings $ 18,403 $ 17,386 $ 49,422 $ 48,152
============= ============= ============= =============
Earnings per share:
Basic $ 1.09 $ 1.07 $ 2.95 $ 2.91
============= ============= ============= =============
Diluted $ 1.06 $ 1.04 $ 2.88 $ 2.84
============= ============= ============= =============
Weighted average shares outstanding:
Basic 16,416,629 16,994,566 16,752,261 16,967,043
============= ============= ============= =============
Diluted 16,825,386 17,432,285 17,158,980 17,359,014
============= ============= ============= =============
See accompanying notes to consolidated financial statements.
4
FirstFed Financial Corp. and Subsidiary
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Nine months ended September 30,
-------------------------------------
2004 2003
---------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 49,402 $ 49,314
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Net change in loans held-for-sale 492 778
Depreciation 837 1,040
Valuation adjustments on real estate sold - (35)
Amortization of fees and premiums/discounts 9,506 1,114
Gain on sale of loans (5,400) (1,500)
Decrease in servicing asset 90 180
FHLB stock dividends (2,805) (2,768)
Change in taxes payable 4,193 11,231
(Increase) decrease in interest and dividends receivable (3,906) 547
Increase (decrease) in interest payable 2,027 (3,238)
Amortization of core deposit intangible asset 1,496 1,495
Increase in other assets (7,301) (8,032)
Increase in accrued expenses and
other liabilities 9,052 2,635
---------------- -----------------
Total adjustments 8,281 3,447
---------------- -----------------
Net cash provided by operating activities 57,683 52,761
---------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans made to customers and principal
collections on loans (1,432,524) (329,077)
Loans purchased (422) (77)
Increase in deferred loan costs (28,913) (8,108)
Proceeds from sales of real estate owned 1,324 716
Proceeds from maturities and principal payments
of investment securities, available-for-sale 40,561 124,149
Principal reductions on mortgage-backed securities,
available for sale 28,880 48,566
Purchase of investment securities,
available for sale (198,494) (86,240)
(Purchases) redemptions of FHLB stock (32,945) 1,253
Purchases of premises and equipment (5,608) (1,116)
---------------- -----------------
Net cash used by investing activities (1,628,141) (249,934)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits 713,494 (22,334)
Net increase in short term borrowings 1,062,802 130,947
Net (decrease) increase in long term borrowings (192,000) 105,000
Purchases of treasury stock (28,049) (965)
Other 239 1,470
---------------- -----------------
Net cash provided by financing activities 1,556,486 214,118
---------------- -----------------
Net (decrease) increase in cash and cash equivalents (13,972) 16,945
Cash and cash equivalents at beginning of period 54,318 45,199
---------------- -----------------
Cash and cash equivalents at end of period $ 40,346 $ 62,144
================ =================
See accompanying notes to consolidated financial statements.
5
FirstFed Financial Corp. and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
1. The unaudited consolidated financial statements included herein have been
prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of the Company, all
adjustments (which include only normal recurring adjustments) necessary to
present fairly the results of operations for the periods covered have been
made. Certain information and note disclosures normally included in
financial statements presented in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted pursuant to such rules and regulations. The Company believes that
the disclosures are adequate to make the information presented not
misleading.
It is suggested that these condensed financial statements be read in
conjunction with the financial statements and the notes thereto included
in the Company's latest annual report on Form 10-K. The results for the
periods covered hereby are not necessarily indicative of the operating
results for a full year.
2. Basic earnings per share were computed by dividing net earnings by the
weighted average number of shares of common stock outstanding for the
period. Diluted earnings per share include the effect of stock options, if
dilutive.
3. For purposes of reporting cash flows on the "Consolidated Statements of
Cash Flows", cash and cash equivalents include cash, overnight investments
and securities purchased under agreements to resell which mature within 90
days of the date of purchase.
4. The Company applies the intrinsic-value-based method of accounting
prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations including FASB
Interpretation No. 44, Accounting for Certain Transactions involving Stock
Compensation, an interpretation of APB Opinion No. 25, issued in March
2000, to account for its fixed-plan stock options. Under this method,
compensation expense is recorded on the date of grant only if the current
market price of the underlying stock exceeded the exercise price. SFAS No.
123, Accounting for Stock-Based Compensation, establishes accounting and
disclosure requirements using a fair-value-based method of accounting for
stock-based employee compensation plans. As allowed by SFAS No. 123, the
Company has elected to continue to apply the intrinsic-value-based method
of accounting described above, and has adopted only the disclosure
requirements of SFAS No. 123. The following table illustrates the effect on
net income if the fair-value-based method had been applied to all
outstanding and unvested awards in each period.
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- ----------------------------
2004 2003 2004 2003
------------ ------------- ------------- ------------
(In thousands, except per share data)
Net income as reported.................. $ 17,872 $ 18,203 $ 49,402 $ 49,314
Deduction:
Total stock-based compensation expense
determined under fair-value-based
method for all awards, net of tax...... (116) (100) (536) (439)
------------ ------------- ------------- ------------
Pro forma net income.................. 17,756 $ 18,103 $ 48,866 $ 48,875
============ ============= ============= ============
Earnings per share:
Basic:
As reported........................... $ 1.09 $ 1.07 $ 2.95 $ 2.91
Pro forma............................. $ 1.08 $ 1.07 $ 2.92 $ 2.88
Diluted:
As reported........................... $ 1.06 $ 1.04 $ 2.88 $ 2.84
Pro forma............................. $ 1.06 $ 1.04 $ 2.86 $ 2.82
6
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 2004 and 2003, respectively: no dividend yield in
any year; expected volatility of 32% and 34%; risk free interest rates of 4.2%
and 3.8%; and expected average lives of 5.5 years in both periods. The
weighted-average grant date fair value of options granted during the periods are
$15.58 and $11.31 for 2004 and 2003, respectively. The Company has elected to
recognize forfeitures in the year they occur.
