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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, 1994
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 No. 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 $.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 15, 1995: $137,566,726.
The number of shares of Registrant's $0.01 par value common stock
outstanding as of February 15, 1995: 10,598,972.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for Annual Meeting of Stockholders,
April 26, 1995 (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 this Form 10-K or any amendment to this Form 10-K.
[X]
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PART 1
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, fsb ("Bank"), "Company"], was incorporated on
February 3, 1987. Since September 22, 1987, FFC has been a savings and
loan holding company engaged primarily in the business of owning the
Bank. Because FFC does not presently engage in any 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 secured
loans.
At December 31, 1994, the Company had assets totaling $4.2 billion
compared to $3.7 billion at December 31, 1993. The Company recorded net
losses of $24.5 million and $2.0 million for the years ended December
31, 1994 and 1993. The Company recorded net earnings of $18.0 million
before the cumulative effect of a change in accounting principle for the
year ended December 31, 1992.
The Bank derives its revenues principally from interest on loans
and investments, gain on sale of loans originated, 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 15, 1995, the Bank operated 25 retail savings
branches and 6 loan origination offices, all located in Southern
California. The Bank acquired 2 retail savings branches from the
Resolution Trust Corporation ("RTC") in 1993 and 7 retail savings
branches from the RTC in 1992. The two branches acquired in 1993 were
consolidated on December 31, 1993. In addition to the retail branches,
the Bank has telemarketing programs which expand the geographical scope
of its deposit activities. Permission to operate all full-service
branches must be approved by the Office of Thrift Supervision.
The Bank's principal market for loan originations continues to be
Southern California.
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 area is Los Angeles County. This area
of Southern California has been especially affected during the current
economic recession. According to the "UCLA Business Forecast for
California, December, 1994 Report" ("UCLA Report"), Los Angeles County
has had the state's largest economic decline with a loss of 440,000 jobs
1
from 1990 to 1994. In addition to the recession, Los Angeles County has
experienced civil unrest (1992), major firestorms (1993) and a
devastating earthquake (1994).
Despite some reported improvement in the economy, many economists
believe that California, and especially Southern California, will lag
behind the rest of the country during the general nationwide economic
recovery. While many reasons are cited, the primary cause is the
structural changes that have taken place in the defense and aerospace
industries. According to the UCLA Report, the contraction of higher
paying durable manufacturing and high technology jobs in the
metropolitan Los Angeles area will persist for the foreseeable future
due to relocation and downsizing by defense and electronic manufacturing
firms.
The unemployment rate for California improved somewhat in 1994,
according to the UCLA Report, having decreased from a high of 3% over
the national rate at one time during the year to the current level of 2%
over the national rate. Improvement was noted in the trade and service
industries (engineering, accounting, management services) and the motion
picture industry. Improvement has also been noted in the hotel and
personal services industries.
While the UCLA Report states that single family home sales in the
metropolitan Los Angeles area have improved in 1994 compared to 1993, it
also cites very little net in-migration to the region and higher
mortgage rates as reasons for the continued deterioration in home
prices.
Because the Bank typically lends less than 80% of the appraised
value of the underlying collateral of loans originated, borrowers
originally have equity in their properties. However, when the value of
the underlying collateral declines, borrowers may have little or no
remaining equity and consequently foreclosure by the Bank becomes more
likely. Additionally, multi-family property values have been impacted by
decreased rental income resulting from increased vacancies and a general
lowering of market rents. Upon foreclosure, or when foreclosure becomes
likely, the assets are recorded at fair value less estimated cost to
sell. Due to declines in real estate values in Southern California, loan
charge-offs have increased to $69 million in 1994 from $49 million in
1993 and $27 million in 1992. $14 million of the 1994 charge-offs were
directly related to the January 17, 1994 earthquake.
The Bank continually monitors the sufficiency of the collateral
supporting its loan portfolio. The portfolio is evaluated on a number of
factors including property location, date of origination and loan-to-value
ratio. The Bank has added substantial amounts to its general allowance for
anticipated loan losses as a result of these evaluations, particularly during
the last three years as the recession worsened in Southern California.
As a result of the increased provisions, the ratio of general
valuation allowances (including general valuation allowances related to
loans sold with recourse which are recorded as a liability) to loans
with loss exposure (the Bank's loan portfolio plus loans sold with
recourse) grew to 1.82% at the end of 1994 from 1.48% at the end of 1993
and 0.93% at the end of 1992.
Current Interest Rate Environment. Interest rates began to
increase early in 1994 when the Federal Reserve Board ("FRB") took steps
to prevent inflation. The FRB increased interest rates a total of six
times during 1994 and once to date during 1995. In a rising interest
rate environment, the Bank earns a lower interest rate spread due to a
time lag inherent in the adjustable loan portfolio. During these
periods, interest costs on deposits and borrowings are impacted
immediately while it takes several months for the yields earned on loans
and mortgage-backed securities to adjust. The time lag inherent in the
loan portfolio is also due to operational and regulatory constraints
which 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. 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.
2
Competition. The Bank experiences strong competition in attracting
and retaining deposits and in originating real estate loans. It competes
for deposits with many of the nation's largest savings institutions and
commercial banks which have significant operations in Southern
California. Absent Congressional action, savings institutions such as
the Bank will face an increasing competitive disadvantage in attracting
deposits, relative to commercial banks, as the result of the potential
disparity between the insurance assessment rates of the Bank Insurance
Fund ("BIF"), which insures the deposits of most commercial banks, and
the Savings Association Insurance Fund ("SAIF"), which insures the
deposits of savings institutions such as the Bank. See "Summary of
Material Legislation and Regulations - Insurance of Accounts."
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 its branch 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.
The Bank began a mortgage banking program in October of 1993 in
which it offers competitively-priced fixed rate loans and certain
adjustable rate loans which the Bank would not typically retain in its
portfolio. Management believes that this expanded array of loan products
will allow the Bank to compete more effectively during periods in which
the Bank's traditional adjustable mortgage loans are less in demand.
These products are sold in the secondary loan markets. Because the
mortgage banking program was started late in 1993, it did not have a
substantial impact on loan originations or loan sales during that year.
During 1994, increasing interest rates decreased borrower demand for
fixed rate loans. Therefore, loans originated for mortgage banking
purposes did not materially impact loan originations, loan sales, loan
interest income or loan servicing income during 1994.
Environmental Concerns. Under certain circumstances, such as when
it participates actively in the management or operation of a property, a
real estate lender may have liability for any properties securing their
loans found to have pollutant or toxic features. Environmental
protection laws are strict and impose joint and several liability on
numerous parties. Liability will generally be imposed on the entity from
which an agency can collect. It is possible for the cost of cleanup of
environmental problems to exceed the value of the security property.
The Bank has adopted stringent environmental underwriting requirements
when considering loans secured by properties which appear to have
environmentally high risk characteristics (e.g. commercial, industrial,
new construction of all types, and older properties 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 Financial Condition and Results
of Operations - Components of Earnings - Net Interest Income" for
further analysis and discussion.
3
Lending Activities
General. The Bank's primary lending activity has been and
continues to be 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 home buyers 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."
Origination and Sale of Loans. The Bank engages loan consultants
on an incentive compensation basis to procure applicants for loans. The
Bank also derives business from traditional sources of mortgage brokers
and borrower referrals. Loan originations were $909 million in 1994,
$746 million in 1993 and $841 million in 1992. Loan originations during
1994 include $59 million in loans purchased from other financial
institutions. The increase in loan originations in 1994 compared to
1993 was due to improved demand for adjustable rate loans resulting from
rising interest rates. The decrease in loan originations during 1993
compared to 1992 was the result of increased competition in the Bank's
lending areas.
Management reevaluated its policy regarding multi-family loans
during 1994 because of real estate market conditions and governmental
regulations relating to risk-based capital requirements for such loans.
Due to inadequate market pricing, management elected to de-emphasize the
origination of multi-family loans during 1994. Multi-family loans
decreased to 18% of originations in 1994 from 32% during 1993.
As mentioned above, the rising interest rate trend in 1994
decreased borrower demand for fixed rate loans. Accordingly, loans
originated for sale in 1994 decreased compared to 1993 and 1992. For the
year ended December 31, 1994, $49 million in loans were originated for
sale compared to $87 million and $154 million during 1993 and 1992,
respectively. Loans originated for resale totaled 5%, 12% and 18% of
loan originations during 1994, 1993 and 1992, respectively.
Loans and mortgage-backed securities held for sale at December 31,
1994, 1993 and 1992 were $30 million, $24 million and $92 million,
respectively, constituting 0.8%, 0.7% and 2.8%, respectively, of the
Bank's total loans and mortgage-backed securities held at such dates.
Loans originated for resale are recorded at the lower of cost or
market. The time from origination to sale may take up to three months
due to packaging requirements.
The Bank structures mortgage-backed securities with loans from its
own 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"). $198 million, $112 million and $187 million in
loans were converted into mortgage-backed securities during 1994, 1993
and 1992, respectively. All mortgage-backed securities were originated
by the Bank. Therefore, the 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 Bank serviced $700 million in loans for other investors as of
December 31, 1994. $305 million of these loans were sold under recourse
arrangements. Of this amount, $27 million were formed into mortgage-
backed securities and were still owned by the Bank as of December
31,1994. Due to regulatory requirements, the Bank maintains capital for
4
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 the new
capital regulations took effect. Loans sold with recourse are considered
along with the Bank's own loans in determining the adequacy of its
general loan valuation allowances. The total principal balance of loans
sold with recourse decreased to $305 million at the end of 1994 from
$347 million at the end of 1993 and $438 million at the end of 1992 due
to loan amortization, payoffs and foreclosures.
Interest Rates, Terms and Fees. First Federal aggressively
markets adjustable mortgage loans ("AMLs") with 30 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 can change annually, the maximum annual change in that payment
is limited to 7.5%. Any additional interest due is added to the
principal balance of the loan ("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 a
lifetime cap 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 Bank enters into a separate written
agreement with the current borrower and the qualified borrower to whom
the property is transferred. Additionally, the new borrower is required
to pay assumption fees customarily charged for similar transactions.
The Bank offers two variations of the AML based on the Index, the
"AML IIC" and the "AML IID". The initial rate on the AML IIC is below
market for the first three months of the loan term. The AML IID has no
below market initial rate but starts with a pay rate similar to the AML
IIC. This results in immediate negative amortization but allows the loan
to earn at the fully indexed rate immediately. The difference in
negative amortization on these two products is minor. 87% of the Bank's
AML loan origination volume in 1994 was comprised of these two products.
The Bank also has a loan product with the interest rate and
payment fixed for three years, the "AML IIH". Thereafter, the loan
becomes a typical, monthly adjustable AML except that the first payment
adjustment has a 15% limitation. Loans originated under this program in
1994 were insignificant.
Additionally, a six month AML based on the six month LIBOR is
offered, the "AML IIIP". Rate changes are subject to a 2% cap per annum.
There is no negative amortization on this product. The AML IIIP
comprised only a minor portion of new loan originations for the Bank in
1994 and were originated for sale in the secondary market.
The Bank will lend up to 95% of the appraised value on fixed rate
loans. These loans are sold in the secondary market. Under current
portfolio loan programs, the Bank normally lends less than or equal to
80% of a single family property's appraised value and less than or equal
to 70% of a multi-family property's appraised value at the time of loan
origination.
The Bank requires that borrowers obtain private mortgage
insurance on loans in excess of 80% of the appraised property value. On
certain portfolio loans the Bank charges premium rates and/or fees in
exchange for waiving the insurance requirement. Subsequent to the
origination of a portfolio loan, the Bank may purchase private mortgage
insurance with its own funds. Loans for which there is no private
mortgage insurance represent less than 10% of the loan portfolio.
Management believes that the additional rates and fees charged on these
loans compensate the Bank for the additional risks associated with this
type of loan.
5
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. Where the Bank does lend in excess of 90% of the
appraised value, additional fees and rate are charged and there is no
below market initial interest rate. The amount of negative amortization
recorded by the Bank increases during periods of rising interest rates.
As of December 31, 1994, negative amortization on all loans serviced by
the Bank totaled $889 thousand.
Although regulations permit a maximum amortization period 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 amortization term of 30 years or less. Starting in 1994, the
Bank started offering several of its loan products based on an
amortization period of 40 years. Loans with 40-year terms constituted
23% of loan originations during 1994.
The following table shows the contractual maturities of the Bank's
loans at December 31, 1994:
Loan Maturity Analysis
Maturity Period
-----------------------------------------------------------
>1 Year
Total 1 Year To 5 >5 - 10 >10 - 20 Over 20
Balance or Less Years Years Years Years
-------- -------- -------- -------- --------- ----------
(Dollars In Thousands)
Interest rate sensitive loans:
AMLs.......................... $3,037,895 $15,653 $ 7,713 $48,911 $ 99,961 $2,865,657
Mortgage-backed securities.... 813,465 - - - - 813,465
---------- ------- ------- ------- -------- ----------
Total interest rate sensitive
loans......................... 3,851,360 15,653 7,713 48,911 99,961 3,679,122
---------- ------- ------- -------- -------- ----------
Fixed rate loans:
1st mortgages................. 32,719 27 2,635 7,826 15,453 6,778
2nd mortgages................. 278 1 18 199 60 -
Mortgage-backed securities.... 7,852 - - 273 7,579 -
Consumer and other loans...... 1,417 1,417 - - - -
---------- ------- ------- -------- -------- ----------
Total fixed rate loans......... 42,266 1,445 2,653 8,298 23,092 6,778
---------- ------- ------- -------- -------- ----------
$3,893,626 $17,098 $10,366 $57,209 $123,053 $3,685,900
========== ======= ======= ======= ======== ==========
Risk Elements
Non-accrual, Past Due 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.
6
The following is a summary of non-accrual loans as of the end of
each of the periods indicated for which delinquent interest allowances
had been established.
% of % of % of % of % of
1994 Total 1993 Total 1992 Total 1991 Total 1990 Total
------- ----- ------- ----- ------- ----- ------- ----- ------- ------
(Dollars In Thousands)
Non-accrual Loans:
Single family........ $13,041 14% $ 25,317 24% $24,634 35% $21,441 37% $ 6,063 24%
Multi-family......... 60,213 64 70,207 66 42,481 60 34,347 60 18,937 75
Commercial........... 20,986 22 10,307 10 3,623 5 1,536 3 - -
Other................ 245 - 245 - 271 - 194 - 388 1
------- --- -------- --- ------- --- ------- --- ------- ---
Total non-accrual
Loans.............. $94,485 100% $106,076 100% $71,009 100% $57,518 100% $25,388 100%
======= === ======== === ======= === ======= === ======= ===
The allowance for delinquent interest, based on loans past due
more than 90 days or in foreclosure, totaled $5 million, $6 million, $4
million, $3 million and $1 million at December 31, 1994, 1993, 1992,
1991 and 1990, respectively.
The Bank has debt restructurings which result from temporary
modifications of principal and interest payments. Under these
arrangements, loan terms are typically reduced to no less than a monthly
interest payment required under the note. Any loss of revenues under
the modified terms would be immaterial to the Bank. 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 instances, the modification period is extended. As of December
31, 1994, the Bank had modified loans totaling $59.7 million, net of loan
loss allowances totaling $8.0 million. This compares with $62.1 million,
net of loan loss allowances totaling $4.1 million as of December 31, 1993.
No modified loans were 90 days or more delinquent as of December 31, 1994
or 1993.
The Bank also restructured certain loans to borrowers who
experienced damage to their properties as a result of the January 17,
1994 earthquake. These modifications were granted in the months
immediately following the earthquake and were usually for the deferral
of loan payments for three to six months. The amount of loans modified
for earthquake-related reasons which were under extended modifications
as of December 31, 1994 totaled $1.7 million. None of these loans was
delinquent as of December 31, 1994 and no allowances were established as
of that date.
The Bank implemented Statement of Financial Accounting Standards
No. 114, "Accounting by Creditors for Impairment of a Loan" ("SFAS No.
114") as of January 1, 1994. Pursuant to SFAS No. 114, the Bank
considers a loan to be impaired when management believes that it is
probable that the Bank will be unable to collect all amounts due under
the contractual terms of the loan. Estimated impairment losses are
included in the Bank's specific loan loss allowances. Subsequent
adjustments to estimated impairment losses are recorded as specific
loan loss allowances which may necessitate an additional provision for
loan losses. At December 31, 1994, the total recorded amount of loans
for which impairment had been recognized in accordance with SFAS No. 114
was $108.3 million (after deducting $23.9 million in specific loss
allowances attributable to such loans). The Bank's impaired loans at
December 31, 1994 were composed of non-accrual major loans (single
family loans with an outstanding principal amount greater than or equal
to $500,000 and multi-family and commercial real estate loans with an
outstanding principal amount greater than or equal to $750,000) of $38.0
million, modified loans (included in modified loans mentioned above) of
$41.6 million, and major loans less than 90 days delinquent in which
full payment of principal and interest is not expected of $28.7 million.
The Bank evaluates loans for impairment whenever the
collectability of contractual principal and interest payments is
questionable. A loan is impaired when the collateral property's
undiscounted net operating income (over a holding period not to exceed
five years) plus the property's anticipated value at the end of the
period, are less than the estimated debt service payments over the same
7
period plus the estimated remaining unpaid balance. Large groups of
smaller balance homogenous loans that are collectively evaluated,
including residential mortgage loans, are not subject to the application
of SFAS No. 114.
When a loan is considered impaired, the Bank measures impairment
based on the present value of expected future cash flows (over a period
not to exceed five years) discounted at the loan's effective interest
rate. However, if the loan is "collateral-dependent" or probable of
foreclosure, impairment is measured based on the fair value of the
collateral. As of December 31, 1994, out of total impaired loans of
$108.3 million, approximately $77.3 million were measured using the fair
value method and $31.0 million were measured based on the present value
of expected future cash flows, discounted at the effective interest rate
of the loan. When the measure of an impaired loan is less than the
recorded investment in the loan, the Bank records a specific loan loss
allowance for the difference of the Bank's recorded investment in the
loan over its measured value.
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 a specific loan
loss 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 a specific loan loss allowance which may necessitate an
adjustment to the provision for loan losses.
Cash payments received from impaired loans are recorded in
accordance with the contractual terms of the loan. The principal
portion of the payment is used to reduce the principal balance of the
loan, whereas the interest portion is recognized as interest income.
On certain modified loans where the Bank does not believe that it will
receive all amounts due under the original contractual loan terms, the
Bank records an allowance for interest received on modified loans.
Because the Bank establishes specific loan loss allowances for all
loans deemed probable of foreclosure based on the fair value of the
collateral, the adoption of SFAS No. 114 had only a minor impact on the
Bank's allowance for loan losses.
Debt restructurings completed prior to the adoption of SFAS No.
114 were accounted for in accordance with Statement of Financial
Accounting Standards No. 15 ("SFAS No. 15"). Bank policy required that
when the estimated cash receipts projected in accordance with the
modified terms were less than the recorded investment in the loan, the
recorded investment would be reduced to an amount equal to these future
cash receipts. The amount of this reduction was required to be
recognized as a specific loan loss allowance. Bank policy also required
that if future cash receipts specified by the new terms exceeded the
recorded investment in the loan, interest income would have been
recognized over the restructuring period using the interest method.
Debt restructurings that are probable of foreclosure require loss
recognition based on the fair value of the collateral.
The table below identifies the Bank's net investment in non-
performing loans determined to be impaired loans by property type at
December 31, 1994 (in thousands):
Single family $ 2,140
Multi-family 22,696
Commercial 13,168
--------
Total $ 38,004
========
Loan Loss Experience Summary. The Bank maintains a general
valuation allowance to absorb possible future losses that may be
realized on its loan portfolio and foreclosed real estate. The allowance
is reviewed and adjusted at least quarterly based upon a number of
8
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.
In response to the above factors, the Bank's general valuation
allowance has increased over the last three years to 1.82% of loans with
loss exposure at December 31, 1994 from 1.48% at December 31, 1993 and
0.93% at December 31, 1992. As a result of continued weaknesses in the
economy and real estate markets in which the Bank operates, further
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 judgments of the
information available at the time of the examination.
