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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from N/A to
----- -----
Commission File Number: 1-9566
FirstFed Financial Corp.
(Exact name of registrant as specified in its charter)
Delaware 95-4087449
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
401 Wilshire Boulevard
Santa Monica, California 90401-1490
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 319-6000
Securities registered pursuant to Section 12(b) of the Act:
Common Stock $0.01 par value
(Title of Class)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No
----- -----
The approximate aggregate market value of the voting stock held
by non-affiliates of the Registrant as of February 15, 1996:
$139,389,004.
The number of shares of Registrant's $0.01 par value common stock
outstanding as of February 15, 1996: 10,614,402.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for Annual Meeting of
Stockholders, April 24, 1996 (Parts III & IV).
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K (sub-section 229.405 of
this chapter) is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of
the Form 10-K or any amendment to this Form 10-K. [X]
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PART I
ITEM 1--BUSINESS
General Description
FirstFed Financial Corp., a Delaware corporation ["FFC",
and collectively with its sole and wholly-owned subsidiary, First
Federal Bank of California (the "Bank"), the "Company"], was
incorporated on February 3, 1987. Since September 22, 1987, FFC
has operated as a savings and loan holding company engaged
primarily in the business of owning the Bank. Because the Company
does not presently engage in any 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, 1995, the Company had assets totaling $4.1
billion compared to $4.2 billion at December 31, 1994. The
Company recorded net earnings of $6.5 million for the year ended
December 31, 1995. It recorded net losses of $24.5 million and
$2.0 million, respectively, for the years ended December 31, 1994
and 1993.
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, 1996, the Bank operated 25 retail savings
branches and 5 loan origination offices, all located in Southern
California. 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 granted by the Office of Thrift Supervision
("OTS").
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." It conducts its loan origination business
under the name "FirstFed Mortgage Services."
See "Competition".
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 by the
economic recession which began in 1990. Many economists agree
that California is now in the second year of its recovery from
the recession, although business activity has not yet improved to
pre-recession levels. Propelling the recovery is job growth,
particularly in the entertainment and personal services
industries, increased foreign trade, and an improved business
climate in the state of California. Retail trade and consumer
confidence have also shown recent signs of improvement.
The real estate market is one sector of the economy yet to
show any real signs of recovery, although the extent by which
real estate values are declining has decreased recently.
According to the "UCLA Business Forecast for California,
December, 1995 Report" ("UCLA Report"), home prices have fallen
2.5% since the beginning of 1994. This represents an improvement
from the 11% per annum depreciation rate which prevailed from the
second quarter of 1992 through the first quarter of 1994. The
extent by which the real estate market improves in the near
future depends to a large extent upon the levels of interest
rates, as well as the amount of problem real estate loans and
foreclosed properties held by financial institutions. According
to the UCLA Report, continued foreclosures may add to problems in
the real estate sector by increasing the supply of homes for
sale, causing downward pressure on home prices. Any additional
price depreciation will add to an already weak situation where a
homeowners' equity in the property is close to zero or negative.
Because the Bank typically lends less than 90% 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 Bank's assets are recorded at fair value less
estimated cost to sell. Consistent with real estate trends in the
greater Los Angeles area, non-performing assets were 2.33% of
total assets at the end of 1995 compared to 2.23% at the end of
1994 and 3.23% at the end of 1993.
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 the original 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 1993 and 1994 at the height of the real
estate recession. The provision for loan losses was $28 million
in 1995 compared to $86 million in 1994 and $68 million in 1993.
The ratio of general valuation allowances to the Bank's
assets with loss exposure (the Bank's loan portfolio plus real
estate owned) was 1.35% at the end of 1995 compared to 1.73% at
the end of 1994 and 1.46% at the end of 1993. The decrease in
general valuation allowances is consistent with the decrease in
charge-offs to $40 million in 1995 from $45 million in 1994 and
$49 million in 1993.
The Bank also maintains separate valuation allowances for
impaired loans and loans sold with recourse. See "Risk Elements-
Loan Loss Experience Summary" for additional information
regarding valuation allowances.
Current Interest Rate Environment. The Federal Reserve Board
("FRB") increased interest rates six times during 1994 and once
during 1995, due to concerns about inflation while the national
economy was expanding. However, the FRB decreased interest rates
twice later during 1995 due to concerns that the national economy
was slowing down. In a declining interest rate environment, the
Bank's interest rate spread increases due to a time lag inherent
in the adjustable loan portfolio. The reverse is true during
periods of increasing interest rates. The time lag inherent in
the loan portfolio results from 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.
However, interest costs on the Bank's short term deposits and
borrowings respond immediately to a change in interest rates. See
"Asset-Liability Management" and
2
"Components of Earnings - Net Interest Income" in "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" for additional information.
Competition. The Bank experiences strong competition in
attracting and retaining deposits and originating real estate
loans. It competes for deposits with many of the nation's largest
savings institutions and commercial banks which have significant
operations in Southern California. Federal legislation has been
proposed to merge the Bank Insurance Fund ("BIF") and the
Savings Association Insurance Fund ("SAIF"). Absent this action,
savings institutions such as the Bank will face an increasing
competitive disadvantage in attracting deposits, relative to
commercial banks, as a result of the disparity between the
insurance assessment rates of the BIF and the SAIF. 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.
Through the Bank's mortgage banking program,
competitively-priced fixed-rate loans and certain adjustable rate
loans which the Bank does not typically retain in its portfolio
are offered. 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. Loans originated for the mortgage banking program have
not yet had a material impact on loan originations, loan sales,
loan interest income or loan servicing income.
In mid-1995, the Bank formed FirstFed Mortgage Services
("FFMS"), a division through which it engages in mortgage
origination and mortgage brokering activities. Through FFMS,
loans which the Bank cannot originate either for its portfolio or
for sale in the secondary market can be marketed to a variety of
other lenders. If a loan brokered by FFMS is funded by another
lender, FFMS receives fee income for its mortgage brokerage
activities. To date, income from brokered loan originations by
FFMS has been insignificant.
Environmental Concerns. Under certain circumstances, such
as when it actively participates in the management or operation
of a property securing its loans, the Bank could have liability
for any properties found to have pollutant or toxic features.
Environmental protection laws are strict and impose joint and
several liability on numerous parties. 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.
3
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 -
Overview and Components of Earnings - Net Interest Income" for
further analysis and discussion.
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 other
sources such as mortgage brokers and borrower referrals.
Loan originations were $299 million in 1995, $909 million in
1994 and $746 million in 1993. Loan originations during 1994
included $60 million in loans purchased from other financial
institutions. Loan originations declined during 1995 due to
decreased real estate activity in Southern California and
consumers' preference for fixed-rate loans.
Management decided to de-emphasize the origination of multi-
family loans in 1994 due to real estate market conditions and
governmental regulations relating to risk-based capital
requirements for such loans. As a result, multi-family loans were
19% of originations in 1995, 18% of loan originations in 1994 and
32% of loan originations in 1993. Multi-family loans originated
during 1994 and 1995 resulted primarily from the sale of the
Bank's foreclosed properties.
Loans sold under the Bank's mortgage banking program
decreased to $37 million in 1995 compared $44 million in 1994 and
$77 million in 1993. For the year ended December 31, 1995, $35
million in loans were originated for sale compared to $49 million
in 1994 and $87 million during 1993, respectively. Loans
originated for resale totaled 12%, 5% and 12% of loan
originations during 1995, 1994 and 1993, respectively.
Loans held-for-sale at December 31, 1995, 1994 and 1993 were
$7 million, $30 million and $24 million, respectively,
constituting 0.24%, 0.99% and 0.87%, respectively, of the Bank's
total loans at such dates. In December of 1995, the Bank
transferred $19 million of loans previously "held-for-sale" to
its "held-for-investment" portfolio.
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. During this time
period the Bank may be exposed to price adjustments as a result
of fluctuations in market interest rates.
4
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"). $60 million,
$198 million and $112 million in loans were converted into
mortgage-backed securities during 1995, 1994 and 1993,
respectively. All of the loans underlying the mortgage-backed
securities were originated by the Bank. Therefore, mortgage-
backed securities generally have the same experience with respect
to prepayment, repayment, delinquencies and other factors as the
remainder of the Bank's portfolio.
In accordance with a Special Report issued by the Financial
Accounting Standards Board in November of 1995 to assist in the
implementation and understanding of the Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities" ("SFAS No. 115"), the Bank
reclassified its entire portfolio of mortgage-backed securities
to the available-for-sale category from the held-to-maturity
category. In accordance with SFAS No. 115, the portfolio of
mortgage-backed securities was recorded at fair value as of
December 31, 1995. A fair value adjustment of $4.9 million, net
of taxes, was recorded in stockholders' equity at that date.
The Bank serviced $623 million in loans for other investors
as of December 31, 1995. $248 million of these loans were sold
under recourse arrangements. The Bank has an additional $23
million in loans that were formed into mortgage-backed securities
with recourse but were still owned by the Bank as of December
31,1995. Due to regulatory requirements, the Bank maintains
capital for loans sold with recourse as if those loans had not
been sold. The Bank had been active in these types of
transactions in the past, but has not entered into any new
recourse arrangements since 1989 when the new capital regulations
took effect. Loans sold with recourse are considered along with
the Bank's own loans in determining the adequacy of general loan
valuation allowances. The decrease in the principal balance of
loans sold with recourse to $248 million at the end of 1995 from
$278 million at the end of 1994 and $318 million at the end of
1993 was due to loan amortization, payoffs and foreclosures.
Interest Rates, Terms and Fees. The Bank makes adjustable
mortgage loans ("AMLs") with 30 and 40 year terms and interest
rates which adjust each month based upon the Federal Home Loan
Bank's Eleventh District Cost of Funds Index ("Index"). (See
"Asset-Liability Management" in "Management's Discussion and
Analysis of Financial Condition and Results of Operations.")
While the monthly payment can change annually, the maximum annual
change in the 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 maximum interest rate
which can be charged ranging from 400 to 750 basis points above
their initial interest rate. Generally, these loans may be
assumed at any time during their term provided that the 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 primary AML products 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. 88% of the Bank's AML loan
origination volume in 1995 was comprised of these two products.
Under current portfolio loan programs, the Bank normally
lends less than or equal to 90% of a single family property's
appraised value at the time of loan origination.
5
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.
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. Subsequent to the origination
of a portfolio loan, the Bank may purchase private mortgage
insurance with its own funds. Under certain of these mortgage
insurance programs, the Bank acts as co-insurer and participates
with the insurer in absorbing any future loss. As of December
31, 1995 and December 31, 1994 loans which had co-insurance
totaled $258 million and $254 million, respectively. Loans for
which there is no private mortgage insurance totaled $133 million
at December 31, 1995 compared to $129 million at December 31,
1994 and $155 million at December 31, 1993.
Because AML loan-to-value ratios may increase above those
established at the time of loan origination due to negative
amortization, the Bank rarely lends in excess of 90% of the
appraised value on AMLs. When the Bank does lend in excess of 90%
of the appraised value, additional fees and higher rates are
charged 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, 1995,
negative amortization on all loans serviced by the Bank totaled
$7 million.
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 20% and 23% of loan originations
during 1995 and 1994, respectively.
The following table shows the contractual remaining
maturities of the Bank's loans at December 31, 1995:
Loan Maturity Analysis
Maturity Period
---------------------------------------------------------------------
>1 Year
Total 1 Year To 5 >5-10 >10-20 >20-30 >30
Balance or Less Years Years Years Years Years
---------- ------- ------- ------- -------- ---------- --------
(Dollars In Thousands)
Interest rate sensitive loans:
AMLs........................... $3,022,920 $12,511 $ 7,605 $51,320 $122,061 $2,573,763 $255,660
Fixed-rate loans:
1st mortgages................. 35,532 191 3,001 7,213 12,259 12,868 -
2nd mortgages................. 182 3 94 71 14 - -
Consumer and other loans...... 1,146 1,146 - - - - -
---------- ------- ------- ------- -------- ---------- --------
Total fixed-rate loans......... 36,860 1,340 3,095 7,284 12,273 12,868 255,660
---------- ------- ------- ------- -------- ---------- --------
$3,059,780 $13,851 $10,700 $58,604 $134,334 $2,586,631 $255,660
========== ======= ======= ======= ======== ========== ========
Non-accrual, Past Due, Impaired and Restructured Loans
The Bank establishes allowances for delinquent interest
equal to the amount of accrued interest on all loans 90 days or
more past due or in foreclosure. This practice effectively places
such loans on non-accrual status for financial reporting
purposes.
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
1995 Total 1994 Total 1993 Total 1992 Total 1991 Total
------- ----- ------- ----- -------- ----- ------- ----- ------- -----
(Dollars In Thousands)
Non-accrual Loans:
Single family.......... $25,991 26% $13,041 14% $ 25,317 24% $24,634 35% $21,441 37%
Multi-family........... 69,579 70 60,213 64 70,207 66 42,481 60 34,347 60
Commercial............. 3,313 4 20,986 22 10,307 10 3,623 5 1,536 3
Other.................. 220 - 245 - 245 - 271 - 194 -
Total Non-accrual ------- --- ------- --- -------- --- ------- --- ------- ---
Loans............... $99,103 100% $94,485 100% $106,076 100% $71,009 100% $57,518 100%
======= === ======= === ======== === ======= === ======= ===
The allowance for delinquent interest, based on loans past
due more than 90 days or in foreclosure, totaled $6 million, $5
million, $6 million, $4 million and $3 million at December 31,
1995, 1994, 1993, 1992 and 1991, 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, 1995,
the Bank had modified loans totaling $19 million, net of loan
loss allowances totaling $5 million. This compares with $60
million, net of loan loss allowances totaling $8 million as of
December 31, 1994. No modified loans were 90 days or more
delinquent as of December 31, 1995 or 1994.
The Bank adopted Statement of Financial Accounting Standards
No. 114, "Accounting by Creditors for Impairment of a Loan"
("SFAS No. 114"), effective January 1, 1994. SFAS No. 114
requires the measurement of impaired loans based on the present
value of expected future cash flows discounted at the loan's
effective interest rate, or at the loan's observable market price
or at the fair value of its collateral. SFAS No. 114 does not
apply to large groups of homogeneous loans that are collectively
reviewed for impairment. For the Bank, loans collectively
reviewed for impairment include all single family loans less than
$500 thousand and multi-family loans less than $750 thousand. The
adoption of SFAS No. 114 did not result in material additions to
the Bank's provision for loan losses.
The Bank adopted Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 118, "Accounting
by Creditors for Impairment of a Loan -- Income Recognition and
Disclosures" ("SFAS No. 118"), on January 1, 1995. SFAS No. 118
amends SFAS No. 114 to allow a creditor to use existing methods
for recognizing interest income on an impaired loan.
Additionally, SFAS No. 118 requires, among other things,
additional disclosure, either in the body of the financial
statements or in the accompanying notes, about the recorded
investment in certain impaired loans and about how a creditor
recognizes interest income related to those impaired loans.
Prior to the adoption of SFAS No. 114, the Bank considered
the transfer of specific allowances from general valuation
allowances to be "charge-offs." Pursuant to SFAS No. 114, the
Bank now considers allowances on impaired loans as charge-offs
when the loan is foreclosed or the borrower is permitted to
satisfy the debt with less than a full repayment of the amount
owed.
7
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
recorded as separate valuation allowances and may be subsequently
adjusted based upon changes in the measurement of impairment.
Impaired loans, which are disclosed net of valuation allowances,
include non-accrual major loans (single family loans with an
outstanding principal amount greater than or equal to $500
thousand and multi-family and commercial real estate loans with
an outstanding principal amount greater than or equal to $750
thousand), modified loans, and major loans less than 90 days
delinquent in which full payment of principal and interest is not
expected to be received.
Valuation allowances for impairment totaled $26 million as
of December 31, 1995 and $24 million as of December 31, 1994.
The following is a summary of impaired loans, net of valuation
allowances for impairment, for the periods indicated:
December 31, December 31,
1995 1994
-------- --------
(Dollars In Thousands)
Non-accrual loans...... $ 34,503 $ 38,004
Modified loans......... 16,573 41,635
Other impaired loans... 35,333 28,637
-------- --------
$ 86,409 $108,276
======== ========
When a loan is considered impaired, the Bank measures
impairment based on the present value of expected future cash
flows (over a period not to exceed 5 years) discounted at the
loan's effective interest rate. However, if the loan is
"collateral-dependent" or probable of foreclosure, impairment is
measured based on the fair value of the collateral. When the
measure of an impaired loan is less than the recorded investment
in the loan, the Bank records an impairment allowance equal to
the excess of the Bank's recorded investment in the loan over its
measured value. The following summary details loans measured
using the present value of expected future cash flows discounted
at the effective interest rate of the loan and loans measured
using the fair value method for the periods indicated:
December 31, December 31,
1995 1994
-------- --------
(Dollars In Thousands)
Present value method.... $ 15,995 $ 31,031
Fair value method....... 70,414 77,245
-------- --------
Total impaired loans.... $ 86,409 $108,276
======== ========
The present value of an impaired loan's expected future cash
flows will change from one reporting period to the next because
of the passage of time and also may change because of revised
estimates in the amount or timing of those cash flows. The Bank
records the entire change in the present value of the expected
future cash flows as an impairment valuation allowance which may
necessitate an increase in the provision for loan losses.
Similarly, the fair value of the collateral of an impaired
collateral-dependent loan may change from one reporting period to
the next. The Bank also records a change in the measure of these
impaired loans as an impairment valuation allowance which may
necessitate an adjustment to the provision for loan losses.
Impaired loans for which there were no valuation allowances
established totaled $9 million and $22 million as of December 31,
1995 and December 31, 1994, respectively.
8
The following is an analysis of the activity in the Bank's
valuation allowance for impaired loans during the periods
indicated (dollars in thousands):
Balance at December 31, 1993....... $ -
Provision for loan losses......... 32,528
Charge-offs, net of recoveries.... (8,641)
--------
Balance at December 31, 1994....... 23,887
Provision for loan losses......... 21,418
Charge-offs, net of recoveries.... (19,204)
--------
Balance at December 31, 1995....... $ 26,101
========
Cash payments received from impaired loans are recorded in
accordance with the contractual terms of the loan. The principal
portion of the payment is used to reduce the principal balance of
the loan, whereas the interest portion is recognized as interest
income. On certain modified loans where the Bank does not believe
that it will receive all amounts due under the original
contractual loan terms, the Bank records an allowance for
interest received.
The average recorded investment in impaired loans during the
year ended December 31, 1995 was $92 million. The amount of
interest income recognized for impaired loans during the year
ended December 31, 1995 was $6 million under both the accrual
method of accounting and the cash basis method of accounting.