5. The following table sets forth the net periodic benefit cost attributable
to the Company's Supplementary Executive Retirement Plan:
Pension Benefits
Three months ended Nine months ended
September 30, September 30,
----------------------------- ------------------------------
2004 2003 2004 2003
------------ ------------- ------------- -------------
(In thousands)
Service cost.......................... $ 122,088 $ 111,690 $ 365,210 $ 335,070
Interest cost......................... 151,759 146,542 454,143 439,626
Expected return on plan assets........ -- -- -- --
Amortization of net (gain) loss....... 37,753 29,865 111,052 89,595
Amortization of prior service cost.... 33,661 33,661 100,983 100,983
Amortization of transition
obligation/(asset).................. -- -- -- --
------------ ------------- ------------- -------------
Net periodic benefit cost........... $ 345,261 $ 321,758 $ 1,031,388 $ 965,274
============ ============= ============= =============
Weighted Average Assumptions
Discount rate......................... 6.00% 6.50% 6.00% 6.50%
Rate of compensation increase......... 4.00% 4.00% 4.00% 4.00%
Expected return on plan assets........ N/A N/A N/A N/A
The Company does not expect any significant changes to the amounts previously
disclosed for contributions for benefits payments.
6. Non-interest income for the quarter ended September 30, 2004 increased by
approximately $5.4 million as a result of the elimination of the Company's
repurchase liability for loans sold with recourse. This change in estimate,
which is a non-cash transaction, increased net earnings for the quarter by
approximately $3.1 million, after tax, or approximately $0.19 per diluted
share.
The Bank's portfolio of loans sold with recourse was originated prior to
1990, and the Bank's exposure to loss on these loans has decreased in
recent years as the balances have declined. Credit experience has been
better than previously estimated, with no charge-offs having occurred on
these loans since 1997. Additionally, the continuing escalation of real
estate prices in Southern California contributed to the conclusion
that the reserve should be reversed. At September 30, 2004, the dollar
amount of loans sold with recourse on which the Company had recourse
liability totaled $81 million. The maximum potential recourse liability
on this portfolio is $15 million.
7. Recent Accounting Pronouncements
In December 2003, SFAS Statement No. 132(revised), Employers' Disclosures
about Pensions and Other Postretirement Benefits, was issued. Statement
132 (revised) prescribes employers' disclosures about pension plans and
other postretirement benefit plans; it does not change the measurement
or recognition of those plans. The Statement retains and revises the
disclosure requirements contained in the original Statement 132. It also
requires additional disclosures about the assets, obligations, cash
flows, and net periodic benefit cost of defined benefit pension plans and
other postretirement benefit plans. The Statement generally is effective
for fiscal years ending after December 15, 2003. The Company's disclosures
incorporate the requirements of Statement 132 (revised).
7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following narrative is written with the presumption that the users have read
or have access to the Company's 2003 Annual Report on Form 10-K, which contains
the latest audited financial statements and notes thereto, together with
Management's Discussion and Analysis of Financial Condition and Results of
Operations as of December 31, 2003, and for the year then ended. Therefore, only
material changes in financial condition and results of operations are discussed
herein.
The Securities and Exchange Commission ("SEC") maintains a web site which
contains reports, proxy and information statements, and other information
pertaining to registrants that file electronically with the SEC, including the
Company. The address is: www.sec.gov. In addition, the Company's periodic and
current reports are available free of charge on its website at
www.firstfedca.com as soon as reasonably practicable after such material is
electronically filed with, or furnished to, the SEC.
Note regarding forward looking statements: This quarterly report contains
certain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the
Securities and Exchange Act of 1934, as amended (the "Exchange Act"). All
statements, other than statements of historical facts, included in this
quarterly report that address activities, events or developments that the
Company expects, believes or anticipates will or may occur in the future, are
forward-looking statements. These statements are based on certain assumptions
and analyses made by the Company in light of its experience and perception of
historical trends, current conditions, expected future developments and other
factors it believes are appropriate in the circumstances. These forward-looking
statements are subject to various factors, many of which are beyond the
Company's control, which could cause actual results to differ materially from
such statements. Such factors include, but are not limited to, the general
business environment, interest rate fluctuations that may affect operating
margins, the California real estate market, branch openings, competitive
conditions in the business and geographic areas in which the Company conducts
its business, and regulatory actions. In addition, these forward-looking
statements are subject to assumptions as to future business strategies and
decisions that are subject to change. The Company makes no guarantee or promises
regarding future results and assumes no responsibility to update such
forward-looking statements.
Financial Condition
At September 30, 2004, FirstFed Financial Corp. ("Company"), holding company for
First Federal Bank of California and its subsidiaries ("Bank"), had consolidated
total assets of $6.4 billion compared to $4.8 billion at December 31, 2003 and
$4.5 billion at September 30, 2003. The increase in total assets for the period
ended September 30, 2004 compared to December 31, 2003 and September 30, 2003 is
primarily attributable to an increase in the loan portfolio to $5.8 billion at
September 30, 2004 from $4.4 billion at December 31, 2003 and $4.1 billion at
September 30, 2003. Loan originations and purchases were $2.5 billion during the
first nine months of 2004 compared to $1.6 billion during the first nine months
of 2003. Loan payoffs and principal reductions were $1.1 billion during the
first nine months of 2004 compared to $1.3 billion during the first nine months
of 2003. Consolidated stockholders' equity at September 30, 2004 was $458.2
million compared to $436.6 million at December 31, 2003 and $420.3 million at
September 30, 2003. Stockholders' equity increased $21.6 million during the
first nine months of 2004 primarily due to net earnings of $49.4 million offset
by stock repurchases of $28.0 million. The Company repurchased 696,600 shares of
common stock at an average market price of $40.25 per share during the first
nine months of 2004. During the first nine months of 2003, the Company
repurchased 33,800 shares of common stock at an average market price of $28.53
per share.