The following table details general valuation allowances by loan
type for the periods indicated, including the liability account for
general valuation allowances on loans sold with recourse:
% of % of % of % of
1994 Total 1993 Total 1992 Total 1991 Total
------ ----- ------- ------ ------- ----- ------ -----
(Dollars In Thousands)
Real Estate Loans:
Single Family ......... $ 6,938 11% $ 6,607 14% $ 3,935 14% $ 4,084 29%
Multi-Family........... 50,018 79 37,691 81 20,708 75 7,581 54
Commercial............. 6,170 10 2,551 5 3,154 11 2,194 16
Non-Real Estate Loans... 175 - 51 - 57 - 78 1
------- --- ------- --- ------- --- ------- ---
Total.................. $63,301 100% $46,900 100% $27,854 100% $13,937 100%
======= === ======= === ======= === ======= ===
The following is an analysis of the activity in the Bank's general
valuation allowances for the periods indicated.
General Valuation Allowances and Loan Charge-Off Activity
Year Ended December 31,
--------------------------------------------------
1994 1993 1992 1991 1990
-------- -------- -------- ------- --------
(Dollars In Thousands)
Beginning General Valuation
Allowances.................. $ 46,900 $ 27,854 $13,937 $11,181 $ 8,394
Provisions for Loan Losses... 85,700 67,679 41,384 11,833 4,126
Charge-Offs:
Single Family............... (16,198) (8,605) (4,863) (1,690) (260)
Multi-Family................ (48,536) (38,178) (22,470) (7,696) (800)
Commercial.................. (4,384) (1,574) - 440 (200)
Non-Real Estate............. (181) (276) (134) (131) (79)
-------- -------- ------- ------- -------
Total Charge-Offs........... (69,299) (48,633) (27,467) (9,077) (1,339)
-------- -------- ------- ------- -------
Transfer to Liability
Account for Loans Sold
with Recourse............... (7,948) - - - -
-------- -------- ------- ------- -------
Ending General Valuation
Allowances.................. $ 55,353 $ 46,900 $ 27,854 $13,937 $11,181
======== ======== ======== ======= =======
Charge-Offs as Percentage of
Average Loans Receivable.... 2.41% 1.82% 1.11% 0.40% 0.06%
==== ==== ==== ==== ====
9
In 1994, the Bank transferred $7.9 million to a liability account
for general valuation allowances on loans sold with recourse. This
amount was included in the general valuation allowances in years prior
to 1994. The amount of this general valuation allowance totaled $6.2
million, $5.3 million, $1.3 million and $1.9 million at December 31,
1993, 1992, 1991 and 1990 respectively.
The progressive increase in loan charge offs since 1989 is due to
recessionary factors such as increased vacancies on multi-family
properties, decreased real estate values, layoffs and slower rates of
real estate sales. These recessionary factors have negatively impacted
the ability of some borrowers to make loan payments on a timely basis or
sell their properties prior to foreclosure. A continuation of the trend
of increased charge-offs would adversely impact the Company's future
loan loss provisions and earnings. Charge-offs during 1994 included
$13.8 million in losses directly attributable to the January 17, 1994
earthquake.
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.
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."
The Bank begins foreclosure proceedings on single family loans
after they have been delinquent for 15 days after the grace period and
begins foreclosure proceedings on multi-family loans after they have
been delinquent for 10 days after the grace period. All loans greater
than 90 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 Bank ceases to accrue and record allowances for interest income and
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
disposition. The Bank inspects the property, using the Bank's appraisal
staff. After inspecting such property, the Bank determines whether the
property may be disposed of in its present condition or whether repairs,
rehabilitation or improvements are necessary. In response to the
increased levels of REO in 1992, the Bank established a committee that
meets weekly for the purpose of supervising the disposition of the
Bank's REO.
The following table provides information regarding the Bank's REO
activity for the periods indicated:
Real Estate Acquired in Settlement of Loans Activity
Year Ended December 31,
----------------------------------
1994 1993 1992
-------- -------- --------
(In Thousands)
Beginning Balance.............. $ 26,878 $ 23,858 $ 8,172
Additions...................... 67,466 93,010 76,121
Sales.......................... (77,620) (89,990) (60,435)
-------- -------- --------
Ending Balance................. $ 16,724 $ 26,878 $ 23,858
======== ======== ========
The Bank's Asset Classification Committee meets at least monthly
to review and monitor the condition of the loan portfolio on an ongoing
basis. Additionally, a special workout group of the Bank's officers
meets at least weekly to resolve delinquent loan situations and to
10
initiate actions enforcing the Bank's rights in security properties
pending foreclosure and liquidation.
Other Interest-Earning Assets. The Bank owned no contractually
delinquent interest-earning assets other than loans as of December 31,
1994.
Investment Activities
Savings institutions are required by federal regulations to
maintain a minimum ratio of liquid assets which 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, 1994, the liquidity requirement was 5.00% and the Bank's
regulatory liquidity percentage was 5.23%.
It is the Bank's policy to keep long term investments at a modest
level and to use available cash to originate mortgages which normally
command higher yields. Therefore, interest income on investments
generally represents less than 5% of total revenues.
Investment securities are carried at amortized cost (with any
premium or discount amortized over the term of the security using the
interest method) because management has the intent and ability to hold
the securities until maturity. Gross unrealized gains totaled $28
thousand at December 31, 1994. Gross unrealized losses as of that date
totaled $4.8 million.
The following table summarizes the total investment portfolio
(including liquid investments) by type at the end of the periods
indicated.
December 31.,
-------------------------------------------------
1994 1993 1992 1991 1990
------- -------- ------- -------- --------
(Dollars In Thousands)
U.S. Treasury Securities.... $ 4,205 $ 5,111 $ 7,113 $ 7,115 $ 9,020
U.S. Agency Securities...... 36,565 42,600 11,034 6,054 -
Corporate Bonds............. - - - 3,003 3,005
Repurchase Agreements....... - - - 95,000 60,000
Certificates of Deposit..... - - - - 4,228
Collateralized Mortgage
Obligations................ 43,282 56,125 25,589 - -
------- -------- ------- -------- -------
$84,052 $103,836 $43,736 $111,172 $76,253
======= ======== ======= ======== =======
Weighted average yield on
interest-earnings invest-
ments end of period........ 5.08% 5.16% 6.18% 4.90% 7.74%
==== ==== ==== ==== ====
11
The following is a summary of the maturities, and market values of
investment securities as of December 31, 1994.
Maturity
----------------------------------
Total carrying
Within 1 year 1 - 5 Years Value
----------------- --------------- -----------------
Weighted Weighted Weighted Average
Average Average Average Maturity
Amount Yield Amount Yield Amount Yield Value Yrs/Mos
------- ------ ------- ------- -------- ------- ------ -------
(Dollars In Thousands)
U.S. Treasury Securities.. $ 4,004 8.05% $ 201 5.48% $ 4,205 7.93% $ 4,223 0/ 9
U.S. Agency Securities.... - - 36,565 5.07 36,565 5.07 34,136 2/ 8
Collateralized Mortgage
Obligations.............. 11,187 4.63 32,095 4.86 43,282 4.80 40,957 2/11
------- ------- ------- -------
$15,191 5.54% $68,861 4.97% $84,052 5.08% $79,316 2/ 5
======= ======= ======= =======
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 other borrowings.
Deposits. The Bank obtains deposits through three different
sources: 1) its retail branch system; 2) its telemarketing department
(phone solicitations by employees); and 3) national brokerage houses.
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 repurchase agreements. As the cost of each
source of funds fluctuates from time to time, based on market rates of
interest generally offered by the Bank and other depository institutions
and associated costs, the Bank seeks funds from the lowest cost source
until the relative costs change. As the costs of funds, operating
margins and net income of the Bank associated with each source of funds
are generally comparable, the Bank does not deem the impact of its use
of any one of the specific sources of funds at a given time to be
material.
Deposits acquired through the telemarketing department are
typically placed by managers of pension funds and represented 9%, 12%
and 19% of total deposits at December 31, 1994, 1993 and 1992,
respectively. The percentage of deposits in telemarketing funds has
decreased over the last three years due to competition from other
investment instruments providing higher yields to depositors.
Deposits acquired through national brokerage houses represented
26%, 23% and 14% of total deposits at December 31, 1994, 1993 and 1992,
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. The Bank
accepted brokered deposits during the first nine months of 1994 pursuant
to a waiver obtained from the Federal Deposit Insurance Corporation
("FDIC"). Well-capitalized institutions are not required to obtain a
waiver from the FDIC. See "Management's Discussion and Analysis -
Sources of Funds."
Retail deposits were $1.5 billion at December 31, 1994 and 1993
and $1.3 billion at December 31, 1992. Retail deposits comprised 65% of
total deposits at December 31, 1994 and remained flat compared to 1993
because deposit growth at pre-existing branches offset deposits lost at
branches acquired in the two previous years. Two retail branches with
deposits totaling $113 million were acquired from the RTC in December of
1993. (One of the two branches was closed and the deposits were merged
12
into the other acquired branch.) During 1992 the Bank acquired 7 retail
branches with deposits totaling $290 million from the RTC. (One
previously-existing branch which was located near an acquired branch was
merged with that acquired branch.) As of December 31, 1994, deposits at
acquired branches totaled $254 million, down 37% from the balances on
deposit when the branches were acquired. The Bank operated 25 retail
branches at the end of 1994.
The interest rates paid on deposits are a major determinant of the
average cost of lendable funds. 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 average balances and rates for those years.
December 31,
------------------------------------------------------
1994 1993 1992
--------------- ----------------- ----------------
Amount % Amount % Amount %
-------- --- --------- --- --------- ----
(Dollars In Thousands)
Variable rate non-term accounts:
Money market deposit accounts (weighted
average rate of 2.55%,2.40% and 2.75%)......... $ 161,147 7% $ 196,467 9% $ 186,721 9%
Interest-bearing checking accounts
(weighted average rate of 2.14%,2.18% and
(2.39%)....................................... 169,416 7 148,460 6 127,985 7
Passbok accounts (2.29%,2.29% and 2.64%....... 114,075 5 118,455 5 106,247 5
Non-interest bearing checking accounts........ 36,773 2 44,868 2 33,177 2
---------- --- --------- --- ---------- ---
481,411 21 508,250 22 454,130 23
---------- --- --------- --- ---------- ---
Fixed rate term certificate accounts:
Under six month term (weighted average
rate of 4.64%, 2.77% and 3.20%)............... 89,763 4 69,132 3 117,954 6
Six month term (weighted average rate of
4.99%,3.13% and 3.50%)........................ 282,130 12 299,368 13 230,489 12
Nine month term (weighted average rate of
4.90%, 3.36% and 3.77%)....................... 104,962 5 200,269 9 45,852 2
One year to 18 month term (weighted
average rate of 4.76%, 3.67% and 4.14%)....... 512,846 22 474,853 20 333,798 17
Two year or 30 month term (weighted
average rate of 5.22%, 4.67% and 6.16%)....... 315,223 14 148,993 7 186,473 9
Over 30 month term (weighted average rate
of 6.20%, 5.80% and 6.56%).................... 285,438 12 307,513 13 141,713 7
Negotiable certificates of $100,000 and
greater, 30 day to one year terms (weighted
average rate of 4.79%, 3.43% and 3.82%)....... 227,141 10 297,102 13 472,336 24
---------- ---- ---------- --- ---------- ---
1,817,503 79 1,797,230 78 1,528,615 77
---------- --- ---------- --- ---------- ---
Total Deposits (weighted average rate of
4.49%, 3.60% and 3.97%)....................... $2,298,914 100% $2,305,480 100% $1,982,745 100%
========== ==== ========== ==== ========== ===
13
During the Year Ended December 31,
--------------------------------------------------------------
1994 1993 1992
------------------ ------------------ --------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
---------- ------- ---------- ------- ----------- -------
(Dollars In Thousands)
Passbook Accounts................... $ 118,776 2.26% $ 105,780 2.25% $ 85,202 3.32%
Money Market Deposit Accounts....... 188,663 2.35 191,023 2.34 142,627 3.43
Interest-bearing Checking Accounts.. 204,882 1.66 178,640 1.73 152,200 2.30
Fixed-term Certificate Accounts..... 1,760,744 4.37 1,590,424 4.25 1,504,407 5.09
---------- ---------- ----------
$2,273,065 3.85% $2,065,867 3.76% $1,884,436 4.66%
========== ========== ==========
The following table shows the maturity distribution of jumbo
certificates of deposit ($100,000 and greater) as of December 31, 1994
(in thousands).
Maturing in:
1 month or less................................ $ 54,593
Over 1 month to 3 months....................... 62,255
Over 3 months to 6 months...................... 51,416
Over 6 months to 12 months..................... 58,877
--------
Total..................................... $227,141
========
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.
Borrowings. The FHLB System functions as a source of credit to
financial institutions which are members of a regional Federal Home Loan
Bank. The Bank may apply for advances from the FHLBSF secured by the
FHLB 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. However, as a result of the enactment of the Financial
Institution Reform, Recovery and Enforcement Act of 1989 ("FIRREA") (see
"Summary of Material Legislation and Regulations"), any institution not
meeting the qualified thrift lender test will be subject to restrictions
on its ability to obtain advances from the FHLBSF. In granting advances,
the FHLBSF also considers a member's creditworthiness and other relevant
factors.
Total advances from the FHLBSF were $863 million at December 31,
1994 at a weighted average rate of 5.96%. This compares with advances of
$515 million at December 31, 1993 and $655 million at December 31, 1992
at weighted average rates of 4.70% and 5.20%, respectively. These
advances were often the lowest cost available source of funds to the
Bank during 1994. The decrease during 1993 was due to advances repaid
when branches were acquired in December of that year. The Bank has
credit availability with the FHLBSF which allows it to borrow up to 40%
of the Bank's assets or approximately $1.7 billion at December 31, 1994.
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
Bank's 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 which meet their regulatory capital
requirements. Borrowings under reverse repurchase agreements totaled
$691 million at December 31, 1994 and were secured by mortgage-backed
securities with principal balances totaling $750 million. Borrowings
under reverse repurchase agreements totaled $549 million at December 31,
1993 and $491 million at December 31, 1992.
14
FFC issued $50 million in 10-year senior unsecured notes ("Notes")
in September of 1994. The Notes have an interest rate of 11.75% and are
due October 2004. The $47.8 million in net proceeds were contributed to
the Bank as capital. The Notes are governed by the terms of an
indenture dated September 28, 1994 (the "Indenture"). The Indenture
contains financial and operating covenants which, among other things,
(i) limit the incurrence of debt by FFC, (ii) limit the payment of
dividends and the making of certain other distributions by FFC and its
subsidiaries, including the Bank, (iii) limit the disposition of, and
the existence of liens on, the stock of FFC's subsidiaries, (iv) limit
the existence of certain liens on other property or assets of FFC and
(v) limit the ability of FFC to enter into certain transactions with
affiliates. Management does not believe that these covenants will impair
the Bank's ordinary course of business. The amount of annual interest
due on the Notes is $5,875,000. FFC is solely dependent upon the Bank's
ability to pay dividends to provide funds for meeting the interest due
on these Notes. See "Summary of Material Legislation and Regulations"
for a discussion of regulatory restrictions on dividends and other
capital distributions.
Borrowings from all sources totaled $1.6 billion, $1.1 billion and
$1.2 billion at weighted average rates of 6.04%, 3.99% and 4.48% at
December 31, 1994, 1993, and 1992, respectively. Due to increased
competition at the retail branches, the Bank increased its use of
borrowings to meet its cash flow requirements.
The Bank's portfolio of short term borrowings includes reverse
repurchase agreements, short-term variable rate credit advances from the
FHLBSF and other short term borrowings. The following schedule
summarizes short term borrowings for the last three years.
Maximum
Month-End
Outstanding
End of period Balance Average for period
----------------- -------------------
During
the
Outstanding Rate Period Outstanding Rate
----------- ---- -------- ----------- ----
(Dollars In Thousands)
1994
Short term variable rate credit advances......... $ 39,000 7.33% $215,000 $ 78,231 5.13%
Securities sold under agreements to repurchase... $691,121 5.81% $691,121 $602,681 4.55%
Other short term borrowings...................... $ 500 5.60% $ 39,800 $ 16,835 3.72%
1993
Short term variable rate credit advances......... $ 30,000 3.94% $245,000 $116,538 3.56%
Securities sold under agreements to repurchase... $548,649 3.32% $650,033 $594,314 3.06%
Other short term borrowings...................... $ 29,800 3.95% $ 76,650 $ 48,473 3.38%
1992
Short term variable rate credit advances......... $140,000 3.34% $195,000 $ 88,462 4.07%
Securities sold under agreements to repurchase... $491,091 3.61% $594,680 $527,528 4.16%
Other short term borrowings...................... $ 50,650 3.73% $157,950 $ 93,069 3.96%
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.
15
As of December 31, 1994 the Bank had invested an aggregate of $786
thousand (primarily equity) in Seaside, Oceanside and SMCG. Revenues and
operating results of these subsidiaries accounted for less than 1% of
consolidated operating results in 1994, and no material change is
presently foreseen. In 1994, only Seaside and Oceanside were active.
The only subsidiary active during 1993 was Seaside.
Real Estate Development Activities. Seaside has not been involved
in any real estate development activity for the last 3 years and there
are no plans for future real estate projects. Therefore, no gains or
losses on real estate development activities were recorded during 1994,
1993 or 1992.
Seaside continues to hold three condominium units which are rented
to the Bank for use by its employees. At December 31, 1994, Seaside's
investment in the units totaled $357 thousand. There were no loans
outstanding against the properties at December 31, 1994. All three units
are located in California.
Trustee Activities. Seaside acts as trustee on the Bank's loans.
Trustee fees for this activity amounted to $403 thousand, $612 thousand
and $599 thousand in 1994, 1993 and 1992, respectively. The decrease in
1994 compared to 1993 was due to a drop in foreclosure activity by the
Bank. The increases in 1993 was due to additional foreclosure activity
by the Bank compared to 1992.
Insurance Brokerage Activities. Oceanside engages in limited
insurance brokerage activities. Income to date from this source has
been insignificant.
Employees
As of December 31, 1994, the Bank had a total of 510 full time
equivalent employees, including 90 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 pension 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 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 $56.1 million in FHLBSF stock at December 31, 1994.
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
16
December 31, 1994, the Bank's advances from the FHLBSF amounted to
$863.2 million, or 22.1% of the Bank's total funding sources (deposits
and borrowings).
As a result of FIRREA, the FHLBs are required to provide funds for
the resolution of troubled savings associations and 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 FHLB dividends paid and could continue to do so in the
future. These contributions also could have an adverse effect on the
value of FHLB stock in the future. For the year ended December 31, 1994,
dividends paid by the FHLBSF to the Bank totaled approximately
$2,367,000.
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, FFC is subject to certain
restrictions with respect to its activities and investments. Among
other things, FFC is generally prohibited, either directly or
indirectly, from acquiring more than 5% of the voting shares of any
savings association or savings and loan holding company which is not a
subsidiary, without prior approval from OTS.
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.
FFC 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 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. FIRREA and the capital
regulations of the OTS promulgated thereunder (the "Capital
Regulations") established three capital requirements for savings
associations. These requirements require the Bank to maintain "tangible
capital" of at least 1.5% of adjusted total assets, "core capital" of at
least 3% of adjusted total assets, and a "risk-based capital" ratio of
at least 8%. 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.
"Core capital" generally includes common stockholders' equity,
noncumulative perpetual preferred stock, including any related surplus,
and minority interests in the equity accounts of fully consolidated
subsidiaries. "Tangible capital" means core capital less any intangible
assets (including supervisory goodwill), plus purchased mortgage
servicing rights and purchased credit card relationships, subject to
certain limitations. The "risk-based capital" ratio is defined as the
ratio of total capital to total assets after the assets have been risk-
weighted in accordance with certain percentages developed by the OTS and
the other bank regulatory agencies. Total capital for purposes of the
risk-based capital requirements consists of core capital and
supplementary capital, less cash pledged for credit support in certain
loan sales. Supplementary capital includes, among other things, general
loan valuation allowances, subject to certain limitations. General loan
valuation allowances may generally be included in supplementary capital
up to 1.25% of risk-weighted assets. At December 31, 1994, $30.9
million of the Bank's $55.4 million in general valuation allowances was
included in supplementary capital. Supplementary capital may be used to
17
satisfy an institution's risk-based capital requirement in an amount not
greater than its core capital.
The Bank exceeded all three capital requirements at December 31,
1994, as indicated by the chart below.