Prior to SFAS No. 114, the Bank had a policy of establishing
valuation allowances for all loans deemed probable of foreclosure
based on the fair value of the collateral. As a result, SFAS No.
114 did not have a material impact on the Bank's allowance for
loan losses.
The table below shows the Bank's net investment in non-
accrual loans determined to be impaired, by property type, as of
the periods indicated:
December 31, December 31,
1995 1994
------- -------
(Dollars In Thousands)
Single family.......... $ 1,677 $ 2,140
Multi-family........... 32,826 22,696
Commercial............. - 13,168
------- -------
$34,503 $38,004
======= =======
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
required loss recognition based on the fair value of the
collateral.
Loan Loss Experience Summary. The Bank maintains a general
valuation allowance to absorb possible future losses that may be
realized on its loan portfolio. The allowance is reviewed and
adjusted at least quarterly based upon a number of factors,
including asset classifications, economic trends, industry
experience, industry and geographic concentrations, estimated
collateral values,
9
management's assessment of credit risk inherent in the portfolio,
historical loss experience and the Bank's underwriting practices.
Based on the factors above, the Bank's general valuation
allowance (including general valuation allowances for loans sold
with recourse) was 1.52% of total assets with loss exposure
(including loans sold with recourse) at December 31, 1995, 1.82%
at December 31, 1994 and 1.48% at December 31, 1993. Depending on
the economy and real estate markets in which the Bank operates,
increases in the general valuation allowance may be required in
future periods. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review
the Bank's general valuation allowance. These agencies may
require the Bank to establish additional general valuation
allowances based on their judgment of the information available
at the time of their examination.
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 % of
1995 Total 1994 Total 1993 Total 1992 Total 1991 Total
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
(Dollars In Thousands)
Real Estate Loans:
Single Family......... $ 8,887 17% $ 6,938 11% $ 6,607 14% $ 3,935 14% $ 4,084 29%
Multi-Family.......... 35,278 68 50,018 79 37,691 81 20,708 75 7,581 54
Commercial............ 7,529 15 6,170 10 2,551 5 3,154 11 2,194 16
Non-Real Estate Loans. 232 - 175 - 51 - 57 - 78 1
------- --- ------- --- ------- --- ------- --- ------- ---
Total................. $51,926 100% $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,
----------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(Dollars In Thousands)
Beginning General Valuation
Allowances....................... $ 55,353 $ 46,900 $ 27,854 $ 13,937 $ 11,181
Provisions for Loan Losses......... 6,958 53,172 67,679 41,384 11,833
Charge-Offs, Net of Recoveries:
Single Family.................... (6,040) (16,127) (8,605) (4,863) (1,690)
Multi-Family..................... (13,676) (19,800) (38,178) (22,470) (7,696)
Commercial....................... 851 (664) (1,574) - 440
Non-Real Estate.................. (67) (180) (276) (134) (131)
-------- -------- -------- -------- --------
Total Charge-Offs................ (18,932) (36,771) (48,633) (27,467) (9,077)
-------- -------- -------- -------- --------
Transfer to Liability Account for
Loans Sold with Recourse......... (503) (7,948) - - -
-------- -------- -------- -------- --------
Ending General Valuation
Allowances....................... $ 42,876 $ 55,353 $ 46,900 $ 27,854 $ 13,937
======== ======== ======== ======== ========
10
The Bank also has a general valuation allowance for loans
sold with recourse. This allowance was included in the general
valuation allowance balance in years prior to 1994. The amount
of this recourse general valuation allowance totaled $6.2
million, $5.3 million, and $1.3 million at December 31, 1993,
1992 and 1991, respectively. The activity in the general
valuation allowance for loans sold with recourse for 1994 and
1995 is presented below (dollars in thousands):
Balance at December 31, 1993............... $ -
Transfer from general valuation allowance.. 7,948
-------
Balance at December 31, 1994............... 7,948
Provisions for loan losses
(recorded as loss on sale of loans)...... 2,123
Charge-offs................................ (1,524)
Transfer from general valuation allowance.. 503
-------
Balance at December 31, 1995............... $ 9,050
=======
Total loan charge-offs, including charge-offs from the
general valuation allowance, impaired allowances and the general
valuation allowances for loans sold with recourse totaled
$40 million, $45 million, $49 million, $27 million and $9 million
for 1995, 1994, 1993, 1992 and 1991, respectively, representing
1.28%, 1.58%, 1.82%, 1.11% and 0.40% of the average loan
portfolio at such dates.
The high level of 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. Any increase in charge-offs would
adversely impact the Company's future loan loss provisions and
earnings. Charge-offs during 1995 and 1994 included $2.4
million and $13.8 million, respectively, 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."
Generally, loans greater than 60 days delinquent are
placed into foreclosure and a valuation allowance is
established, if necessary. The Bank acquires title to the
property in most foreclosure actions in which the loan is
not reinstated by the borrower. Once real estate is acquired
in settlement of a loan, the property is recorded at fair
value less estimated costs to sell.
Following the acquisition of foreclosed real estate
("REO"), the Bank evaluates the property and establishes
a plan for marketing and disposition. The Bank inspects the
property, using the Bank's appraisal staff. After inspecting
a property, the Bank determines whether the property may be
disposed of in its present condition or whether repairs,
rehabilitation or improvements are necessary.
11
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,
--------------------------------
1995 1994 1993
-------- -------- --------
(Dollars In Thousands)
Beginning Balance........................ $ 16,724 $ 26,878 $ 23,858
Additions................................ 64,053 67,466 93,010
Sales.................................... (61,076) (77,620) (89,990)
-------- -------- --------
Ending Balance........................... $ 19,701 $ 16,724 $ 26,878
======== ======== ========
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 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, 1995.
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, 1995, the regulatory liquidity
requirement was 5.00% and the Bank's liquidity percentage was
5.20%.
It is the Bank's policy to maintain 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.
In November 1995, the Financial Accounting Standards Board
issued a Special Report as an aid in understanding and
implementing Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments and Debt Securities" ("SAS
115"). In accordance with the Report, the Bank reclassified its
entire portfolio of liquidity-qualifying investments to the
available-for-sale portfolio from the held-to-maturity portfolio.
Management believes that the reclassification will provide
greater flexibility to the Bank in the future.
12
The following table summarizes the total investment
portfolio (including liquid investments) by type at the end of
the periods indicated:
December 31,
-------------------------------------------------
1995 1994 1993 1992 1991
------- ------- -------- ------- --------
(Dollars In Thousands)
U.S. Treasury Securities......... $ 301 $ 4,205 $ 5,111 $ 7,113 $ 7,115
U.S. Agency Securities........... 46,561 36,565 42,600 11,034 6,054
Corporate Bonds.................. - - - - 3,003
Repurchase Agreements............ - - - - 95,000
Collateralized Mortgage
Obligations.................... 29,874 43,282 56,125 25,589 -
------- ------- -------- ------- --------
76,736 84,052 103,836 43,736 111,172
Unrealized gain (loss) on
securities available-for-sale.. (552) - - - -
------- ------- -------- ------- --------
$76,184 $84,052 $103,836 $43,736 $111,172
======= ======= ======== ======= ========
Weighted average yield on
interest-earnings invest-
ments end of period............ 5.15% 5.08% 5.16% 6.18% 4.90%
==== ==== ==== ==== ====
The following is a summary of the maturities of investment
securities at historical value as of December 31, 1995:
Maturity
------------------------------------
Total Historical
Within 1 Year 1-5 Years Value
----------------- ----------------- -----------------
Weighted Weighted Weighted Average
Average Average Average Maturity
Amount Yield Amount Yield Amount Yield Yrs/Mos
------- ------- ------- ------- ------- ------- -------
(Dollars In Thousands)
U.S. Treasury
Securities.................. $ - -% $ 301 5.86% $ 301 5.86% 1/8
U.S. Agency Securities........ 16,537 5.18 30,024 5.64 46,561 5.48 1/5
Collateralized Mortgage
Obligations................. 11,360 4.31 18,514 4.81 29,874 4.62 2/1
------- ------- -------
$27,897 4.83% $48,839 5.33% $76,736 5.15% 1/10
======= ======= =======
Sources of Funds
General. The Bank's principal sources of funds are savings
deposits, advances from the Federal Home Loan Bank of San
Francisco ("FHLBSF") and securities sold under agreements to
repurchase.
Deposits. The Bank obtains deposits through three different
sources: 1) its retail branch system; 2) its telemarketing
department (phone solicitations by employees); and 3) national
brokerage firms.
The cost of funds, operating margins and net earnings of the
Bank associated with brokered and telemarketing deposits are
generally comparable to the cost of funds, operating margins and
net earnings of the Bank associated with retail deposits, Federal
Home Loan Bank ("FHLB") borrowings and securities sold under
agreements to repurchase. As the cost of each source of funds
13
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
11%, 9% and 12% of total deposits at December 31, 1995, 1994 and
1993, respectively. The level of telemarketing deposits varies
based on yields available to depositors on other investment
instruments and the depositors' perception of the Bank's credit
worthiness.
Deposits acquired through national brokerage firms
represented 23%, 26% and 23% of total deposits at December 31,
1995, 1994 and 1993, 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, as an adequately-
capitalized institution, 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 - Capital Resources and
Liquidity."
Retail deposits were $1.5 billion at December 31, 1995, 1994
and 1993. Retail deposits comprised 66% of total deposits at
December 31, 1995 and 65% of total deposits at December 31, 1994
and 1993. The level of deposits has decreased slightly over the
last three years due to the competitive market for retail savings
deposits in Southern California. The Bank operated 25 retail
branches at the end of 1995.
14
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,
---------------------------------------------------------
1995 1994 1993
----------------- ----------------- -----------------
Amount % Amount % Amount %
---------- ----- ---------- ----- ---------- -----
(Dollars In Thousands)
Variable rate non-term accounts:
Money market deposit accounts
(weighted average rate of 2.52%,
2.55% and 2.40%)...................... $ 125,352 6% $ 161,147 7% $ 196,467 9%
Interest-bearing checking accounts
(weighted average rate of 1.20%,
2.14% and 2.18%)..................... 145,801 7 169,416 7 148,460 6
Passbook accounts (2.04%, 2.29%
and 2.29%)............................ 96,948 4 114,075 5 118,455 5
Non-interest bearing checking
accounts.............................. 54,876 2 36,773 2 44,868 2
---------- --- ---------- --- ---------- ---
422,977 19 481,411 21 508,250 22
Fixed term rate certificate accounts: ---------- --- ---------- --- ---------- ---
Under six month term (weighted
average rate of 5.21%, 4.64%
and 2.77%)........................... 126,599 6 89,763 4 69,132 3
Six month term (weighted average
rate of 5.42%, 4.99% and 3.13%)....... 417,855 19 282,130 12 299,368 13
Nine month term (weighted average of
5.98%, 4.90% and 3.36%)............... 144,308 6 104,962 5 200,269 9
One year to 18 month term (weighted
average rate of 5.57%, 4.76% and
3.67%)............................... 235,164 11 512,846 22 474,853 20
Two year or 30 month term (weighted
average rate of 5.55%, 5.22% and
4.67%)............................... 239,411 11 315,223 14 148,993 7
Over 30 month term (weighted
average rate of 6.31%, 6.20%
and 5.80%)........................... 238,742 11 285,438 12 307,513 13
Negotiable certificates of $100,000
and greater, 30 day to one year terms
(weighted average rate of 5.66%,
4.79% and 3.43%).................... 379,980 17 227,141 10 297,102 13
---------- --- ---------- --- ---------- ---
1,782,059 81 1,817,503 79 1,797,230 78
Total deposits (weighted average ---------- --- ---------- --- ---------- ---
rate of 4.89%, 4.49% and 3.60%)....... $2,205,036 100% $2,298,914 100% $2,305,480 100%
========== === ========== === ========== ===
15
During the Year Ended December 31,
-------------------------------------------------------------
1995 1994 1993
------------------- ------------------- -------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
---------- ------- ---------- ------- ---------- -------
(Dollars In Thousands)
Passbook Accounts........................ $ 103,737 2.20% $ 118,776 2.26% $ 105,780 2.25%
Money Market Deposit Accounts............ 137,099 2.59 188,663 2.35 191,023 2.34
Interest-bearing Checking Accounts....... 195,920 1.39 204,882 1.66 178,640 1.73
Fixed term Certificate Accounts.......... 1,808,422 5.56 1,760,744 4.37 1,590,424 4.25
---------- ---- ---------- ---- ---------- ----
$2,245,178 4.86% $2,273,065 3.85% $2,065,867 3.76%
========== ==== ========== ==== ========== ====
The following table shows the maturity distribution of jumbo
certificates of deposit ($100,000 and greater) as of December 31,
1995 (dollars in thousands):
Maturing in:
1 month or less............ $ 71,697
Over 1 month to 3 months.... 93,908
Over 3 months to 6 months... 97,286
Over 6 months to 12 months.. 117,089
--------
Total....................... $379,980
========
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 FHLBSF capital stock owned by the Bank, certain of
the Bank's mortgages and other assets (principally obligations
issued or guaranteed by the United States government or agencies
thereof). Advances can be requested for any sound business
purpose which an institution is authorized to pursue. Any
institution not meeting the qualified thrift lender test will be
subject to restrictions on its ability to obtain advances from
the FHLBSF. In granting advances, the FHLBSF also considers a
member's creditworthiness and other relevant factors.
Total advances from the FHLBSF were $890 million at December
31, 1995 at a weighted average rate of 6.12%. This compares with
advances of $863 million at December 31, 1994 and $515 million at
December 31, 1993 at weighted average rates of 5.96% and 4.70%,
respectively. These advances were often the most available source
of funds to the Bank during 1995 and 1994. 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, 1995.
The Bank enters into sales of securities under agreements to
repurchase (reverse repurchase agreements) which require the
repurchase of the same securities. The agreements are treated as
borrowings in the Company's Consolidated Statements of Financial
Condition. There are certain risks involved with doing these
types of transactions. In order to minimize these risks, the
Bank's policy is to enter into agreements only with well-known
national brokerage firms which meet their regulatory capital
requirements. Borrowings under reverse repurchase agreements
totaled $725 million at December 31, 1995 at a weighted average
rate of 5.68% and were secured by mortgage-backed securities with
principal balances totaling $766 million. Borrowings under
reverse repurchase agreements totaled $691 million at December
31, 1994 and $549 million at December 31, 1993 at weighted
average rates of 5.81% and 3.32%, respectively.
16
The Company issued $50 million in 10-year senior unsecured
notes ("Notes") in September of 1994. The Notes are interest
only, with 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 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. 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 $5.9
million. The Company 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 $1.7 billion, $1.6
billion and $1.1 billion at weighted average rates of 6.11%,
6.04% and 3.99% at December 31, 1995, 1994 and 1993,
respectively. Due to increased competition at the retail
branches, the Bank increased its use of borrowings in 1995 and
1994 to meet its cash flow requirements.
The Bank's portfolio of short term borrowings includes
short-term variable rate credit advances and FHLB advances due in
less than one year from the FHLBSF, securities sold under
agreements to repurchase and other short term borrowings. The
following schedule summarizes short term borrowings for the last
three years:
Maximum
Month-End
Outstanding
End of Period Balance Average for Period
------------------ ------------------
During the
Outstanding Rate Period Outstanding Rate
----------- ----- ---------- ------------ -----
(Dollars In Thousands)
1995
Short term variable rate credit advances.......... $ 21,000 6.90% $ 59,000 $ 9,154 6.09%
Short term FHLB Advances.......................... 810,000 6.11 990,000 728,077 6.32
Securities sold under agreements to repurchase.... 724,643 5.68 749,546 718,057 5.93
Other short term borrowings....................... 2,300 5.82 15,000 8,565 5.99
1994
Short term variable rate credit advances.......... 39,000 7.33 215,000 78,231 5.13
Short term FHLB Advances.......................... 500,000 6.22 525,000 179,231 5.58
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
Short term FHLB Advances.......................... - - 40,000 18,462 3.44
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
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.
17
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.
As of December 31, 1995 the Bank had invested an aggregate
of $233 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
1995, and no material change is presently foreseen. For the past
several years, only Seaside and Oceanside have been active.
Real Estate Development Activities. Seaside has not been
involved in any real estate development activity for the last
four years and there are no plans for future real estate
projects. Therefore, no gains or losses on real estate
development activities were recorded during 1995, 1994, or 1993.
Seaside continues to hold two condominium units which are
rented to the Bank for use by its employees. In 1995, a house,
previously rented to the Bank, was sold. At December 31, 1995,
Seaside's investment in the units totaled $120 thousand. There
were no loans outstanding against the properties at December 31,
1995. Both units are located in California.
Trustee Activities. Seaside acts as trustee on the Bank's
loans. Trustee fees for this activity amounted to $462 thousand,
$403 thousand and $612 thousand in 1995, 1994 and 1993,
respectively. The amount of trustee fees earned by Seaside varies
based on foreclosure activity by the Bank.
Insurance Brokerage Activities. Oceanside engages in
limited insurance brokerage activities. Income to date from this
source has been insignificant. Beginning in 1996, Oceanside will
act as a licensed life insurance agent solely for the purpose of
receiving commissions on the sale of fixed rate annuities by a
third party vendor with sales facilities located in the Bank's
branch offices.
Employees
As of December 31, 1995, the Bank had a total of 455 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.
18
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 $59
million in FHLBSF stock at December 31, 1995.
The FHLBSF serves as a source of liquidity for the member
institutions within its assigned region, the FHLB Eleventh
District. It is funded primarily from proceeds derived from the
sale of consolidated obligations of the FHLB System. It makes
advances to members in accordance with policies and procedures
established by the Federal Housing Finance Board and the Board of
Directors of the FHLBSF. At December 31, 1995, the Bank's
advances from the FHLBSF amounted to $890 million, or 23% of the
Bank's total funding sources (deposits and borrowings).
As a result of the Financial Institutions Reform, Recovery
and Enforcement Act of 1989 ("FIRREA"), the FHLBs are required to
provide funds for the resolution of troubled savings institutions
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, 1995,
dividends paid by the FHLBSF to the Bank totaled approximately
$2.9 million.
Savings and Loan Holding Company Regulations. The
activities of savings and loan holding companies are governed by
the Home Owners' Loan Act, as amended. Pursuant to that statute,
the Company is subject to certain restrictions with respect to
its activities and investments.