The UCLA Anderson Forecast for California ("Forecast") projects continued growth
in jobs and personal income during 2004 and continuing into 2005 and 2006.
Although real estate prices are at record high levels, demand for housing
remains strong due to continued migration to California. Permits for new housing
are expected to reach 200,000 units in 2004 and remain strong throughout 2006.
According to the Forecast, "it would take something like a big spike in interest
rates or a very tough recession to slow building down."
8
Southern California has traditionally been the Bank's primary lending area. In
2004, the Bank expanded its lending operations to Northern California, which
accounted for 35% of loan originations during the first nine months.
The following table summarizes loan originations and purchases by property type
for the periods indicated:
Nine months ended
September 30,
2004 2003
------------- -------------
(In thousands)
Single family $ 1,976,818 $ 1,201,451
Multi-family and commercial 487,271 377,146
Other (1) 57,218 37,127
----------- -----------
Total $ 2,521,307 $ 1,615,724
=========== ===========
(1) Includes consumer loans and commercial business loans.
The following table summarizes loan originations and purchases by loan type for
the periods indicated:
Nine months ended
September 30,
2004 2003
------------ -------------
(In thousands)
Adjustable:
12MAT $ 703,389 $ 517,334
CODI 1,656,298 472,794
COFI 79,496 129,041
Prime 57,860 37,127
Libor 932 --
Fixed 3,723 61,363
Hybrid (1) 19,609 398,065
----------- -----------
Total $ 2,521,307 $ 1,615,724
=========== ===========
(1) These loan types are adjustable rate loans with initial fixed interest rate
periods ranging from 3 to 7 years.
At September 30, 2004, 89.1% of the Bank's loan portfolio was invested in
adjustable rate products. Loans that adjust monthly based on the 12-month
average of the 3-Month Certificate of Deposit Index ("CODI") comprised 37.3% of
the loan portfolio. Loans that adjust monthly based on the 12-month average U.S.
Treasury Security rate ("12MAT") comprised 25.2% of the loan portfolio. Loans
that adjust monthly based on the FHLB Eleventh District Cost of Funds Index
("COFI") comprised 23.6% of the loan portfolio. The remaining 3.0% of the
adjustable rate loan portfolio varies based on changes in the Prime Rate and the
London Inter-Bank Offering Rate ("LIBOR") and other indices.
The Bank's non-performing assets to total assets ratio was 0.02% as of September
30, 2004, compared to 0.10% as of December 31, 2003 and 0.12% as of September
30, 2003. (See "Non-performing Assets" for further discussion.)
The Bank recorded net loan recoveries of $231 thousand and $443 thousand for the
third quarter and first nine months of 2004, respectively. For the comparable
periods last year, the Bank recorded no loan charge-offs during the third
quarter of 2003 and net loan recoveries of $25 thousand during the first nine
months of 2003, respectively. Allowances for loan losses (including general
valuation allowances and valuation allowances for impaired loans) totaled $76.2
million or 1.29% of gross loans at September 30, 2004. This compares with $75.7
million or 1.70% at December 31, 2003 and $75.7 million or 1.81% at September
30, 2003.
9
The following table shows the components of the Bank's portfolio of loans
(including loans held for sale) and mortgage-backed securities by collateral
type as of the dates indicated:
September 30, December 31, September 30,
2004 2003 2003
--------------- -------------- ---------------
(In thousands)
REAL ESTATE LOANS
First trust deed residential loans
One-to-four units $ 3,727,516 $ 2,456,971 $ 2,134,608
Five or more units 1,703,413 1,547,771 1,585,646
--------------- -------------- ---------------
Residential loans 5,430,929 4,004,742 3,720,254
OTHER REAL ESTATE LOANS
Commercial and industrial 313,475 345,273 382,531
Second trust deeds 6,018 7,281 6,342
Construction 19,028 9,053 7,263
--------------- -------------- ---------------
Real estate loans 5,769,450 4,366,349 4,116,390
NON-REAL ESTATE LOANS:
Deposit accounts 526 649 616
Commercial business loans 55,742 34,424 26,914
Consumer 57,940 49,738 45,772
--------------- -------------- ---------------
Loans receivable 5,883,658 4,451,160 4,189,692
LESS:
General valuation allowances -
loan portfolio 75,681 75,238 75,248
Valuation allowances - impaired loans 496 496 496
Deferred loan origination fees
(costs), net (18,458) 1,314 6,302
--------------- -------------- ---------------
Net loans receivable 5,825,939 4,374,112 4,107,646
FHLMC AND FNMA MORTGAGE-BACKED
SECURITIES (at fair value):
Secured by single family dwellings 99,667 128,465 143,850
Secured by multi-family dwellings 6,144 6,711 7,280
--------------- -------------- ---------------
Mortgage-backed securities 105,811 135,176 151,130
--------------- -------------- ---------------
TOTAL $ 5,931,750 $ 4,509,288 $ 4,258,776
=============== ============== ===============
The mortgage-backed securities portfolio, classified as available-for-sale, was
recorded at fair value as of September 30, 2004. An unrealized gain of $684
thousand, net of taxes, was recorded in stockholders' equity as of September 30,
2004. This compares to net unrealized gains of $965 thousand as of December 31,
2003 and $1.1 million as of September 30, 2003.