December 31,
1994
--------------------
Amount %
--------- -----
(Dollars In Thousands)
Tangible capital requirement........ $ 62,260 1.50%
Bank's tangible capital............. 226,959 5.47
-------- -----
Excess tangible capital............ $164,699 3.97%
======== =====
Core capital requirement............ $124,520 3.00%
Bank's core capital................. 226,959 5.47
-------- -----
Excess core capital................ $102,439 2.47%
======== =====
Risk-based capital requirement...... $195,882 8.00%
Bank's risk-based capital........... 255,498 10.44
-------- -----
Excess risk-based capital.......... $ 59,616 2.44%
======== =====
In April 1991, the OTS issued a notice proposing amendments to the
minimum core capital requirements to reflect changes in the core capital
requirements applicable to national banks. Under the proposed
amendments, only savings associations receiving the highest rating under
the OTS supervisory rating system would be permitted to operate at or
near the minimum core capital requirements of 3% of adjusted total
assets. All other savings associations would be required to meet a
minimum core capital requirement at least 1% to 2% greater than the
minimum requirement. In determining the amount of additional capital
required, the OTS stated that it would assess both the quality of risk
management systems and the level of overall risk in each individual
savings institution on a case-by-case basis. The Company cannot predict
whether or in what form this amendment will be adopted or whether it
will be withdrawn in light of the "prompt corrective action" provisions
of the Federal Deposit Insurance Corporation Improvements Act of 1991
("FDICIA"), described below.
The Capital Regulations substantially changed the capital
requirements for asset sales with recourse or the retention of the
subordinated portion of a senior/subordinated loan participation or
interest in a package of loans sold. Essentially, the Capital
Regulations treat asset sales with recourse as if they had not occurred,
and generally require a savings institution to maintain capital against
the entire amount of assets sold with recourse, even if the recourse is
for less than the full amount of assets sold, with one limited
exception. The exception is that assets sold with recourse with respect
to which the recourse percentage is less than the applicable risk-based
capital requirement are not included in risk-weighted assets; however,
capital is required to be maintained in an amount equal to such recourse
amount. A savings institution's retention of the subordinated portion
of a senior/subordinated loan participation or interest in a package of
loans sold is treated in the same manner as an asset sale with recourse.
Since the change in regulation, the Bank has not been active in such
loan sales. At December 31, 1994, the Bank had loans sold with recourse
or subordination totaling $305.0 million on which it was required to
hold additional capital. The amount of capital required to be
maintained against such off-balance sheet items was $16.0 million. On
May 25, 1994, the OTS and the other federal bank regulatory agencies
proposed revisions to their risk-based capital standards with respect to
the regulatory capital treatment of recourse arrangements and direct
credit substitutes. The proposal would generally allow banks and
18
thrifts to maintain lower amounts of capital against recourse
arrangements. The Bank has not quantified the impact, if any, of this
proposal; however, the Bank does not expect that this proposal, if
adopted, would have a material effect on its operations or financial
condition.
In August 1993, the OTS adopted a final rule incorporating an
interest-rate risk component into the risk-based capital regulation.
Under the rule, an institution with a greater than "normal" level of
interest rate risk will be subject to a deduction of an interest rate
risk component from total capital for purposes of calculating its risk-
based capital requirement. As a result, such an institution will be
required to maintain additional capital in order to comply with such
requirement. An institution with a greater than "normal" interest rate
risk is defined as an institution that would suffer a loss of net
portfolio value exceeding 2.0% of the estimated market value of its
assets in the event of an immediate and sustained 200 basis point
increase or decrease (with certain minor exceptions) in interest rates.
The interest rate risk component will be calculated, on a quarterly
basis, as one-half of the difference between an institution's measured
interest rate risk and 2.0%, multiplied by the market value of its
assets. The rule also authorizes the OTS to waive or defer an
institution's interest rate risk component on a case-by-case basis. The
final rule is effective at January 1, 1994, subject, however, to a "lag"
time between the reporting date of the data used to calculate an
institution's interest rate risk and the effective date of each
quarter's interest rate risk component. The regulatory calculation for
determining the Bank's interest rate risk, measured as of June 30, 1994,
as required by the regulations, resulted in an interest rate risk
measurement of 0.18% at December 31, 1994, compared to the 2.0%
regulatory threshold at which additional capital would be required.
FIRREA requires a savings institution which fails to meet its
capital standards to submit a capital restoration plan to the OTS
District Director which describes the manner in which the institution
proposes to increase its capital and the activities in which it will
engage, and requires that any increase in its assets be met with a
commensurate increase in tangible capital and risk-based capital. As
part of the submission of a capital plan, a savings institution is
required to certify that, during the pendency of its application for
approval of its capital plan, it will adhere to certain growth
restrictions, and will not make any capital distributions or engage in
certain other prohibited or restricted activities. The OTS must, with
certain limited exceptions, limit the asset growth of any such
institution.
Upon approval of a capital plan by the OTS, the submitting savings
institution is not generally subject to enforcement sanctions for
failure to meet its statutory capital standards as long as it is in
compliance with the approved capital plan. However, there is no limit
on the authority of the OTS to take any appropriate action with respect
to any unsafe or unsound practice or condition of a savings institution,
other than the failure to comply with the capital standards. As a
result, approval of a capital plan by the OTS does not limit any
authority of the Director of the OTS under any other provisions of law.
The OTS has the authority to issue a capital directive to a
savings institution that does not satisfy its minimum capital
requirements. The capital directive may also specify corrective actions
to be taken. A capital directive, including any plan submitted pursuant
to a capital directive, is directly enforceable in a court of law. Such
actions, however, are governed by prior notice and appeal processes
which provide the institution with an opportunity to respond to the
proposed directive. The Capital Regulations provide that material
failure of a savings institution to comply with any plan, regulation,
written agreement, undertaking, order or directive issued pursuant to
the Capital Regulations, including material noncompliance with the
capital requirements, shall be treated by the Director as an unsafe and
unsound practice. The existence of an unsafe and unsound practice
authorizes the OTS to take enforcement or supervisory action against a
savings institution, including the appointment of a conservator or
receiver. Moreover, other regulations restrict growth and prohibit
savings institutions not meeting minimum capital requirements from
paying dividends and from making certain types of investments without
the prior approval of the OTS. The FDIC may also terminate a savings
institution's deposit insurance upon failure to meet applicable capital
requirements and may temporarily suspend a savings institution's deposit
insurance if the FDIC finds that the institution has no tangible capital
19
(which may be calculated under certain conditions by including
goodwill). If such termination were to occur, accounts outstanding at
the time of such termination would continue to be insured for a period
of at least six months.
Insurance of Accounts. The FDIC administers two separate deposit
insurance funds. The BIF insures the deposits of commercial banks and
other institutions which were insured by the FDIC prior to the enactment
of FIRREA. The 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 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.
FDICIA required the FDIC to implement a risk-based assessment
system, under which an institution's 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. The FDIC adopted a final
risk-based assessment system effective January 1, 1994.
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 evaluations by the OTS: Group A, financially sound with only a few
minor weaknesses; Group B, demonstrated weaknesses that could result in
significant deterioration; and Group C, poses a substantial probability
of loss to the SAIF. The capital ratios used by the FDIC are the same
as those defined in the OTS's "prompt corrective action" regulation. A
schedule detailing the FDIC assessment rates for SAIF-insured
institutions as a percentage of deposits follows:
Group A Group B Group C
------- ------- -------
Well Capitalized............... 0.23% 0.26% 0.29%
Adequately Capitalized......... 0.26 0.29 0.30
Undercapitalized............... 0.29 0.30 0.31
In addition to the above deposit insurance assessments, the OTS
has imposed assessments and examination fees on savings institutions.
OTS assessments for the Bank increased to $547,000 in 1994, from
$531,000 in 1993 and $482,000 in 1992.
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.
In December 1993, President Clinton signed legislation which
provides funding for the RTC and the SAIF. Among other things, the
legislation authorized $8 billion to provide the SAIF with funds for the
resolution of troubled savings associations upon the expiration of the
RTC's new case resolution authority. Appropriation of the $8 billion
would only occur after the Chairperson of the FDIC certifies to the
Congress that funds from that source are necessary under certain
conditions set forth in the legislation. In the absence of such
certification, an increase in SAIF premiums is likely since both the
SAIF and the BIF are required to be recapitalized to a reserve ratio of
20
1.25% of insured deposits. Such an increase would cause a disparity in
deposit insurance premiums between members of SAIF and members of BIF
administered by the FDIC. A significant increase in SAIF insurance
premiums and a long-term reduction in BIF insurance premiums would have
an adverse effect on the Bank's operating expenses and results of
operations and could place the Bank and other SAIF-insured institutions
at a competitive disadvantage relative to BIF-insured institutions.
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 5% of the average daily balance of its net
withdrawable accounts and short-term borrowings during the preceding
calendar month. 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 borrowings depending upon economic conditions and the
deposit flows of member institutions. Federal regulations also require
each member institution to maintain a monthly average daily balance of
short-term liquid assets (generally those having maturities of 12 months
or less) equal to at least 1% of the average daily balance of its net
withdrawable accounts and short-term borrowings during the preceding
calendar month. Monetary penalties may be imposed for failure to meet
these liquidity ratio requirements. The Bank's liquidity and short-term
liquidity ratios for the calculation period ended December 31, 1994,
were 5.2% and 2.9%, respectively, 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 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 savings and loan holding company
acquisitions. An unsatisfactory CRA rating may be the basis for denying
such an application and community groups have successfully protested
applications on CRA grounds. 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 1994. A series of CRA regulations
have been proposed by the OTS which would significantly change the
manner in which the OTS assesses CRA compliance. Under the proposed
regulations, institutions would be evaluated based on: (i) performance
in lending in their delineated service areas; (ii) the provision of
deposit services in their delineated service areas; and (iii) the impact
their investments have on their delineated service areas. The current
regulations focus on an institution's adherence to procedures designed
to serve its community's credit needs rather than an institution's
actual performance in meeting its community's credit needs. Under the
regulations as presently proposed, an institution which 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. The Company is unable to predict whether the
presently proposed regulations will be adopted and, if so, what final
form they will take.
Restrictions on Dividends and Other Capital Distributions.
Savings association subsidiaries of holding companies generally are
required to provide not less than thirty days' advance notice to their
OTS District Director of any proposed declaration of a dividend on the
association's stock.
Under OTS regulations, limitations are imposed on "capital
distributions" by savings institutions, including cash dividends,
payments to repurchase or otherwise acquire its shares, payments to
stockholders of another institution in a cash-out merger and other
distributions charged against capital. The regulations, which establish
a three-tiered system of regulation, establish "safe-harbor" amounts of
capital distributions that institutions can make after providing notice
to the OTS, but without needing prior approval. Institutions can
distribute amounts in excess of the safe-harbor only with the prior
approval of the OTS. Under OTS regulations, a Tier 1 association, which
21
is a savings association that before and after the proposed distribution
meets or exceeds its fully phased-in capital requirements, may make
capital distributions during any calendar year up to the higher of 100%
of net income for the calendar year-to-date plus 50% of its "surplus
capital ratio" at the beginning of the calendar year, or 75% of its net
income over the most recent four-quarter period. The "surplus capital
ratio" is defined as the percentage by which the association's ratio of
total capital to assets exceeds the ratio of its fully phased-in capital
requirement to assets and "fully phased-in capital requirement" is
defined to mean an association's capital requirement under the statutory
and regulatory standards applicable on January 1, 1995, as modified to
reflect any applicable individual minimum capital requirements imposed
upon an association. At December 31, 1994, the Bank qualified as a Tier
1 institution for purposes of this regulation.
Tier 2 associations, which are associations that before and after
the proposed distribution meet or exceed their minimum capital
requirements, but not their fully phased-in capital requirements, may
make capital distributions up to 75% of their net income over the most
recent four-quarter period.
Tier 3 associations, which are associations that do not meet
current minimum capital requirements, or are in need of more than normal
supervision, cannot make any capital distribution without obtaining
prior OTS approval.
Although the OTS has never prohibited the Bank from making a
capital distribution, the OTS nevertheless retains the authority to
prohibit any capital distribution otherwise authorized under the
regulations if the OTS determines that the capital distribution would
constitute an unsafe or unsound practice. The regulations also state
that the capital distribution limitations apply to direct and indirect
distributions to affiliates, including those occurring in connection
with corporate reorganizations. Moreover, the Bank would not be
permitted to pay cash dividends if it were deemed to be an
"undercapitalized" institution for purposes of the "prompt corrective
action" rules of FDICIA. At December 31, 1994, the Bank met the
standards necessary to be deemed to be "well capitalized" for purposes
of the "prompt corrective action" rules.
Limits on Types of Loans and Investments. Federal savings
associations 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 FHLB
or stock of FNMA; certain mortgages, obligations, or other securities
which have been sold by FHLMC; and certain securities issued by, or
fully guaranteed as to principal and interest by, FNMA, 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, limited to 10% of assets;
loans on the security of liens upon nonresidential real property,
limited to 400% of capital except when the Director of the OTS permits
an association to exceed such limits; investments in personal property,
limited to 10% of assets; consumer loans and certain securities such as
commercial paper and corporate debt, limited to 35% of assets; and
construction loans without security, which may not exceed the greater of
an association's capital or 5% of its assets.
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 "unimpaired 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, 1994.
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.
22
Safety and Soundness Standards. The OTS has proposed various
"safety and soundness" standards covering various aspects of the
operations of savings institutions pursuant to a requirement of FDICIA
that such standards be adopted by the federal banking agencies. The
proposed regulations include standards relating to internal controls,
information systems and internal audit systems, loan documentation,
credit underwriting, interest rate exposure, asset growth, compensation,
maximum ratios of classified assets to capital (a maximum ratio of
classified assets to risk-based total capital plus ineligible general
valuation allowances of 1.0 has been proposed, but lower ratios are also
being considered), and minimum earnings sufficient to absorb losses
without impairing capital. A savings institution not meeting one or
more of such standards would be required 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. FFC is unable to predict the form in which such regulations will
be adopted or the impact, if any, that such adoption would have on the
Bank or FFC.
FDICIA contains 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 with insufficient capital or inadequate operational and
managerial standards. The Bank must prepare a management report, signed
by the chief executive officer and chief financial officer, on the
effectiveness of the institution's internal control structure over
financial reporting, and on the institution's compliance with designated
laws and regulations relating to safety and soundness. The Bank's
independent accountants must be engaged to attest to, and report
separately on, management's assertions regarding the internal control
structure over financial reporting and on compliance with designated
laws. Management's report and the attestations, along with financial
statements and such other disclosure requirements as the FDIC and OTS
may prescribe, must be submitted to the FDIC and OTS. The Bank's annual
report and independent accountants' attestation as to internal controls
will be made available in March of 1995.
Prompt Corrective Action. FDICIA contains "prompt corrective
action" provisions pursuant to which insured depository institutions are
to be classified into one of five categories based primarily upon
capital adequacy, ranging from "well capitalized" to "critically
undercapitalized" and which 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." These provisions
expand the powers and duties of the OTS and the FDIC and expressly
authorize, or in many cases direct, regulatory intervention at an earlier
state than was previously the case.
The OTS regulations implementing the "prompt corrective action"
provisions of FDICIA define the five capital categories as follows: (i)
a savings institution is "well capitalized" if it has a total risk-based
capital ratio (total capital to risk-weighted assets) of 10% or greater,
has a Tier 1 risk-based capital ratio (Tier 1 capital to risk weighted
assets) of 6% or greater, has a core capital ratio (core capital to
total assets) of 5% or greater and is not subject to any written capital
order or directive to meet and maintain a specific capital level or any
capital measure; (ii) a savings institution is "adequately capitalized"
if it has a total risk-based capital ratio of 8% or greater, has a Tier
1 risk-based capital ratio of 4% or greater and has a core capital ratio
of 4% or greater (3% for certain highly rated institutions); (iii) a
savings institution is "undercapitalized" if it has a total risk-based
capital ratio of less than 8%, a Tier 1 risk-based capital ratio of less
than 4% or a core capital ratio of less than 4% (3% for certain highly
rated institutions); (iv) a savings institution is "significantly
undercapitalized" if it has a total risk-based capital ratio of less
than 6%, or has either a Tier 1 risk-based or a core capital ratio of
less than 3%; and (v) a savings institution is "critically
undercapitalized" if its "tangible equity" (defined in the "prompt
corrective action" regulations to mean core capital plus cumulative
perpetual preferred stock) is equal to or less than 2% of its total
assets. The OTS also has authority, after an opportunity for a hearing,
to downgrade a savings institution from "well capitalized" to
"adequately capitalized," or to subject an "adequately capitalized" or
"undercapitalized" savings institution to the supervisory actions
applicable to the next lower category, for supervisory concerns. At
23
December 31, 1994, the Bank's regulatory capital was in excess of the
amount necessary to be deemed "well capitalized."
Generally, FDICIA requires that an "undercapitalized" institution
submit an acceptable capital restoration plan to the appropriate federal
banking agency within 45 days after the institution becomes
undercapitalized and that the agency take action on the plan within 60
days. The appropriate federal banking agency may not accept a capital
restoration plan unless, among other requirements, each company having
control of the institution has guaranteed that the institution will
comply with the plan until the institution has been adequately
capitalized on average during each of four consecutive calendar quarters
and has provided adequate assurance of performance. The aggregate
liability under this provision of all companies having control of an
institution is limited to the lesser of (i) 5% of the institution's
total assets at the time the institution became "undercapitalized" or
(ii) the amount which is necessary, or would have been necessary, to
bring the institution into compliance with all capital standards
applicable to the institution at the time the institution fails to
comply with a plan filed pursuant to FDICIA.
Pursuant to FDICIA and implementing regulations adopted by the
FDIC, 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. During the first nine months of 1994, the Bank
obtained brokered deposits pursuant to a waiver obtained from the FDIC.
As of October 1, 1994, no waiver was required. The Bank will be able to
continue to obtain new brokered deposits after this date only if it
remains "well capitalized" or receives another waiver. See "Business -
Sources of Funds."
An "undercapitalized" institution may not acquire an interest in
any company or any other insured depository institution, establish or
acquire additional branch offices or engage in any new business unless
the appropriate federal banking agency has accepted its capital
restoration plan, the institution is implementing the plan and the
agency determines that the proposed action is consistent with and will
further the achievement of the plan, or the FDIC determines that the
proposed action will further the purpose of the "prompt corrective
action" sections of FDICIA.
Under FDICIA, the OTS must place a "critically undercapitalized"
institution in conservatorship or receivership within 90 days after it
becomes "critically undercapitalized" or take such other actions as the
OTS, with the concurrence of the FDIC, deems appropriate. In addition,
the institution must comply with the restrictions described above and
must discontinue, beginning 60 days after becoming critically
undercapitalized, any payment of principal and interest on its
subordinated debt unless the FDIC determines that an exception to this
provision would further the purposes of FDICIA. The FDIC is authorized
to restrict the activities of any critically undercapitalized
institution and to prohibit such an institution, with the FDIC's prior
written approval, from: (i) entering into any material transaction
other than in the usual course of business; (ii) engaging in any covered
transaction (as defined in Section 23A(b) of the Federal Reserve Act)
with affiliates; (iii) paying excessive compensation or bonuses; and
(iv) paying interest on new or renewed liabilities at a rate that would
increase the institution's weighted average cost of funds to a level
significantly exceeding the prevailing rates of interest on insured
deposits in the institution's normal market areas.
Qualified Thrift Lender Test. In general, the Qualified Thrift
Lender ("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, 1994, with 94.0% of its portfolio assets comprised of
"qualified thrift investments."
24
Transactions with Affiliates. Federal savings associations are
subject to the provisions of Section 23A of the Federal Reserve Act,
which place limits as to the amount of 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. In addition, most of these
loans and certain other transactions must be secured in prescribed
amounts. Federal savings associations may not make any extension of
credit to an affiliate which is engaged in activities not permitted to
bank holding companies, and may not invest in securities issued by an
affiliate (except with respect to a subsidiary). FFC is an "affiliate"
of the Bank for the purposes of these provisions.
Federal savings associations are also subject to the provisions of
Section 23B of the Federal Reserve Act which, among other things,
prohibit an institution from engaging in certain transactions
(including, for example, loans) with certain affiliates unless the
transactions are on terms substantially the same, or at least as
favorable to such institution or its subsidiaries, as those prevailing
at the time for comparable transactions with or involving non-affiliated
companies. In the absence of such comparable transactions, any
transaction between a savings association and its affiliates must be on
terms and under circumstances, including credit standards, that in good
faith would be offered to, or would apply to, nonaffiliated companies.
Transactions with Insiders. Federal savings associations 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 unimpaired 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, 1994 was 3% of the first $47.9 million (increasing to $49.8
million as of January 1, 1995) of such accounts and 10% (subject to
adjustment by the Federal Reserve Board between 8% and 14%) of the
balance of such accounts. The Federal Reserve Board eliminated its reserve
requirements for non-personal time deposits during 1990. The Bank is in
compliance with these requirements.