A savings and loan holding company, like FFC, which controls
only one savings association is exempt from restrictions on the
conduct of unrelated business activities that are applicable to
savings and loan holding companies that control more than one
savings association. The restrictions on multiple savings and
loan holding companies are similar to the restrictions on the
conduct of unrelated business activities applicable to bank
holding companies under the Bank Holding Company Act. The
Company would become subject to these restrictions if it were to
acquire control of another savings association or if the Bank
were to fail to meet its 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
institutions. These regulations 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.
"Tangible capital" means stockholders' equity computed in
accordance with generally accepted accounting principles less any
intangible assets (including supervisory goodwill), less
unrealized gains and losses on certain "available-for-sale"
securities, plus purchased mortgage servicing rights and
19
purchased credit card relationships, subject to certain
limitations. "Core capital" is generally defined the same as
tangible capital except that certain qualifying intangible assets
may be included. The Bank has no such qualifying intangible
assets as of December 31, 1995. 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 and impairment allowances, subject to
certain limitations. The general loan valuation allowance and
the impaired valuation allowance may generally be included in
supplementary capital up to 1.25% of risk-weighted assets. At
December 31, 1995, $29.7 million of the Bank's $69.0 million in
general valuation allowances and impairment allowances were
included in supplementary capital. Supplementary capital may be
used to 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, 1995, as indicated by the chart below:
December 31,
1995
----------------
Amount %
-------- -----
(Dollars In Thousands)
Tangible capital requirement........... $ 61,933 1.50%
Bank's tangible capital................ 232,329 5.63
-------- -----
Excess tangible capital.............. $170,396 4.13%
======== =====
Core capital requirement............... $123,867 3.00%
Bank's core capital.................... 232,329 5.63
-------- -----
Excess core (tangible) capital....... $108,462 2.63%
======== =====
Risk-based capital requirement......... $189,123 8.00%
Bank's risk-based capital.............. 259,502 10.98
-------- -----
Excess risk-based capital............ $ 70,379 2.98%
======== =====
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, 1995, the Bank had loans sold with
recourse or subordination totaling $248 million on which it was
required to hold additional capital. The amount of capital
required to be maintained against such off-balance sheet loans
was $13 million.
In August 1993, the OTS adopted a final rule incorporating
an interest-rate risk component into the risk-based capital
regulation. Under the rule (implementation of which has been
temporarily suspended) 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.
20
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
became effective 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, 1995, as required by the regulations,
resulted in an interest rate risk measurement of 0.39% at
December 31, 1995, 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. The OTS also 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.
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.
The Federal Deposit Insurance Corporation Improvement Act of
1991 ("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
21
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 $603
thousand in 1995, from $547 thousand in 1994 and $531 thousand in
1993.
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.
Federal legislation has been proposed which would merge the
BIF and SAIF funds. If this occurs, it is expected that the
premiums paid by thrifts would decrease substantially after an
initial one-time assessment. However, it is not known if or when
such legislation may be enacted.
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,
1995 were 5.2% and 3.6%, 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. New CRA
regulations which were enacted in late 1995 will take effect
starting in 1996. Under the new regulations, institutions will
be evaluated based on: (i) performance in lending in their
assessment areas; (ii) the provision of deposit and other
community services in their assessment areas; and (iii) the
investment in housing-related and other qualified community
investments. Under the new regulations, 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.
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.
22
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.
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, 1995, 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
institutions are authorized, without quantitative limits, to make
loans on the security of liens upon residential real property and
to invest in a variety of instruments such as obligations of, or
fully guaranteed as to principal and interest by, the United
States; stock or bonds of the FHLB; certain mortgages,
obligations, or other securities which have been sold by FHLMC or
FNMA; and certain securities issued by, or fully guaranteed as to
principal and interest by, the Student Loan Marketing Association
and the Government National Mortgage Association. Certain other
types of loans or investments may be acquired subject to
quantitative limits: secured or unsecured loans for commercial,
corporate, business, or agricultural purposes, 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 capital and surplus, plus an additional
10% if the loan is collateralized by certain readily marketable
collateral. The Bank's loans were within the LTOB limitations at
December 31, 1995.
Savings institutions and their subsidiaries are prohibited
from acquiring or retaining any corporate debt security that, at
the time of acquisition, is not rated in one of the four highest
rating categories by at least one nationally recognized
statistical rating organization. The Bank has no impermissible
equity investments in its investment portfolio.
Safety and Soundness Standards. In 1995, the OTS enacted
regulations containing "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 guidelines include
standards relating to internal controls, information systems and
internal audit systems, loan documentation, credit underwriting,
interest rate exposure, asset growth, executive compensation,
maximum ratios of classified assets to capital, and minimum
earnings sufficient to absorb losses without impairing capital.
A savings institution not meeting one or more of such standards
is 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.
23
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's annual management report on the effectiveness of
compliance with these measures and the independent accountants'
attestation as to the effectiveness of the Bank's internal
controls will be made available in March of 1996.
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.
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. The Bank met
the "well-capitalized" standards throughout 1995 and was eligible
to accept brokered deposits without a waiver.
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, 1995, with 95.5% of its portfolio assets comprised
of "qualified thrift investments."
Transactions with Affiliates. Federal savings institutions
are subject to the provisions of Sections 23A and 23B of the
Federal Reserve Act. Section 23A restricts loans or extensions
of credit to, or investments in, or certain other transactions
with, affiliates and as to the amount of advances to third
parties collateralized by the securities or obligations of
affiliates. Section 23B generally requires that transactions
with affiliates must be on a non-preferential basis. Federal
savings institutions may not make any extension of credit to an
affiliate which is engaged in activities not permitted by bank
holding companies, and may not invest in securities issued by an
affiliate (except with respect to a subsidiary). The Company is
an "affiliate" of the Bank for the purposes of these provisions.
Transactions with Insiders. Federal savings institutions
are subject to the restrictions of Sections 22(g) and (h) of the
Federal Reserve Act which, among other things, restrict the
amount of extensions of credit which may be made to executive
officers, directors, certain principal shareholders (collectively
"insiders"), and to their related interests. When lending to
insiders, a savings association must follow credit underwriting
procedures that are not less stringent than those applicable to
comparable transactions with persons outside the association.
The amount that a savings association can lend in the aggregate
to insiders (and to their related interests) is limited to an
amount equal to the association's core capital and surplus.
Insiders are also prohibited from knowingly receiving (or
knowingly permitting their related interests to receive) any
extensions of credit not authorized under these statutes.
24
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, 1995 was 3% of the first
$47.7 million (increasing to $49.8 million as of January 1, 1996)
of such accounts and 10% (subject to adjustment by the Federal
Reserve Board between 8% and 14%) of the balance of such
accounts. The Bank is in compliance with these requirements.
Taxation. The Company, the Bank and its subsidiaries file a
consolidated federal income tax return on a calendar year basis
using the accrual method. The maximum marginal federal tax rate
is currently 35%.
The Bank 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. 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 1995, 1994 and 1993, 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.
Proposed legislation pertaining primarily to the merger of
the BIF and SAIF insurance funds also contains provisions which
would eliminate the tax bad debt deduction for the year beginning
January 1, 1996. However, existing tax bad debt reserves
established prior to 1987 would be permitted to be carried under
a proposed "grandfathering" treatment. Post-1987 reserves would
have to be eliminated over a period of several years (presently
proposed to be six years). The Company cannot predict if or in
what form such legislation may be enacted or any potential effect
on its Consolidated Statements of Operations.
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 the Company
that are permitted under federal regulations exceed the Bank's
earnings and profits (as computed for federal income tax
purposes), such distributions would be treated for tax purposes
as being made out of the Bank's 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, 1995, the Bank's
excess bad debt reserve was zero. At December 31, 1995, the
25
Bank's earnings and profits (as computed for federal income tax
purposes) were approximately $128 million.
At December 31, 1995, the Bank had $36.2 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 $42.8 million at December 31, 1995.
The Bank is subject to an alternative minimum tax if such
tax is larger than the tax otherwise payable. Generally,
alternative minimum taxable income is a taxpayer's regular
taxable income, increased by the taxpayer's tax preference items
for the year and adjusted by computing certain deductions in a
special manner which negates the acceleration of such deductions
under the regular tax. The adjusted income is then reduced by an
exemption amount and is subject to tax at a 20% rate. 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 1995, 1994 or 1993.
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 1995, 1994
and 1993 were 11.300%, 11.469% and 11.107%, respectively.
The Internal Revenue Service ("IRS") is currently examining
tax years 1991 and 1992. During 1994, the IRS completed its
examination of the Company's consolidated federal income tax
returns for tax years 1984 through 1986 and, in 1995, completed
its examination of tax returns for 1987 and 1988. In early 1996,
the IRS completed its examination of tax returns for 1989 and
1990. The IRS has proposed adjustments primarily related to
temporary differences as to the recognition of certain taxable
income and expense items. The Company has filed formal protests
with the IRS to take exception to most of the proposed
adjustments for all 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 of certain income
and expense items could result in interest due to the IRS and
FTB. Although the outcome of the exams is not known at this
time, and it may take several years to resolve any disputed
matters, the Company has recorded charges of $3.5 million, $3.2
million and $1.8 million in 1995, 1994 and 1993, respectively, as
interest on possible tax adjustments. At December 31, 1995, the
Company had $14.1 million 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 the
liability as of this date.
26
ITEM 2--PROPERTIES
At December 31, 1995, 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 County 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.
ITEM 3--LEGAL PROCEEDINGS
The Company is involved as a plaintiff or defendant in
various legal actions incident to its business, none of which are
believed by management to be material to the Company.
ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
27
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, 1996, the Company had
10,614,402 shares of its common stock outstanding, representing
approximately 1,189 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 the Company totaling $5.9
million, $5.0 million and $3.0 million in 1995, 1994 and 1993,
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:
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
FIVE YEAR CONSOLIDATED SUMMARY OF OPERATIONS
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
(Dollars In Thousands, Except For Share Data)
For the Year Ended December 31:
Interest income...................... $ 301,735 $ 235,424 $ 229,445 $ 255,612 $ 296,530
Interest expense..................... 224,077 157,655 131,616 151,510 195,756
Net interest income.................. 77,658 77,769 97,829 104,102 100,774
Provision for loan losses............ 28,376 85,700 67,679 41,384 11,833
Other income......................... 8,725 11,264 12,054 12,634 7,059
Non-interest expense.................. 45,903 45,496 45,298 46,125 40,482
Earnings (loss) before income
taxes (benefit) and cumulative
effect of change in accounting
principle........................ 12,104 (42,163) (3,094) 29,227 55,518
Income taxes (benefit)............. 5,569 (17,699) (1,046) 11,198 27,091
Earnings (loss) before
cumulative effect of change
in accounting principle........... 6,535 (24,464) (2,048) 18,029 28,427
Net earnings (loss)................ 6,535 (24,464) (2,048) 22,104 28,427
Earnings (loss) per share
before cumulative effect of
change in accounting princi-
ple.............................. 0.61 (2.32) (0.20) 1.66 2.61
Earnings (loss) per share 1........ 0.61 (2.32) (0.20) 2.04 2.61
End of Year:
Loans receivable..................... 3,059,780 3,072,309 2,715,663 2,496,700 2,368,796
Mortgage-backed securities........... 835,448 821,317 708,283 769,155 644,264
Investment securities................ 76,184 84,052 103,836 43,736 111,172
Total assets........................ 4,139,737 4,157,414 3,661,117 3,446,573 3,287,059
Deposits........................... 2,205,036 2,298,914 2,305,480 1,982,745 1,740,103
Borrowings......................... 1,666,943 1,604,821 1,093,149 1,196,241 1,280,372
Liabilities......................... 3,943,446 3,972,727 3,452,825 3,239,062 3,096,883
Stockholders' equity................. 196,291 184,687 208,292 207,511 190,176
Book value per share 1............... 18.49 17.42 19.78 19.98 18.28
Selected Ratios:
Return on average assets........... 0.16% (0.64)% (0.06)% 0.65% 0.90%
Return on average equity........... 3.47% (12.78)% (1.01)% 11.09% 16.09%
Ratio of non-performing
assets to total assets............. 2.33% 2.23% 3.23% 2.62% 1.83%
Other Data:
Number of Bank full service
branches........................... 25 25 25 24 18
- ----------
1 Adjusted for the five-for-four stock split declared September 26, 1991.
Also see summarized results of operations on a quarterly
basis for 1995, 1994 and 1993 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.
Net earnings of $6.5 million or $0.61 per share were
recorded in 1995. Net losses of $24.5 million and $2.0 million
were reported in 1994 and 1993, respectively. On a per share
basis, the losses during 1994 and 1993 were $2.32 and $0.20,
respectively. The Company's results over the last three years
have been impacted by the prolonged economic recession in
Southern California. Loan charge-offs were $39.7 million, $45.4
million, and $48.6 million during 1995, 1994 and 1993,
respectively. The Company also transferred $21.4 million and
$32.5 million to valuation allowances for impaired loans during
1995 and 1994, respectively. Loan charge-offs during 1994
include $13.8 million in losses directly attributable to the
January 17, 1994 earthquake in Southern California. Charge-offs
related to the 1994 earthquake during 1995 were $2.4 million.
Certain key financial ratios for the Company are presented
below:
Average
Return on Return on Equity to
Average Average Average
Assets Equity Assets
--------- --------- ---------
1995................................. 16% 3.47% 4.49%
1994................................. (.64) (12.78) 4.97
1993................................. (.06) (1.01) 5.61
1992................................. .65 11.09 5.86
1991................................. .90 16.09 5.63
Core earnings reflect the Company's results from basic
operations and were $45.6 million in 1995, $46.5 million in 1994
and $62.2 million in 1993. 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. Non-recurring items are excluded from
core earnings. Core earnings decreased in 1995 compared to 1994
primarily as a result of decreased loan servicing fees due to
payoffs of loans serviced for others. Core earnings decreased in
1994 compared to 1993 primarily due to a decline in net interest
income.
Non-performing assets (primarily loans 90 days past due or
in foreclosure plus foreclosed real estate) were $96.6 million or
2.33% of total assets at December 31, 1995. This figure compares
to $92.6 million or 2.23% of total assets at December 31, 1994
and $118.2 million or 3.23% of total assets at December 31, 1993.
The increase in non-performing assets during 1995 was due
primarily to growth in foreclosed real estate and a small
increase in non-performing loans. The decrease during 1994
compared to 1993 was due to a bulk sale of $29.6 million in non-
performing loans and $2.3 million in foreclosed real estate.
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 four years.
The Company issued $50 million in 10-year Notes during 1994.
The net proceeds were contributed to the Bank as capital. At
December 31, 1995, the Bank's regulatory risk-based capital ratio
increased to 10.98% and the tangible and core capital ratios
increased to 5.63%. The Bank met the regulatory capital standards
to be deemed "well-capitalized" at December 31, 1995.
30
The Bank's deposits are insured by the SAIF up to a maximum
of $100,000 for each insured depositor. The FDIC administers a
separate fund, BIF, applicable to commercial banks and certain
other non-SAIF insured institutions. Legislation is currently
under consideration by Congress which includes a one-time
assessment for SAIF members such as the Bank. Should legislation
be enacted in its currently contemplated form, the Bank's one-
time assessment would be approximately $11 million, net of tax,
based on the Bank's insured deposits at March 31, 1995 and an
assumed assessment rate of 85 basis points. Additionally, once
the SAIF has been recapitalized through the one-time assessment,
the Bank's deposit insurance premium assessments would be reduced
from the current rate. The currently proposed legislation has
evolved significantly over recent months and may continue to
change until final legislation is enacted, if ever. Moreover,
there can be no assurance that a premium reduction will occur.
Assuming the proposed one-time special assessment became law
in 1996 and was immediately charged against the Company's results
of operations, the one-time assessment would have a material
adverse effect on the Bank's 1996 results of operations. However,
the Bank has sufficient regulatory capital to continue to be
classified as "well-capitalized" by its regulators following such
an assessment. In addition, the Bank would not face any
liquidity issues as a result of such an assessment.
Proposed legislation is currently under consideration by
Congress which would significantly change the federal income tax
law affecting the bad debt reserves of savings institutions. This
proposed legislation would eliminate the reserve method for
computing bad debt deductions beginning
in 1996 and might require the recapture of bad debt reserves
established after 1987 under varying factual situations. The
proposed legislation is currently under review and may change
significantly before final legislation is enacted, if ever.
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 susceptible to changes in the economic environment and market
conditions. Management believes that the allowance for loan
losses as of December 31, 1995 was adequate based on information
available at that time. A continuation of the current economic
climate could increase the likelihood of losses due to credit
and market risks. This could create the need for additional loan
loss provisions.
Regulatory risk is the risk that the regulators will reach
different conclusions than management regarding the financial
position of the Company. The OTS examines the Bank's financial
results annually. The OTS reviews the allowance for loan losses
and may require the Bank to adjust the allowance based on
information available at the time of their examination.
31
Other Risks
The Bank has been named as a defendant in various lawsuits,
none of which is expected to have a materially adverse effect on
the Company. The outcome of the lawsuits cannot be predicted but
the Bank intends to vigorously defend the actions.
Inflation substantially impacts the financial position and
operations of financial intermediaries, such as banks and savings
institutions. These entities primarily hold monetary assets and
liabilities and, as such, can experience significant purchasing
power gains and losses over relatively short periods of time. In
addition, interest rate changes during inflationary periods
change the amounts and composition of assets and liabilities held
by financial intermediaries and could result in regulatory
pressure for additional equity investment.
COMPONENTS OF EARNINGS
Net Interest Income
Net interest income is the primary component of the
Company's earnings. The chief determinants of net interest income
are the dollar amounts of interest-earning assets and
interest-bearing liabilities and the interest rates earned or
paid thereon. The greater the excess of average interest-earning
assets over average interest-bearing liabilities, the more
beneficial the impact on net interest income. The excess of
average interest-earning assets over average interest-bearing
liabilities was $63.1 million in 1995, $53.9 million in 1994 and
$90.8 million in 1993. The improvement in 1995 compared to 1994
was due to increased average earning assets, as a result of a
decline in average non-performing assets. The compression in 1994
was due to the Company's net loss in that year, offset by a small
decrease in average non-performing assets.
The Company's net interest income is also impacted by a
three month time lag before changes in the cost of funds can be
passed along to monthly adjustable rate loan customers. Savings
and borrowing costs adjust to market rates immediately while it
takes several months for the loan yield to adjust. This time lag
decreases the Company's net interest income during periods of
rising interest rates. The reverse is true during periods of
declining interest rates. (See "Asset-Liability Management" for
further discussion.)