The investment securities portfolio, classified as available-for-sale, was
recorded at fair value as of September 30, 2004. An unrealized gain of $427
thousand, net of taxes, was reflected in stockholders' equity as of September
30, 2004. This compares to net unrealized gains of $126 thousand as of December
31, 2003 and unrealized losses of $37 thousand as of September 30, 2003.
Asset/Liability Management
Market risk is the risk of loss from adverse changes in market prices and
interest rates. The Bank's market risk arises primarily from the interest rate
risk inherent in its lending and liability funding activities.
10
The Bank's net interest income typically improves during periods of decreasing
interest rates because there is a three-month time lag before changes in COFI,
and a two-month time lag before changes in 12MAT, CODI and LIBOR, can be
implemented with respect to the Bank's adjustable rate loans Thus during periods
immediately following interest rate decreases the Bank's cost of funds tends to
decrease faster than the yield earned on its adjustable rate loan portfolio. The
reverse is true during rising rate environments and the Bank's net interest
income typically decreases if there is no growth in earning assets.
The composition of the Bank's financial instruments that are subject to market
risk has not changed materially since December 31, 2003.
The one year GAP (the difference between rate-sensitive assets and liabilities
repricing within one year or less) was a positive $411.4 million or 6.39% of
total assets at September 30, 2004. In comparison, the one year GAP was a
positive $666.1 million or 13.8% of total assets at December 31, 2003. The
decrease in GAP at September 30, 2004 from December 31, 2003 is attributable to
an increase in short-term borrowings.
Capital
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and percentages of total capital to
assets. The Bank met the standards necessary to be deemed well capitalized under
the applicable regulatory requirements. The following table summarizes the
Bank's actual capital and required capital as of September 30, 2004:
Tangible Core Risk-based
Capital Capital Capital
----------- ------------ -------------
(Dollars in thousands)
Actual Capital:
Amount $ 429,701 $ 429,701 $ 474,583
Ratio 6.68% 6.68% 13.33%
Minimum required capital:
Amount $ 96,448 $ 257,194 $ 284,784
Ratio 1.50% 4.00% 8.00%
Well capitalized required capital:
Amount $ -- $ 321,493 $ 355,980
Ratio --% 5.00% 10.00%
During the first nine months of 2004, the Company repurchased 696,900 shares of
common stock at an average market price of $40.25 per share. During the first
nine months of 2003, the Company repurchased 33,800 shares of common stock at an
average market price of $28.53 per share. The Board of Directors authorized the
repurchase of 820,302 additional shares on July 22, 2004, which brought the
shares available for repurchase as of November 1, 2004 to 1,472,079 or 9% of
total common shares outstanding.
11
Loan Loss Allowances
Listed below is a summary of activity in the Bank's general valuation allowance
and the valuation allowance for impaired loans during the periods indicated:
Nine Months Ended September 30, 2004
--------------------------------------------
General Impaired
Valuation Valuation
Allowances Allowances Total
-------------- ------------- ----------
(In thousands)
Balance at December 31, 2003 $ 75,238 $ 496 $ 75,734
Recoveries 443 -- 443
-------------- ------------- ----------
Balance at September 30, 2004 $ 75,681 $ 496 $ 76,177
============== ============= ==========
Nine Months Ended September 30, 2003
--------------------------------------------
General Impaired
Valuation Valuation
Allowances Allowances Total
-------------- ------------- ----------
(In thousands)
Balance at December 31, 2002 $ 75,223 $ 496 $ 75,719
Charge-offs:
Single family (52) -- (52)
Multifamily (8) -- (8)
Other - non-real estate (32) -- (32)
-------------- ------------- ----------
Total charge-offs (92) -- (92)
Recoveries 117 -- 117
-------------- ------------- ----------
Net recoveries 25 -- 25
-------------- ------------- ----------
Balance at September 30, 2003 $ 75,248 $ 496 $ 75,744
============== ============= ==========
The Bank maintains a general valuation allowance for loan losses due to the
inherent risks in the loan portfolio that have yet to be specifically
identified. The Bank's loan portfolio is stratified based on factors affecting
the perceived level and concentration of risk, such as type of collateral, level
of loan documentation, the borrowers credit rating, year of origination,
original loan-to-value ratio and geographic location.
The appropriate level of general valuation allowance is calculated by applying
reserve factors to the balance of assets on which the Bank has loss exposure.
These reserve factors represent the expected likelihood of default multiplied by
the expected rate of loss. The expected rates of loss and default are based on
the Bank's historical loss experience and adjusted for current conditions and
trends in the Bank's lending areas.
Based on this methodology, the Bank did not record a provision for loan losses
during the first nine months of 2004 or for any period in 2003.
Loans that require a reduced level of documentation at origination are an
increasing percentage of the Bank's loan portfolio. On "Stated Income/Stated
Asset" (SISA) loans, the borrower includes information on his/her level of
income and assets that is not subject to verification by the Bank. For "No
Income/No Asset" (NINA) loans, the borrower is not required to submit
information on his/her level of income or assets. At September 30, 2004,
approximately 45% of the Bank's single family loan portfolio was composed of
either NINA or SISA loans. This was an increase from approximately 32% of the
Bank's single family loan portfolio being NINA or SISA at December 31, 2003. The
Bank's portfolios of multifamily and other real estate loans all require full
documentation by the borrowers.