Accounting Matters. The Director of the OTS must prescribe
uniform accounting and disclosure standards for savings institutions.
The uniform accounting standards must incorporate generally accepted
accounting principles ("GAAP") to the same degree used to determine
compliance with federal banking agency regulations, with an exception
for the regulatory capital requirement described above. No allowance
for a deviation from full compliance with such standards may be
permitted after December 31, 1993. All regulations and policies of the
OTS governing the safe and sound operation of savings institutions,
including regulation of the Bank and policies governing asset
classification and appraisals, must be no less stringent than those
established by the Office of the Comptroller of the Currency ("OCC") for
national banks. The Bank's financial statements are prepared in
accordance with GAAP.
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 Bank can elect annually one of two methods to compute its
additions to the bad debt reserve on qualifying real property loans:
(i) the percentage of taxable income method or (ii) the experience
method.
25
Qualifying real property loans are generally loans secured by an
interest in real property, and non-qualifying loans are all other loans.
The deduction with respect to non-qualifying loans must be computed
under the experience method. The Bank intends to compute its annual
bad debt reserve deduction for qualifying real property loans under the
method which permits the maximum allowable deduction.
In 1994, 1993 and 1992, the Bank was allowed an addition to its
tax bad debt reserves under the experience method equal to the amount
necessary to bring the tax reserve balance to the level that was
established at December 31, 1987. In accordance with the Tax Reform Act
of 1986, the Bank generally may maintain the balance of its tax reserve
at the December 31, 1987 level, even if the result would be less using
the experience method; however, if the amount of the Bank's loans
outstanding at the end of a particular year is less than the Bank's
loans outstanding on December 31, 1987, then for such year the Bank may
maintain the balance of its tax reserve at a level equal to the amount
which bears the same ratio to loans outstanding at the close of such
year as the balance of the reserve on December 31, 1987 bears to the
amount of loans outstanding on December 31, 1987. If the Bank were to
fail the 60% qualifying asset test, it would no longer be permitted to
calculate its bad debt deductions under the reserve method. In that
case, the Bank would be required generally to change to the specific
charge-off method of accounting for bad debts and would be required to
include the amount of its reserve in income over a six-year period.
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.
To the extent that distributions by the Bank to FFC 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 excess bad debt reserve and would thereby constitute taxable
income to the Bank in an amount equal to the lesser of the Bank's excess
bad debt 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, 1994, the
Bank's excess bad debt reserve was zero. At December 31, 1994, the
Bank's earnings and profits (as computed for federal income tax
purposes) were approximately $118 million.
The maximum marginal federal corporate income tax rate was 34% in
1992. Under the Omnibus Tax Act of 1993, the maximum marginal corporate
tax rate was increased to 35%.
The Company implemented Statement of Financial Accounting
Standards No. 109 ("SFAS No. 109") on a prospective basis during 1992.
SFAS No. 109 establishes new accounting principles for calculating
income taxes using the asset and liability method instead of the
deferred method. In applying the asset and liability method using SFAS
No. 109, deferred tax assets and liabilities are established at 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. The application of SFAS No. 109 entitled the Bank to a tax
benefit of $4.1 million during 1992, due primarily to the fact that the
difference between the federal and state tax bad debt reserves and the
book bad debt reserves is now deductible as a timing difference under
SFAS No. 109.
At December 31, 1994, the Bank had $33.7 million in 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. Deferred tax liabilities totaled $40.1 million at
December 31, 1994.
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
26
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. (In
addition, the Bank is subject to an additional environmental tax of
0.12% of its alternative minimum taxable income with certain adjustments
and exclusions.) The excess of the addition to the bad debt reserve
computed under the percentage of taxable income method over the increase
in the reserve calculated on the basis of actual experience is an item
of tax preference. No alternative minimum taxes were applicable to the
Bank for tax years 1994, 1993 or 1992.
California tax laws have generally conformed to federal tax laws
since several provisions of the Tax Reform Act of 1986 were adopted in
September 1987.
For California franchise tax purposes, federal savings banks are
taxed as "financial corporations" at a higher rate than that applicable
to non-financial corporations because of exemptions from certain state
and local taxes. Under present law, the California franchise tax rate
applicable to financial corporations may vary each year. The tax rates
for 1994, 1993 and 1992 were 11.469%, 11.107% and 11.007%, respectively.
The tax rate for 1995 will be 11.300%.
In 1991, the California Supreme Court's decision in California
Federal Savings and Loan Association vs. City of Los Angeles which
upheld the statutory exemption of savings institutions and other non-
bank financial corporations from local business taxes, became final.
The Bank was a plaintiff in this lawsuit and received a $365,000 refund
during 1992.
The Internal Revenue Service ("IRS") is currently examining tax
years 1989 and 1990. During 1994, the IRS completed its examination of
tax years 1984 to 1986 and, early in 1995, completed its examination of
tax years 1987 and 1988. The IRS has proposed adjustments primarily
related to temporary differences as to the recognition of certain
taxable income and expense items. The Company is in the process of
filing formal protests with the IRS to take exception to the proposed
adjustments on both examinations. In addition, the California Franchise
Tax Board is examining tax years 1989 and 1990. While the Company has
provided for deferred taxes for federal and state purposes, a change in
the period of income or expense recognition could result in interest due
to the government. Although the outcome of the audits is not known at
this time, and it may take several years to resolve any disputed
matters, the Company has recorded charges of $3.2 million, $1.8 million,
and $3.4 million in 1994, 1993 and 1992, respectively, as interest on
possible tax adjustments which may be required in connection with the
tax returns for all periods affected by such income and expense
recognition issues. These estimated interest amounts are continually
evaluated based on relevant tax rulings and the progress of the review
by the Appeals Office of the IRS. At December 31, 1994, the Company had
$10.7 million of accrued interest payable recorded as a liability on the
consolidated statements of financial condition. The amount of interest
accrued was based upon management's assessment of the likelihood that
the IRS will prevail in requiring the Company to record these tax
adjustments. See note 11 of the Notes to Consolidated Financial
Statements.
ITEM 2--PROPERTIES
At December 31, 1994, the Bank owned the building and 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, loan offices in Los
Angeles, Ventura and Orange counties and a general services and
corporate operations office building in Santa Monica. FFC does not lease
or own properties. For information concerning rental obligations, see
note 6 of the Notes to Consolidated Financial Statements.
27
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 financial condition of the Company.
ITEM 4--SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
None.
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". Prior to
the Company's acquisition of all the Bank's common stock in September,
1987, the Bank's stock was traded in the national over-the-counter
market under the symbol "FFSB." 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 15, 1995, the Company had 10,598,972
shares of its common stock outstanding, representing approximately 1,271
record stockholders, 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.) Within these regulations, the Board of Directors of the
Bank declared and paid dividends to FFC totaling $5.0 million, $3.0
million and $4.3 million in 1994, 1993 and 1992, respectively.
The ability of the Company to pay dividends is also restricted by
the covenants contained in its Indenture pertaining to $50 million in
Notes due October 2004. See "Business - Borrowings."
28
ITEM 6 -- SELECTED FINANCIAL DATA
Selected financial data for the Company is presented below:
FIRTSTFED FINANCIAL CORP. AND SUBSIDIARY
FIVE YEAR CONSOLIDATED SUMMARY OF OPERATIONS
1994 1993 1992 1991 1990
----------- ---------- ---------- ---------- -----------
(Dollars In Thousands, Except For Share Data)
For the Year Ended December 31:
Interest income................ $ 235,424 $ 229,445 $ 255,612 $ 296,530 $ 291,436
Interest expense............... 157,655 131,616 151,510 195,756 207,817
Net interest income............ 77,769 97,829 104,102 100,774 83,619
Provision for loan losses...... 85,700 67,679 41,384 11,833 4,126
Other income................... 11,264 12,054 12,634 7,059 7,025
Non-interest expense........... 45,496 45,298 46,125 40,482 39,355
Earnings (loss) before income
taxes (benefit) and cumulative
effect of change in accounting
principle..................... (42,163) (3,094) 29,227 55,518 47,163
Income taxes (benefit)......... (17,699) (1,046) 11,198 27,091 20,112
Earnings (loss) before
cumulative effect of change in
accounting principle.......... (24,464) (2,048) 18,029 28,427 27,051
Net earnings (loss)............ (24,464) (2,048) 22,104 28,427 27,051
Earnings (loss) per share
before cumulative effect of
change in accounting principle. (2.32) (0.20) 1.66 2.61 2.49
Earnings (loss) per share (1) (2.32) (0.20) 2.04 2.61 2.49
End of Year:
Loans receivable............... 3,072,309 2,715,663 2,496,700 2,368,796 2,131,917
Mortgage-backed securities..... 821,317 708,283 769,155 644,264 614,306
Investment securities.......... 84,052 103,836 43,736 111,172 76,253
Total assets................... 4,157,414 3,661,117 3,446,573 3,287,059 3,051,808
Deposits....................... 2,298,914 2,305,480 1,982,745 1,740,103 1,739,653
Borrowings..................... 1,604,821 1,093,149 1,196,241 1,280,372 1,062,804
Liabilities.................... 3,972,727 3,452,825 3,239,062 3,096,883 2,890,370
Stockholders'equity............ 184,687 208,292 207,511 190,176 161,438
Book value per share (1)....... 17.42 19.78 19.98 18.28 15.81
Selected Ratios:
Return on average assets....... (0.64)% (0.06)% 0.65% 0.90% 0.97%
Return on average equity....... (12.78)% (1.01)% 11.09% 16.09% 18.31%
Ratio of non-performing
assets to total assets........ 2.23% 3.23% 2.62% 1.83% 0.82%
Other Data:
Number of Bank full service
branches...................... 25 25 24 18 18
- ----------
(1) Adjusted for three-for-two stock splits declared August 22, 1985,
June 19,1986 and September 24, 1987 and five-for-four stock splits
declared October 27, 1988 and September 26, 1991.
Also see summarized results of operations on a quarterly basis for
1994, 1993 and 1992 in note 15 of the Notes to Consolidated Financial
Statements.
29
ITEM 7--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The Company's results of operations are 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.
A net loss of $24.5 million or $2.32 per share was recorded in
1994. A net loss of $2.0 million was reported in 1993 and $22.1 million
in net earnings were reported in 1992. The loss per share for 1993 was
$0.20 and the earnings per share for 1992 was $1.66 (before the
cumulative effect of a change in accounting principle). The Company's
results during 1994 were impacted by the prolonged economic recession in
Southern California and the January 17, 1994 earthquake. Loan charge-
offs during 1994 were $69.3 million, $13.8 million of which was directly
related to the earthquake.
Core earnings reflect the Company's results from basic operations
and were $46.5 million in 1994 compared to $62.2 million in 1993 and
$71.5 million in 1992. Core earnings are defined as net interest income
before provision for loan losses plus other income (excluding gain on
sale of loans and securities) less non-interest expense and excluding
non-recurring items. Core earnings decreased in 1994 compared to 1993
due to lower net interest income resulting from increased interest
rates.
Core earnings decreased in 1993 compared to 1992 due to
stabilization of interest rates which had been declining in 1992. The
adjustable rate loan portfolio responds to changes in the primary index
used on a three-month lagged basis while savings and borrowing costs are
impacted immediately. Additionally, the primary index used for the
Bank's loan portfolio has increased much slower than the general rise in
interest rates. Core earnings also decreased in 1993 compared to 1992
due to increased non-performing assets during the periods.
Average
Return on Return on Equity to
Average Average Average
Assets Equity Assets
---------- --------- ----------
1994.................. (.64)% (12.78)% 4.97%
1993.................. (.06) (1.01) 5.61
1992.................. .65 11.09 5.86
1991.................. .90 16.09 5.63
1990.................. .97 18.31 5.28
At December 31, 1994, total non-performing assets (primarily loans
90 days past due or in foreclosure plus foreclosed real estate) were
$92.6 million or 2.23% of total assets. This figure compares to $118.2
million or 3.23% of total assets at the end of 1993 and $90.3 million or
2.62% of total assets at the end of 1992. The decrease in non-performing
assets during 1994 is due primarily to a bulk sale of $29.6 million in
non-performing loans and $2.3 million in foreclosed real estate during
the fourth quarter. Increased delinquencies and foreclosures resulting
from unemployment and decreased real estate values in Southern
California have impacted the level of non-performing assets over the
last three years.
The Company issued $50 million in 10-year Notes during 1994 and
contributed the proceeds to the Bank as capital. The Bank's regulatory
risk-based capital ratio increased to 10.44% and the tangible and core
30
capital ratios increased to 5.47% as of December 31, 1994. The Bank met
the regulatory capital standards to be deemed "well-capitalized" at
December 31, 1994.
Risks and Uncertainties
In the normal course of business, the Company encounters two
significant types of risk: economic risk and regulatory risk.
There are three main components of economic risk: interest rate
risk, credit risk and market risk. The Company is subject to interest
rate risk when its interest-earning assets reprice in different time
frames, or on a different basis than its interest-bearing liabilities.
(See "Asset-Liability Management.") Credit risk is the risk of default
on the Company's loan portfolio that results from the borrowers'
inability to make contractually required payments. (See "Loan Loss
Provisions" and "Non-performing Assets.") Market risk reflects changes
in the value of the collateral underlying loans receivable and the
valuation of real estate held by the Company.
The determination of the allowance for loan losses and the
valuation of real estate collateral is based on estimates that are
highly susceptible to changes in the economic environment and market
conditions. Management believes that the allowance for loan losses as of
December 31, 1994 was adequate based on information available at that
time. A continuation of the current economic climate, together with the
continuing adverse consequences of the earthquake, could increase the
likelihood of losses due to credit and market risks. This could create
the need for more additions to loan loss allowances.
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.
Its most recent examination began in February of 1995. 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 examination.
Other Risks
The Bank has been named as a defendant in various lawsuits. The
outcome of the lawsuits cannot be predicted but the Bank intends to
vigorously defend the actions. Management is of the opinion that no
current pending lawsuit will have a materially adverse effect on the
Company.
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 often result in creditor and regulatory pressures for additional
equity investment.
COMPONENTS OF EARNINGS
Net Interest Income
The dollar amounts of interest-earning assets and interest-bearing
liabilities and the interest rates earned or paid thereon are the chief
determinants of net interest income. The greater the excess of average
interest-earning assets over average interest-bearing liabilities, the
more beneficial is the impact on net interest income. The excess of
average interest-earning assets over average interest-bearing
liabilities declined to $53.9 million in 1994 from $90.8 million in 1993
and $142.6 million in 1992. The compression in 1994 compared to 1993 was
31
due to the Company's net loss in 1994, offset by a small decrease in
average non-performing assets. The compression in 1993 compared to 1992
was due to an increase in average non-performing assets and the
Company's net loss in 1993.
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:
1994 1993 1992
---------- ---------- ---------
(Dollars In Thousands)
Average loans and mortgage-backed
securities (1)....................... $3,598,561 $3,331,352 $3,144,596
Average investment securities......... 149,907 134,986 123,481
---------- ---------- ----------
Average interest-earning assets....... 3,748,468 3,466,338 3,268,077
---------- ---------- ----------
Average savings deposits.............. 2,273,065 2,065,867 1,884,436
Average borrowings.................... 1,421,522 1,309,658 1,241,011
---------- ---------- ----------
Average interest-bearing liabilities.. 3,694,587 3,375,525 3,125,447
---------- ---------- ----------
Excess of interest-earning assets
over interest-bearing liabilities.... $ 53,881 $ 90,813 $ 142,630
========== ========== ==========
Yield earned on average interest
earning assets....................... 6.20% 6.56% 7.24%
Rates paid on average interest-
bearing liabilities.................. 4.27 3.89 4.83
Net interest rate spread.............. 1.93 2.67 2.95
Effective net spread.................. 1.99 2.77 3.16
Total interest income (2)............. $ 232,368 $ 227,521 $ 254,202
Total interest expense................ 157,625 131,325 151,071
---------- ----------- ----------
Net interest income................... $ 74,743 $ 96,196 $ 103,131
========== =========== ==========
- ----------
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 Dividends on Federal Home Loan Bank stock and miscellaneous interest
income were not considered in this analysis.
Net interest income is also impacted by a three month lag before
changes in the cost of funds can be passed along to monthly adjustable
rate loan customers. During periods of increasing interest rates,
savings and borrowing costs adjust to market rates immediately while it
takes several months for the loan yield to adjust.
32
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, 1994 December 31, 1993
Versus Versus
December 31, 1993 December 31, 1992
--------------------------- ----------------------------
Change Due To Change Due To
--------------------------- ----------------------------
Volume Rate Total Volume Rate Total
------ ------ ------- ------- ------ -------
(In Thousands)
Interest Income:
Loans and mortgage-backed
securities................. $17,139 $(13,445) $ 3,694 $14,144 $(41,930) $(27,786)
Investments................ 730 423 1,153 513 592 1,105
------- -------- -------- ------- -------- --------
Total interest income..... 17,869 (13,022) 4,847 14,657 (41,338) (26,681)
------- -------- -------- ------- -------- --------
Interest Expense:
Deposits................... 7,947 1,851 9,798 7,914 (17,988) (10,074)
Borrowings................. 4,850 11,652 16,502 3,346 (13,018) (9,672)
------- -------- -------- ------- -------- --------
Total interest expense.... 12,797 13,503 26,300 11,260 (31,006) (19,746)
------- -------- -------- ------- -------- --------
Net interest income
(expense).................. $ 5,072 $(26,525) $(21,453) $ 3,397 $(10,332) $ (6,935)
======= ======== ======== ======= ======== ========
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. Dividends on Federal Home Loan Bank stock and miscellaneous
interest income were not considered in this analysis.
Also, interest expense during 1994, 1993 and 1992 includes
accruals of $3.2 million, $1.8 million and $3.4 million, respectively,
for amounts potentially due as a result of IRS and California Franchise
Tax Board audits. The Company provides for interest on the disputed
items based on relevant tax rulings and case law as well as the
progression of the audit at the Appeals Office of the IRS.
For these reasons, the interest rate spread (the average yield on
loans and investments less the average cost of funds) dropped to 1.93%
in 1994 from 2.67% in 1993 and 2.95% in 1992.
33
Interest Rate Spreads and Yield on Average Interest-Earning Assets
Year Ended December 31,
------------------------------------------------------------------------------
1994 1993 1992 1991 1990
-------------- -------------- -------------- -------------- --------------
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 loan portfolio...... 6.25% 6.50% 6.64% 6.20% 7.92% 7.25% 9.96% 9.20% 10.87% 10.45%
Weighted average yield
on investment portfolio
(1).................... 5.00 5.08 4.70 5.16 4.24 6.18 6.03 4.90 8.16 7.74
Weighted average yield
on all interest-earning
assets................. 6.20 6.47 6.56 6.17 7.78 7.24 9.82 9.05 10.78 10.37
Weighted average rate
paid on deposits....... 3.85 4.49 3.76 3.60 4.66 3.97 6.70 5.74 7.93 7.67
Weighted average rate
paid on borrowings and
FHLB advances.......... 4.93 6.04 4.09 3.99 5.10 4.48 7.08 5.47 8.59 8.07
Weighted average rate
paid on all interest
bearing-liabilities.... 4.27 5.12 3.89 3.73 4.83 4.16 6.85 5.63 8.16 7.82
Effective net spread
(2).................... 1.99 2.77 3.16 3.29 3.02
Interest rate spread
(3)................... 1.93% 1.35% 2.67% 2.44% 2.95% 3.08% 2.97% 3.42% 2.62% 2.55%
- ----------
1 Dividends on Federal Home Loan Bank stock and miscellaneous interest
income were not considered in this analysis.
2 Net interest income (the difference in the dollar amounts of
interest earned and paid) divided by average interest-earning assets.
3 Weighted average yield on all interest-earnings assets less weighted
average rate paid on all interest-bearing liabilities.
Loss Provisions
Loan loss provisions were $85.7 million in 1994 compared with
$67.7 million in 1993 and $41.4 million in 1992. The Bank recorded loan
loss provisions totaling $24.7 million and $55.0 million for the first
and second quarters of 1994 due to potential losses stemming from the
weak Southern California economy and real estate market and the
earthquake. The Bank has a policy of providing for general valuation
allowances, unallocated to any specific loan, but available to offset
any future loan losses. The allowance is maintained at an amount that
management believes adequate to cover estimable and probable loan
losses. General valuation allowances totaled $55.4 million and $40.7
million at December 31, 1994 and December 31, 1993, respectively.