32
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:
1995 1994 1993
---------- ---------- ----------
(Dollars In Thousands)
Average loans and mortgage-backed
securities 1............................ $3,940,247 $3,598,561 $3,331,352
Average investment securities............. 176,131 149,907 134,986
---------- ---------- ----------
Average interest-earning assets........... 4,116,378 3,748,468 3,466,338
---------- ---------- ----------
Average savings deposits.................. 2,245,178 2,273,065 2,065,867
Average borrowings........................ 1,808,072 1,421,522 1,309,658
---------- ---------- ----------
Average interest-bearing liabilities...... 4,053,250 3,694,587 3,375,525
Excess of interest-earning assets over ---------- ---------- ----------
interest-bearing liabilities............ $ 63,128 $ 53,881 $ 90,813
========== ========== ==========
Yields earned on average interest
earning assets......................... 7.23% 6.20% 6.56%
Rates paid on average interest-
bearing liabilities..................... 5.51 4.27 3.89
Net interest rate spread.................. 1.72 1.93 2.67
Effective net spread...................... 1.80 1.99 2.77
Total interest income 2................... $ 297,683 $ 232,368 $ 227,521
Total interest expense 2.................. 223,501 157,625 131,325
---------- ---------- ----------
Net interest income....................... $ 74,182 $ 74,743 $ 96,196
========== ========== ==========
- -----------
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 FHLB stock and miscellaneous interest income and
expense were not considered in this analysis.
The net interest spread decreased in 1995 compared to 1994
primarily due to higher interest rates paid during 1995. Although
the FRB decreased its Federal Funds rate by 0.25% in July and
December of 1995, these adjustments only offset the 0.50%
increase that occurred in February of the same year. The FRB
increased interest rates six times during 1994 (by 2.50%);
however, interest rates were at their lowest point in several
years at the beginning of 1994.
The dollar amount of net interest income remained virtually
unchanged during 1995 compared to 1994 because the impact of the
lower net interest spread during 1995 was offset by growth in
average interest-earning assets. Average interest-earning assets
increased during 1995 compared to 1994 due to substantial new
loan originations which occurred late in 1994. Average interest-
earning assets also increased during 1995 compared to 1994 due to
improvement in average non-performing assets which decreased to
2.29% in 1995 from 3.02% in 1994.
33
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, 1995 December 31, 1994
Versus Versus
December 31, 1994 December 31, 1993
----------------------------- --------------------------------
Change Due To Change Due To
----------------------------- --------------------------------
Rate Volume Total Rate Volume Total
------- ------- ------- ------- -------- --------
(Dollars In Thousands)
Interest Income:
Loans and mortgage-backed
securities.................. $40,373 $22,651 $63,024 $17,139 $(13,445) $ 3,694
Investments................... 891 1,400 2,291 730 423 1,153
------- ------- ------- ------- -------- --------
Total interest income....... 41,264 24,051 65,315 17,869 (13,022) 4,847
------- ------- ------- ------- -------- --------
Interest Expense:
Deposits...................... 22,698 (1,087) 21,611 7,947 1,851 9,798
Borrowings.................... 22,572 21,693 44,265 4,850 11,652 16,502
------- ------- ------- ------- -------- --------
Total interest expense...... 45,270 20,606 65,876 12,797 13,503 26,300
Net change in ------- ------- ------- ------- -------- --------
interest income (expense)..... $(4,006) $ 3,445 $ (561) $ 5,072 $(26,525) $(21,453)
======= ======= ======= ======= ======== ========
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 and
expense were not considered in this analysis.
Interest expense on borrowings includes accruals of $3.5
million, $3.2 million and $1.8 million, during 1995, 1994 and
1993, 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.
34
Interest Rate Spreads and Yield on Average Interest-Earning Assets
Year Ended December 31,
---------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
--------------- --------------- --------------- --------------- ---------------
During End of During End of During End of During End of During End of
Period Period Period Period Period Period Period Period Period Period
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Weighted average yield
on loans and mortgage-
backed securities............... 7.31% 7.63% 6.25% 6.50% 6.64% 6.20% 7.92% 7.25% 9.96% 9.20%
Weighted average yield
on investment portfolio 1...... 5.56 5.15 5.00 5.08 4.70 5.16 4.24 6.18 6.03 4.90
Weighted average yield
on all interest-earning
assets......................... 7.23 7.59 6.20 6.47 6.56 6.17 7.78 7.24 9.82 9.05
Weighted average rate
paid on deposits............... 4.86 4.89 3.85 4.49 3.76 3.60 4.66 3.97 6.70 5.74
Weighted average rate
paid on borrowings and
FHLB advances.................. 6.32 6.11 4.93 6.04 4.09 3.99 5.10 4.48 7.08 5.47
Weighted average rate
paid on all interest-
bearing liabilities............ 5.51 5.41 4.27 5.12 3.89 3.73 4.83 4.16 6.85 5.63
Effective net spread2............ 1.80 1.99 2.77 3.16 3.29
Interest rate spread3............ 1.72% 2.18% 1.93% 1.35% 2.67% 2.44% 2.95% 3.08% 2.97% 3.42%
- ----------
1 Dividends on FHLB 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-earning assets less
weighted average rate paid on all interest-bearing
liabilities.
Loss Provisions
The Company recorded $28.4 million in loan loss provisions
during 1995 due to continued weakness in the Southern California
real estate markets. Another $2.1 million in loss provisions
were recorded as an adjustment to gain (loss) on sale of loans.
This compares with $85.7 million recorded in 1994 and $67.7
million in 1993. The Company recorded its largest provisions for
loan losses during 1994 and 1993 in response to the economic
recession in Southern California. The 1994 provision also
includes amounts provided for losses resulting from the
earthquake which occurred in Southern California on January 17,
1994.
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 $42.9
million and $55.4 million at December 31, 1995 and December 31,
1994, respectively. The decrease in general valuation allowances
from 1994 to 1995 is consistent with the decrease in charge-offs
from 1.58% of average loans outstanding in 1994 to 1.28% of
average loans outstanding in 1995. The Company also maintains
valuation allowances for impaired loans and loans sold with
recourse. See "Allowances for Loan Losses." Management performs
regular risk assessments of the Bank's loan portfolio to maintain
appropriate general valuation allowances.
Additional loan loss provisions may also be required to the
extent that charge-offs are recorded against the valuation
allowance for impaired loans or the general valuation allowance.
Loan charge-offs decreased to $39.7 million in 1995 from $45.4
million in 1994 and $48.6 million in 1993. Charge-offs for 1995
include $2.4 million directly related to the 1994 earthquake.
Charge-offs for 1994 include 13.8 million directly related to the
earthquake. Charge-offs are due primarily to declines in the
estimated value of the underlying collateral of the Bank's loans.
The Southern California area has experienced declines in real
estate values and other economic problems for the past several
35
years resulting from increased unemployment, reductions in
defense spending and natural disasters. Multi-family properties
have been particularly affected in the current recession. 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.
Non-interest Income
Loan and other fees decreased to $6.1 million in 1995
compared to $7.0 million in 1994 and $6.5 million in 1993
primarily as a result of decreased servicing income due to
prepayments in the portfolio of loans serviced for others and
decreased miscellaneous loan fees due to the decline in loan
originations in 1995 compared to 1994 and 1993.
Gain (loss) on sale of loans and mortgage-backed securities
decreased to a loss of $1.6 million in 1995 from gains of $319
thousand in 1994 and $4.3 million in 1993. The 1995 loss includes
a $2.1 million provision for loans that had been sold with
recourse in prior years. The 1993 gain includes a $2.0 million
gain on the sale of a mortgage-backed security from the Bank's
available-for-sale portfolio. Loans originated for sale declined
during 1995 and 1994 due to increased mortgage banking
competition in the current economic environment.
Real estate operations resulted in a net gain of $2.0
million in 1995 compared to a net gain of $2.3 million in 1994
and a net loss of $437 thousand in 1993. The gains recorded in
1995 and 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. The Bank normally sells
foreclosed properties within a few months after acquisition,
usually after the properties have been rehabilitated.
Other operating income, which increased to $2.2 million in
1995 from $1.6 million in 1994 and $1.7 million in 1993, consists
primarily of fees earned for services provided by the retail
savings branches. Fees earned by retail savings branches
increased 44% in 1995 compared to 1994 directly as a result of
management efforts to improve fee income. Other operating income
during 1993 includes additional trustee fees earned due to the
high level of foreclosures in that year.
Non-interest Expense
Non-interest expense decreased to 1.10% of average total
assets in 1995 from 1.18% of average total assets in 1994 and
1.26% of total assets in 1993. The decreasing trend in non-
interest expense over the last three years resulted from
management's ongoing cost control programs.
Salary and benefit costs increased only 1% in 1995 compared
to 1994. Decreased salary and related payroll and benefit
insurance costs caused by attrition were offset by year-end
performance bonuses and an increase in the contribution to the
Employee Stock Ownership Plan ("ESOP"). The decrease in 1994
compared to 1993 was due to lower amounts contributed to the
bonus and profit sharing plans in 1994.
Occupancy expense decreased 6% in 1995 compared to 1994 due
to decreased maintenance and equipment costs and the
consolidation of existing loan offices. Occupancy expense
increased by 2% in 1994 compared to 1993 due to rent escalation
clauses. One loan office was closed and consolidated with an
existing loan office in 1995. Two loan offices were closed and
consolidated with existing loan offices during 1994.
Other operating expenses decreased 7% in 1995 compared to
1994 due primarily to lower insurance, legal and contribution
expenses. The 5% increase in 1994 compared to 1993 was primarily
due to increased data processing, goodwill and insurance costs.
36
Advertising expense decreased by 7% in 1995 and 21% in 1994
due to cost containment efforts and the realignment of costs to
reflect business activity in 1995 and 1994.
Federal deposit insurance increased by 24% in 1995 compared
to 1994 due to a higher average assessment rate in 1995 compared
to 1994. The increase of 11% in 1994 compared to 1993 was due to
growth in average savings deposits.
The following table details the components of non-interest
expense for the periods indicated:
Non-Interest Expense
Year Ended December 31,
---------------------------------------------------
1995 1994 1993 1992 1991
------- ------- ------- ------- -------
(Dollars In Thousands)
Salaries and Employee Benefits:
Salaries.............................. $16,436 $16,887 $16,557 $15,387 $13,055
Incentive compensation................ 899 1,363 1,425 1,635 1,426
Payroll taxes......................... 1,400 1,498 1,388 1,225 994
Employee benefit insurance............ 1,180 1,225 1,332 1,244 1,230
Bonus compensation.................... 1,001 300 633 1,751 2,385
Profit sharing........................ 500 200 200 1,007 1,510
Pension............................... 436 481 468 475 350
Other salaries and benefits........... 1,193 780 877 729 595
------- ------- ------- ------- -------
23,045 22,734 22,880 23,453 21,545
Occupancy: ------- ------- ------- ------- -------
Rent.................................. 4,250 4,246 3,898 3,390 2,942
Equipment............................. 885 1,246 1,285 1,522 1,290
Maintenance costs.................... 460 594 741 690 542
Other occupancy....................... 663 600 892 1,040 940
------- ------- ------- ------- -------
6,258 6,686 6,816 6,642 5,714
Other Operating Expense: ------- ------- ------- ------- -------
Insurance............................. 528 748 570 556 537
Goodwill.............................. 996 996 650 531 269
Data processing....................... 1,012 1,094 895 2,213 1,160
Contributions......................... 341 412 591 751 761
Professional services................. 777 732 799 709 636
Supervisory exam...................... 603 547 531 482 433
Other operating costs................. 4,110 4,424 4,458 4,397 3,806
------- ------- ------- ------- -------
8,367 8,953 8,494 9,639 7,602
------- ------- ------- ------- -------
Federal deposit insurance............. 6,400 5,151 4,622 4,156 3,890
Advertising........................... 1,833 1,972 2,486 2,235 1,731
------- ------- ------- ------- -------
Total............................... $45,903 $45,496 $45,298 $46,125 $40,482
======= ======= ======= ======= =======
Non-interest expense as
% of average assets................. 1.10% 1.18% 1.26% 1.36% 1.28%
==== ==== ==== ==== ====
37
BALANCE SHEET ANALYSIS
Consolidated assets at the end of 1995 were $4.1 billion,
slightly less than $4.2 billion at the end of 1994. The decline
in consolidated assets during 1995 was the result of sales of
loans and a reduction in investment securities. Also, loan
originations during 1995 were substantially offset by loan
payoffs during the year. Assets increased 14% in 1994 compared to
1993 due to growth in the loan portfolio.
Loan Portfolio
At the end of 1995, 97% 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.")
The Board of Directors authorized the origination of fixed-
rate loans up to an aggregate limit of $120 million. Management
believes that the limited origination of fixed-rate loans will
enhance the Company's overall return on assets and improve loan
originations in this economy. The initial interest rate is fixed
for 3, 5 or 7 years. At the end of the fixed period, the
interest rate becomes adjustable based upon changes in the one-
month LIBOR. Loans originated under this program in 1995 were
insignificant.
The Bank began a mortgage banking program near the end of
1993 to take advantage of borrower demand for fixed rate and
other loan products not kept in its loan portfolio. Under this
program, competitively priced loans are originated for immediate
sale in the secondary market. To date, no significant amounts of
loans have been originated for this program due to decreased
borrower demand for real estate loans in the current recession.
Loans sold under the mortgage banking program totaled $37
million, $44 million and $77 million in 1995, 1994 and 1993,
respectively.
Loans originated and purchased totaled $299 million in 1995,
$909 million in 1994 and $746 million in 1993. Included in the
1994 amount is $59 million in single family adjustable rate
mortgages purchased from other financial institutions. In 1995,
loans made on the security of single family properties (one to
four units) comprised 79% of the dollar amount of new loan
originations; loans made on the security of multi-family
properties comprised 19% of new originations; and loans made on
the security of commercial real estate properties comprised less
than 1% of new originations. No construction loans and an
insignificant amount of consumer loans were originated in 1995.
Adjustable rate mortgages comprised 90% of new loan activity
during 1995 compared to 97% in 1994.
The following table details loan originations by loan type
for the periods indicated:
Loan Originations by Type
Year Ended December 31,
--------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(Dollars In Thousands)
Single Family (one to four units)...... $237,508 $734,438 $499,560 $590,152 $357,906
Multi-Family........................... 55,832 164,788 236,211 237,720 273,194
Commercial............................. 4,881 9,858 9,638 9,104 14,462
Other.................................. 1,031 230 419 3,779 1,692
-------- -------- -------- -------- --------
Total................................ $299,252 $909,314 $745,828 $840,755 $647,254
======== ======== ======== ======== ========
38
Loans originated upon the sale of the Bank's real estate
owned were $49.3 million or 16% of total originations in 1995.
$3.7 million of these loans were originated based on the security
of single family properties, $42.7 million were originated based
on the security of multi-family properties and $2.9 million were
based on the security of commercial properties.
The Bank converted $59.7 million of its loans into
mortgage-backed securities in 1995 for use in securitized
borrowings (reverse repurchase agreements). In 1994, $198.1
million in loans were securitized compared with $111.7 million in
1993. Securitized loans have a lower risk weighting for
regulatory risk-based capital purposes. In exchange for the
enhanced credit risk associated with mortgage-backed securities,
the Bank pays guarantee fees to FHLMC and/or FNMA.
The Bank's adjustable rate loan products often provide for
first year monthly payments that are lower than the fully-indexed
interest and principal due. Any interest not fully paid by such
lower first year payments is added to the principal balance of
the loan. This causes negative amortization until payments
increase to cover interest and principal 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 foreclosure experience on loans with
negative amortization has been no different from 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 $6.7 million at December 31,1995 compared to $889
thousand at December 31, 1994 and $602 thousand at December 31,
1993.
The Bank does not normally lend in excess of 90% of the
appraised collateral value on adjustable mortgage loans ("AMLs").
Where the Bank does lend in excess of 90% of the appraised value,
additional fees and rates are charged 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 originated under this program
for which there is no private mortgage insurance totaled $133
million at December 31, 1995 compared to $129 million at December
31, 1994 and $155 million at December 31, 1993. See "Business -
Interest Rates, Terms and Fees."
Loan Composition
Loans based on the security of single family properties (one
to four units) comprise the largest category of the Bank's loan
portfolio (including mortgage-backed securities). The loan
portfolio also includes loans secured by multi-family and
commercial properties. At December 31, 1995, approximately 60% of
the loan and mortgage-backed securities 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 starting in
1994 and continuing in 1995. Approximately 19% of loan
originations in 1995 were multi-family loans compared with 18%
during 1994. Multi-family loans originated upon the sale of
real estate were approximately 14% and 5% of total loan
originations during 1995 and 1994, respectively. 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 secured by
multi-family properties. Loans sold with recourse totaled $248
million as of December 31, 1995, $278 million as of December 31,
39
1994, and $318 million as of December 31, 1993. 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.
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,
------------------------------------------------------------------
1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
(Dollars In Thousands)
REAL ESTATE LOANS:
First trust deed residential loans:
One unit............................. $1,221,927 $1,192,251 $ 862,340 $ 769,367 $ 760,903
Two to four units.................... 351,942 350,718 340,035 296,550 258,825
Five or more units................... 1,344,866 1,357,251 1,298,794 1,181,098 1,078,159
---------- ---------- ---------- ---------- ----------
Residential loans.................. 2,918,735 2,900,220 2,501,169 2,247,015 2,097,887
OTHER REAL ESTATE LOANS:
Commercial and industrial............ 221,982 246,340 245,387 256,474 263,183
Second trust deeds................... 2,213 20,401 24,606 29,441 35,245
Other................................ 3,157 4,793 5,861 10,733 4,193
---------- ---------- ---------- ---------- ----------
Real estate loans.................. 3,146,087 3,171,754 2,777,023 2,543,663 2,400,508
NON-REAL ESTATE LOANS:
Manufactured housing................. 1,938 2,439 2,763 3,481 4,031
Deposit accounts..................... 1,104 1,301 1,086 1,184 1,615
Consumer............................. 359 506 964 1,494 2,705
---------- ---------- ---------- ---------- ----------
Loans receivable................... 3,149,488 3,176,000 2,781,836 2,549,822 2,408,859
LESS:
Allowance for loan losses............ 42,876 55,353 46,900 27,854 13,937
Valuation allowances -
impaired loans...................... 26,101 23,887 - - -
Unrealized loan fees............... 20,731 24,451 19,273 25,268 26,126
---------- ---------- ---------- ---------- ----------
Net loans receivable............... 3,059,780 3,072,309 2,715,663 2,496,700 2,368,796
FHLMC AND FNMA MORT-
GAGE-BACKED SECURITIES:
Secured by single family
dwellings........................... 810,980 794,126 678,884 660,673 524,969
Secured by multi-family
dwellings........................... 24,468 27,191 29,399 108,482 119,295
---------- ---------- ---------- ---------- ----------
Mortgage-backed securities......... 835,448 821,317 708,283 769,155 644,264
---------- ---------- ---------- ---------- ----------
TOTAL............................ $3,895,228 $3,893,626 $3,423,946 $3,265,855 $3,013,060
========== ========== ========== ========== ==========
40
ASSET QUALITY
Asset Quality Ratios
The following table sets forth certain asset quality
ratios of the Bank for the periods indicated:
December 31,
----------------------------------------------
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
Non-performing Loans to Loans Receivable 1....... 2.44% 2.39% 3.28% 2.61% 2.16%
Non-performing Assets to Total Assets 2.......... 2.33% 2.23% 3.23% 2.62% 1.83%
Loan Loss Allowances to Non-performing
Loans 3........................................ 65.62% 78.27% 52.23% 37.54% 31.31%
General Loss Allowances to Assets
with Loss Exposure 4........................... 1.35% 1.73% 1.46% 0.88% 0.53%
General Loss Allowances to Total Assets with
Loss Exposure 5................................ 1.52% 1.82% 1.48% 0.93% 0.49%
- ----------
1 Non-performing loans are net of valuation allowances related
to those loans. Loans receivable exclude mortgage-backed
securities and are before deducting unrealized loan fees,
general valuation allowances and valuation allowances for
impaired loans.