12
The Bank attempts to mitigate the inherent risk of making reduced documentation
loans by evaluating the other credit characteristics of the loans, such as the
creditworthiness of the borrower and the loan to value ratio at the origination
date. One measure of the creditworthiness of the borrower is the borrower's FICO
score, which is a standardized credit scoring system developed by Fair Isaac &
Co. The Bank's portfolio of single family loans had a weighted average FICO
score at date of origination of 708. The weighted average loan to value ratio at
date of origination for the single family portfolio was approximately 72% at
September 30, 2004.
Results of Operations
The Company reported consolidated net earnings of $17.9 million or $1.06 per
diluted share of common stock for the third quarter of 2004 compared to net
earnings of $18.2 million or $1.04 per diluted share for the third quarter of
2003. Net earnings for the third quarter of 2004 included income of $3.1 million
or $0.19 per diluted share from the elimination of the Bank's repurchase
liability for loans sold with recourse. Net earnings for the third quarter of
2003 included $870 thousand or $0.05 per diluted share for a reduction in the
same liability. Additionally, income tax expense for the third quarter of 2003
was reduced by $1.6 million or $0.09 per diluted share due to a change in the
California tax method of accounting for bad debts.
Net earnings for the first nine months of 2004 were $49.4 million or $2.88 per
diluted common share compared to $49.3 million or $2.84 per diluted common share
for the first nine months of 2003. Net earnings for the first nine months of
2004 include $907 thousand or $0.05 per diluted share for interest received from
the California Franchise Tax Board in settlement of amended returns for tax
years 1993 to 1998.
Net Interest Income
Net interest income increased by 6% during the third quarter of 2004 compared to
the third quarter of 2003, but decreased by 3% compared to the second quarter of
2004. Although the interest rate spread dropped to 2.55% during the third
quarter of 2004 from 3.17% during the third quarter of 2003, net interest income
increased due to a 31% growth in average interest-earning assets. However, net
interest income fell compared to the second quarter of 2004 because the 12%
growth in average interest-earning assets was not sufficient to compensate for a
26 basis point decrease in interest spread. The average earning assets yield
dropped 14 basis points primarily due to the time-lag inherent in adjustable
rate loans. The cost of funds increased by 12 basis points due to higher
short-term interest rates.
Net interest income increased by 5% to $116.6 million during the first nine
months of 2004 compared to $111.1 million for the first nine months of 2003. The
increase is attributable to a 22% increase in average interest-earning assets
which was offset by a 49 basis point decline in interest rate spreads. The
decline in spread is attributable to the yield on interest-earning assets
declining more rapidly than the cost of funds. The yield on average earning
assets decreased by 90 basis points during the first nine months of 2004
compared to the prior year while the cost of funds decreased by only 41 basis
points. Funding costs started to increase during the first nine months of 2004
due to three interest rate increases by the Federal Reserve during this period.
13
The following table sets forth: (i) the average daily dollar amounts of and
average yields earned on loans, mortgage-backed securities and investment
securities, (ii) the average daily dollar amounts of and average rates paid on
savings deposits and borrowings, (iii) the average daily dollar differences,
(iv) the interest rate spreads, and (v) the effective net spreads for the
periods indicated:
During the Nine Months Ended
September 30,
-------------------------------
2004 2003
------------ ---------------
(Dollars in thousands)
Average loans and mortgage-backed securities $ 4,968,365 $ 4,137,904
Average investment securities 242,345 123,176
------------ ---------------
Average interest-earning assets 5,210,710 4,261,080
------------ ---------------
Average savings deposits 2,798,348 2,502,758
Average borrowings 2,136,130 1,500,810
------------ ---------------
Average interest-bearing liabilities 4,934,478 4,003,568
------------ ---------------
Excess of interest-earning assets over
interest-bearing liabilities $ 276,232 $ 257,512
============ ===============
Yields earned on average interest-earning assets 4.61% 5.51%
Rates paid on average interest-bearing liabilities 1.84 2.25
Interest rate spread 2.77 3.26
Effective net spread (1) 2.86 3.40
Total interest income $ 180,160 $ 176,089
Total interest expense 68,096 67,560
------------ ---------------
112,064 108,529
Total other items (2) 4,502 2,578
------------ ---------------
Net interest income $ 116,566 $ 111,107
============ ===============
(1) The effective net spread is a fraction, the denominator of which is the
average dollar amount of interest-earning assets, and the numerator of
which is net interest income (excluding stock dividends, interest from the
FTB and miscellaneous interest income).
(2) Includes Federal Home Loan Bank Stock dividends, interest from the FTB and
other miscellaneous interest income.
Non-Interest Income and Expense
Loan servicing and other fees were $2.5 million and $6.9 million for the third
quarter and first nine months of 2004, respectively, compared to $2.5 million
and $5.6 million for the same periods of the prior year. Because a greater
number of loans subject to prepayment fees were paid off, loan prepayment fees
grew to $2.2 million and $5.8 million for the third quarter and first nine
months of 2004 compared to $2.0 million and $4.0 million for the same periods
last year.
Gain on sale of loans was $5.4 million for both the third quarter and first nine
months of 2004 resulting from the elimination the Bank's repurchase liability
for loans sold with recourse. Because loan balances have declined, credit
experience has been better than previously estimated and no charge-offs have
occurred on these loans since 1997, the Bank eliminated its repurchase liability
for loans sold with recourse. Additionally, the age of the loans and the
continuing escalation of real estate prices in Southern California contributed
to the conclusion that the reserve should be reversed. Gains of $1.7 million and
$2.4 million for the third quarter and first nine months of 2003 include a $1.5
million partial reversal of the recourse liability.