Management performs regular risk assessments of the Bank's loan
portfolio to maintain an appropriate general valuation allowance.
Additional loan loss provisions may be required to the extent that
the allowance is used for loan charge-offs. Loan charge-offs increased
to $69.3 million in 1994 from $48.6 million in 1993 and $27.5 million in
1992. Charge-offs for 1994 include $13.8 million directly related to the
1994 earthquake. The increased charge-offs were due to specific
valuation allowances provided for certain problem assets based on
declines in the estimated value of the underlying collateral. The
Southern California area has experienced declines in real estate values
and other economic problems for the past three years resulting from
increased unemployment, reductions in defense spending, and natural
disasters. The Bank's loan portfolio, excluding mortgage-backed
securities, 43% of which is secured by multi-family properties, has
required additional loss provisions primarily due to these recessionary
factors.
Due to economic concerns and increased loan charge-offs,
management increased the ratio of general valuation allowances to loans
with loss exposure to 1.82% at the end of 1994 from 1.48% at the end of
1993 and 0.93% at the end of 1992. Loans with loss exposure consist of
the Bank's loan portfolio plus any loans sold with recourse.
34
Non-interest Income
Loan and other fees increased to $7.0 million in 1994 compared to
$6.5 million in 1993 and $5.9 million in 1992 primarily as a result of
miscellaneous fees earned on new loans funded.
Gain on sale of loans and mortgage-backed securities decreased to
$319 thousand in 1994 from $4.3 million in 1993 and $2.1 million in
1992. Loans originated for sale, primarily fixed-rate loans, decreased
during 1994 due to the impact of increasing interest rates.
Accordingly, gains decreased during 1994 due to the lower volume of
loans sold. $2.0 million of the gain recognized during 1993 resulted
from the sale of a mortgage-backed security from the Bank's portfolio of
loans and securities held for sale.
Real estate operations resulted in a net gain of $2.3 million in
1994 compared to a net loss of $437 thousand in 1993 and a net gain of
$2.6 million in 1992. The gains recorded in 1994 resulted primarily
from the recovery of excess valuation allowances upon the sale of
foreclosed properties. Losses recorded in 1993 resulted primarily from
the operation of foreclosed properties prior to sale. Many of the
properties were in a general state of disrepair with high vacancy rates
and rent collection problems. These problems may take several months to
correct. The Bank normally sells these properties within a few months
after foreclosure, usually after the property has been rehabilitated.
Other operating income consists primarily of fees earned for
services provided by the retail savings branches.
Non-interest Expense
Non-interest expense decreased to 1.18% of average total assets in
1994 from 1.26% of average total assets in 1993 and 1.36% of total
assets in 1992. The decreasing trend in non-interest expense over the
last three years results from management's ongoing cost control
programs.
Salary and benefit costs decreased slightly in 1994 compared to
1993 and in 1993 compared to 1992 because lower amounts were
contributed to the bonus and profit sharing plans in 1994 and 1993 due
to decreased earnings.
Occupancy expense decreased 2% in 1994 compared to 1993. Two loan
offices were closed and consolidated with existing loan offices during
1994. Occupancy expense increased by 3% in 1993 compared to 1992 due to
higher lease costs resulting from the effect of lease escalation clauses
and the addition of two loan offices.
Advertising expense decreased 21% in 1994 compared to 1993 due to
cost containment efforts and the realignment of costs to reflect
business activity in 1994. In 1993, advertising expense increased by
11% over 1992 due to advertising campaigns promoting various savings and
loan products, particularly during the fourth quarter when the Bank
advertised its new mortgage banking efforts.
Federal deposit insurance increased by 11% in 1994 compared to
1993 and by 11% in 1993 compared to 1992 due to growth in average
savings deposits.
Other operating expenses increased 5% in 1994 compared to 1993
primarily due to increased data processing, goodwill and insurance
costs. Other operating expenses decreased 12% in 1993 compared to 1992
primarily as a result of decreased charitable contributions and data
processing costs.
35
Non-Interest Expense
Year Ended December 31,
-------------------------------------------
1994 1993 1992 1991 1990
------- ------- ------- ------- -------
(Dollars In Thousands)
Salaries...................... $16,887 $16,557 $15,387 $13,055 $11,934
Incentive compensation........ 1,363 1,425 1,635 1,426 1,506
Payroll taxes................. 1,498 1,388 1,225 994 952
Employee benefit insurance.... 1,225 1,332 1,244 1,230 1,261
Bonus compensation............ 300 633 1,751 2,385 2,419
Profit sharing................ 200 200 1,007 1,510 1,709
Other salaries and benefits... 1,261 1,345 1,204 945 988
------- ------- ------- ------- -------
22,734 22,880 23,453 21,545 20,769
------- ------- ------- ------- -------
Insurance..................... 748 570 556 537 499
Goodwill...................... 996 650 531 269 187
Data processing............... 1,094 895 2,213 1,160 953
Contributions................. 412 591 751 761 784
Professional services......... 732 799 709 636 372
Supervisory exam.............. 547 531 482 433 493
Lawsuit....................... - - - - 1,400
Other operating costs......... 4,424 4,458 4,397 3,806 3,828
------- ------- ------- ------- -------
8,953 8,494 9,639 7,602 8,516
------- ------- ------- ------- -------
Rent.......................... 4,246 3,898 3,390 2,942 2,505
Equipment..................... 1,246 1,285 1,522 1,290 1,294
Maintenance costs............. 594 741 690 542 537
Other occupancy............... 600 892 1,040 940 950
------- ------- ------- ------- -------
6,686 6,816 6,642 5,714 5,286
------- ------- ------- ------- -------
Federal deposit insurance..... 5,151 4,622 4,156 3,890 3,205
Advertising................... 1,972 2,486 2,235 1,731 1,579
------- ------- ------- ------- -------
Total........................ $45,496 $45,298 $46,125 $40,482 $39,355
======= ======= ======= ======= =======
Non-interest expense as
% of average assets.......... 1.18% 1.26% 1.36% 1.28% 1.40%
==== ==== ==== ==== ====
Income Taxes
The Company implemented Statement of Financial Accounting
Standards No. 109 ("SFAS No. 109") during 1992 and recorded a one-time
benefit of $4.1 million. For further discussion see "Business -
Taxation."
BALANCE SHEET ANALYSIS
Consolidated assets at the end of 1994 were $4.2 billion, 14%
greater than $3.7 billion at the end of 1993. Assets grew 6% from 1992
to 1993. The growth in assets was the result of increases in the loan
portfolio.
36
Loan Portfolio
The Bank continues its long-standing policy of originating only
monthly adjustable rate loans for its loan portfolio. At the end of
1994, 96% of the Bank's loan portfolio was adjustable based on monthly
changes in the Eleventh District Federal Home Loan Bank Cost of Funds
Index. The Bank has maintained the level of adjustable loans in its
portfolio at over 90% for the last 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 lag between a change in its monthly cost of funds and a
corresponding change in its loan rates. (See "Asset - Liability
Management.")
During the fourth quarter of 1993, the Bank started a mortgage
banking program to take advantage of borrower demand for fixed rate and
other loan products the Bank does not keep in its portfolio. Under this
program, competitively priced loans are originated for immediate sale in
the secondary market. No significant amounts of loans have been
originated for sale in the secondary market due to the increasing
interest rate environment in 1994.
Loans originated and purchased totaled $909 million in 1994
compared to $746 million in 1993 and $841 million in 1992. The increase
in 1994 resulted from improved borrower demand for adjustable rate
mortgages which comprised over 97% of new loan activity during the year.
Also, $59.1 million in single family adjustable rate mortgages, included
in the 1994 amount above, were purchased from other financial
institutions during the year. Loan originations decreased during 1993
compared to 1992 due to borrower preference for fixed rate mortgages
which are not originated for the Bank's portfolio. In 1994, loans made
on the security of single family properties comprised 81% of new
originations by dollar amount; loans made on the security of
multi-family properties comprised 18% of new originations; and loans
made on the security of commercial real estate properties comprised 1%
of new originations. No construction loans and an insignificant amount
of consumer loans were originated in 1994.
The following table details loan originations by loan type for the
periods indicated:
Loan Originations by Type
Year Ended December 31,
----------------------------------------------------
1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
(In Thousands)
Single Family.......... $734,438 $499,560 $590,152 $357,906 $535,822
Multi-Family........... 164,788 236,211 237,720 273,194 345,348
Commercial............. 9,858 9,638 9,104 14,462 18,583
Other.................. 230 419 3,779 1,692 7,277
-------- -------- -------- -------- --------
Total................ $909,314 $745,828 $840,755 $647,254 $907,030
======== ======== ======== ======== ========
Loans originated upon the sale of the Bank's real estate owned
were $54.6 million or 6.0% of total originations in 1994. $7.0 million
of these loans were originated based on the security of single family
properties, $47.2 million were originated based on the security of
multi-family properties and $408 thousand were based on the security of
commercial properties.
The Bank converted $198.1 million of its loans into
mortgage-backed securities in 1994 for use in securitized borrowings
(reverse repurchase agreements). In 1993, $111.7 million in loans were
securitized compared with $187.5 million in 1992. Securitized loans have
a lower risk weighting for regulatory risk-based capital purposes.
37
The Bank's adjustable rate loan products often provide for
first-year monthly payments which 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 shortfalls. Due to negative amortization, loan-to-value
ratios may increase above those calculated at the inception of the loan.
To date, the Bank's loss experience on loans with negative
amortization has been no different than that on the fully-amortizing
portfolio. The amount of negative amortization recorded by the Bank
decreases in periods of declining interest rates and increases during
periods of increasing interest rates. The balance of negative
amortization on all loans serviced by the Bank was $889 thousand in 1994
compared to $602 thousand in 1993 and $3.1 million in 1992.
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
rate are charged and there is no initial below market interest rate.
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 in the Bank's
portfolio for which there is no private mortgage insurance totaled $129
million at December 31, 1994 compared to $155 million at December 31,
1993 and $201 million at December 31, 1992.
Loan Composition
Loans based on the security of single family dwellings (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,
1994, approximately 59% of the loan portfolio consisted of first liens
on single family properties. First liens on multi-family properties
comprised approximately 34% of the portfolio, and first liens on
commercial properties represented approximately 6% of the portfolio.
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. Due to
inadequate market pricing, management elected to de-emphasize the
origination of multi-family loans during 1994. Approximately 18% of
loan originations in 1994 were multi-family loans compared with 32%
during 1993. The Bank has not emphasized the origination of commercial
real estate loans for several years.
The Bank also has loss exposure on certain loans sold with
recourse. These loans are substantially all multi-family loans. Loans
sold with recourse totaled $305 million as of December 31, 1994, $347
million as of December 31, 1993 and $438 million at December 31, 1992.
Although no longer owned by the Bank, these loans are combined with the
Bank's loan portfolio for purposes of computing general valuation
allowances and measuring risk exposure for regulatory capital purposes.
Under the Bank's current policy, it no longer enters into loans sold
with recourse agreements.
38
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,
---------------------------------------------------------------
1994 1993 1992 1991 1990
----------- ---------- ----------- ----------- -----------
(In Thousands)
REAL ESTATE LOANS:
First trust deed residential loans:
One unit.......................... $1,188,022 $ 862,340 $ 769,367 $ 760,903 $ 758,758
Two to four units................. 349,766 340,035 296,550 258,825 227,535
Five or more units................ 1,329,833 1,298,794 1,181,098 1,078,159 855,844
---------- ---------- ---------- ---------- ----------
Residential loans................ 2,867,621 2,501,169 2,247,015 2,097,887 1,842,137
OTHER REAL ESTATE LOANS:
Commercial and industrial......... 239,710 245,387 256,474 263,183 266,258
Second trust deeds................ 20,401 24,606 29,441 35,245 41,957
Other............................. 20,460 5,861 10,733 4,193 5,298
---------- ---------- ---------- ---------- ----------
Real estate loans................ 3,148,192 2,777,023 2,543,663 2,400,508 2,155,650
NON-REAL ESTATE LOANS:
Manufactured housing.............. 2,114 2,763 3,481 4,031 4,873
Deposit accounts.................. 1,301 1,086 1,184 1,615 1,884
Consumer.......................... 506 964 1,494 2,705 4,324
---------- ---------- ---------- ---------- ----------
Loans receivable................. 3,152,113 2,781,836 2,549,822 2,408,859 2,166,731
LESS:
Allowance for loan losses......... 55,353 46,900 27,854 13,937 11,181
Unrealized loan fees.............. 24,451 19,273 25,268 26,126 23,633
---------- ---------- ---------- ---------- ----------
Net loans receivable............. 3,072,309 2,715,663 2,496,700 2,368,796 2,131,917
FHLMC AND FNMA MORTGAGE-BACKED
SECURITIES:
Secured by single family
dwellings........................ 794,126 678,884 660,673 524,969 487,842
Secured by multi-family dwellings. 27,191 29,399 108,482 119,295 126,464
---------- ---------- ---------- ---------- ----------
Mortgage-backed securities........ 821,317 708,283 769,155 644,264 614,306
---------- ---------- ---------- ---------- ----------
TOTAL............................ $3,893,626 $3,423,946 $3,265,855 $3,013,060 $2,746,223
========== ========== ========== ========== ==========
ASSET QUALITY
Asset Quality Ratios
The following table sets forth certain asset quality ratios of the Bank for
the periods indicated:
December 31,
------------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
Non-performing Loans to Loans Receivable (1).. 2.41% 3.28% 2.61% 2.16% 1.13%
Non-performing Assets to Total Assets (2)..... 2.23% 3.23% 2.62% 1.83% 0.82%
Loan Loss Allowances to Non-performing
Loans (3).................................... 78.27% 52.23% 37.54% 31.31% 40.24%
General Loss Allowances to Loans Receivable
(4).......................................... 1.76% 1.46% 0.88% 0.53% 0.30%
General Loss Allowances to Total Loans with
Loss Exposure (5)............................ 1.82% 1.48% 0.93% 0.49% 0.42%
- ----------
1 Non-performing loans are net of specific loan loss allowances. Loans
receivable exclude mortgage-backed securities and are before deducting
unrealized loan fees and general valuation allowances.
2 Non-performing loans are net of specific loan loss allowances. Loans
receivable exclude mortgage-backed securities and are before deducting
unrealized loan fees and general valuation allowances.
3 Bank's loan loss allowances, including specific loan loss allowances
for non-performing loans and general valuation allowances but excluding
general valuation allowances for loans sold by the Bank with full or
limited recourse. Non-performing loans are before deducting specific
loan loss allowance.
4 Bank's general valuation allowances, excluding general valuation
allowances for loans sold with full or limited recourse. Loans receivable
exclude mortgage-backed securities and are before deducting unrealized loan
fees and general valuation allowances.
5 Bank's general valuation allowances, including general valuation allowances
for loans sold with full or limited recourse.
39
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 and the percentage to total non-performing assets.
Also shown is the ratio of non-performing assets to total assets.
Non-Performing Assets
December 31,
1994 1993 1992 1991 1990
----------------- ------------------ ------------------ ----------------- ----------------
% of % of % of % of % of
Total Total Total Total Total
Assets Assets Assets Assets Assets
Non- Non- Non- Non- Non-
$ Performing $ Performing $ Performing $ Performing $ Performing
------- --------- ------ ----------- ------- ---------- ------ ---------- ----- ----------
(Dollars In Thousands)
Real Estate Owned:
Single Family...... $ 5,711 6.17% $ 10,052 8.50% $ 8,268 9.16% $ 3,015 5.00% $ 422 1.69%
Multi-Family....... 10,647 11.50 16,015 13.55 15,590 17.27 4,881 8.10 - -
Commercial......... 366 0.39 327 0.28 - - 276 0.46 - -
Other.............. - - 484 0.41 - - - - - -
------- ------ -------- ------ ------- ------ ------- ------ ------- ------
Total Real Estate
Owned 16,724 18.06 26,878 22.74 23,858 26.43 8,172 13.56 422 1.69
------- ------ -------- ------ ------- ------ ------- ------ ------- ------
Non-Performing Loans:
Single Family..... 13,041 14.08 25,317 21.41 24,634 27.28 21,441 35.57 6,063 24.35
Multi-Family...... 60,213 65.02 70,207 59.39 42,481 47.05 34,347 56.99 18,937 76.06
Commercial........ 20,986 22.66 10,307 8.72 3,623 4.01 1,536 2.55 - -
Other............. 245 0.26 245 0.20 271 0.30 194 0.33 388 1.56
Less Valuation
Allowances........ (18,596) (20.08) (14,732) (12.46) (4,582) (5.07) (5,422) (9.00) (912) (3.66)
------- ------ -------- ------ ------- ------ ------- ------ ------- ------
Total Non-Performing
Loans............. 75,889 81.94 91,344 77.26 66,427 73.57 52,096 86.44 24,476 98.31
------- ------ -------- ------ ------- ------ ------- ------ ------- ------
Total.............. $92,613 100.00% $118,222 100.00% $90,285 100.00% $60,268 100.00% $24,898 100.00%
======= ====== ======== ====== ======= ====== ======= ====== ======= ======
Ratio of Non-
Performing Assets to
Total Assets: 2.23% 3.23% 2.62% 1.83% .82%
==== ==== ==== ==== ===
The decrease in non-performing loans in 1994 compared to 1993 is
due primarily to a $29.6 million bulk sale of non-performing loans. The
decrease in real estate owned in 1994 compared to 1993 is due to a
decline in foreclosure activity. Also, $2.3 million in foreclosed real
estate was sold as part of the bulk sale.
The increase in single family non-performing loans in 1993 is
primarily due to recession-related factors such as layoffs, decreased
incomes and decreased real estate values. The increase in multi-family
and commercial non-performing loans is attributable primarily to
economic factors, declines in occupancy rates, and decreased real estate
values. The Bank actively monitors the status of all non-performing
loans.
The Bank implemented Statement of Financial Standards No. 114,
"Accounting by Creditors for Impairment of a Loan" (" SFAS No. 114)," as
of January 1, 1994. As of December 31, 1994, impaired loans totaled
$108.3 million, net of $23.9 million in related loss allowances. See
"Business - Risk Elements" for a further discussion of impaired loans.
40
The Bank has debt restructurings which result from temporary
modifications of principal and interest payments. Under these
arrangements, loan terms are typically reduced to no less than a
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, 1994, the Bank had modified loans totaling $59.7 million,
net of loan loss allowances. This compares with $62.1 million, net, as
of December 31, 1993. No modified loans were 90 days or more delinquent
as of December 31, 1994 or 1993.
Allowance for Loan Losses
For an analysis of the changes in the allowance for loan losses,
see "Business - Risk Elements." At December 31, 1994, the allowance for
loan losses was comprised of $55.4 million in general valuation
allowances and a liability of $7.9 million for loans sold with recourse.
Total general valuation allowances, including the liability for loans
sold with recourse amounted to 1.82% of the loans with loss exposure at
the end of 1994. This compares to 1.48% at the end of 1993 and 0.93% at
the end of 1992. The increase reflects management's concerns regarding
the Southern California economy. 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.
SOURCES OF FUNDS
External Sources of Funds
External sources of funds include savings deposits, loan sales,
advances from the FHLBSF and other borrowings. For purposes of funding
asset growth, the source or sources of funds with the lowest all-in cost
for the desired term are generally selected. The funding sources used
most often during 1994 were FHLB advances and reverse repurchase
agreements (securitized borrowings).
Deposits obtained from national brokerage firms ("brokered
deposits") are considered a source of funds similar to a borrowing.
Since the Bank achieved the capital ratios necessary to be deemed "well-
capitalized" during 1994, the Bank can obtain brokered deposits at its
discretion so long as it meets applicable capital standards.
Previously, the Bank obtained brokered deposits pursuant to a waiver of
regulatory requirements from the Federal Deposit Insurance Corporation.
In evaluating brokered deposits as a source of funds, the cost of these
deposits, including commission costs, is compared to other funding
sources. Brokered deposits were $597 million at December 31, 1994.
This compares to $519 million at the end of 1993 and $274 million at the
end of 1992.
Deposits at retail savings branches were $1.5 billion at the end
of 1994, the same level as the end of 1993. Deposits at the end of 1993
included two branches acquired from the RTC near the end of the year
with deposits totaling $113 million. Thirty days after the acquisition,
the deposits of the two branches were combined and one of the branches
was closed. Deposit outflows from the acquired branches were offset by
deposits gathered at previously-existing branches during 1994. Deposits
at the end of 1992 were $1.3 billion. The Bank acquired seven branches
with deposits totaling $290 million from the RTC in March 1992.