2 Non-performing assets are net of valuation allowances related
to those assets.
3 The Bank's loan loss allowances, including valuation
allowances for non-performing loans and general valuation
allowances but excluding general valuation allowances for
loans sold by the Bank with full or limited recourse. Non-
performing loans are before deducting valuation allowances
related to those loans.
4 The Bank's general valuation allowances, excluding general
valuation allowances for loans sold with full or limited
recourse. The Bank's assets with loss exposure include
primarily loans and real estate owned, but exclude mortgage-
backed securities.
5 The Bank's general valuation allowances, including general
valuation allowances for loans sold with full or limited
recourse. Assets with loss exposure include the Bank's loan
portfolio plus loans sold with recourse, but exclude mortgage-
backed securities.
41
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 of total non-performing
assets. Also shown is the ratio of non-performing assets to
total assets.
Non-Performing Assets
December 31,
----------------- ----------------- ----------------- ----------------- ----------------
1995 1994 1993 1992 1991
----------------- ----------------- ----------------- ----------------- ----------------
$ % $ % $ % $ % $ %
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
(Dollars In Thousands)
Real Estate Owned:
Single Family............ $ 7,252 7.50% $ 5,711 6.17% $ 10,052 8.50% $ 8,268 9.16% $ 3,015 5.00%
Multi-Family............. 9,827 10.17 10,647 11.50 16,015 13.55 15,590 17.27 4,881 8.10
Commercial............... 2,544 2.63 366 0.39 327 0.28 - - 276 0.46
Other.................... 78 0.08 - - 484 0.41 - - - -
Total Real Estate -------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Owned.................. 19,701 20.38 16,724 18.06 26,878 22.74 23,858 26.43 8,172 13.56
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Non-Performing Loans:
Single Family............ 25,991 26.89 13,041 14.08 25,317 21.41 24,634 27.28 21,441 35.57
Multi-Family............. 69,579 72.00 60,213 65.02 70,207 59.39 42,481 47.05 34,347 56.99
Commercial............... 3,313 3.43 20,986 22.66 10,307 8.72 3,623 4.01 1,536 2.55
Other.................... 220 0.23 245 0.26 245 0.20 271 0.30 194 0.33
Less Valuation
Allowances............. (22,159) (22.93) (18,596) (20.08) (14,732) (12.46) (4,582) (5.07) (5,422) (9.00)
Total Non-Performing -------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Loans.................... 76,944 79.62 75,889 81.94 91,344 77.26 66,427 73.57 52,096 86.44
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total.................... $ 96,645 100.00% $ 92,613 100.00% $118,222 100.00% $ 90,285 100.00% $ 60,268 100.00%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
Ratio of Non-Performing
Assets To Total Assets: 2.33% 2.23% 3.23% 2.62% 1.83%
==== ==== ==== ==== ====
The increase in non-performing loans in 1995 compared to
1994 was due primarily to growth in multi-family and single
family delinquent loans offset by a decrease in delinquent
commercial real estate loans. The decrease in non-performing
loans in 1994 compared to 1993 was due primarily to a $29.6
million bulk sale of non-performing loans.
The increase in real estate owned in 1995 compared to 1994
was due to additional foreclosures on single family and
commercial real estate loans. The decrease in real estate owned
in 1994 compared to 1993 was due to a decline in foreclosure
activity. Also, $2.3 million in foreclosed real estate was sold
as part of a bulk sale in 1994.
Single family non-performing loans are primarily due to
recession-related factors such as layoffs, decreased incomes and
decreased real estate values. Multi-family and commercial non-
performing loans are 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 and Statement of Financial
Standards No. 118, "Accounting by Creditors for Impairment of a
Loan-Income Recognition and Disclosures" ("SFAS No. 118"), as of
January 1, 1995. Impaired loans totaled $86 million and $108
42
million, net of related allowances of $26 million and $24 million
as of December 31, 1995 and 1994, respectively. See "Business -
Risk Elements" for a further discussion of impaired loans.
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, 1995, the
Bank had modified loans totaling $19 million, net of loan loss
allowances. This compares with $60 million, net, as of December
31, 1994. Modified loans included in the impaired loan totals
above totaled $17 million, net, and $22 million, net, as of
December 31, 1995 and 1994, respectively. No modified loans were
90 days or more delinquent as of December 31, 1995 or 1994.
Allowances for Loan Losses
For an analysis of the changes in the loan loss allowances,
see "Business - Risk Elements." At December 31, 1995, the
general allowance for loan losses was $43 million or 1.35% of the
Bank's assets with loss exposure. This compares to 1.73% at the
end of 1994 and 1.46% at the end of 1993. In addition to the
general allowance for loan losses and the allowance for impaired
loans mentioned above, the Bank also maintains an allowance for
loans sold with recourse. These allowances amounted to 3.65%,
2.86% and 1.96% of loans sold with recourse at December 31, 1995,
1994 and 1993, respectively. Management considers the current
level of loss allowances adequate to cover the Bank's loss
exposure at this time. However, there can be no assurance that
future additions to loan loss allowances will not be required.
CAPITAL RESOURCES AND LIQUIDITY
Liquidity Requirements
OTS regulations require a savings association to maintain a
specified ratio of cash and short-term United States government
and other specified investment securities to net withdrawable
deposits and borrowings payable in one year or less. This
liquidity requirement is based upon average liquidity balances
maintained during each month and may vary from time to time,
depending upon economic conditions and deposit flows. The
liquidity requirement is currently 5%. For the periods ended
December 31, 1995 and 1994, the Bank's regulatory liquidity
ratios were 5.20% and 5.23%, respectively.
External Sources of Funds
External sources of funds include savings deposits, loan
sales, advances from the FHLBSF and reverse repurchase agreements
("reverse repos"). For purposes of funding asset growth, the
source or sources of funds with the lowest total cost for the
desired term are generally selected. The funding sources used
most often during 1995 were FHLB advances and reverse repos.
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, brokered deposits
can be obtained at the Bank's discretion as long as applicable
capital standards are met. Previously, the Bank obtained brokered
deposits pursuant to a waiver of regulatory requirements from the
FDIC. 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 $502 million at
December 31, 1995. This compares to $597 million at December 31,
1994 and $519 million at December 31, 1993.
43
Deposits at retail savings offices have remained steady at
$1.5 billion for the last three years. The Bank experienced $103
million in deposit outflows from savings offices during 1995 due
to the availability of alternate investments paying higher
returns to customers and intense competition for deposits by
other financial institutions.
The Bank also solicits deposits through telemarketing
efforts. Telemarketing deposits are obtained by the Bank's
employees via telephone, principally from pension funds.
Telemarketing deposits increased by 19% to $239 million at the
end of 1995 from $201 million at the end of 1994. The level of
telemarketing deposits varies based on the availability of higher
yielding investments to investors, who are usually managers of
pension funds. The availability of telemarketing deposits also
varies based on the investors' perception of the Bank's
creditworthiness. Telemarketing deposits were $286 million at the
end of 1993.
Reverse repos are short term borrowings secured by
mortgage-backed securities. These borrowings increased 5% to $725
million at the end of 1995 from $691 million at the end of 1994.
Reverse repos at the end of 1993 were $549 million. $60 million
in loans were securitized during 1995 to increase the
availability of this type of borrowing.
FHLB advances increased to $890 million at the end of 1995
from $863 million at the end of 1994. Advances at the end of 1993
totaled $515 million. Advances increased during 1995 because
these were often the most available source to the Bank.
Sales of loans were $37 million during 1995. This compares
to $44 million during 1994 and $153 million sold during 1993. The
volume of loans sold varies with the amount of saleable loans
originated. Loans originated for sale in the secondary market
decreased during 1995 consistent with the overall decline in loan
originations. The Bank sold $30 million in non-performing loans
under a bulk sale arrangement during 1994. The 1993 sales figure
includes the sale of a $76 million mortgage-backed security.
Internal Sources of Funds
Internal sources of funds include scheduled loan principal
payments, loan payoffs, and positive cash flows from operations.
Principal payments were $162 million in 1995 compared with $183
million in 1994 and $355 million in 1993. 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 necessitate the preparation of a capital
plan, subject to regulatory approval. Generally, any institution
with a risk-based capital ratio in excess of 10% and a core
capital ratio greater than 5% is considered well-capitalized for
regulatory purposes. Institutions who maintain this capital level
can take in brokered deposits at their discretion, and if they
achieve a sufficient ranking on their regulatory examination, may
be assessed a lower deposit insurance rate.
Effective January 1, 1994, institutions whose exposure to
interest-rate risk as determined by the OTS is deemed to be above
normal may be required to hold additional risk-based capital. As
of December 31, 1995, the Bank was not required to hold
additional capital as a result of this regulation.
44
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, the Company issued $50 million in 10-year Notes. The
proceeds from these Notes were contributed to the Bank as
capital. See "Business - Borrowings." The Bank met the regulatory
capital standards to be deemed "well-capitalized" at December 31,
1995.
The Bank met all three capital requirements at the end of
1995 as indicated by the chart below:
Regulatory Capital
Requirement Ratio
----------- ----------
Tangible Capital................. 1.50% 5.63%
Core Capital..................... 3.00% 5.63%
Risk-based Capital............... 8.00% 10.98%
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 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 97% of the loan portfolio at the end of 1995.
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. Generally, a positive GAP benefits a
company during periods of increasing interest rates. The reverse
is true during periods of decreasing interest rates. However,
because the Index lags changes in market interest rates by three
months while the Bank's short-term savings and borrowing costs
adjust immediately, the Bank's net interest income initially
decreases during periods of rising interest rates and increases
during periods of declining interest rates.
In order to minimize the impact of rate fluctuations on
earnings, management's goal is to keep the one year GAP at less
than 20% of total assets (positive or negative). At December 31,
1995, the Company's one-year GAP was a positive $348 million or
8.4% of total assets. This compares with positive GAP ratios of
13.8% and 14.8% of total assets at December 31, 1994 and December
31, 1993, respectively.
45
The following chart shows the interest sensitivity of the
Company's assets and liabilities by repricing period at December
31, 1995 and the consolidated GAP position as a percentage of
total assets at that time:
INTEREST-SENSITIVITY GAP
Balances Balances Balances Balances
Repricing Repricing Repricing Repricing
Total Within Within Within After
Balance 0-3 Months 4-12 Months 1-5 Years 5 Years
---------- ---------- ----------- ---------- ----------
(Dollars In Thousands)
Interest-Earning Assets:
Investment Securities............... $ 76,184 $ 6,243 $ 19,763 $ 50,178 $ -
MBS................................. 835,448 828,722 888 3,377 2,461
Loans Receivable:
Interest Rate Sensitive Loans....... 3,021,582 3,021,582 - - -
Fixed Rate Loans.................... 38,198 2,677 4,581 17,179 13,761
Total Interest-Earning ---------- ---------- ----------- ---------- ----------
Assets.......................... $3,971,412 $3,859,224 $ 25,232 $ 70,734 $ 16,222
========== ========== =========== ========== ==========
Interest-Bearing Liabilities:
Demand Accounts..................... $ 422,977 $ 422,976 $ - $ - $ -
Fixed Rate Term Certificate......... 1,782,059 652,700 894,105 223,014 12,241
Borrowings:
FHLB Advances...................... 890,000 426,000 414,000 50,000 -
Reverse Repurchase
Agreements....................... 724,643 373,037 351,606 - -
Other Borrowings................... 52,300 2,300 - - 50,000
Total Interest-Bearing ---------- ---------- ----------- ---------- ----------
Liabilities..................... $3,871,979 $1,877,013 $ 1,659,711 $ 273,014 $ 62,241
========== ========== =========== ========== ==========
Interest-Sensitivity Gap.............. $ 99,433 $1,982,211 $(1,634,479) $ (202,280) $ (46,019)
========== ========== =========== ========== ==========
Interest-Sensitivity Gap as a
Percentage of Total Assets........... 47.88% (39.48)% (4.89)% (1.11)%
===== ====== ===== =====
Cumulative Interest-Sensitivity Gap... $1,982,211 $ 347,732 $ 145,452 $ 99,433
========== =========== ========== ==========
Cumulative Interest-Sensitivity
Gap as a Percentage of Total
Assets.............................. 47.88% 8.40% 3.51% 2.40%
===== ==== ==== ====
46
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 1995 or 1994. As of December
31, 1995, 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 Split)
First Quarter Second Quarter Third Quarter Fourth Quarter
--------------- --------------- --------------- ---------------
High Low High Low High Low High Low
------ ------ ------ ------ ------ ------ ------ ------
1995............... 16 11 1/8 17 3/4 14 5/8 17 5/8 14 1/2 18 1/2 13 3/4
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
47
ITEM 8--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1995 AND 1994
(Dollars In Thousands, Except per Share Data)
1995 1994
---------- ----------
ASSETS
Cash and cash equivalents................................. $ 36,878 $ 35,853
Investment securities, available-for-sale
(at fair value ) (Note 2)............................... 76,184 -
Investment securities, held-to-maturity (fair value of
$79,316) (Note 2)....................................... - 84,052
Mortgage-backed securities, available-for-sale
(at fair value) (Notes 3 and 10)........................ 835,448 -
Mortgage-backed securities, held-to-maturity
fair value of $791,930 ) (Notes 3 and 10)............... - 821,317
Loans receivable, held-for-sale (fair value of $7,464
and $30,399) (Note 4)................................... 7,377 30,399
Loans receivable (Note 4)................................. 3,052,403 3,041,910
Accrued interest and dividends receivable................. 28,620 24,420
Real estate (Note 5)...................................... 19,821 17,081
Office properties and equipment, net (Note 6)............. 8,686 9,211
Investment in Federal Home Loan Bank (FHLB)
stock, at cost (Note 7)................................. 58,935 56,061
Other assets (Notes 1 and 11)............................. 15,385 37,110
---------- ----------
$4,139,737 $4,157,414
========== ==========
LIABILITIES
Deposits (Note 8)......................................... $2,205,036 $2,298,914
FHLB advances and other borrowings (Note 9)............... 942,300 913,700
Securities sold under agreements to repurchase
(Note 10)............................................... 724,643 691,121
Accrued expenses and other liabilities.................... 71,467 68,992
---------- ----------
3,943,446 3,972,727
---------- ----------
COMMITMENTS AND CONTINGENT
LIABILITIES (NOTES 4, 6 AND 13)
STOCKHOLDERS' EQUITY (NOTES 12 AND 13)
Common stock, par value $.01 per share; authorized
25,000,000 shares; issued 11,410,922 and
11,395,492 shares, outstanding 10,614,402 and
10,598,972 shares....................................... 114 114
Additional paid-in capital................................ 28,212 28,061
Retained earnings-substantially restricted................ 175,721 169,186
Loan to employee stock ownership plan..................... (2,500) (2,842)
Treasury stock, at cost, 796,520 shares................... (9,832) (9,832)
Unrealized gain on securities
available-for-sale, net of taxes........................ 4,576 -
---------- ----------
196,291 184,687
---------- ----------
$4,139,737 $4,157,414
========== ==========
See accompanying notes to consolidated financial statements.
48
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(Dollars In Thousands, Except per Share Data)
1995 1994 1993
-------- -------- --------
Interest income:
Interest on loans............................. $233,648 $188,665 $181,223
Interest on mortgage-backed securities........ 54,389 36,207 39,954
Interest and dividends on investments......... 13,698 10,552 8,268
-------- -------- --------
Total interest income....................... 301,735 235,424 229,445
-------- -------- --------
Interest expense:
Interest on deposits (Note 8)................. 109,151 87,545 77,741
Interest on borrowings (Note 9)............... 114,926 70,110 53,875
-------- -------- --------
Total interest expense...................... 224,077 157,655 131,616
-------- -------- --------
Net interest income............................ 77,658 77,769 97,829
Provision for loan losses (Note 4)............ 28,376 85,700 67,679
Net interest income (loss) after provision for -------- -------- --------
loan losses.................................. 49,282 (7,931) 30,150
Other income : -------- -------- --------
Loan servicing and other fees................. 6,126 7,044 6,530
Gain (loss) on sale of loans and
mortgage-backed securities.................. (1,581) 319 4,257
Real estate operations, net................... 2,015 2,327 (437)
Other operating income........................ 2,165 1,574 1,704
-------- -------- --------
Total other income.......................... 8,725 11,264 12,054
-------- -------- --------
Non-interest expense:
Salaries and employee benefits (Note 13)...... 23,045 22,734 22,880
Occupancy (Note 6)............................ 6,258 6,686 6,816
Advertising................................... 1,833 1,972 2,486
Federal deposit insurance..................... 6,400 5,151 4,622
Other operating expense....................... 8,367 8,953 8,494
-------- -------- --------
Total non-interest expense.................. 45,903 45,496 45,298
-------- -------- --------
Earnings (loss) before income taxes (benefit).. 12,104 (42,163) (3,094)
Income taxes (benefit) (Note 11)............... 5,569 (17,699) (1,046)
-------- -------- --------
Net earnings (loss)............................ $ 6,535 $(24,464) $ (2,048)
======== ======== ========
Earnings (loss) per share (Notes 12 and 15).... $ 0.61 $ (2.32) $ (0.20)
======== ======== ========
See accompanying notes to consolidated financial statements.