Real estate operations resulted in net losses of $24 thousand during the third
quarter of 2004 compared to net losses of $49 thousand for the same period last
year. Real estate operations resulted in net gains of $106 thousand during the
first nine months of 2004 compared to net gains of $315 thousand for the same
period last year. Real estate operations normally include gains and losses on
the sale of foreclosed properties as well as rental income and operating expense
during the holding period of these foreclosed properties.
14
Non-interest expense increased to $17.7 million and $48.3 million, respectively,
for the third quarter and first nine months of 2004 from $13.5 million and $41.1
million, respectively, from the third quarter and first nine months of 2003. The
increase in non-interest expense during the third quarter and first nine months
of 2004 resulted from higher incentive-based compensation related to loan volume
and legal costs. Year to date results during 2004 include a $395 thousand first
quarter loss from a vendor defalcation.
The ratio of non-interest expense to average total assets fell to 1.18% during
the third quarter of 2004 from 1.20% for the third quarter of 2003. On a
year-to-date basis, the ratio of non-interest expense to total assets fell to
1.17% for the first nine months of 2004 from 1.24% for the first nine months of
2003. The decreased ratios during 2004 are attributable to asset growth.
Non-accrual, Past Due, Modified and Restructured Loans
The Bank accrues interest earned but uncollected for every loan without regard
to its contractual delinquency status and establishes a specific interest
allowance for each loan which becomes 90 days or more past due or in
foreclosure. Loans requiring delinquent interest allowances (non-accrual loans)
totaled $1.4 million at September 30, 2004 compared to $3.3 million at December
31, 2003 and $5.2 million at September 30, 2003.
The amount of interest allowance for loans 90 days or more delinquent or in
foreclosure was $190 thousand, $227 thousand, and $303 thousand as of September
30, 2004, December 31, 2003, and September 30, 2003, respectively.
The Bank allows loan restructurings that result from temporary modifications of
principal and interest payments. Under these arrangements, loan terms are
typically reduced to no less than a monthly interest payment required under the
note. Any loss of revenues under the modified terms would be immaterial to the
Bank. Generally, if the borrower is unable to return to scheduled principal and
interest payments at the end of the modification period, foreclosure proceedings
are initiated. As of September 30, 2004, the Bank had net modified loans
totaling $2.4 million. No modified loans were 90 days or more delinquent as of
September 30, 2004.
The Bank considers a loan impaired when management believes that it is probable
that the Bank will not be able to collect all amounts due under the contractual
terms of the loan. Estimated impairment losses are recorded as separate
valuation allowances and may be subsequently adjusted based upon changes in the
measurement of impairment. Impaired loans, disclosed net of valuation
allowances, include non-accrual major loans (commercial business loans with an
outstanding principal amount greater than or equal to $500 thousand and
single-family loans greater than or equal to $750 thousand, and income property
loans with an outstanding principal amount greater than or equal to $1.5
million), modified loans, and major loans less than 90 days delinquent in which
full payment of principal and interest is not expected to be received.
The following is a summary of impaired loans, net of valuation allowances for
impairment, as of the dates indicated:
September 30, December 31, September 30,
2004 2003 2003
--------------- -------------- ---------------
(In thousands)
Non-accrual loans $ -- $ 1,782 $ 1,312
Modified loans -- 1,488 1,508
--------------- -------------- ---------------
$ -- $ 3,270 $ 2,820
=============== ============== ===============
15
The Bank evaluates loans for impairment whenever the collectibility of
contractual principal and interest payments is questionable. 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 foreclosure is probable, impairment is measured based
on the fair value of the collateral. When the measure of an impaired loan is
less than the recorded investment in the loan, the Bank records an impairment
allowance equal to the excess of the Bank's recorded investment in the loan over
its measured value.
All impaired loans were measured using the fair value method as of September 30,
2004, December 31, 2003 and September 30, 2003, respectively.
Impaired loans for which valuation allowances had been established totaled $496
thousand at September 30, 2004, December 31, 2003 and September 30, 2003.
Impaired loans for which there were no valuation allowances established totaled
$0 at September 30, 2004, $3.3 million at December 31, 2003 and $2.8 million at
September 30, 2003. See "Results of Operations" for an analysis of activity in
the valuation allowance for impaired loans.
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 net investment in impaired loans was $0 for the quarter ended
September 30, 2004, $3.6 million for the quarter ended December 31, 2003 and
$4.5 million for the quarter ended September 30, 2003. The amount of interest
income recognized on the cash basis for impaired loans during the quarters ended
September 30, 2004 and September 30, 2003 was $0 and $18 thousand, respectively.
Interest income recognized under the accrual basis for the quarters ended
September 30, 2004 and September 30, 2003 was $0 and $18 thousand, respectively.
Asset Quality
The following table sets forth certain asset quality ratios of the Bank at the
periods indicated:
September 30, December 31, September 30,
2004 2003 2003
--------------- -------------- ---------------
Non-performing loans to gross loans receivable (1) 0.02% 0.08% 0.12%
Non-performing assets to total assets (2) 0.02% 0.10% 0.12%
Loan loss allowances to non-performing loans (3) 5,560% 2,266% 1,447%
General loss allowances to gross loans
receivable (4) 1.29% 1.70% 1.81%
--------------------------
(1) Non-performing loans are net of valuation allowances related to those
loans. Loans receivable are before deducting deferred loan origination fees
(costs), general valuation allowances and valuation allowances for impaired
loans.
(2) Non-performing assets are net of valuation allowances related to those
assets.
(3) The Bank's loan loss allowances, including any valuation allowances for
non-performing loans, impaired loans and the general valuation allowance.
Non-performing loans are before deducting valuation allowances related to
those loans.
(4) The Bank's general valuation allowances plus the allowance for impaired
loans as a percentage of gross loans receivable before deducting deferred
loan origination fees (costs), general valuation allowances and valuation
allowances for impaired loans.
