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, 2001
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 5, 2002: $399,729,000.
The number of shares of Registrant's $0.01 par value common stock outstanding as
of February 5, 2002: 17,252,604
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for Annual Meeting of Stockholders, April 24,
2002 (Parts III & IV).
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (sub-section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of the
Form 10-K or any amendment to this Form 10-K. [X]
FirstFed Financial Corp.
Index
Page
Part I Item 1. Business.......................................... 3
Item 2. Properties........................................ 22
Item 3. Legal Proceedings................................. 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Part II Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters............................... 22
Item 6. Selected Financial Data........................... 23
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............... 24
Item 8. Financial Statements and Supplementary Data....... 41
Notes to Consolidated Financial Statements........ 45
Independent Auditors' Report...................... 74
Item 9. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure............... 75
Part III
Item 10. Directors and Executive Officers of the Registrant 75
Item 11. Executive Compensation............................ 75
Item 12. Security Ownership of Certain Beneficial Owners and
Management........................................ 75
Item 13. Certain Relationships and Related Transactions.... 75
Part IV Item 14. Exhibits, Consolidated Financial Statement
Schedules, and Reports on Form 8K................. 76
Signatures......................................................... 77
Power of Attorney.................................................. 78
2
PART I
ITEM 1--BUSINESS
General Description
FirstFed Financial Corp., a Delaware corporation ["FFC," and collectively
with its sole and wholly owned subsidiary, First Federal Bank of California (the
"Bank"), the "Company"], was incorporated on February 3, 1987. Since September
22, 1987, FFC has operated as a savings and loan holding company engaged
primarily in the business of owning the Bank. Because the Company does not
presently engage in any significant independent business operations,
substantially all earnings and performance figures herein reflect the operations
of the Bank.
The Bank was organized in 1929 as a state-chartered savings and loan
association, and, in 1935, converted to a federal mutual charter. In February
1983 the Bank obtained a federal savings bank charter, and, in December 1983,
converted from mutual to stock ownership.
The principal business of the Bank is attracting savings and checking
deposits from the general public, and using such deposits, together with
borrowings and other funds, to make real estate, business and consumer loans.
At December 31, 2001, the Company had assets totaling $4.7 billion,
compared to $4.4 billion at December 31, 2000 and $3.9 billion at December 31,
1999. The Company recorded net earnings of $50.3 million for 2001, compared to
net earnings of $38.5 million for 2000 and $33.3 million for 1999. Results for
1999 included an extraordinary item of $2.2 million, which resulted from a loss
recorded on the early extinguishment of debt. Net earnings before extraordinary
items totaled $35.4 million for 1999.
The Bank derives its revenues principally from interest on loans and
investments, loan origination fees and servicing fees on loans sold. Its major
items of expense are interest on deposits and borrowings, and general and
administrative expense.
As of February 15, 2002, the Bank operated 29 retail savings branches, all
located in Southern California. The increased number of branches resulted from
the acquisition in November 2001 of Frontier State Bank and Del Amo Savings
Bank. Permission to operate all full-service branches must be granted by the
Office of Thrift Supervision ("OTS"). In addition to its retail branches, the
Bank operates a retail call center, which conducts transactions with deposit
customers by telephone.
The Bank's principal loan market is Southern California. The Bank has a
residential lending group which includes a retail lending division with four
loan offices, a wholesale loan office, a correspondent lending group, and
"LENDFFB", a loan origination group which operates primarily by telephone.
The Bank has three wholly-owned subsidiaries: Seaside Financial
Corporation, Oceanside Insurance Agency, Inc. and Santa Monica Capital Group,
all of which are California corporations. See "Subsidiaries."
Current Operating Environment
The Company's operating results are significantly influenced by national
and regional economic conditions, monetary and fiscal policies of the federal
government, housing demand and affordability, and general levels of interest
rates.
The Bank's primary market is the Los Angeles County area of Southern
California. According to the UCLA Anderson Forecast for California, December
2001 Report ("Forecast"), California, like the rest of the nation, entered into
a recession during 2001. The recession is expected to be short-lived for the
nation, as well as California, with a slow rebound starting in the second
quarter of 2002. Average unemployment levels in California are expected to rise
from 5.2% in 2001 to 6.2% for both 2002 and 2003. The rise in unemployment is
due to decreased employment levels in the state's service sector (particularly
computer service jobs.) Personal income in California, which increased by 2.1%
in 2001, is expected to increase by only 1.3% from 2001 to 2002 but is expected
to improve by 5.6% from 2002 to 2003.
Real estate prices in Southern California are expected to remain stable
over the next several years due to the low production of new housing units and
moderate interest rates. According to the Forecast, home values in Los Angeles
County increased by 7.3% during 2001, but are expected to increase by only 3.8%
in 2002 and 3.5% in 2003.