49
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(Dollars In Thousands)
Unrealized
Gain on
Securities
Retained Available
Earnings for Sale,
(Sub- Loan to Net of
Additional stantially ESOP Taxes
Common Paid-In Restricted) (Notes 12 Treasury (Notes 3
Stock Capital (Note 12) and 13) Stock and 4) Total
------ --------- ---------- --------- --------- -------- ----------
Balance, December 31, 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
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 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
Exercise of employee stock options....... - 151 - - - - 151
Net decrease in loan to employee stock
ownership plan......................... - - - 342 - - 342
Unrealized gain on securities
available-for-sale, net of taxes....... - - - - - 4,576 4,576
Net earnings 1995........................ - - 6,535 - - - 6,535
---- ------- -------- ------- ------- ------ --------
Balance, December 31, 1995............... $114 $28,212 $175,721 $(2,500) $(9,832) $4,576 $196,291
==== ======= ======== ======= ======= ====== ========
See accompanying notes to consolidated financial statements.
50
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(Dollars In Thousands)
1995 1994 1993
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss)................................... $ 6,535 $ (24,464) $ (2,048)
Adjustments to reconcile net earnings (loss) to --------- --------- ---------
net cash provided (used) by operating activities:
Net change in loans held-for-sale.................. 23,022 (10,155) (8,153)
Depreciation and amortization...................... 739 1,977 1,710
Provision for losses on loans...................... 28,376 85,700 67,679
Valuation adjustments on real estate sold.......... 2,711 (5,876) (1,151)
Amortization of fees and discounts................. (1,753) (2,690) (763)
Decrease in deferred premium on sale of loans...... 865 1,154 3,079
(Increase) decrease in negative amortization....... (5,044) (243) (2,008)
Decrease (increase) in taxes payable............... 8,807 (16,366) (5,367)
Increase in interest and dividends
receivable........................................ (4,200) (4,711) 1,998
Increase in interest payable....................... 2,714 6,050 2,242
(Increase) decrease in other assets................ 1,573 (3,868) (3,458)
Increase (decrease) in accrued expenses and
other liabilities................................. 1,761 4,257 (521)
--------- --------- ---------
Total adjustments................................. 59,571 55,229 55,287
--------- --------- ---------
Net cash provided by operating activities........ 66,106 30,765 53,239
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans made to customers and principal collections
on loans............................................. (129,393) (624,728) (335,534)
Loans purchased....................................... (115) (59,191) (95)
Loans repurchased..................................... (27,212) (21,506) (55,093)
Proceeds from sales of real estate.................... 58,586 83,498 96,120
Proceeds from sales of non-performing loans........... - 17,674 -
Proceeds from maturities and principal payments
of investment securities............................. 20,267 21,946 11,710
Principal reductions of mortgage-backed securities.... 53,973 85,052 76,084
Purchases of investment securities.................... (13,095) (2,347) (71,682)
Purchases of FHLB stock............................... - (15,785) (2,415)
Other................................................. 6,324 (614) 1,007
--------- --------- ---------
Net cash used by investing activities............ (30,665) (516,001) (279,898)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits................... (93,878) (6,566) 209,488
Acquisitions of branches, net......................... - - 113,247
Net increase (decrease) in short term borrowings...... 327,322 622,172 (73,292)
Proceeds from long term borrowings.................... - 100,000 -
Repayment of long term borrowings..................... (265,200) (210,500) (29,800)
Other................................................. (2,660) (1,508) 522
--------- --------- ---------
Net cash provided (used) by financing activities. (34,416) 503,598 220,165
Net increase (decrease) in cash and cash --------- --------- ---------
equivalents.......................................... 1,025 18,362 (6,494)
Cash and cash equivalents at beginning of year........ 35,853 17,491 23,985
--------- --------- ---------
Cash and cash equivalents at end of year.............. $ 36,878 $ 35,853 $ 17,491
========= ========= =========
See accompanying notes to consolidated financial statements.
51
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
The following is a summary of the significant accounting
policies of FirstFed Financial Corp. ("Company"), and its
wholly-owned subsidiary First Federal Bank of California
("Bank").
The preparation of the Company's financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial
statements and the reported operations of the Company for the
periods presented. Actual results may differ from those
estimates calculated by management.
Principles of Consolidation
The consolidated financial statements include the accounts
of the Company and its subsidiary, the Bank. The Bank maintains
25 full-service savings branches and 5 loan offices in Southern
California. The Bank's primary business consists of attracting
retail deposits from the general public and originating loans
secured by mortgages on residential real estate. All significant
inter-company balances and transactions have been eliminated in
consolidation. Certain items in the 1994 and 1993 consolidated
financial statements have been reclassified to conform to the
1995 presentation.
Statement of Cash Flows
For purposes of reporting cash flows in accordance with
Statement of Financial Accounting Standards No. 95, cash and cash
equivalents include cash, overnight investments and securities
purchased under agreements to resell with maturities within 90
days of the date of purchase.
Financial Instruments
Statement of Financial Accounting Standards No. 107,
"Disclosures about Fair Value of Financial Instruments" ("SFAS
No. 107"), requires the disclosure of the fair value of financial
instruments, whether or not recognized on the statement of
financial condition, for which it is practicable to estimate the
value. A significant portion of the Bank's assets and liabilities
are financial instruments as defined under SFAS No. 107. SFAS No.
107 requires that the Bank disclose fair values for its financial
instruments. Fair values, estimates and assumptions are set forth
in Note 16, Fair Value of Financial Instruments.
Risks Associated with Financial Instruments
The credit risk of a financial instrument is the possibility
that a loss may result from the failure of another party to
perform in accordance with the terms of the contract. The most
significant credit risk associated with the Bank's financial
instruments is concentrated in its loans receivable.
Additionally, the Bank is subject to credit risk on certain loans
sold with recourse. The Bank has established a system for
monitoring the level of credit risk in its loan portfolio and for
loans sold with recourse.
The market risk of a financial instrument is the possibility
that future changes in market prices may reduce the value of a
financial instrument or increase the contractual obligations of
the Bank. The
52
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies (continued)
Bank's market risk is concentrated in its portfolios of loans
receivable and real estate acquired by foreclosure. When a
borrower fails to meet the contractual requirements of their loan
agreement, the Bank is subject to the market risk of the
collateral securing the loan. Likewise, the Bank is subject to
the volatility of real estate prices with respect to real estate
acquired by foreclosure. The Bank's securities available-for-sale
are traded in active markets. The value of these securities is
susceptible to the fluctuations of the market.
Interest Rate Risk
Financial instruments are subject to interest rate risks to
the extent that they report on a frequency, degree or basis that
varies from market pricing. The Bank is subject to interest rate
risk to the degree that its interest-earning assets reprice on a
different frequency or schedule than its interest-bearing
liabilities. A majority of the Bank's loans receivable and
mortgage-backed securities reprice based on the Eleventh District
Cost of Funds Index ("COFI"). The repricing of COFI tends to lag
market interest rates. The Bank closely monitors the pricing
sensitivity of its financial instruments.
Concentrations of Credit Risk
Concentrations of credit risk would exist for groups of
borrowers when they have similar economic characteristics that
would cause their ability to meet contractual obligations to be
similarly affected by changes in economic or other conditions.
The ability of the Bank's borrowers to repay their commitments is
contingent on several factors, including the economic conditions
in the borrowers' geographic area and the individual financial
condition of the borrowers. The Bank's lending activities are
primarily concentrated in Southern California. The Bank currently
focuses on the origination of single family loans (one to four
units) although, prior to October of 1994, the Bank's lending
strategy also included the origination of multi-family loans. The
Bank does not have significant exposure to any individual
customer.
Securities Purchased under Agreements to Resell
The Bank invests in securities purchased under agreements to
resell ("repurchase agreements"). The Bank obtains collateral for
these agreements, which normally consists of U.S. treasury
securities or mortgage-backed securities guaranteed by agencies
of the U.S. government. The collateral is held in the custody of
a trustee, who is not a party to the transaction. The duration
of these agreements is typically 1 to 30 days. The Bank deals
only with nationally recognized investment banking firms as the
counterparties to these agreements. The Bank's investment in
repurchase agreements consisted solely of securities purchased
under agreements to resell identical securities.
Investments and Mortgage-Backed Securities
The Bank's investment in securities principally consists of
U.S. treasury and agency securities and mortgage-backed
securities. The Bank creates mortgage-backed securities when it
exchanges pools of its own loans for mortgage-backed securities.
In accordance with Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity
Securities"
53
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies (continued)
("SFAS No. 115"), the Bank classifies its investment in
securities as "held-to-maturity" securities, "trading" securities
and "available-for-sale" securities as applicable. The Bank did
not hold any trading securities at December 31, 1995 or 1994.
In November of 1995, the Financial Accounting Standard Board
issued a Special Report as an aid in understanding and
implementing SFAS No. 115. The Special Report included guidance
that allowed the Bank to review the appropriateness of the
classifications of all securities held.
Any reclassifications must be accounted for at fair value in
accordance with SFAS No. 115. In accordance with the Special
Report, the Bank redesignated its entire portfolio of U.S.
treasury and agency securities and mortgage-backed securities as
"available-for-sale" from "held-to-maturity" during the fourth
quarter of 1995.
Available-for-Sale Securities
The Bank classified all of its securities as "available-for-
sale" as of December 31, 1995. The Bank classifies securities as
available-for-sale based upon a determination that such
securities may be sold at a future date or if there are
foreseeable circumstances under which the Bank would sell such
securities.
Securities designated as available-for-sale are recorded at
fair value. Changes in the fair value of debt securities
available-for-sale are included in stockholders' equity as
unrealized gains (losses) on securities available-for-sale, net
of taxes. Unrealized losses, on available-for-sale securities
reflecting a decline in value judged to be other than temporary,
are charged to income in the Consolidated Statements of
Operations. Unrealized gains or losses on available-for-sale
securities are computed on a specific identification basis.
Securities Held-to-Maturity
The Bank classified all of its securities as "held-to-
maturity" as of December 31, 1994. Securities are designated as
held-to-maturity if the Bank has the positive intent and the
ability to hold the securities to maturity. Held-to-maturity
securities are carried at amortized cost, adjusted for the
amortization of any related premiums or the accretion of any
related discounts into interest income using the interest method
over the estimated remaining period until maturity. Unrealized
losses, on held-to-maturity securities reflecting a decline in
value judged to be other than temporary, are charged to income in
the Consolidated Statements of Operations.
Loans Held-for-Investment
The Bank's loan portfolio is primarily comprised of single
family residential loans (one to four units), and multi-family
loans (five or more units). Since 1994, the Bank has not actively
sought to originate multi-family loans, except to finance the
sale of the Bank's foreclosed real estate. Loans are generally
recorded at the contractual amounts owed by borrowers, less
deferrals, unearned interest and the allowances for loan losses.
54
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies (continued)
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 fair value on an
aggregate basis by type of asset. For loans, fair value is
calculated on an aggregate basis as determined by the current
market investor yield requirement.
Impaired Loans
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 impairment
allowances. At December 31, 1995, the total recorded amount of
loans for which impairment has been recognized in accordance with
SFAS No. 114 was $86,409,000 (after deducting $26,101,000 of
impairment allowances attributable to such loans). The Bank's
impaired loans at December 31, 1995 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 $34,503,000, modified loans of $16,573,000 and major
loans less than 90 days delinquent in which full payment of
principal and interest is not expected of $35,333,000.
The Bank evaluates loans for impairment whenever the
collectibility of contractual principal and interest payments is
questionable. A loan is impaired when, based on current
circumstances and events, a creditor will be unable to collect
all amounts contractually due under a loan agreement. Large
groups of smaller balance homogenous loans that are collectively
evaluated for impairment are not subject to the application of
SFAS No. 114.
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.
Because the Bank's policy is to establish loss allowances for
all loans deemed probable of foreclosure based on the fair value
of the collateral, the adoption of SFAS No. 114 did not have a
material impact on the Bank's allowance for loan losses.
The Bank adopted Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 118,
"Accounting by Creditors for Impairment of a Loan -- Income
Recognition and Disclosures" ("SFAS No. 118"), on January 1,
1995. SFAS No. 118 amends SFAS No. 114 to allow a creditor to use
existing methods for recognizing interest income on an impaired
loan. Additionally, SFAS No. 118 requires, among other things,
additional disclosure, either in the body of the financial
statements or in the accompanying notes, about the recorded
investment in
55
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies (continued)
certain impaired loans and about how a creditor recognizes
interest income related to those impaired loans.
Allowances for Loan Losses
The Bank maintains a general valuation allowance for loan
losses for the inherent risk in the loan portfolio which has yet
to be specifically identified. The allowance is 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 impairment
allowances if losses are expected to be incurred. Additions
to the allowances are charged to earnings. The regulatory
agencies periodically review the allowances for loan losses and
may require the Bank to adjust the allowances based on
information available to them at the time of their examination.
General allowances are provided for all loans, regardless of
any specific allowances provided. The determination of the Bank's
general allowance for loan losses is based on estimates that are
affected by changes in the regional or national economy and
market conditions. The Bank believes that as of December 31,
1995 and 1994, the general allowance for loan losses is adequate
based on current economic and market conditions. Should there
be an economic or market downturn or if market interest rates
increase significantly, the Bank could experience a material
increase in the level of loan defaults and charge-offs.
Loan Origination Fees and Costs
Loan origination fees and certain direct loan origination
costs are deferred and recognized over the lives of the related
loans as an adjustment of loan yields using the interest
method. When a loan is repaid or sold, any unamortized net
deferred fee balance is credited to income.
Allowance for Delinquent Interest
The Bank provides an allowance for accrued interest
receivable on delinquent loans when such interest is deemed
uncollectible which is generally at the time the loan is 90 days
past due. Any addition to the allowance reduces interest
receivable and interest income 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.
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 of the loans sold. A
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
56
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies (continued)
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.
Excess servicing arising from the sale of loans are included
in other assets and were $5,719,000 and $6,584,000 at December
31, 1995 and 1994, respectively.
Real Estate
The Bank's real estate acquired in settlement of loans
("REO") consists of property acquired through foreclosure
proceedings or by deed in lieu of foreclosure. Generally, all
loans greater than 60 days delinquent are placed into foreclosure
and, if necessary, a valuation allowance is established. The
Bank acquires title to the property in most foreclosure actions
that are not reinstated by the borrower. Once real estate is
acquired in settlement of a loan, the property is recorded as REO
at fair market value, less estimated selling costs. The REO'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, 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 files a consolidated federal income tax return
and a combined California franchise tax report with the Bank and
its subsidiaries. The Bank accounts for income taxes using the
asset and liability method in 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.
57
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies (continued)
Recent Accounting Pronouncements
In May of 1995, the FASB issued Statement of Financial
Accounting Standards No. 122, "Accounting for Mortgage Servicing
Rights" ("SFAS No. 122"), an amendment of FASB Statement No. 65
"Accounting for Certain Mortgage Banking Activities" ("SFAS No.
65"). SFAS No. 122 amends SFAS No. 65 to remove the distinction
in accounting for mortgage servicing rights resulting from
originated loans and those resulting from purchased loans.
Additionally, SFAS No. 122 requires that a mortgage banking
enterprise assess its capitalized mortgage servicing rights for
impairment based on the fair value of those rights. SFAS No. 122
is to be applied prospectively to fiscal years beginning after
December 15, 1995. It is not expected that SFAS No. 122 will
have a material adverse effect on the Company's financial
position or results of operations.
In November of 1995 the FASB issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). This statement establishes
financial accounting standards for stock-based employee
compensation plans. SFAS No. 123 permits the Company to choose
either a new fair-value-based method or the current APB Opinion
25 intrinsic value-based method of accounting for its stock-based
compensation arrangements. SFAS No. 123 requires pro forma
disclosures of net earnings and earnings per share computed as if
the fair-value-based method had been applied in financial
statements of companies that continue to follow current practice
in accounting for such arrangements under Opinion 25. SFAS No.
123 applies to all stock-based employee compensation plans in
which an employer grants shares of its stock or other equity
instruments to employees except for employee stock ownership
plans. SFAS No. 123 also applies to plans in which the employer
incurs liabilities to employees in amounts based on the price of
the employer's stock, i.e. stock option plans, stock purchase
plans, restricted stock plans, and stock appreciation rights.
The recognition provisions of SFAS No. 123 for companies choosing
to adopt the new fair-value-based method of accounting for stock-
based compensation arrangements may be adopted immediately and
will apply to all transactions entered into in fiscal years that
begin after December 15, 1995. The disclosure provisions of
SFAS No. 123 are effective for fiscal years beginning after
December 15, 1995.
Proposed Legislation
The Bank's deposits are insured by the SAIF up to a maximum
of $100,000 for each insured depositor. The FDIC administers a
separate fund, BIF, applicable to commercial banks and certain
other non-SAIF insured institutions. Legislation is currently
under consideration by Congress which includes a one-time
assessment for SAIF members such as the Bank. Should legislation
be enacted in its currently contemplated form, the Bank's one-
time assessment would be approximately $11,378,000, net of tax,
based on the Bank's insured deposits at March 31, 1995 and an
assumed assessment rate of 85 basis points. Additionally, once
the SAIF has been recapitalized through the one-time assessment,
the Bank's deposit insurance premium assessments would be reduced
from the current rate. The currently proposed legislation has
evolved significantly over recent months and may continue to
change until final legislation is enacted, if ever. Moreover,
there can be no assurance that a premium reduction will occur.
58
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies (continued)
Assuming the proposed one-time special assessment became law
in 1996 and was immediately charged against the Company's results
of operations, the one-time assessment would have a material
adverse effect on the Bank's 1996 results of operations. However,
the Bank has sufficient regulatory capital to continue to be
classified as "well-capitalized" by its regulators following such
an assessment. In addition, the Bank would not face any
liquidity issues as a result of such an assessment.
Proposed legislation is currently under consideration by
Congress which would significantly change the federal income tax
law affecting the bad debt reserves of savings institutions. This
proposed legislation would eliminate the reserve method for
computing bad debt deductions beginning in 1996 and might require
the recapture of bad debt reserves established after 1987 under
varying factual situations. The proposed legislation is currently
under review and may change significantly before final
legislation is enacted, if ever.
(2) Investment Securities
The amounts advanced under agreements to resell securities
(repurchase agreements) represent short-term investments. During
the agreement period the securities are maintained by the dealer
under a written custodial agreement that explicitly recognizes
the Bank's interest in the securities. The Bank had no agreements
to resell securities at December 31, 1995 or December 31, 1994.