16
Non-performing Assets
The Bank defines non-performing assets as loans delinquent over 90 days
(non-accrual loans), loans in foreclosure and real estate acquired by
foreclosure (real estate owned). The following is an analysis of non-performing
assets as of the periods indicated:
September 30, December 31, September 30,
2004 2003 2003
---------------- -------------- -----------------
(In thousands)
Real estate owned:
Single family $ -- $ 1,324 $ --
---------------- -------------- -----------------
Total real estate owned -- 1,324 --
---------------- -------------- -----------------
Non-accrual loans:
Single family 1,364 3,326 5,224
Other 6 16 12
---------------- -------------- -----------------
Total non-accrual loans 1,370 3,342 5,236
---------------- -------------- -----------------
Total non-performing assets $ 1,370 $ 4,666 $ 5,236
================ ============== =================
Real estate owned and non-accrual loans, while varying slightly from quarter to
quarter, have remained at very low levels for the last few years. Historically,
single family non-performing loans have been attributable to factors such as
layoffs and decreased incomes. Historically, multi-family and commercial
non-performing loans have been attributable to factors such as declines in
occupancy rates, employment rates and rental values.
Sources of Funds
External sources of funds include savings and checking deposits from several
sources, advances from the Federal Home Loan Bank of San Francisco ("FHLB"), and
collateralized borrowings.
Savings and checking deposits are accepted from retail banking offices,
telemarketing sources, and national deposit brokers. The cost of funds,
operating margins and net earnings of the Bank associated with brokered and
telemarketing deposits are generally comparable to the cost of funds, operating
margins and net earnings of the Bank associated with retail deposits, FHLB
borrowings and repurchase agreements. As the cost of each source of funds
fluctuates from time to time, based on market rates of interest offered by the
Bank and other depository institutions, the Bank selects funds from the lowest
cost source until the relative costs change. To diversify its funding sources,
the Bank is considering securitizing additional loans for use as collateral for
reverse repurchase agreements.
Total savings deposits increased by $493.2 million and $713.5 million during the
third quarter and first nine months of 2004, respectively. The increase in
deposits for the third quarter of 2004 is primarily attributable to an increase
in deposits acquired from national brokerage firms ("brokered deposits").
Brokered deposits increased by $477.3 million and $642.9 million during the
third quarter and first nine months of 2004, respectively. In order to fund loan
originations, the Bank increased its use of brokered deposits during the third
quarter and the first nine months of 2004. Brokered deposits comprised 20%, 0%
and 0% of total deposits at September 30, 2004, December 31, 2003 and September
30, 2003, respectively. Because the Bank has sufficient capital to be deemed
"well capitalized" under the standards established by the Office of Thrift
Supervision, it may solicit brokered funds without special regulatory approval.
Deposits accepted by retail banking offices increased by $22.8 million and $50.7
million during the third quarter of 2004 and first nine months of 2004,
respectively. Retail and business deposits comprised 79%, 99% and 99% of total
deposits as of September 30, 2004, December 31, 2003 and September 30, 2003,
respectively.
17
Telemarketing deposits decreased by $6.9 million during the third quarter of
2004 and increased by $19.9 million during the first nine months of 2004. These
deposits are normally large deposits from pension plans, managed trusts and
other financial institutions. These deposit levels fluctuate based on the
attractiveness of the Bank's rates compared to returns available to investors on
alternative investments. Telemarketing deposits comprised 1%, 1% and 1% of total
deposits at September 30, 2004, December 31, 2003 and September 30, 2003,
respectively.
Total borrowings increased by $393.2 million and $870.8 million during the third
quarter and first nine months of 2004, respectively, due to a $407.2 million and
$882.2 million net increase in borrowings from the FHLB and net decreases of
$14.0 million and $11.4 million in reverse repurchase agreements. The Bank used
FHLB advances during the third quarter and first nine months of 2004 to fund
asset growth.
Internal sources of funds include both principal payments and payoffs on loans
and mortgage-backed securities, loan sales, and positive cash flow from
operations. Principal payments include amortized principal and prepayments that
are a function of lending activity and the general level of interest rates.
Loan payoffs and principal reductions were $1.1 billion during the first nine
months of 2004 compared to $1.3 billion during the first nine months of 2003.
The decrease is primarily attributable to reduced payoff activity as fewer
borrowers refinanced existing loans into new loans at lower rates.
The volume of loans sold totaled $280 thousand and $3.3 million during the third
quarter and first nine months of 2004, respectively, compared to $19.1 million
and $81.2 million, respectively for the same periods of 2003. The decrease in
loans sold from the comparable periods is attributable to the Bank's efforts to
originate adjustable rate loans for its portfolio. Loan sale activity also
varies based upon borrower demand for 15-year and 30-year fixed rate loans,
which the Bank only originates for sale in the secondary market.
18
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Asset/Liability Management" on page 9 hereof for Quantitative and
Qualitative Disclosures About Market Risk.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under SEC rules, the Company is required to maintain disclosure controls and
procedures designed to ensure that information required to be disclosed by the
Company in the reports that it files or submits under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms. Within the 90-day period prior
to the filing date of this report, the Company carried out an evaluation of the
effectiveness of the design and operation of its disclosure controls and
procedures. The Company's management, including the Company's Chief Executive
Officer and Chief Financial Officer, supervised and participated in the
evaluation. Based on this evaluation, the Chief Executive Officer and the Chief
Financial Officer concluded that as of the evaluation date, the Company's
disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and
15d-14) are effective in alerting management to material information that may be
required to be included in the Company's public filings. In designing and
evaluating the disclosure controls and procedures, management recognizes that
any such controls and procedures can provide only reasonable assurance as to the
control objectives. Management is required to apply its judgment in evaluating
the cost-benefit relationship of such controls and procedures.