Consistent with the favorable real estate climate in the greater Los
Angeles area, the Bank's non-performing assets declined to 0.17% of total assets
at the end of 2001 from 0.19% at the end of 2000 and 0.40% at the end of 1999.
3
The Bank monitors the sufficiency of the collateral supporting its loan
portfolio based on many factors including the property location, the date of
loan origination and the original loan-to-value ratio. The Bank adjusts its
general allowance for anticipated loan losses as a result of these evaluations.
No provision for loan losses was necessary during 2001, 2000 or 1999.
The ratio of the general valuation allowance to the Bank's assets with loss
exposure (the Bank's loan portfolio, real estate owned, loan commitments, and
potential loan buybacks) was 1.70% at the end of 2001 compared to 1.81% at the
end of 2000 and 2.15% at the end of 1999. The decline in the ratio over the last
three years is due to asset growth. See "Business - Loan Loss Allowance" for
additional information.
The Bank also maintains a separate valuation allowance for impaired loans
and a repurchase liability for loans sold with recourse. See "Business - Loan
Loss Allowance" for additional information regarding valuation allowances for
these loans.
Current Interest Rate Environment. In its attempts to encourage economic
activity at the national level, the Federal Reserve Board ("FRB") decreased
interest rates eleven times during 2001. This is in contrast to 2000 and 1999
when the FRB increased interest rates three times during each year. Through
March 5, 2002, the FRB has not changed interest rates.
The Bank's interest rate spread typically increases in a decreasing
interest rate environment, (savings and borrowing costs decrease immediately
while the loan portfolio yield stays approximately the same or decreases
slowly). The reverse is true during periods of increasing interest rates.
Changes in interest rates have a moderate impact on the Bank's loan portfolio
due to the interest rate adjustment features of its loans. There is also a time
lag before changes in interest rates can be implemented with respect to the
Bank's loan portfolio due to operational and regulatory constraints. These
constraints do not allow the Bank to pass through monthly changes in the primary
index utilized for the majority of its adjustable rate loan customers for a
period of ninety days.
The Bank's interest rate spread increased to 2.71% in 2001 from 2.37% in
2000 because the cost of its deposits and borrowings decreased more quickly than
the rates earned on its loan portfolio. The decrease to 2.37% in 2000 from 2.50%
in 1999 was due to the fact that the cost of its deposits and borrowings
increased more quickly than the rates earned on the loan portfolio. It is
expected that the Bank's interest rate spread will compress during 2002 because
the loan yield on adjustable rate mortgages will decrease due to the ninety-day
time lag mentioned above. However, the Bank's cost of funds may remain stable or
decrease at a much slower pace, particularly if the FRB does not decrease
interest rates further in the near future. See "Asset-Liability Management" and
"Components of Earnings - Net Interest Income" in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" for additional
information.
Competition. The Bank experiences strong competition in attracting and
retaining deposits and originating real estate loans. It competes for deposits
with many of the nation's largest savings institutions and commercial banks that
have significant operations in Southern California.
The Bank also competes for deposits with credit unions, thrift and loan
associations, money market mutual funds, issuers of corporate debt securities
and the government. In addition to the rates of interest offered to depositors,
the Bank's ability to attract and retain deposits depends upon the quality and
variety of services offered, the convenience of the Bank's locations and its
financial strength as perceived by depositors.
The Bank competes for real estate loans primarily with savings
institutions, commercial banks, mortgage companies and insurance companies. The
primary factors in competing for loans are interest rates, loan fees, interest
rate caps, interest rate adjustment provisions and the quality and extent of
service to borrowers and mortgage brokers.
Environmental Concerns. In certain circumstances, such as if it actively
participates in the management or operation of a property securing its loans,
the Bank could have liability for any properties found to have pollutant or
toxic features. Environmental protection laws are strict and impose joint and
several liability on numerous parties. It is possible for the cost of cleanup of
environmental problems to exceed the value of the security property. The Bank
has adopted environmental underwriting requirements when considering loans
secured by properties which appear to have environmentally high risk
characteristics (e.g. commercial, industrial and construction of all types,
which may contain friable asbestos or lead paint hazards). These requirements
are intended to minimize the risk of environmental hazard liability. The Bank's
policies are also designed to avoid the potential for liability imposed on
lenders who assume the management of a property.
Business Concentration. The Bank has no single customer or group of
customers, either as depositors or borrowers, the loss of any one or more of
which would have a material adverse effect on the Bank's operations or earnings
prospects.