The Bank also solicits deposits through telemarketing efforts.
Telemarketing deposits are solicited by the Bank's employees by
telephone, principally from pension funds. Telemarketing deposits
decreased by 30% during 1994 to $201 million at the end of the year.
Telemarketing deposits decreased during 1994 due to higher yielding
investments available to the Bank's customers, usually managers of
pension funds. Telemarketing deposits were $286 million at the end of
1993 and $389 million at the end of 1992.
41
Reverse repurchase agreements ("reverse repos") are short term
borrowings secured by mortgage-backed securities. These borrowings
increased 26% to $691 million at the end of 1994 from $549 million at
the end of 1993. Reverse repos at the end of 1992 were $491 million.
$198 million in loans were securitized during 1994 to increase the
availability of this type of borrowing.
FHLB advances increased 68% to $863 million at the end of 1994
from $515 million at the end of 1993. Advances at the end of 1992
totaled $655 million. Advances increased during 1994 because these were
often the least costly funds available to the Bank. Advances dropped at
the end of 1993 because short term borrowings were paid off with funds
from the branches acquired in December.
Sales of loans and mortgage-backed securities were $43.7 million
during 1994. This compares to $153 million during 1993 and $154 million
sold during 1992. The volume of loans sold varies with the amount of
saleable loans originated. The level of loans originated for sale in
the secondary market decreased during 1994 due to a lower amount of
fixed rate loans originated.
Internal Sources of Funds
Internal sources of funds include scheduled loan principal
payments, loan payoffs, and positive cash flows from operations.
Principal payments were $260 million in 1994 compared with $355 million
in 1993 and $322 million in 1992. Principal payments include both
amortization and prepayments and are a function of real estate activity
and the general level of interest rates.
CAPITAL REQUIREMENTS
Current regulatory capital standards require that the Bank
maintain tangible capital of at least 1.5% of total assets, core capital
of 3.0% 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 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.
Effective July 1, 1994, institutions whose exposure to interest-
rate risk as determined by the OTS is deemed to be above normal are
required to hold additional risk-based capital. As of December 31,
1994, the Bank was not required to hold additional capital as a result
of this regulation.
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. In September of 1994, FFC issued $50
million in 10-year Notes. The proceeds from these Notes were
contributed to the Bank as a capital infusion. See "Business -
Borrowings." The Bank met the regulatory capital standards to be deemed
"well-capitalized" at December 31, 1994.
42
The Bank met all three capital requirements at the end of 1994 as
indicated by the chart below:
Regulatory Capital
Requirement Ratio
------------ --------
Tangible Capital................... 1.50% 5.47%
Core Capital....................... 3.00% 5.47%
Risk-based Capital................. 8.00% 10.44%
ASSET-LIABILITY MANAGEMENT
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 maturities of fixed rate assets are
matched with fixed cost liabilities.
The majority of the Bank's assets are monthly adjustable rate
mortgages with interest rates that fluctuate based on changes in the
Federal Home Loan Bank of San Francisco Eleventh District Cost of Funds
Index ("Index"). These mortgages constitute over 95% of the loan
portfolio at the end of 1994. Comparisons over the last several years
show that changes in the Bank's cost of funds generally correlate with
changes in the Index. The Bank does not use any futures, options or
swaps in its asset-liability strategy.
Assets and liabilities which are subject to repricing are
considered rate sensitive. The mismatch 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. A positive GAP benefits a company during periods of
increasing interest rates. The reverse is true during periods of
decreasing 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,
1994, the Company's one-year GAP was a positive $574 million or 13.8% of
total assets. This compares with positive GAP ratios of 14.8% and 11.6%
of total assets at December 31, 1993 and December 31, 1992,
respectively.
43
The following chart shows the composition of the Company's
consolidated GAP position at the end of 1994 and the 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:
Investments Securities.......... $ 84,052 $ 1,000 $ 11,698 $ 71,354 $ -
MBS 821,317 813,465 - - 7,852
Loans Receivable:
Interest Rate Sensitive Loans... 3,027,558 3,027,558 - - -
Fixed Rate Loans ............... 44,751 13,783 6,089 7,582 17,297
---------- ---------- ---------- --------- --------
Total Interest-Earning
Assets....................... $3,977,678 $3,855,806 $ 17,787 $ 78,936 $25,149
========== ========== ========== ======== =======
Interest-Bearing Liabilities:
Demand Accounts............... $ 481,411 $ 481,411 $ - $ - $ -
Fixed Rate Term Certificate... 1,817,503 492,933 829,240 474,421 20,909
Borrowings:
FHLB Advances............... 863,200 579,500 224,700 59,000 -
Reverse Repurchase
Agreements................. 691,121 691,121 - - -
Other Borrowings............ 50,500 500 - - 50,000
---------- ---------- ----------- --------- -------
Total Interest-Bearing
Liabilities.............. $3,903,735 $2,245,465 $ 1,053,940 $533,421 $70,909
========== ========== =========== ======== =======
Interest-Sensitivity Gap........ $ 73,943 $1,610,341 $(1,036,153) $(454,485) $(45,760)
========== ========== =========== ========= ========
Interest-Sensitivity Gap as a
Percentage of Total Assets..... 38.73% (24.92)% (10.93)% 1.10%
===== ====== ====== ====
Cumulative Interest-Sensitivity Gap $1,610,341 $ 574,188 $ 119,703 $ 73,943
========== =========== ========= ========
Cumulative Interest-Sensitivity
Gap as a Percentage of Total
Assets........................ 38.73% 13.81% 2.88% 1.78%
===== ===== ==== ====
44
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 and period-end price information presented below is based on
information supplied by the New York Stock Exchange. All prices have
been adjusted for stock splits.
The Company has never declared or paid a cash dividend. In 1987
the Company's Board of Directors authorized the repurchase of 10% of the
Company's outstanding shares of stock. No shares were repurchased
during 1994 or 1993. As of December 31, 1994, a total of 796,520 shares
had been repurchased at an average cost of $12.34 per share. Based on
the number of shares outstanding at December 31, 1987, 264,000 shares
remain eligible for repurchase under this program.
PRICE RANGE OF COMMON STOCK
(Adjusted for Stock Splits)
First Quarter Second Quarter Third Quarter Fourth Quarter
-------------- ---------------- ------------- -------------
High Low High Low High Low High Low
------ ----- ------ ----- ------ ------ ------ ------
1994......... 17 13 3/8 17 1/4 13 3/8 16 1/2 13 3/4 15 1/4 10 1/4
1993......... 26 1/2 19 1/4 20 7/8 15 1/4 20 3/8 16 1/4 19 3/4 14 7/8
1992......... 26 22 24 1/2 19 1/2 21 3/4 13 7/8 19 1/2 13 1/2
1991......... 19 7/8 12 1/4 24 1/4 19 7/8 26 5/8 21 1/8 24 18 1/4
1990......... 18 14 3/4 20 5/8 15 3/8 18 1/2 11 1/2 13 7/8 11 1/4
45
ITEM 8--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1994 1993
---------- ----------
ASSETS
Cash................................................... $ 35,853 $ 17,491
Investment securities, held to maturity (market of
$79,316 and $104,282) (Note 2)........................ 84,052 103,836
Loans receivable (Notes 3 and 9)....................... 3,041,910 2,692,036
Mortgage-backed securities (market of $791,930 and
$715,726) (Notes 4 and 10)............................ 821,317 708,283
Loans held for sale (market of $30,399 and
$24,030) (Note 3)..................................... 30,399 23,627
Accrued interest and dividends receivable.............. 24,420 21,018
Real estate (Note 5)................................... 17,081 27,249
Office properties and equipment, at cost less accumulated
depreciation (Note 6)................................. 9,211 8,923
Investment in Federal Home Loan Bank (FHLB) stock , at
cost (Note 7)......................................... 56,061 38,967
Other assets (Note 1).................................. 37,110 19,687
---------- ----------
$4,157,414 $3,661,117
========== ==========
LIABILITIES
Deposits (Note 8)...................................... $2,298,914 $2,305,480
FHLB advances and other borrowings (Note 9)............ 913,700 544,500
Securities sold under agreements to repurchase (Note 10) 691,121 548,649
Deferred income taxes (Note 11)........................ 6,324 16,366
Accrued expenses and other liabilities................. 62,668 37,830
---------- ----------
3,972,727 3,452,825
---------- ----------
COMMITMENTS AND CONTINGENT LIABILITIES
(NOTES 3, 6, AND 13)
STOCKHOLDERS' EQUITY (NOTES 12 AND 13)
Common stock, par value $.01 per share; authorized
25,000,000 shares; issued 11,395,492 and 11,326,191
shares, outstanding 10,598,972 and 10,529,671
shares................................................ 114 113
Additional paid-in capital............................. 28,061 27,279
Retained earnings--substantially restricted............ 169,186 193,650
Loan to employee stock ownership plan.................. (2,842) (2,918)
Treasury stock, at cost, 796,520 shares................ (9,832) (9,832)
---------- ----------
184,687 208,292
---------- ----------
$4,157,414 $3,661,117
========== ==========
See accompanying notes to consolidated financial statements.
46
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1994 1993 1992
-------- -------- --------
Interest income:
Interest on loans............................... $188,665 $181,223 $206,662
Interest on mortgage-backed securities.......... 36,207 39,954 42,514
Interest and dividends on investments........... 10,552 8,268 6,436
-------- -------- --------
Total interest income......................... 235,424 229,445 255,612
-------- -------- --------
Interest expense:
Interest on deposits (Note 8)................... 87,545 77,741 87,802
Interest on borrowings (Note 9)................. 70,110 53,875 63,708
-------- -------- --------
Total interest expense........................ 157,655 131,616 151,510
-------- -------- --------
Net interest income............................... 77,769 97,829 104,102
Provision for loan losses (Note 3)............... 85,700 67,679 41,384
-------- -------- --------
Net interest income (loss) after provision for
loan losses..................................... (7,931) 30,150 62,718
-------- -------- --------
Other income (expense):
Loan and other fees............................. 7,044 6,530 5,863
Gain on sale of loans and mortgage-backed
securities..................................... 319 4,257 2,098
Real estate operations, net..................... 2,327 (437) 2,604
Other operating income.......................... 1,574 1,704 2,069
-------- -------- --------
Total other income............................ 11,264 12,054 12,634
-------- -------- --------
Non-interest expense:
Salaries and employee benefits (Note 13)........ 22,734 22,880 23,453
Occupancy (Note 6).............................. 6,686 6,816 6,642
Advertising..................................... 1,972 2,486 2,235
Federal deposit insurance....................... 5,151 4,622 4,156
Other operating expense......................... 8,953 8,494 9,639
-------- -------- --------
Total non-interest expense.................... 45,496 45,298 46,125
-------- -------- --------
Earnings (loss) before income taxes (benefit) and
cumulative effect of change in accounting
principle....................................... (42,163) (3,094) 29,227
Income taxes (benefit) (Note 11).................. (17,699) (1,046) 11,198
-------- -------- --------
Earnings (loss) before cumulative effect of
change in accounting principle................... (24,464) (2,048) 18,029
Cumulative effect of change in accounting - - 4,075
principle (Note 11).............................. -------- -------- --------
Net earnings (loss)............................. $(24,464) $ (2,048)$ 22,104
======== ======== ========
Earnings (loss) per share (Note 12):
Earnings (loss) before cumulative effect of
change in accounting principle................. $ (2.32) $ (0.20)$ 1.66
Cumulative effect of change in accounting - - 0.38
principle...................................... -------- -------- --------
Earnings (loss) per share ........................ $ (2.32) $ (0.20)$ 2.04
======== ======== ========
See accompanying notes to consolidated financial statements.
47
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(IN THOUSANDS)
RETAINED
EARNINGS LOAN TO
ADDITIONAL (SUBSTANTIALLY ESOP
COMMON PAID-IN RESTRICTED) (NOTES 12 TREASURY
STOCK CAPITAL (NOTE 12) AND 13) STOCK TOTAL
------ ---------- -------------- --------- -------- --------
Balance, December 31,
1991................... $109 $23,674 $173,594 $(1,965) $(5,236) $190,176
Exercise of employee
stock options.......... 3 850 - - - 853
Net increase in loan to
employee stock
ownership plan......... - - - (1,026) - (1,026)
Treasury stock
purchases.............. - - - (4,596) (4,596)
Net earnings 1992....... - - 22,104 - - 22,104
---- ------- -------- ------- ------- --------
Balance, December 31,
1992................... 112 24,524 195,698 (2,991) (9,832) 207,511
Exercise of employee
stock options.......... 1 400 - - - 401
Net decrease in loan to
employee stock owner-
ownership plan......... - - - 73 - 73
Benefit from stock
option tax adjustment.. - 2,355 - - - 2,355
Net loss 1993........... - - (2,048) - - (2,048)
---- ------- -------- ------- ------- --------
Balance, December 31,
1993................... 113 27,279 193,650 (2,918) (9,832) 208,292
Exercise of employee
stock options.......... 1 273 - - - 274
Net decrease in loan to
employee stock
ownership plan......... - - - 76 - 76
Benefit from stock op-
option tax adjustment.. - 509 - - - 509
Net loss 1994........... - - (24,464) - - (24,464)
---- ------- -------- ------- ------- --------
Balance, December 31,
1994................... $114 $28,061 $169,186 $(2,842) $(9,832) $184,687
==== ======= ======== ======= ======= ========
See accompanying notes to consolidated financial statements.
48
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(IN THOUSANDS)
1994 1993 1992
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss).............................. $(24,464) $ (2,048) $ 22,104
Adjustments to reconcile net earnings (loss) to
net cash provided (used) operating activities:
Net change in loans held for sale.............. (6,772) (8,153) 62,557
Depreciation and amortization.................. 1,977 1,710 1,712
Provision for losses on loans.................. 85,700 67,679 41,384
Valuation adjustments on real estate sold...... (5,877) (1,151) (2,890)
Amortization of fees and discounts............. (2,690) (763) (1,111)
Decrease in deferred premium on sale of loans.. 1,154 3,079 3,998
(Increase) decrease in negative amortization... (243) (2,008) 15,005
Decrease in taxes payable...................... (20,537) (5,367) (4,716)
(Increase) decrease in interest and dividends
receivable.................................... (4,711) 1,998 5,782
Increase (decrease) in interest payable........ 6,050 2,242 (3,513)
Increase in other assets....................... (3,868) (3,458) (2,333)
Increase (decrease) in accrued expenses and 4,449 (521) 422
other liabilities............................. -------- -------- --------
Net cash provided by operating activities..... 30,168 53,239 138,401
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans made to customers and principal collections
of loans........................................ (544,775) (335,534) (428,790)
Loans purchased.................................. (59,191) (95) (245)
Loans repurchased................................ (21,506) (55,093) (17,032)
Proceeds from sales of real estate............... 83,498 96,120 69,405
Proceeds from sales of non-performing loans...... 17,674 - -
Proceeds from maturities and principal payments
of investment securities........................ 21,946 11,710 3,510
Proceeds from sale of mortgage-backed securities. - 76,084 -
Purchases of investment securities............... (2,347) (71,682) (31,124)
Purchases of FHLB stock.......................... (15,785) (2,415) (6,559)
Other............................................ (3,600) 1,007 (6,399)
-------- -------- --------
Net cash used by investing activities........ (524,086) (279,898) (417,234)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits.............. (6,566) 209,488 52,246
Acquisitions of branches, net.................... - 113,247 190,396
Net increase (decrease) in short term borrowings. 622,172 (73,292) (198,631)
Proceeds from long term borrowings............... 100,000 -- 214,500
Repayment of long term borrowings................ (210,500) (29,800) (100,000)
Payments to acquire treasury stock............... - - (4,596)
Other............................................ 7,174 522 (7,672)
-------- -------- --------
Net cash provided by financing activities.... 512,280 220,165 146,243
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents..................................... 18,362 (6,494) (132,590)
Cash and cash equivalents at beginning of year... 17,491 23,985 156,575
-------- -------- --------
Cash and cash equivalents at end of year......... $ 35,853 $ 17,491 $ 23,985
======== ======== ========
See accompanying notes to consolidated financial statements.
49
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").
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its subsidiary. All significant intercompany balances and
transactions have been eliminated in consolidation.
Certain items in the 1993 and 1992 consolidated financial statements
have been reclassified to conform to the 1994 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 which mature in 90 days or less.
Allowance for Loan Losses
The Bank maintains a general valuation allowance for loan losses,
unallocated 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 establish specific loan loss allowances if losses are expected to be
incurred. Additions to the allowance are charged to earnings. The regulatory
agencies periodically review the allowance for loan losses and may require the
Bank to adjust the allowance based on information available to them at the
time of their examination.
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
conditions in the borrowers' geographic area and the individual financial
condition of the borrowers. The Bank's lending activities are primarily
conducted in Southern California. The Bank currently focuses on the
origination of single family loans although, prior to October of 1994, the
Bank's lending strategy also included the origination of multi-family loans.
The Bank does not have a significant exposure to any individual customer.
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 yield using the interest method. When a loan is paid off or sold, any
unamortized net deferred fee balance is credited to income.
50
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(1) Summary of Significant Accounting Policies (continued)
Allowance for Delinquent Interest
The Bank provides an allowance for accrued interest receivable on
delinquent loans when such interest is deemed uncollectible, generally at the
time the loan is 90 days past due. This allowance reduces interest receivable
for financial statement purposes.
The Bank applies cash received on delinquent loans first to delinquent
interest, then to delinquent principal only when the entire principal balance
of the loan is expected to be recovered.
Loans Held for Sale
The Bank identifies loans that foreseeably may be sold prior to maturity
and classifies them as held for sale. They are carried at the lower of
amortized cost or market value on an aggregate basis by type of asset. For
loans, market value is calculated on an aggregate basis as determined by the
current market investor yield requirement.
Gain or Loss on Sale of Loans
The Bank sells mortgage loans and loan participations with yield rates
to the buyer based upon the current market rates which may differ from the
contractual rate on the loans sold. Gain or loss is recognized and a premium
or discount is recorded at the time of sale based upon the net present value
of amounts expected to be received or paid resulting from the difference
between the contractual interest rates and the yield to the buyer, excluding a
normal servicing fee to be earned for continuing to service the loans.
Amortization of discount or premium represents an adjustment of yield and is
reflected as an addition to or reduction of interest income using the interest
method over the life of such loans adjusted for estimated prepayments. Excess
service fees are written down for impairment if the present value of the
estimated remaining future excess service fee revenue, using the same discount
factor used to calculate the original excess service fee receivable, exceeds
the recorded amount.
Deferred premiums arising from the sale of loans are included in other
assets and were $6,584,000 and $7,738,000 at December 31, 1994 and 1993,
respectively.
Investment Securities and Mortgage-Backed Securities
Investment securities and mortgage-backed securities held to maturity
are carried at amortized cost. Any premium or discount is amortized over the
term of the security using the interest method. The securities are carried at
amortized costs because management has the ability to and intends to hold such
securities until maturity.
In May of 1993, the FASB issued SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." The Statement addresses the
accounting and reporting for investments in debt and equity securities. The
Statement requires that all securities be classified, at acquisition, into one
of three categories: held-to maturity securities, trading securities, and
available-for-sale securities. Held-to-maturity securities are those
securities the Company has the positive intent and ability to hold to maturity
and are carried at amortized cost. Trading securities are those securities
51
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(1) Summary of Significant Accounting Policies (continued)
that are bought and held principally for the purpose of selling them in the
near term and are reported at fair value, with unrealized gains and losses
included in earnings. Available-for-sale securities are those securities that
do not fall into the other two categories and are reported at fair value, with
unrealized gains and losses excluded from earnings and reported in a separate
component of stockholders' equity, net of any tax effect. All the Company's
investment securities are held to maturity; therefore, the implementation of
this standard did not have a material impact on the Company.
Real Estate
The Bank's real estate acquired in settlement of loans ("REO") consists
of property acquired through foreclosure proceedings or, infrequently, by deed
in lieu of foreclosure. The Bank begins foreclosure proceedings on single
family loans after they have been delinquent for 15 days after the grace
period and begins foreclosure proceedings on multi-family and commercial loans
after they have been delinquent for 10 days after the grace period.
Generally, all loans greater than 90 days delinquent are placed into
foreclosure and, if necessary, a specific loan loss 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 Bank ceases to accrue interest income and the property is recorded
as REO at fair market value, less estimated selling costs, based upon
appraised values. The REO's 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 sold, 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, income is deferred and recognized
under an alternative method.