Changes in Internal Controls
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation, and there has not been any corrective action with regard to
significant deficiencies and material weaknesses.
19
PART II - OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None
Item 6. Exhibits and Reports on Form-8K
(a) Exhibits
(3.1) Restated Certificate of Incorporation filed as Exhibit 3.1 to
Form 10-K for the fiscal year ended December 31, 1999 and
incorporated by reference.
(3.2) Bylaws filed as Exhibit 3.2 to Form 10-Q dated August 12, 2002 and
incorporated by reference. (4.1) Amended and Restated Rights Agreement
dated as of September 25, 1998, filed as Exhibit 4.1 to Form
8-A/A, dated September 25, 1998 and incorporated by reference.
(10.1) Deferred Compensation Plan filed as Exhibit 10.3 to Form 10-K for the
fiscal year ended December 31, 1983 and incorporated by reference.
(10.2) 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.
(10.3) 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 March 31, 2001 and incorporated by
reference.
(10.4) 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 March 31, 2001, and incorporated by
reference.
(21) Registrant's sole subsidiary is First Federal Bank of California, a
federal savings bank.
(31.1) Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
(31.2) Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
(32.1) Certification of Chief Executive Officer pursuant to 18 U.S.C. section
1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(32.2) Certification of Chief Financial Officer pursuant to 18 U.S.C. section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(b) Reports on Form 8-K
The Company filed current reports on Form 8-K during the quarter ended September
30, 2004 on the following dates: July 23, 2004, August 19, 2004, September 9,
2004, and September 22, 2004. These reports are related to the release of the
Company's disclosure of certain other financial data and earnings release. The
Form 8-K filed on September 9, 2004 related to changes in the registrant's
certifying accountant.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FIRSTFED FINANCIAL CORP.
------------------------
Registrant
Date: November 9, 2004 By: /s/ Douglas J. Goddard
----------------------
Douglas J. Goddard
Chief Financial Officer and
Executive Vice President
21
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Babette Heimbuch, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of FirstFed Financial
Corp.;
(2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
(4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over the financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15D-15(f) for the registrant and have:
(i) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this
quarterly report is being prepared;
(ii) Designed such internal control over financial reporting, or caused
such disclosure controls and procedures to be designed under our
supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principals;
(iii) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such evaluation;
and
(iv) Disclosed in this quarterly report any change in the registrant's
internal control over financial reporting that occurred in the
registrant's most recent fiscal quarter that has materially affected, or
is reasonably likely to materially affect the registrant's internal
control over financial reporting; and
(5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons fulfilling the equivalent function):
(i) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(ii) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
control over financial reporting and
(6) The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
control over financial reporting or in other factors that could
significantly affect internal control over financial reporting subsequent to
the date of our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
Dated this 9th day of November 2004.
By: /s/ Babette E. Heimbuch
-----------------------
Babette E. Heimbuch
Chief Executive Officer
22
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Douglas Goddard, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of FirstFed Financial
Corp.;
(2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
(4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over the financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15D-15(f) for the registrant and have:
(i) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this
quarterly report is being prepared;
(ii) Designed such internal control over financial reporting, or caused
such disclosure controls and procedures to be designed under our
supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principals;
(iii) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such evaluation;
and
(iv) Disclosed in this quarterly report any change in the registrant's
internal control over financial reporting that occurred in the
registrant's most recent fiscal quarter that has materially affected, or
is reasonably likely to materially affect the registrant's internal
control over financial reporting; and
(5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons fulfilling the equivalent function):
(i) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(ii) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
control over financial reporting and
(6) The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
control over financial reporting or in other factors that could significantly
affect internal control over financial reporting subsequent to the date of
our most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Dated this 9th day of November 2004.
By: /s/ Douglas Goddard
-------------------
Douglas Goddard
Chief Financial Officer
23
EXHIBIT 32.1
CEO CERTIFICATION
The undersigned, as Chief Executive Officer hereby certifies, to the best of her
knowledge and belief, that:
(1) the Form 10-Q of FirstFed Financial Corp. (the "Company") for the
quarterly period ended September 30, 2004 (the "Report ")
accompanying this certification fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange
Act of 1934 (15 U.S.C. 78m or 78o(d)); and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of
operations of the Company for such period.
This certification is made solely for purposes of complying with the provisions
of Section 906 of the Sarbanes-Oxley Act of 2003, 18 U.S.C. Section 1350.
FIRSTFED FINANCIAL CORP.
------------------------
Registrant
Date: November 9, 2004
By: /s/ Babette E. Heimbuch
-----------------------
Babette E. Heimbuch
Chief Executive Officer
24
EXHIBIT 32.2
CFO CERTIFICATION
The undersigned, as Chief Financial Officer hereby certifies, to the best of her
knowledge and belief, that:
(1) the Form 10-Q of FirstFed Financial Corp. (the "Company") for the
quarterly period ended September 30, 2004 (the "Report ")
accompanying this certification fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange
Act of 1934 (15 U.S.C. 78m or 78o(d)); and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of
operations of the Company for such period.
This certification is made solely for purposes of complying with the provisions
of Section 906 of the Sarbanes-Oxley Act of 2003, 18 U.S.C. Section 1350.
FIRSTFED FINANCIAL CORP.
------------------------
Registrant
Date: November 9, 2004
By: /s/ Douglas J. Goddard
----------------------
Douglas J. Goddard
Chief Financial Officer and
Executive Vice President
25