Securities purchased under agreements to resell averaged
$88,859,000 and $54,400,000 during 1995 and 1994, and the maximum
amounts outstanding at any month end during 1995 and 1994 were
$112,000,000 and $26,000,000, respectively.
As permitted by the Financial Standards Board's Special
Report, the Bank reclassified its entire portfolio of investment
securities from "held-to-maturity" to "available-for-sale" during
the fourth quarter of 1995.
Investment securities, available-for-sale, are recorded at
fair value and summarized below for the period indicated:
1995
--------------------------------------------
Gross Gross
Historical Unrealized Unrealized Fair
Value Gains Losses Value
---------- ---------- ---------- --------
(Dollars In Thousands)
United States Government
and federal agency
obligations................ $46,862 $ 22 $ (193) $ 46,691
Collateralized
Mortgage Obligations........ 29,874 9 (390) 29,493
------- ----- ------ --------
$76,736 $ 31 $ (583) $ 76,184
======= ===== ====== ========
59
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) Investment Securities (continued)
Related maturity data for investment securities,
available-for-sale, is summarized below for the period indicated:
1995
-------------------------------------------
Gross Gross
Historical Unrealized Unrealized Fair
Value Gains Losses Value
---------- ---------- ---------- --------
(Dollars In Thousands)
Maturing within 1 year...... $27,897 $ 4 $ (48) $27,853
Maturing after 1 year
but within 5 years........ 48,839 27 (535) 48,331
------- ----- ------ -------
$76,736 $ 31 $ (583) $76,184
======= ===== ====== =======
Investment securities, held-to-maturity, are summarized
below for the period indicated:
1994
--------------------------------------------
Gross Gross
Historical Unrealized Unrealized Fair
Value Gains Losses Value
---------- ---------- ---------- --------
(Dollars In Thousands)
United States Government
and federal agency
obligations................ $40,770 $ 28 $(2,439) $38,359
Collateralized
Mortgage Obligations........ 43,282 - (2,325) 40,957
------- ----- ------- -------
$84,052 $ 28 $(4,764) $79,316
======= ===== ======= =======
60
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) Mortgage-backed Securities
As permitted by the Financial Standards Board's Special
Report, the Bank reclassified its entire portfolio of mortgage-
backed securities from "held-to-maturity" to "available-for-sale"
during the fourth quarter of 1995.
Mortgage-backed securities, available-for-sale, at December
31, 1995 are due through the year 2035 and are summarized as
follows:
1995
--------------------------------------------
Gross Gross
Historical Unrealized Unrealized Fair
Value Gains Losses Value
---------- ---------- ---------- --------
(Dollars In Thousands)
FNMA.............. $ 27,221 $ 533 $ - $ 27,754
FHLMC............. 799,843 7,854 (3) 807,694
-------- ------- ------ --------
Total............. $827,064 $ 8,387 $ (3) $835,448
======== ======= ====== ========
Mortgage-backed securities, held-to-maturity, at December
31, 1994 are summarized as follows:
1994
--------------------------------------------
Gross Gross
Historical Unrealized Unrealized Fair
Value Gains Losses Value
---------- ---------- ---------- --------
(Dollars In Thousands)
FNMA.............. $ 30,844 $ - $ (829) $ 30,015
FHLMC............. 790,473 7,762 (36,320) 761,915
-------- ------- -------- --------
Total............. $821,317 $ 7,762 $(37,149) $791,930
======== ======= ======== ========
Mortgage-backed securities created with loans originated by
the Bank totaled $59,720,000, $198,085,000 and $111,701,000,
during 1995, 1994, and 1993, respectively. Proceeds from the sale
of mortgage-backed securities totaled $72,453,000 in 1993. There
were no sales during 1995 or 1994.
Accrued interest receivable related to mortgage-backed
securities outstanding at December 31, 1995 and 1994 totaled
$7,746,000 and $6,376,000, respectively.
61
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(4) Loans Receivable
Loans receivable are summarized as follows:
1995 1994
---------- ----------
(Dollars In Thousands)
Real Estate Loans:
First trust deed residential loans:
One unit................................ $1,221,927 $1,192,251
Two to four units....................... 351,942 350,718
Five or more units...................... 1,344,866 1,357,251
---------- ----------
Residential loans....................... 2,918,735 2,900,220
Other real estate loans:
Commercial and industrial............... 221,982 246,340
Second trust deeds...................... 2,213 20,401
Other................................... 3,157 4,793
---------- ----------
Real estate loans..................... 3,146,087 3,171,754
Non-real estate loans:
Manufactured housing.................... 1,938 2,439
Deposit accounts........................ 1,104 1,301
Consumer................................ 359 506
---------- ----------
Loans receivable...................... 3,149,488 3,176,000
Less:
General loan valuation allowances....... 42,876 55,353
Valuation allowances for impaired loans. 26,101 23,887
Unearned loan fees...................... 20,731 24,451
---------- ----------
Subtotal.............................. 3,059,780 3,072,309
Less: ---------- ----------
Loans held-for-sale..................... 7,377 30,399
---------- ----------
Loans receivable, net................... $3,052,403 $3,041,910
========== ==========
During the fourth quarter of 1995, the Bank reclassified
$19,154,000 from loans "held-for-sale" to loans receivable.
Loans serviced for others totaled $622,969,000, $699,538,000
and $786,809,000 at December 31, 1995, 1994 and 1993,
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 $248,139,000 and $277,877,000 at
December 31, 1995 and 1994, respectively. The maximum potential
recourse liability totaled $47,424,000 and $56,342,000 at
December 31, 1995 and December 31, 1994, respectively. The
Bank's allowance for losses related to loans sold with recourse,
which is recorded as a liability, totaled $9,050,000 and
$7,948,000 at December 31, 1995 and 1994, respectively.
At December 31, 1995 the Bank had outstanding commitments to
fund $18,417,000 in real estate loans, which were primarily
adjustable rate mortgages. The Bank's outstanding commitments to
sell real estate loans totaled $7,685,000 at December 31, 1995.
62
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(4) Loans Receivable (continued)
Accrued interest receivable related to loans outstanding at
December 31, 1995 and 1994 totaled $24,767,000 and $21,652,000,
respectively.
Loans delinquent greater than 90 days or in foreclosure were
$99,103,000 and $94,485,000 at December 31, 1995 and 1994,
respectively, and the related allowances for delinquent interest
were $5,557,000 and $5,182,000, respectively.
Loans originated upon the sale of real estate totaled
$49,303,000, $54,561,000, and $69,808,000 during 1995, 1994 and
1993, respectively.
See Note 9 for a summary of loans which were pledged as
security for borrowings.
The following is a summary of the activity in general loan
valuation allowances and impaired valuation allowances for the
periods indicated:
General Impaired
Valuation Valuation
Allowances Allowances Total
---------- ---------- --------
(Dollars In Thousands)
Balance at December 31, 1992......................... $ 27,854 $ - $ 27,854
Provisions for loan losses........................... 67,679 - 67,679
Charge-offs, net of recoveries....................... (48,633) - (48,633)
-------- -------- --------
Balance at December 31, 1993......................... 46,900 - 46,900
Provisions for loan losses........................... 53,172 32,528 85,700
Charge-offs, net of recoveries....................... (36,771) (8,641) (45,412)
Transfer of general valuation allowances for loans
sold with recourse to liability account............. (7,948) - (7,948)
-------- -------- --------
Balance at December 31, 1994......................... 55,353 23,887 79,240
Provisions for loan losses........................... 6,958 21,418 28,376
Charge-offs, net of recoveries....................... (18,932) (19,204) (38,136)
Transfer of general valuation allowances for loans
sold with recourse to liability account............. (503) - (503)
-------- -------- --------
Balance at December 31, 1995......................... $ 42,876 $ 26,101 $ 68,977
======== ======== ========
63
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(4) Loans Receivable (continued)
Additionally the Bank maintains a general valuation
allowance for loans sold with recourse. This allowance is
included in accrued expenses and other liabilities in the
Consolidated Statements of Financial Condition. The following is
a summary of the activity in the allowance for the periods
indicated (dollars in thousands):
Balance at December 31, 1993....................... $ -
Transfer from general valuation allowance.......... 7,948
-------
Balance at December 31, 1994....................... 7,948
Provisions for loan losses
(recorded as loss on sale of loans).............. 2,123
Transfer from general valuation allowance.......... 503
Charge-offs, net of recoveries..................... (1,524)
-------
Balance at December 31, 1995....................... $ 9,050
=======
The following is a summary of impaired loans, net of
valuation allowances for impairment, for the periods indicated:
December 31, December 31,
1995 1994
-------- --------
(Dollars In Thousands)
Non-accrual loans.......... $ 34,503 $ 38,004
Modified loans............. 16,573 41,635
Other impaired loans....... 35,333 28,637
-------- --------
$ 86,409 $108,276
======== ========
Impaired loans for which there were no valuation allowances
established are included in the above summary and totaled
$9,261,000 and $21,833,000 as of December 31, 1995 and December
31, 1994, respectively.
The average recorded investment in impaired loans during the
year ended December 31, 1995 was $91,818,000. The amount of
interest income recognized for impaired loans during the year
ended December 31, 1995 was $6,075,000 under the cash basis
method of accounting. Interest income recognized under the
accrual basis method of accounting for the year ended December
31, 1995 totaled $5,746,000. There were no commitments to lend
additional funds to borrowers whose terms have been modified.
64
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) Real Estate
Real estate, net of allowances, consists of the following
for the periods indicated:
1995 1994
------- -------
(Dollars In Thousands)
Real estate held-for-investment................................. $ 120 $ 357
Real estate acquired by (or deed in lieu of) foreclosure, net... 19,701 16,724
------- -------
$19,821 $17,081
======= =======
The Bank acquired $64,053,000, $67,466,000 and $93,010,000
of real estate in settlement of loans during 1995, 1994, and
1993, respectively.
(6) Office Properties, Equipment and Lease Commitments
Office properties and equipment, at cost, less accumulated
depreciation and amortization, are summarized as follows:
1995 1994
------- -------
(Dollars In Thousands)
Land.............................................. $ 3,061 $ 3,061
Office buildings.................................. 4,458 4,449
Furniture, fixtures and equipment................. 10,057 9,943
Leasehold improvements............................ 8,650 8,571
Other............................................. 44 44
------- -------
26,270 26,068
Less accumulated depreciation and amortization.... 17,584 16,857
------- -------
$ 8,686 $ 9,211
======= =======
The Bank is obligated under noncancelable operating leases
for periods ranging from five to thirty years. The leases are for
certain of the Bank's office facilities. Approximately half of
the leases for office facilities contain five and ten year
renewal options. Minimum rental commitments at December 31, 1995
under all noncancelable leases are as follows (dollars in
thousands):
1996.............................. $ 4,297
1997.............................. 4,071
1998.............................. 3,214
1999.............................. 1,175
2000.............................. 1,107
Thereafter....................... 5,452
-------
$19,316
=======
Rent payments under these leases were $4,250,000,
$4,246,000, and $3,898,000 for 1995, 1994 and 1993, respectively.
Certain leases require the Bank to pay property taxes and
insurance. Additionally, certain leases have rent escalation
clauses based on specified indices.
65
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) Federal Home Loan Bank Stock
The Bank's investment in FHLB stock at December 31, 1995 and
1994 was $58,935,000 and $56,061,000, 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, 1995. The
Bank's investment in FHLB stock was pledged as collateral on
advances from the FHLB at December 31, 1995 and 1994. 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.
(8) Deposits
Deposit account balances are summarized as follows:
1995 1994
------------------ ------------------
Amount % Amount %
---------- ----- ---------- -----
(Dollars In Thousands)
Variable rate non-term accounts:
Money market deposit accounts (weighted
average rate of 2.52% and 2.55%)................ $ 125,352 6% $ 161,147 7%
Interest-bearing checking accounts
(weighted average rate of 1.20% and
2.14%)......................................... 145,801 7 169,416 7
Passbook accounts (weighted average
rate of 2.04% and 2.29%)........................ 96,948 4 114,075 5
Non-interest bearing checking accounts........... 54,876 2 36,773 2
---------- --- ---------- ---
422,977 19 481,411 21
Fixed-rate term certificate accounts: ---------- --- ---------- ---
Under six-month term (weighted average
rate of 5.21% and 4.64%)........................ 126,599 6 89,763 4
Six-month term (weighted average rate of
5.42% and 4.99%)................................ 417,855 19 282,130 12
Nine-month term (weighted average rate of
5.98% and 4.90%)................................ 144,308 6 104,962 5
One year to 18 month term (weighted
average rate of 5.57% and 4.76%)................ 235,164 11 512,846 22
Two year or 30 month term (weighted
average rate of 5.55% and 5.22%)................ 239,411 11 315,223 14
Over 30-month term (weighted average rate
of 6.31% and 6.20%)............................. 238,742 11 285,438 12
Negotiable certificates of $100,000 and
greater, 30 day to one year terms (weighted
average rate of 5.66% and 4.79%)............... 379,980 17 227,141 10
---------- --- ---------- ---
1,782,059 81 1,817,503 79
Total Deposits (weighted average rate of ---------- --- ---------- ---
4.89% and 4.49%)................................ $2,205,036 100% $2,298,914 100%
========== === ========== ===
66
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) Deposits (continued)
Certificates of deposit, placed through five major national
brokerage firms, totaled $502,013,000 in 1995 and $597,249,000 in
1994.
Cash payments for interest on deposits (including interest
credited) totaled $110,357,000, $84,842,000, and $75,810,000
during 1995, 1994 and 1993, respectively. Accrued interest on
deposits at December 31, 1995 and 1994 totaled $9,698,000 and
$10,904,000, respectively, and is included in accrued expenses
and other liabilities in the accompanying Consolidated Statements
of Financial Condition.
The following table indicates the maturities and weighted
average interest rates of the Bank's deposits at December 31,
1995:
Non-Term There-
Accounts 1996 1997 1998 1999 After Total
---------- ---------- ---------- ---------- ---------- ---------- ----------
(Dollars In Thousands)
Deposits at
December 31, 1995..... $ 422,977 $1,546,804 $ 113,714 $ 30,476 $ 72,102 $ 18,963 $2,205,036
Weighted average ========== ========== ========== ========== ========== ========== ==========
interest rates........ 1.63% 5.58% 6.45% 5.79% 5.96% 5.78% 4.89%
==== ==== ==== ==== ==== ==== ====
Interest expense on deposits is summarized as follows:
1995 1994 1993
-------- -------- --------
(Dollars In Thousands)
Passbook accounts.................................. $ 2,289 $ 2,726 $ 2,580
Money market deposits and
interest-bearing checking accounts................ 6,272 7,960 7,918
Certificate accounts............................... 100,590 76,859 67,243
-------- -------- --------
$109,151 $ 87,545 $ 77,741
======== ======== ========
(9) Federal Home Loan Bank Advances and Other Borrowings
Federal Home Loan Bank (FHLB) Advances and other borrowings
consist of the following:
1995 1994
-------- --------
(Dollars In Thousands)
Advances from the FHLB of San Francisco with a
weighted average interest rate of 6.12% and 5.96%,
respectively, secured by FHLB stock and certain
real estate loans with unpaid principal balances of
approximately $1,787,461,000 at December 31, 1995,
advances mature through 1997............................... $890,000 $863,200
Unsecured term funds with a weighted average interest
rate of 5.82% and 5.60%, maturing within one year.......... 2,300 500
10 Year Senior Unsecured Notes with an interest
rate of 11.75%, due 2004................................... 50,000 50,000
-------- --------
$942,300 $913,700
======== ========
67
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) Federal Home Loan Bank Advances and Other Borrowings (continued)
At December 31, 1995 and 1994, accrued interest payable on
FHLB advances and other borrowings totaled $6,010,000 and
$5,614,000, respectively, which is included in accrued expenses
and other liabilities in the accompanying Consolidated Statements
of Financial Condition.
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 in 1994 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.
As of December 31, 1995, the Bank has not originated any loans
under this program.
The Bank has a credit facility with the FHLB in the form of
FHLB advances and letters of credit which allow borrowings up to
40% of the Bank's assets, or approximately $1,654,884,000 at
December 31, 1995 with terms up to 30 years.
The following is a summary of borrowing maturities at
December 31, 1995 (dollars in thousands):
1996........... $842,300
1997........... 50,000
Thereafter..... 50,000
--------
$942,300
========
Cash payments for interest on borrowings (including reverse
repurchase agreements) totaled $102,611,000, $61,945,000, and
$53,531,000 during 1995, 1994, and 1993, respectively.
68
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) Federal Home Loan Bank Advances and Other Borrowings (continued)
Interest expense on borrowings is comprised of the following
for the years indicated:
Year Ended December 31,
--------------------------------
1995 1994 1993
-------- -------- --------
(Dollars In Thousands)
FHLB Advances........................ $ 61,591 $ 38,162 $ 30,589
Reverse Repurchase Agreements........ 43,295 26,430 19,793
10 Year Senior Unsecured Notes....... 5,875 1,568 -
Other................................ 4,165 3,950 3,493
-------- -------- --------
$114,926 $ 70,110 $ 53,875
======== ======== ========
(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, 1995, $724,643,000 in reverse repurchase
agreements were collateralized by mortgage-backed securities with
principal balances totaling $765,792,000 and market values
totaling $773,295,000. 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.
The weighted average interest rates for borrowings under
reverse repurchase agreements were 5.68% and 5.81%, respectively,
as of December 31, 1995 and December 31, 1994.
Securities sold under agreements to repurchase averaged
$718,057,000 and $602,681,000 during 1995 and 1994, respectively,
and the maximum amounts outstanding at any month end during 1995
and 1994 were $749,546,000 and $691,121,000, respectively.
The following is a summary of maturities at December 31, 1995
(dollars in thousands):
Up to 30 days...... $ 90,406
30 to 90 days...... 282,631
Over 90 days....... 351,606
--------
$724,643
========
Accrued interest on securities sold under agreements to
repurchase which is included in accrued expenses and other
liabilities in the accompanying Consolidated Statements of
Financial Condition was $8,940,000 and $5,410,000 for the years
ended December 31, 1995 and 1994, respectively.