Depreciation and Amortization
Depreciation of 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.
Income Taxes
The Company accounts for income taxes using the asset and liability
method in accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS No. 109"). 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.
Recent Accounting Pronouncements
At January 1, 1994, the Bank implemented Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of a
Loan" ("SFAS No. 114"). Pursuant to SFAS No. 114, the Bank considers a loan
52
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(1) Summary of Significant Accounting Policies (continued)
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 specific loan loss
allowances. Subsequent adjustments to estimated impairment losses are
recorded as a specific loan loss allowance which may necessitate an addition
to the Bank's provision for loan losses. At December 31, 1994, the total
recorded amount of loans for which impairment has been recognized in
accordance with SFAS No. 114 was $108.3 million (after deducting $23.9 million
of specific loan loss allowances attributable to such loans). The Bank's
impaired loans at December 31, 1994 were composed of non-accrual major loans
(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) of $38.0 million, modified loans of $41.6
million and major loans less than 90 days delinquent in which full payment of
principal and interest is not expected of $28.7 million.
The Bank evaluates loans for impairment whenever the collectibility
of contractual principal and interest payments is questionable. A loan is
impaired when the collateral property's undiscounted net operating income
(over a holding period not to exceed 5 years) plus the property's anticipated
value at the end of the period, are less than the estimated debt service
payments over the same period plus the estimated remaining unpaid balance.
Large groups of smaller balance homogenous loans that are collectively
evaluated, including residential mortgage loans, are not subject to the
application of SFAS No. 114.
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 a specific loan loss 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 a specific loan loss allowance
which may necessitate an adjustment to the provision for loan losses.
Cash payments received from impaired loans are recorded in accordance
with the contractual terms of the loan. The principal portion of the
payment is used to reduce the principal balance of the loan, whereas the
interest portion is recognized as interest income. On certain modified
loans where the Bank does not believe that it will receive all amounts due
under the original contractual loan terms, the Bank records an allowance for
interest received on modified loans.
Because the Bank establishes specific loan loss allowances for all loans
deemed probable of foreclosure based on the fair value of the collateral, the
adoption of SFAS No. 114 had only a minor impact on the Bank's allowance for
loan losses.
53
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(2) Investment Securities
Investment securities, all held to maturity, are summarized as follows:
1994 1993
---------------------------------------- -----------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market
Cost Gains Losses Value Cost Gains Losses Value
--------- ---------- ---------- -------- --------- ---------- ---------- --------
(In Thousands)
United Stated government
and federal agency
obligations.............. $40,770 $ 28 $(2,439) $38,359 $ 47,711 $ 396 $ (53) $ 48,054
Collateralized
Mortgage Obligations..... 43,282 - (2,325) 40,957 56,125 221 (118) 56,228
------- ----- ------- ------- -------- ----- ----- --------
$84,052 $ 28 $(4,764) $79,316 $103,836 $ 617 $(171) $104,282
======= ===== ======= ======= ======== ===== ===== ========
Related maturity data for United States government and federal
agency obligations is summarized below:
1994 1993
--------------------------------------------- --------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market
Cost Gains Losses Value Cost Gains Losses Value
--------- ---------- ---------- ------- --------- ---------- ---------- --------
(In Thousands)
Maturing within 1 year.... $ 4,004 $ 28 $ - $ 4,032 $ 3,108 $ 38 $ - $ 3,146
Maturing after 1 year
but within 5 years....... 36,766 - (2,439) 34,327 44,603 358 (53) 44,908
------- ----- ------- ------- ------- ------ ------- -------
$40,770 $ 28 $(2,439) $38,359 $47,711 $ 396 $ (53) $48,054
======= ===== ======= ======= ======= ====== ======= =======
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
no agreements to resell securities at December 31, 1994 or December 31, 1993.
Securities purchased under agreements to resell averaged $54,400,000 and
$48,761,000 during 1994 and 1993, and the maximum amounts outstanding at any
month end during 1994 and 1993 were $26,000,000 and $95,000,000, respectively.
54
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(3) Loans Receivable
Loans receivable are summarized as follows:
1994 1993
--------- ----------
(In Thousands)
Real Estate Loans:
First trust deed residential loans:
One unit.. $ 1,188,022 $ 862,340
Two to four units........................ 349,766 340,035
Five or more units....................... 1,329,833 1,298,794
---------- ----------
Residential loans........................ 2,867,621 2,501,169
Other real estate loans:
Commercial and industrial................ 239,710 245,387
Second trust deeds....................... 20,401 24,606
Other.................................... 20,460 5,861
---------- ----------
Real estate loans........................ 3,148,192 2,777,023
Non-Real Estate Loans:
Manufactured housing..................... 2,114 2,763
Deposit accounts......................... 1,301 1,086
Consumer................................. 506 964
---------- ----------
Loans receivable......................... 3,152,113 2,781,836
Less:
General loan valuation allowances........ 55,353 46,900
Unearned loan fees....................... 24,451 19,273
---------- ----------
Subtotal................................. 3,072,309 2,715,663
---------- ----------
Less:
Loans and held for sale.................. 30,399 23,627
---------- ----------
Loans receivable, net.................... $3,041,910 $2,692,036
========== ==========
Loans serviced for others totaled $699,538,000, $786,809,000 and
$891,484,000 at December 31, 1994, 1993 and 1992, respectively.
The Bank has loss exposure on certain loans sold with recourse.
These loans are combined with the Bank's loan portfolio for purposes of
computing general valuation allowances and measuring credit risk exposure.
The dollar amount of loans sold with recourse totaled $305,029,000 and
$346,829,000, respectively, as of December 31, 1994 and 1993. The maximum
potential recourse liability totaled $56,342,000 and $66,498,000,
respectively, as of December 31, 1994 and December 31, 1993. The Bank's
allowance for losses related to loans sold with recourse, which is recorded
as a liability, totaled $7,948,000 and $6,231,000 at December 31, 1994 and
1993, respectively.
At December 31, 1994 the Bank had outstanding commitments to fund
$28,504,000 in real estate loans, which were primarily adjustable
rate mortgages.
Accrued interest receivable related to loans outstanding at December 31,
1994 and 1993 totaled $21,652,000 and $19,604,000, respectively.
55
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(3) Loans Receivable (continued)
Loans delinquent greater than 90 days or in foreclosure were $94,485,000
and $106,076,000 as of December 31, 1994 and 1993, respectively, and the
related allowances for delinquent interest were $5,182,000 and $5,723,000,
respectively.
Loans originated upon sale of real estate totaled $54,561,000,
$69,808,000, and $48,132,000 during 1994, 1993 and 1992, respectively.
The following is a summary of the activity in general loan valuation
allowances for the periods indicated (in thousands):
Balance at December 31, 1991......................... $ 13,937
Charge-offs.......................................... (27,467)
Provisions for loan losses........................... 41,384
--------
Balance at December 31, 1992......................... 27,854
Charge-offs.......................................... (48,633)
Provisions for loan losses........................... 67,679
--------
Balance at December 31, 1993......................... 46,900
Charge-offs.......................................... (69,299)
Provisions for loan losses........................... 85,700
Transfer of general valuation allowances for loans
sold with recourse to liability account............. (7,948)
--------
Balance at December 31, 1994......................... $ 55,353
========
(4) Mortgage-backed Securities
Mortgage-backed securities are summarized as follows:
1994 1993
------------------------------------------ ---------------------------------
Gross Gross Gross
Carrying Unrealized Unrealized Market Carrying Unrealized Market
Value Gains Losses Value Value Gains Value
--------- --------- ---------- -------- ---------- ---------- ----------
(In Thousands)
FNMA $ 30,844 $ - $ (829) $ 30,015 $ 33,911 $ 522 $ 34,433
FHLMC 790,473 7,762 (36,320) 761,915 674,372 6,921 681,293
-------- ------ -------- -------- -------- ------- --------
Total $821,317 $7,762 $(37,149) $791,930 $708,283 $ 7,443 $715,726
======== ====== ======== ======== ======== ======= ========
Mortgage-backed securities created with loans originated by the Bank
totaled $198,085,000, $111,701,000 and $187,479,000, during 1994, 1993, and
1992, respectively.
Accrued interest receivable related to mortgage-backed securities
outstanding at December 31, 1994 and 1993 totaled $6,376,000 and $5,846,000,
respectively.
56
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(5) Real Estate
Real estate consists of the following:
1994 1993
-------- -------
(In Thousands)
Real estate held for investment............................ $ 357 $ 371
Real estate acquired (or deed in lieu of) foreclosure..... 16,724 26,878
------- -------
$17,081 $27,249
======= =======
The Bank acquired $67,466,000, $93,010,000 and $76,121,000 of real
estate in settlement of loans during 1994, 1993, and 1992, respectively.
During 1994, the Bank established specific allowances on real estate
subsequent to foreclosure. The following is a summary of the activity in
specific real estate valuation allowances (in thousands):
1994
------
Balance at December 31, 1993............................ $ -
Charge-offs............................................. (740)
Provision............................................... 1,757
------
Balance at December 31, 1994............................ $1,017
======
(6) Office Properties, Equipment and Lease Commitments
Office properties and equipment, at cost, less accumulated depreciation
and amortization, are summarized as follows:
1994 1993
------- -------
(In Thousands)
Land.............................................. $ 3,061 $ 2,907
Office buildings.................................. 4,449 3,759
Furniture,fixtures and equipment.................. 9,943 9,511
Leasehold improvements............................ 8,571 8,541
Other............................................. 44 93
------- -------
26,068 24,811
Less accumulated depreciation and amortization.... 16,857 15,888
------- -------
$ 9,211 $ 8,923
======= =======
57
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(6) Office Properties, Equipment and Lease Commitments (continued)
The Bank is obligated under noncancelable operating leases for periods
ranging from five to thirty years. The leases are for certain of the office
facilities. Approximately half of the leases for office facilities contain
five and ten year renewal options. Minimum rental commitments at December 31,
1994 under all noncancelable leases are as follows:
(In Thousands)
1995................................ $ 4,274
1996............................... 4,232
1997............................... 4,039
1998............................... 3,105
1999............................... 1,094
Thereafter....................... 5,202
-------
$21,946
=======
Rent payments under these leases were $4,246,000, $3,898,000, and
$3,390,000 for 1994, 1993 and 1992, respectively. Certain leases require the
Bank to pay property taxes and insurance. Additionally, certain leases have
rent escalation clauses based on specified indices.
(7) Federal Home Loan Bank Stock
The Bank's investment in FHLB stock at December 31, 1994 and 1993 was
$56,061,000 and $38,967,000, 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 FHLB of San Francisco 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
FHLB of San Francisco. The Bank was in compliance with this requirement at
December 31, 1994. The Bank's investment in FHLB stock was pledged as
collateral on advances from the FHLB at December 31, 1994 and 1993. 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.
58
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(8) Deposits
Deposit account balances are summarized as follows:
1994 1993
--------------- ---------------
Amount % Amount %
-------- --- --------- ---
(Dollars In Thousands)
Variable rate non-term accounts:
Money market deposit accounts (weighted
average rate of 2.55% and 2.40%).............. $ 161,147 7% $ 196,467 9%
Interest-bearing checking accounts
(weighted average rate of 2.14% and
(2.18%)...................................... 169,416 7 148,460 6
Passbook accounts (weighted average rate
of 2.29% and 2.29%).......................... 114,075 5 118,455 5
Non-interest bearing checking accounts........ 36,773 2 44,868 2
---------- --- ---------- ---
481,411 21 508,250 22
---------- --- ---------- ---
Fixed rate term certificate accounts:
Under six month term (weighted average
rate of 4.64% and 2.77%)..................... 89,763 4 69,132 3
Six month term (weighted average rate of
4.99% and 3.13%)............................. 282,130 12 299,368 13
Nine month term (weighted average rate of
4.90% and 3.36%)............................. 104,962 5 200,269 9
One year to 18 month term (weighted
average rate of 4.76% and 3.67%)............. 512,846 22 474,853 20
Two year or 30 month term (weighted
average rate of 5.22% and 4.67%)............. 315,223 14 148,993 7
Over 30 month term (weighted average rate
of 6.20% and 5.80%).......................... 285,438 12 307,513 13
Negotiable certificates of $100,000 and
greater, 30 day to one year terms (weighted
average rate of 4.79% and 3.43%)............. 227,141 10 297,102 13
---------- --- ---------- ---
1,817,503 79 1,797,230 78
---------- --- ---------- ---
Total Deposits (weighted average rate of
4.49% and 3.60%)............................. $2,298,914 100% $2,305,480 100%
========== ==== ========== ====
Certificates of deposit, placed through five major national brokerage
firms, totaled $597,249,000 in 1994 and $518,888,000 in 1993.
Cash payments for interest on deposits (including interest credited)
totaled $82,021,000, $73,751,000, and $82,973,000 during 1994, 1993 and 1992,
respectively. Accrued interest on deposits at December 31, 1994 and 1993
totaled $10,904,000 and $8,201,000, respectively.
59
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(8) Deposits (continued)
The following table indicates the maturities and weighted average
interest rates of the Bank's deposits at December 31, 1994:
Non-Term There-
Accounts 1995 1996 1997 1998 After Total
---------- -------- -------- ------- ------- --------- ---------
(Dollars In Thousands)
Deposits at
December 31, 1994..... $481,411 $1,330,241 $283,744 $82,308 $21,695 $99,515 $2,298,914
======== ========== ======== ======= ======= ======= ==========
Weighted average
interest rates........ 2.15% 4.64% 5.50% 6.50% 5.72% 5.92% 4.49%
===== ==== ==== ==== ==== ==== ====
Interest expense on deposits is summarized as follows:
1994 1993 1992
------- -------- -------
(In Thousands)
Passbook accounts......................... $ 2,726 $ 2,580 $ 2,806
Money market deposits and
interest-bearing checking accounts....... 7,960 7,918 8,328
Certificate accounts...................... 76,859 67,243 76,668
------- ------- -------
$87,545 $77,741 $87,802
======= ======= =======
(9) Federal Home Loan Bank Advances and Other Borrowings
Federal Home Loan Bank (FHLB) Advances and other borrowings consist of
the following:
1994 1993
--------- ---------
(In Thousands)
Advances from the FHLB of San Francisco with a
weighted average interest rate of 5.96% and 4.70%,
secured by FHLB stock and certain real estate loans
with unpaid principal balances of approximately
$1,961,863,000 at December 31, 1994, payable through
1997..................................................... $863,200 $514,700
Unsecured term funds with a weighted average interest
rate of 5.60% and 3.33%, maturing within one year........ 500 24,800
Unsecured promissory note with an interest rate of
prime plus 1% (7%), maturing within one year............. - 5,000
10 Year Senior Unsecured Notes with an interest rate
of 11.75%, due 2004...................................... 50,000 -
-------- --------
$913,700 $544,500
======== ========
60
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(9) Federal Home Loan Bank Advances and Other Borrowings (continued)
The Company's 10-year senior unsecured Notes are governed by the terms
of an indenture dated September 28, 1994 (the "Indenture"). The Indenture
contains financial and operating covenants which, among other things, (i)
limit the incurrence of debt by the Company, (ii) limit the payment of
dividends and the making of certain other distributions by the Company and
its subsidiaries, including the Bank, (iii) limit the disposition of, and
the existence of liens on, the stock of the Company's subsidiaries, (iv)
limit the existence of certain liens on other property or assets of the
Company and (v) limit the ability of the Company to enter into certain
transactions with affiliates. The amount of annual interest due on the
Notes is $5,875,000.
The Bank entered into an agreement with the City of Los Angeles Housing
Department to guarantee $5 million of bonds for the acquisition and
renovation of earthquake stricken properties with a standby letter of credit
from the FHLB. The bonds will be used to fund low interest rate loans made
by participating lenders to owners of earthquake-damaged properties.
The Bank had credit availability with the FHLB in the form of FHLB
Advances and Letters of Credit which allowed borrowings up to 40% of the
Bank's assets, or approximately $1,661,774,000 at December 31, 1994 with
terms up to 30 years.
The following is a summary of maturities at December 31, 1994
(in thousands):
1995..................................... $804,700
1996..................................... 9,000
1997..................................... 50,000
Thereafter............................... 50,000
--------
$913,700
========
Cash payments for interest on borrowings (including reverse repurchase
agreements) totaled $61,945,000, $53,531,000, and $54,472,000 during
1994, 1993, and 1992, respectively.
Interest expense on borrowings is comprised of the following for the
years indicated:
Year Ended December 31,
--------------------------------
1994 1993 1992
-------- -------- --------
(In Thousands)
FHLB Advances....................... $38,162 $30,589 $31,036
Reverse Repurchase Agreements....... 26,430 19,793 26,450
10 Year senior Unsecured Notes...... 1,568 - -
Other............................... 3,950 3,493 6,222
------- ------- -------
$70,110 $53,875 $63,708
======= ======= =======
61
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(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 statement 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, 1994, $691,121,000 in reverse repurchase agreements were
collateralized by mortgage-backed securities with principal balances totaling
$750,052,000 and market values totaling $722,971,000. At December 31, 1993,
$548,649,000 in reverse repurchase agreements were collateralized by
mortgage-backed securities with principal balances totaling $559,004,000
and market values totaling $564,768,000.
Borrowings under reverse repurchase agreements at December 31, 1994
matured within 81 days and had a weighted average interest rate of 5.81%.
Borrowings under reverse repurchase agreements at December 31, 1993
matured within 96 days and had a weighted average interest rate of 3.32%.
Securities sold under agreements to repurchase averaged $602,681,000 and
$594,314,000 during 1994 and 1993, respectively, and the maximum amounts
outstanding at any month end during 1994 and 1993 were $691,121,000 and
$650,033,000, respectively.
(11) Income Taxes
Income taxes (benefit) consist of the following:
1994 1993 1992
--------- --------- ---------
(In Thousands)
Current:
Federal......................... $ (7,169) $ 4,317 $12,590
State........................... (488) 120 3,688
-------- ------- -------
(7,657) 4,437 16,278
-------- ------- -------
Deferred:
Federal......................... (4,464) (5,114) (3,764)
State........................... (5,578) (369) (1,316)
-------- ------- -------
(10,042) (5,483) (5,080)
-------- ------- -------
Total:
Federal......................... (11,633) (797) 8,826
State........................... (6,066) (249) 2,372
-------- ------- -------
$(17,699) $(1,046) $11,198
======== ======= =======
62
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(11) Income Taxes (continued)
A reconciliation of the statutory federal corporate income tax rate
to the Company's effective income tax rate follows:
1994 1993 1992
------ ------ ------
(In Thousands)
Statutory federal income tax rate............... (35.0)% (35.0)% 34.0%
Increases (reductions) in taxes resulting from:
State franchise tax, net of federal income
tax benefit.................................... (7.2) (6.4) 4.2
Goodwill....................................... 0.1 7.4 .6
Other, net..................................... 0.1 .2 (.5)
----- ----- -----
Effective rate................................ (42.0)% (33.8)% 38.3%
===== ===== =====
Cash payments for income taxes totaled $254,000, $2,158,000 and
$20,645,000 during 1994, 1993, and 1992, respectively.
Current income taxes receivable at December 31, 1994 and December 31,
1993 were $11,337,000 and $5,542,000, respectively.
The Company implemented SFAS No. 109 on a prospective basis during
1992. SFAS No.109 established new accounting principles for calculating
income taxes using the asset and liability method instead of the deferred
method. In applying the asset and liability method using SFAS No. 109,
deferred tax assets and liabilities are established as of the reporting
date for the realizable cumulative difference between the financial
reporting and tax return bases of the Company'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. As a result of
implementing SFAS No. 109, the Bank recognized $4,075,000 in tax benefits
during 1992 due primarily to additions to its general valuation allowances.
63
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(11) Income Taxes (continued)
Listed below are the significant components of the net deferred
liability :
1994 1993
-------- ---------
(In Thousands)
Components of the deferred tax asset:
Bad debts.................................. $(29,308) $(16,850)
Pension expense............................ (1,920) (1,773)
State taxes................................ - (1,822)
Other...................................... (2,515) -
-------- --------
Total deferred tax asset.................. (33,743) (20,445)
Valuation allowance......................... - -
-------- --------
Total deferred tax assets, net of
valuation allowance....................... (33,743) (20,445)
-------- --------
Components of the deferred tax liability:
Loan fees.................................. 26,766 25,197
Loan sales................................. 3,610 4,146
FHLB stock dividends....................... 6,316 5,705
State taxes................................ 1,923 -
Other...................................... 1,452 1,763
-------- --------
Total deferred tax liability................ 40,067 36,811
-------- -------
Net deferred tax liability.................. $ 6,324 $16,366
======== =======
Net state deferred tax liability........... $ 471 $ 6,049
Net federal deferred tax liability......... 5,853 10,317
-------- -------
Net deferred tax liability.................. $ 6,324 $16,366
======== =======
SFAS No. 109 allows for recognition and measurement of deductible
temporary differences (including general valuation allowances) to the extent
that it is more likely than not that the deferred tax asset will be realized.
The Bank did not have a valuation allowance for the deferred tax asset at
December 31, 1994 and 1993, 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.
The Internal Revenue Service ("IRS") is currently examining tax years
1989 and 1990. During 1994, the IRS completed its examination of the
Company's consolidated federal income tax returns for tax years 1984 through
1986 and, early in 1995, completed its examination of tax returns for 1987
and 1988. The IRS has proposed adjustments primarily related to temporary
differences as to the recognition of certain taxable income and expense items.
The Company is in the process of filing formal protests with the IRS to take
exception to the proposed adjustments for both examinations. In addition, the
Franchise Tax Board (FTB) is examining tax years 1989 and 1990. While the
Company has provided for deferred taxes for federal and state purposes, a
change in the period of recognition could result in interest due to the IRS
and FTB. Although the outcome of the audits is not known at this time, and it
may take several years to resolve any disputed matters, the Company has
recorded charges of $3,239,000, $1,776,000 and $3,409,000 in 1994, 1993
and 1992, respectively, as interest on possible tax adjustments. At December
31, 1994, the Company had $10,686,000 of accrued interest payable recorded
as a liability on the consolidated statements of financial condition. The
amount of interest accrued is based upon the proposed adjustments and is
management's best estimate of liability as of this date.
64
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(11) Income Taxes (continued)
The Bank computes its bad debt deduction based upon actual loan loss
experience (the "experience method"). Savings institutions may utilize the
experience method to "fill-up" to their adjusted base year bad debt reserve.
The adjusted base year bad debt reserve is the tax bad debt reserve amount
at the end of 1987. The base year reserve may be proportionately decreased
by any reduction in qualifying loans at the end of the current year relative
to the end of 1987. The Bank utilized the fill-up method for computing its
bad debt deduction for all years presented.
The consolidated financial statements at December 1994 and 1993 did not
include a liability of $5,175,000 in each such year related to the adjusted
base year bad debt reserve since these reserves are not expected to reverse
until indefinite future periods, and may never reverse. Circumstances that
would require an accrual for a portion or all of this unrecorded tax
liability are a further significant reduction in qualifying loan levels
relative to 1987, failure to meet the tax definition of a savings institution,
dividend payments in excess of current year or accumulated tax earnings and
profits, or other distributions in dissolution or liquidation.
(12) Stockholders' Equity and Earnings (Loss) Per Share
The Company's stock charter authorizes 5,000,000 shares of serial
preferred stock. As of December 31, 1994 no preferred shares have been
issued.
The computation of net earnings (loss) per share is based on the
weighted average shares of common stock and dilutive common stock equivalents
(employee stock options) outstanding during the year which were 10,552,963,
10,460,145 and 10,856,815 for 1994, 1993 and 1992 respectively.
The Office of Thrift Supervision ("OTS") has adopted regulations that
contain capital standards for savings institutions. The Bank is in
compliance with these capital standards at December 31, 1994.
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 issued
a regulation in 1990 which 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 during a calendar year
plus the amount that would reduce the institution's "surplus capital ratio"
(the excess over its fully phased-in capital requirements) to one-half of
its surplus capital ratio at the beginning of the calendar year. However,
the OTS has the authority to preclude the declaration of any dividends or
adopt more stringent amendments to its capital regulations.
For federal income tax purposes, savings institutions meeting certain
definitional and other tests are allowed a special bad debt reserve deduction
for qualifying loans computed as percentage of taxable income before such
deduction. If amounts appropriated to these tax bad debt reserves in excess of
the amount allowable under the experience method ("excess tax bad debt
65
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(12) Stockholders' Equity and Earnings (Loss) Per Share (continued)
reserves") are used for the payment of return of capital dividends or other
distributions to stockholders (including distributions in dissolution,
liquidation or redemption of stock), an amount will generally be includable in
taxable income. The amount includable in taxable income is equal to the
distribution plus the federal income tax attributable thereto, up to the
aggregate amount of excess tax bad debt reserves. At December 31, 1994 and
1993 the Company had no excess bad debt reserves.
FFC may loan up to $6,000,000 to the Employee Stock Ownership Plan
("ESOP") under a line of credit loan. At December 31, 1994 and 1993 the
loans to the ESOP totaled $2,842,000 and $2,918,000, 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
1994 and 1993 were 4.16% and 3.90%, respectively.
In 1988, the Company adopted a 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-hundredth share of a new series of preferred stock for its estimated
long term value of $54.80 (subsequently adjusted for a stock split). 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 its Board of Directors deem redemption
to be in its stockholders' best interests.
(13) Employee Benefit Plans
The Bank maintains a pension plan ("Pension Plan") covering
substantially all employees who are employed on either a full time or a part
time basis. The benefits are based on the employee's years of credited
service, average annual salary and primary social security benefit, as
defined in the Pension Plan.
Pension expense including administration costs was $481,000, $468,000
and $475,000 for 1994, 1993 and 1992, respectively. The Bank uses the
projected unit credit actuarial method and bases its funding policy on the
entry age normal method.
The discount rate and rate of increase in future compensation levels
used in determining the actuarial value of benefit obligations were 8.5% and
6.0%, respectively, as of December 31, 1994. The discount rate and rate of
increase in future compensation levels used in determining the pension
cost were 7.0% and 5.0%, respectively, as of December 31, 1993. The expected
long-term rates of return on assets were 7.5% at December 31, 1994 and 7.0% at
December 31, 1993.
The Bank has a Supplementary Executive Retirement Plan ("SERP") which
covers any individual employed by the Bank as its President or Chairman of the
Board. The pension expense for the SERP was $471,000, $434,000 and $418,000
in 1994, 1993 and 1992, respectively. The SERP uses the same actuarial
assumptions as the Pension Plan. The SERP is unfunded.
66
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(13) Employee Benefit Plans (continued)
The following table sets forth the funded status and amounts recognized
in the Bank's statement of the financial condition for the Pension Plan and
the SERP for the years indicated (in thousands):
Pension Plan SERP
---------------- ----------------
1994 1993 1994 1993
------- ------ ------- -------
Actuarial present value of benefit obligations:
Accumulated benefit obligation................ $2,631 $ 2,703 $ 2,265 $ 2,781
====== ====== ====== =======
Vested benefit obligation..................... $2,482 $ 2,567 $ 2,573 $ 2,423
====== ====== ====== =======
Plan assets at fair value...................... $2,642 $ 2,268 $ - $ -
Projected benefit obligation for service
rendered to date.............................. 3,887 4,156 2,952 3,414
------ ------ ------ ------
Shortage of plan assets over the projected
benefit obligation............................ (1,245) (1,888) (2,952) (3,414)
Unrecognized net loss (gain) from past ex-
perience different from that assumed.......... 387 729 (698) 131
Prior service cost not yet recognized in net
periodic pension cost......................... 180 247 752 838
Additional minimum liability................... - - (112) (846)
Unrecognized net (asset) obligation at
transition.................................... (130) (230) 437 510
------ ------- ------- -------
Accrued pension liability...................... $ (808) $(1,142) $(2,573) $(2,781)
====== ======= ======= =======
Net pension cost for the year ended December
31, 1994 and December 31, 1993 included
the following components:
Service cost-benefits earned during the
period........................................ $ 441 $ 396 $ 76 $ 57
Interest cost on projected benefit obligation. 269 264 236 217
Actual return on plan assets.................. (19) (106) - -
Net amortization.............................. (32) (50) 159 160
Deferral of asset gains....................... (173) (73) - -
------ ------ ------ -------
Net period pension cost....................... $ 486 $ 431 $ 471 $ 434
====== ====== ====== =======
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, 1994 the ESOP held 8.26% of outstanding stock of the Company. Profit
sharing expense for the years ended December 31, 1994, 1993 and 1992 was
$200,000, $200,000 and $1,007,000, 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.
The Company has issued options pursuant to the 1983 Stock Option and
Stock Appreciation Rights Plan which expired in August 1993. Options prices
are based upon the market value of the common stock on the date of grant.
67
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(13) Employee Benefit Plans (continued)
Information with respect to stock options follows:
1994 1993
-------- --------
(In Shares)
Options Outstanding
(Average option prices for 1994)
Beginning of Year ($11.70)................... 342,375 516,616
Granted ($14.58)............................. 102,906 15,322
Exercised ($3.95)............................ (69,301) (33,026)
Canceled ($16.11)............................ (28,661) (156,537)
-------- --------
End of Year ($13.74)......................... 347,319 342,375
======== ========
Shares exercisable at December 31 ($11.76)... 164,322 215,795
======== ========
Of the 347,319 options outstanding as of December 31, 1994, 106,104 were
granted subject to shareholder approval.
(14) Parent Company Financial Information
This parent company only financial information should be read in
conjunction with the other notes to consolidated financial statements.
STATEMENTS OF FINANCIAL CONDITION December 31,
------------
(In Thousands) 1994 1993
Assets: -------- -------
Cash............................... $ 1,653 $ 923
Other assets....................... 2,210 25
Investment in subsidiary........... 231,573 212,226
-------- --------
$235,436 $213,174
======== ========
Liabilities and Stockholders'Equity:
Notes payable...................... $ 50,000 $ 5,000
Other liabilities.................. 749 (118)
Stockholders'equity................ 184,687 208,292
-------- --------
$235,436 $213,174
======== ========
STATEMENTS OF OPERATIONS Years Ended December 31,
------------------------
(In Thousands) 1994 1993 1992
--------- -------- --------
Other expense,net..................... $ (1,061) $ (78) $ (28)
Equity in undistributed net
earnings(loss) of subsidiary......... (23,403) (1,970) 22,132
-------- ------- -------
Net earnings (loss)................... $(24,464) $(2,048) $22,104
======== ======= =======
68
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(14) Parent Company Financial Information (continued)
Years Ended December 31,
STATEMENTS OF CASH FLOWS ------------------------
(In Thousands) 1994 1993 1992
--------- -------- --------
Net Cash Flows from Operating Activities: $(24,464) $(2,048) $ 22,104
Net earnings (loss).....................
Adjustments to reconcile net earnings
(loss) to net cash used by
operating activities:
Equity in net (earnings) loss of
subsidiary............................. 23,403 1,970 (22,132)
Other................................... 39 (10) (2)
-------- ------- --------
Net cash used by operating activities... (1,022) (88) (30)
-------- ------- --------
Cash Flows from Investing Activities:
(Increase) decrease in ESOP loan........ 76 73 (1,026)
(Increase) decrease in other assets..... (2,225) - (25)
-------- ------- --------
Net cash (used) by provided for
investing activities.................... (2,149) 73 (1,051)
-------- ------- --------
Cash Flows from Financing Activities:
Dividend from subsidiary................ 5,000 3,000 4,250
Capital contribution to subsidiary...... (47,750) (7,355) (4,000)
Increase (decrease) in short term
notes payable........................... (5,000) 2,000 3,000
Purchase of treasury stock.............. - - (4,596)
Proceeds from long term borrowings...... 50,000 - -
Benefit from stock option tax
adjustment.............................. 510 2,355 -
Other................................... 1,141 352 815
-------- ------- --------
Net cash provided (used) by financing
activities.............................. 3,901 352 (531)
-------- ------- --------
Net increase (decrease) in cash.......... 730 337 (1,612)
Cash at beginning of period.............. 923 586 2,198
-------- ------- --------
Cash at end of period.................... $ 1,653 $ 923 $ 586
======== ======= ========
69
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(15) Quarterly Results of Operations: (unaudited)
Summarized below are the Company's results of operations on a quarterly
basis for 1994, 1993 and 1992:
Net
Provision Non- Net Earnings
Interest Interest For Loan Other Interest Earnings (loss)
Income Expense Losses Income Expense (Loss) Per Share
-------- -------- --------- ------ -------- --------- ---------
(In Thousands, Except per Share data)
First quarter
1994....... $ 55,725 $ 32,106 $24,670 $ 2,810 $12,133 $ (6,115) $ (.58)
1993....... 58,247 33,198 44,123 2,718 11,454 (16,402) (1.57)
1992....... 67,984 41,787 10,716 2,873 11,052 6,774 .62
Second quarter
1994....... $ 54,380 $ 34,562 $55,030 $ 2,755 $11,711 $(25,553) $ (2.42)
1993....... 56,526 32,918 1,849 4,023 11,443 8,328 .78
1992....... 65,800 37,889 5,847 3,370 11,818 7,972 .73
Third quarter
1994....... $ 59,542 $ 40,918 $ 3,000 $ 3,474 $11,653 $ 4,158 $ .39
1993....... 58,875 32,586 11,590 2,964 11,453 3,629 .34
1992....... 61,647 36,765 18,098 4,077 11,993 703 .06
Fourth quarter
1994....... $ 65,777 $ 50,069 $ 3,000 $ 2,225 $ 9,999 $ 3,046 $ .29
1993....... 55,797 32,914 10,117 2,349 10,948 2,397 .23
1992....... 60,181 35,069 6,723 2,314 11,262 6,655 .62
Total year
1994....... $235,424 $157,655 $85,700 $11,264 $45,496 $(24,464) $ (2.32)
1993....... 229,445 131,616 67,679 12,054 45,298 (2,048) (.20)
1992....... 255,612 151,510 41,384 12,634 46,125 22,104 2.04
(16) Fair Values of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments" ("SFAS No. 107"), requires that the
Company disclose estimated fair value for its financial instruments as of
December 31, 1994 and 1993. 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.
70
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(16) Fair Values of Financial Instruments (continued)
1994 1993
-------------------------- --------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
---------- ----------- --------- ---------
(In Thousands)
Mortgage-backed Securities............ $ 821,317 $ 791,930 $ 708,283 $ 715,726
Investment securities................. 40,770 38,359 47,711 48,054
Collateralized Mortgage Obligations... 43,282 40,957 56,125 56,228
The following table presents fair value information for financial
instruments shown in the Bank's 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 Bank does not know whether the fair values shown below represent values
at which the respective financial instruments could be sold.
1994 1993
--------------------- ----------------------
Calculated Calculated
Carrying Fair Value Carrying Fair Value
Value Amount Value Amount
--------- ---------- --------- ----------
(In Thousands)
Adjustable Loans:
Single Family...................... $1,471,156 $1,378,258 $1,112,144 $1,154,316
Multi-Family....................... 1,244,990 1,070,107 1,205,176 1,215,585
Commercial....................... 195,506 179,631 227,712 213,268
Fixed Rate Loans:
Single Family.................... 14,535 13,814 24,520 25,393
Multi-Family..................... 12,701 12,212 13,624 14,288
Commercial....................... 3,087 3,161 4,409 4,483
Other Real Estate Loans........... 20,297 20,921 8,654 8,880
Non-Real Estate Loans............. 3,749 2,686 4,453 5,334
Loans Held for Sale............... 30,399 30,399 23,627 24,030
Non-Performing Loans.............. 75,889 75,889 91,344 91,344
Fixed-Term Certificate Accounts... 1,817,503 1,808,165 1,797,230 1,803,457
Non-Term Deposit Accounts......... 481,411 481,411 508,250 508,250
Borrowings........................ 1,604,821 1,602,130 1,093,149 1,095,620
SFAS No. 107 specifies that fair values should be calculated based on
the value of one unit. The estimates do not necessary reflect the price
the Bank might receive if it were to sell the entire holding of a
particular financial instrument at one time.
71
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(16) Fair Values of Financial Instruments (continued)
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
The carrying amounts reported in the 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.
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.
Loans Held for Sale
The carrying amounts reported in the statements of financial condition
for this item approximate fair value.
Non-performing Assets
The carrying amounts reported in the 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 NOW accounts, is defined by SFAS No. 107
as the carrying accounts reported in the 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 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.
Deferred Premiums Arising from the Sale of Loans
The carrying amounts reported in the statements of financial condition for
this item approximate fair value.
72
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, 1994 and 1993, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1994. 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 generally accepted auditing
standards. 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 at December 31, 1994 and 1993, and the results
of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1994, in conformity with generally
accepted accounting principles.
As discussed in notes 1 and 11 to the consolidated financial statements,
FirstFed Financial Corp. and subsidiary adopted the provisions of the
Financial Accounting Standards Board's Statements of Financial Accounting
Standards No. 115, Accounting for Certain Investments in Debt and Equity
Securities, in 1994, and No. 109, Accounting for Income Taxes, in 1992.
KPMG Peat Marwick LLP
Los Angeles, California
January 24, 1995
73
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 3 through 7 of the Proxy Statement for the Annual Meeting of
Stockholders dated April 26, 1995, is incorporated herein by reference.
ITEM 11--EXECUTIVE COMPENSATION
Information regarding executive compensation appearing on pages 7
through 12 of the Proxy Statement for the Annual Meeting of Stockholders dated
April 26, 1995, 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 26, 1995, 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 12
of the Proxy Statement for the Annual Meeting of Stockholders dated April 26,
1995, is incorporated herein by reference.
PART IV
ITEM 14--EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8K
(a) 1. Financial Statements
The financial statements included in this Report are listed under
Item 8.
2. Financial Statement Schedules
Schedules have been omitted because they are not applicable or the
required information is presented in the financial statements or notes
thereto.
74
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
EXHIBIT
NUMBER
--------
(1) Underwriting Agreement filed as Exhibit 1 to Amendment No.2 to Form
S-3 dated September 7, 1994 and incorporated by reference.
(3.1) Certificate of Incorporation and By-Laws filed as Exhibit (1)(a) to
Form 8-A dated June 4, 1987 and incorporated by reference.
(4.1) Shareholders'Rights Agreement filed as Exhibit 1 to Form 8-A, dated
November 2, 1988 and incorporated by reference.
(4.2) Indenture filed as Exhibit 4 to Amendment No. 3 to Form S-3 dated
September 20, 1994 and incorporated by reference.
(10.1) Deferred Compensation Plan filed as Exhibit 10.3 to Form 10-K for
the fiscal year ended December 31, 1983 and incorporated by
reference.
(10.2) Bonus Plan filed as Exhibit 10(iii)(A)(2) to Form 10 dated November
2, 1993 and incorporated by reference.
(10.3) Supplemental Executive Retirement Plan dated January 16, 1986 and
filed as Exhibit 10.5 to Form 10-K for the fiscal year ended
December 31, 1992 and incorporated by reference.
(21) Registrant's sole subsidiary is First Federal Bank of California,
fsb, a federal savings bank.
(24) Power of Attorney (included at page 76).
This 1994 Annual Report on Form 10-K and the Proxy Statement for the
Annual Meeting of Stockholders dated April 26, 1995 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 7, 1995 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
No reports on Form 8-K were filed during the last quarter of the period
covered by this report.
75
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/ William S. Mortensen
-------------------------
William S. Mortensen,
Chairman and Chief Executive Officer
Date: February 23, 1995
POWER OF ATTORNEY
Each person whose signature appears below hereby authorizes William S.
Mortensen and James P. Giraldin, 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 23rd day of February, 1995.
SIGNATURE TITLE
/s/ William S. Mortensen Chairman of the Board (Principal
- --------------------------------
William S. Mortensen Executive Officer)
/s/ James P. Giraldin Executive Vice President (Principal
- ---------------------------------
James P. Giraldin Financial Officer)
/s/ Michael R. Hilton Senior Vice President and Controller
- ---------------------------------
Michael R. Hilton (Principal Accounting Officer)
/s/ Samuel J. Crawford, Jr. Director
- ----------------------------------
Samuel J. Crawford, Jr.
/s/ Christopher M. Harding Director
- ----------------------------------
Christopher M. Harding
/s/ Babette E. Heimbuch Director
- ----------------------------------
Babette E. Heimbuch
/s/ James L. Hesburgh Director
- ----------------------------------
James L. Hesburgh
/s/ June Lockhart Director
- ----------------------------------
June Lockhart
/s/ Charles F. Smith Director
- ----------------------------------
Charles F. Smith
/s/ Steven L. Soboroff Director
- ----------------------------------
Steven L. Soboroff
/s/ John R. Woodhull Director
- ----------------------------------
John R. Woodhull
76