69
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(11) Income Taxes
Income taxes (benefit) consist of the following:
1995 1994 1993
------ --------- -------
(Dollars In Thousands)
Current:
Federal...................... $ 42 $ (7,169) $ 4,317
State........................ 555 (488) 120
------ -------- -------
597 (7,657) 4,437
Deferred: ------ -------- -------
Federal...................... 3,898 (4,464) (5,114)
State........................ 1,074 (5,578) (369)
------ -------- -------
4,972 (10,042) (5,483)
Total: ------ -------- -------
Federal...................... 3,940 (11,633) (797)
State........................ 1,629 (6,066) (249)
------ -------- -------
$5,569 $(17,699) $(1,046)
====== ======== =======
A reconciliation of the statutory federal corporate income
tax rate to the Company's effective income tax rate follows:
1995 1994 1993
------ ------- -------
Statutory federal income tax rate................. 35.0% (35.0)% (35.0)%
Increase (reductions) in taxes resulting from:
State franchise tax, net of federal income
tax benefit.................................... 8.8 (7.2) (6.4)
Core deposit intangibles........................ 0.8 0.1 7.4
Other, net...................................... 1.4 0.1 0.2
---- ----- -----
Effective rate................................. 46.0% (42.0)% (33.8)%
==== ===== =====
Cash payments for income taxes totaled $154,000, $254,000
and $2,158,000 during 1995, 1994, and 1993, respectively. In
addition, the Company received cash refunds totaling $8,267,000
during 1995.
Current income taxes receivable at December 31, 1995 and
1994 were $2,276,000 and $11,337,000, respectively.
70
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(11) Income Taxes (continued)
Listed below are the significant components of the net
deferred tax liability (1994 has been restated for prior year
tax returns filed through 1995):
1995 1994
--------- ---------
(Dollars In Thousands)
Components of the deferred tax asset:
Bad debts.................................................. $(25,419) $(29,308)
Pension expense............................................ (1,941) (1,765)
State taxes................................................ (370) -
IRS interest accrual....................................... (6,535) (4,948)
Other...................................................... (1,887) (3,035)
-------- --------
Total deferred tax asset................................. (36,152) (39,056)
Valuation allowance.......................................... - -
-------- --------
Total deferred tax asset, net of valuation allowance..... (36,152) (39,056)
Components of the deferred tax liability: -------- --------
Loan fees.................................................. 27,134 26,766
Tax effect of unrealized gain on
securities available-for-sale............................. 3,257 -
Loan sales................................................. 2,914 3,283
FHLB stock dividends....................................... 8,947 6,316
State taxes................................................ - 586
Other...................................................... 585 561
-------- --------
Total deferred tax liability............................. 42,837 37,512
-------- --------
Net deferred tax liability (asset)........................... $ 6,685 $ (1,544)
======== ========
Net state deferred tax asset............................... $ (188) $ (1,499)
Net federal deferred tax liability (asset)................. 6,873 (45)
-------- --------
Net deferred tax liability (asset)........................... $ 6,685 $ (1,544)
======== ========
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,
1995 and 1994, 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 1991 and 1992. During 1994, the IRS completed its
examination of the Company's consolidated federal income tax
returns for tax years 1984 through 1986 and, in 1995, completed
its examination of tax returns for 1987 and 1988. In early 1996,
the IRS completed its examination of tax returns for 1989 and
1990. The IRS has proposed adjustments primarily related to
temporary differences as to the recognition of certain taxable
income and expense items. The Company has filed formal protests
with the IRS to take exception to the proposed adjustments for
all 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 of certain income and
expense items could result in interest due to the IRS and FTB.
Although the outcome of the exams is not known at this time,
and it may take several years to resolve any
71
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(11) Income Taxes (continued)
disputed matters, the Company has recorded charges of
$3,524,000, $3,239,000 and $1,776,000 in 1995, 1994 and 1993,
respectively, as interest on possible tax adjustments. At
December 31, 1995, the Company had $14,114,000 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 management's best
estimate of liability as of this date.
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 1995 and
1994 did not include a liability of $5,164,000 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.
Proposed legislation pertaining primarily to the merger of
the BIF and SAIF insurance funds contains provisions which would
eliminate the tax bad debt deduction for the year beginning
January 1, 1996. However, existing tax bad debt reserves
established prior to 1987 would be permitted to be carried under
proposed "grandfathering" treatment. Post-1987 reserves would
have to be eliminated over a period of several years (presently
proposed to be six years). The Company cannot predict if or in
what form such legislation may be enacted. The Company also
cannot predict any impact on its results of operations.
(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, 1995 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 10,655,577, 10,552,963 and
10,460,145 for 1995, 1994 and 1993 respectively.
The Office of Thrift Supervision ("OTS") has adopted
regulations that contain capital standards for savings
institutions. The Bank was in compliance with these capital
standards at December 31, 1995.
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
72
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12) Stockholders' Equity and Earnings (Loss) Per Share (continued)
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 requirements are allowed a special bad debt
reserve deduction for qualifying loans computed as a 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 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, 1995 and 1994 the Company
had no excess bad debt reserves.
The Company may loan up to $6,000,000 to the Employee
Stock Ownership Plan ("ESOP") under a line of credit loan. At
December 31, 1995 and 1994 the loan to the ESOP totaled
$2,500,000 and $2,842,000, 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 1995 and 1994 were 5.44% and 4.16%,
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 the Board of Directors
deem redemption to be in its stockholders' best interests.
73
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 an
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
$436,000, $481,000 and $468,000 for 1995, 1994 and 1993,
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 7.0% and 5.0%, respectively, as of
December 31, 1995. The discount rate and rate of increase in
future compensation levels used in determining the pension cost
were 8.5% and 6.0%, respectively, as of December 31, 1994. The
expected long-term rates of return on assets were 8.5% at
December 31, 1995 and 7.5% at December 31, 1994.
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 $408,000, $471,000 and $434,000 in 1995, 1994
and 1993, respectively. The SERP uses the same actuarial
assumptions as the Pension Plan. The SERP is unfunded.
74
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(13) Employee Benefit Plans (continued)
The following table sets forth the funded status and amounts
recognized in the Company's Statements of Financial Condition for
the Pension Plan and the SERP for the years indicated:
Pension Plan SERP
------------------- -------------------
1995 1994 1995 1994
------- ------- ------- -------
(Dollars In Thousands)
Actuarial present value of benefits obligations:
Accumulated benefits obligation................... $ 2,943 $ 2,631 $ 3,167 $ 2,265
======= ======= ======= =======
Vested benefit obligation......................... $ 2,725 $ 2,482 $ 2,678 $ 2,573
======= ======= ======= =======
Plan assets at fair value........................... $ 2,979 $ 2,642 $ - $ -
Projected benefit obligation for service
rendered to date................................... 4,491 3,887 3,738 2,952
Shortage of plan assets over the projected ------- ------- ------- ------
benefit obligation................................. (1,512) (1,245) (3,738) (2,952)
Unrecognized net loss (gain) from past ex-
perience different from that assumed............... 959 387 (75) (698)
Prior service cost not yet recognized in
net periodic pension cost.......................... 149 180 655 752
Additional minimum liability........................ - - (384) (112)
Unrecognized net (asset) obligation at
transition......................................... (41) (130) 375 437
------- ------- ------- -------
Accrued pension liability........................... $ (445) $ (808) $(3,167) $(2,573)
Net pension cost for the year ended December ======= ======= ======= =======
31, 1995 and December 31, 1994 in-
cluded the following components:
Service cost-benefits earned during the
period........................................... $ 412 $ 441 $ 62 $ 76
Interest cost on projected benefit obligation..... 320 269 237 236
Actual return on plan assets...................... (223) (19) - -
Net amortization.................................. (58) (32) 109 159
Deferral of asset gains........................... (46) (173) - -
------- ------- ------- -------
Net period pension cost........................... $ 405 $ 486 $ 408 $ 471
======= ======= ======= =======
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, 1995 the ESOP held 7.17% of
outstanding stock of the Company. Profit sharing expense for the
years ended December 31, 1995, 1994 and 1993 was $500,000,
$200,000 and $200,000, respectively. The amount of the
contribution made by the Bank is determined each year by the
Board of Directors, but is not to exceed 15% of the
participants' aggregated compensation. The Bank does not offer
post retirement benefits under this plan.
The Company has issued options pursuant to the 1983 Stock
Option and Stock Appreciation Rights Plan which expired in
August 1993 as well as the 1994 Stock Option and Stock
Appreciation Rights Plan. Options prices are based upon the
market value of the common stock on the date of grant.
75
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(13) Employee Benefit Plans (continued)
Information with respect to stock options follows:
1995 1994
--------- --------
(In Shares)
Options Outstanding
(Average option prices)
Beginning of year ($13.74 and $11.70).................... 347,319 342,375
Granted ($15.90 and $14.58).............................. 35,384 102,906
Exercised ($9.79 and $3.95).............................. (15,430) (69,301)
Canceled ($14.99 and $16.11)............................. (25,256) (28,661)
------- -------
End of Year ($14.04 and $13.74).......................... 342,017 347,319
======= =======
Shares exercisable at December 31 ($12.18 and $11.76).... 164,252 164,322
======= =======
(14) Parent Company Financial Information
The following condensed parent company financial information
should be read in conjunction with the other Notes to the
Consolidated Financial Statements.
CONDENSED STATEMENTS OF FINANCIAL CONDITION
December 31,
----------------------
1995 1994
-------- --------
(Dollars In Thousands)
Assets:
Cash......................................... $ 2,737 $ 1,653
Other assets................................. 2,036 2,210
Investment in subsidiary..................... 240,523 231,573
-------- --------
$245,296 $235,436
======== ========
Liabilities and Stockholders' Equity:
Notes payable................................ $ 50,000 $ 50,000
Other liabilities............................ (995) 749
Stockholders' equity......................... 196,291 184,687
-------- --------
$245,296 $235,436
======== ========
Years Ended December 31,
-------------------------------------
CONDENSED STATEMENTS OF OPERATIONS 1995 1994 1993
--------- --------- ---------
(Dollars In Thousands)
Other expense, net............................. $ (3,714) $ (1,061) $ (78)
Equity in net earnings (loss) of
subsidiary.................................... 10,249 (23,403) (1,970)
-------- -------- --------
Net earnings (loss)............................ $ 6,535 $(24,464) $ (2,048)
======== ======== ========
76
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(14) Parent Company Information (continued)
Years Ended December 31,
CONDENSED STATEMENTS OF CASH FLOWS ------------------------------------
1995 1994 1993
-------- -------- --------
(Dollars In Thousands)
Net Cash Flows from Operating Activities:
Net earnings (loss).................................. $ 6,535 $(24,464) $ (2,048)
Adjustments to reconcile net earnings (loss) to
net cash provided (used) by operating activi-
ties:
Equity in net (earnings) loss of subsidiary.......... (10,249) 23,403 1,970
Other................................................ (1,521) 39 (10)
-------- -------- --------
Net cash used by operating activities................ (5,235) (1,022) (88)
Cash Flows from Investing Activities: -------- -------- --------
Decrease in ESOP loan................................ 342 76 73
Increase in other assets............................. - (2,225) -
Net cash (used) provided by investing activ- -------- -------- --------
ities............................................... 342 (2,149) 73
Cash Flows from Financing Activities: -------- -------- --------
Dividend from subsidiary............................. 5,875 5,000 3,000
Capital contribution to subsidiary................... - (47,750) (7,355)
Increase (decrease) in short term notes payable...... - (5,000) 2,000
Proceeds from long term borrowings................... - 50,000 -
Benefit from stock option tax adjustment............. - 510 2,355
Other................................................ 102 1,141 352
-------- -------- --------
Net cash provided by financing activities............ 5,977 3,901 352
-------- -------- --------
Net increase in cash................................. 1,084 730 337
Cash at beginning of period.......................... 1,653 923 586
-------- -------- --------
Cash at end of period................................ $ 2,737 $ 1,653 $ 923
======== ======== ========
77
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(15) Quarterly Results of Operations: (unaudited)
Summarized below are the Company's results of operations on
a quarterly basis for 1995, 1994 and 1993:
Net
Provision Other Non- Net Earnings
Interest Interest For Loan Income Interest Earnings (Loss)
Income Expense Losses (Expense) Expense (Loss) Per Share
-------- -------- -------- --------- -------- --------- ---------
(Dollars In Thousands, Except Per Share Data)
First quarter
1995........ $ 69,726 $ 53,505 $ 3,000 $ 2,762 $ 11,677 $ 2,357 $ .22
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)
Second quarter
1995........ $ 76,342 $ 57,739 $ 8,203 $ 3,251 $ 11,205 $ 1,346 $ .13
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
Third quarter
1995........ $ 78,548 $ 57,183 $ 6,173 $ (255) $ 11,342 $ 1,984 $ .19
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
Fourth quarter
1995........ $ 77,119 $ 55,650 $ 11,000 $ 2,967 $ 11,679 $ 848 $ .08
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
Total year
1995........ $301,735 $224,077 $ 28,376 $ 8,725 $ 45,903 $ 6,535 $ .61
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)
(16) Fair Value 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 the estimated fair
value for its financial instruments as of December 31, 1995 and
1994. 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.
78
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(16) Fair Value of Financial Instruments (continued)
1995 1994
----------------------- -----------------------
Historical Historical
Value Fair Value Value Fair Value
---------- ---------- ---------- ----------
(Dollars In Thousands)
Mortgage-backed Securities............... $827,064 $835,448 $821,317 $791,930
Investment Securities.................... 46,862 46,691 40,770 38,359
Collateralized Mortgage Obligations...... 29,874 29,493 43,282 40,957
Loans Held-for-Sale...................... 7,377 7,464 30,399 30,399
The following table presents fair value information for
financial instruments shown in the Company's Consolidated
Statements of Financial Condition for which there is no readily
available market. The fair values for these financial instruments
were calculated by discounting expected cash flows. Because
these financial instruments have not been evaluated for possible
sale and because management does not intend to sell these
financial instruments, the Company does not know whether the fair
values shown below represent values at which the respective
financial instruments could be sold.
1995 1994
------------------------ ------------------------
Calculated Calculated
Carrying Fair Value Carrying Fair Value
Value Amount Value Amount
---------- ---------- ---------- ----------
(Dollars In Thousands)
Adjustable Loans:
Single Family...................... $1,556,368 $1,569,324 $1,471,156 $1,378,258
Multi-Family....................... 1,191,852 1,188,435 1,244,990 1,070,107
Commercial......................... 188,623 192,488 195,506 179,631
Fixed Rate Loans:
Single Family...................... 20,867 22,050 14,535 13,814
Multi-Family....................... 11,714 12,360 12,701 12,212
Commercial......................... 2,147 2,443 3,087 3,161
Other Real Estate Loans.............. 3,135 3,582 20,297 20,921
Non-Real Estate Loans................ 753 475 3,749 2,686
Non-Performing Loans................. 76,944 76,944 75,889 75,889
Fixed-Term Certificate Accounts...... 1,782,059 1,788,581 1,817,503 1,808,165
Non-Term Deposit Accounts............ 422,977 422,977 481,411 481,411
Borrowings........................... 1,666,943 1,667,953 1,604,821 1,602,130
SFAS No. 107 specifies that fair values should be calculated
based on the value of one unit. The estimates do not necessarily
reflect the price the Company might receive if it were to sell
the entire holding of a particular financial instrument at one
time.
Fair value estimates are based on the following methods and
assumptions, some of which are subjective in nature. Changes in
assumptions could significantly affect the estimates.
79
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(16) Fair Value of Financial Instruments (continued)
Cash
The carrying amounts reported in the Consolidated Statements
of Financial Condition for this item approximate fair value.
Investment Securities and Mortgage-Backed Securities
Fair values are based on bid prices published in financial
newspapers or bid quotations received from national securities
dealers.
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. The Bank had
outstanding commitments to fund $18,417,000 in real estate loans
which were substantially at fair value.
Non-performing Assets
The carrying amounts reported in the Consolidated Statements
of Financial Condition for this item approximate fair value.
Deposits
The fair value of deposits with no stated term such as
regular passbook accounts, money market accounts and checking
accounts, is defined by SFAS No. 107 as the carrying accounts
reported in the Consolidated Statements of Financial Condition.
The fair value of deposits with a stated maturity such as
certificates of deposit is based on discounting future cash flows
by the current rate offered for such deposits with similar
remaining maturities.
Borrowings
For short term borrowings, fair value approximates carrying
value. The fair value of long term borrowings is based on their
interest rate characteristics. For variable rate borrowings, fair
value is based on carrying values. For fixed rate borrowings,
fair value is based on discounting future contractual cash flows
by the current interest rate paid on such borrowings with similar
remaining maturities.
Excess Servicing Arising from the Sale of Loans
The carrying amounts reported in the Consolidated Statements
of Financial Condition for this item approximate fair value.
80
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, 1995 and 1994, 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, 1995. 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, 1995 and 1994, and the results of their operations
and their cash flows for each of the years in the three-year
period ended December 31, 1995, in conformity with generally
accepted accounting principles.
As discussed in note 1 of the consolidated financial
statements, FirstFed Financial Corp. and subsidiary adopted the
provisions of the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 115, Accounting
for Certain Investments in Debt and Equity Securities, in 1994.
KPMG Peat Marwick LLP
Los Angeles, California
January 23, 1996
81
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 4 through 8 of the Proxy Statement for the
Annual Meeting of Stockholders dated April 24, 1996 is
incorporated herein by reference.
ITEM 11--EXECUTIVE COMPENSATION
Information regarding executive compensation appearing on
pages 8 through 13 of the Proxy Statement for the Annual Meeting
of Stockholders dated April 24, 1996 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 24, 1996 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 10 of the Proxy Statement for the Annual Meeting of
Stockholders dated April 24, 1996 is incorporated herein by
reference.
PART IV
ITEM 14--EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8K
(a) 1. Consolidated Financial Statements
The consolidated financial statements included in this
Report are listed under Item 8.
2. Consolidated Financial Statement Schedules
Schedules have been omitted because they are not
applicable or the required information is presented in
the consolidated financial statements or notes thereto.
82
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, a federal savings bank.
(24) Power of Attorney (included at page 84).
This 1995 Annual Report on Form 10-K and the Proxy Statement
for the Annual Meeting of Stockholders dated April 24, 1996 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 4, 1996 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.
83
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 22, 1996
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 22nd day of February, 1996.
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/ Ruben H. Valle Senior Vice President and Controller
- ----------------------------
Ruben H. Valle (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/ William G. Ouchi Director
- ----------------------------
William G. Ouchi
/s/ William P. Rutledge Director
- ----------------------------
William P. Rutledge
/s/ Charles F. Smith Director
- ----------------------------
Charles F. Smith
/s/ Steven L. Soboroff Director
- ----------------------------
Steven L. Soboroff
/s/ John R. Woodhull Director
- ----------------------------
John R. Woodhull
84