4
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 the origination of
loans for the purpose of enabling borrowers to purchase, refinance or construct
improvements on residential real property. The loan portfolio primarily consists
of loans made to homebuyers and homeowners on the security of single family
dwellings and multi-family dwellings. The loan portfolio also includes loans
secured by commercial and industrial properties.
For an analysis of loan portfolio composition and an analysis of the types
of loans originated, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Balance Sheet Analysis - Loan Portfolio
and Loan Composition."
Origination and Sale of Loans. The Bank employs loan officers on an
incentive compensation basis to obtain qualified applicants for loans. The Bank
also derives business from other sources such as mortgage brokers, borrower
referrals, direct telephone sales and clients from its retail banking branches.
Loan originations and purchases were $1.5 billion in 2001, $1.1 billion in
2000, and $944.1 million in 1999. Loan origination volume has improved over the
last three years due to an increase in real estate activity in the Bank's market
areas. The above amounts include loan purchases totaling $132.6 million during
2001, $139.5 million during 2000 and $122.8 million during 1999.
Loans sold totaled $61.2 million in 2001, $9.5 million in 2000 and $133.0
million in 1999. For the year ended December 31, 2001, $64.2 million in loans
were originated for sale compared to $10.9 million for 2000 and $120.6 million
in 1999. Loans originated for sale totaled 5%, 1% and 14% of loan originations
during 2001, 2000 and 1999, respectively. The increase in loans originated for
sale is due to borrower preference for 30-year and 15-year fixed rate loans,
which were available to borrowers at lower interest rates in 2001 compared to
2000. The Bank originates 30-year and 15-year fixed rate loans only for sale.
Loans held-for-sale at December 31, 2001, 2000 and 1999 were $5.2 million,
$2.2 million and $2.3 million, respectively, constituting 0.13%, 0.06% and
0.08%, respectively, of the Bank's total loans at such dates.
Loans originated for sale are recorded at the lower of cost or fair value.
The time from origination to sale typically takes up to 30 days. During this
time period the Bank may be exposed to price adjustments as a result of
fluctuations in market interest rates.
The Bank structures mortgage-backed securities with loans from its loan
portfolio for use in collateralized borrowing arrangements. In exchange for the
improvement in credit risk when the mortgage-backed securities are formed,
guarantee fees are paid to the Federal Home Loan Mortgage Corporation ("FHLMC")
or the Federal National Mortgage Association ("FNMA"). No loans were converted
into mortgage-backed securities during 2001, 2000 or 1999. The Bank originated
all loans underlying the mortgage-backed securities that it owns. Therefore,
mortgage-backed securities generally have the same experience with respect to
prepayment, repayment, delinquencies and other factors as the remainder of the
Bank's portfolio.
The portfolio of mortgage-backed securities was recorded at fair value as
of December 31, 2001, 2000 and 1999. A positive fair adjustment of $1.9 million,
net of tax, was recorded for mortgage-backed securities during 2001. Negative
fair value adjustments for mortgage-backed securities totaling $1.9 million and
$6.6 million, net of taxes, were recorded in stockholders' equity at December
31, 2000 and 1999, respectively.
The Bank serviced $257.6 million in loans for other investors as of
December 31, 2001. $126.4 million of these loans were sold under recourse
arrangements. The Bank has an additional $10.8 million in loans that were formed
into mortgage-backed securities with recourse features, but were still owned by
the Bank as of December 31, 2001. Due to regulatory requirements, the Bank
maintains capital for loans sold with recourse as if those loans had not been
sold. The Bank had been active in these types of transactions in the past, but
has not entered into any new recourse arrangements since 1989 when a change in
the capital regulations took effect. Loans sold with recourse are analyzed in
determining the adequacy of the repurchase liability. The decrease in the
principal balance of loans sold with recourse to $126.4 million at the end of
2001 from $146.5 million at the end of 2000 and $178.7 million at the end of
1999 is due to loan amortization and payoffs.
5
Interest Rates, Terms and Fees. The Bank makes residential adjustable
mortgage loans ("AMLs") with 30 and 40 year terms and interest rates which
adjust each month based upon the Federal Home Loan Bank's Eleventh District Cost
of Funds Index ("Index"). (See "Asset-Liability Management" in "Management's
Discussion and Analysis of Financial Condition and Results of Operations.")
While the monthly payment adjusts annually, the maximum annual change in the
payment is limited to 7.5%. Any additional interest due as a result of a rising
Index is added to the principal balance of the loan ("negative amortization").
Payments are adjusted every five years without regard to the 7.5% limitation to
provide for full amortization during the balance of the loan term. Although the
interest rates are adjusted monthly, these loans have maximum interest rates
which can be charged ranging from 400 to 750 basis points above their initial
interest rate. Generally, these loans may be assumed at any time during their
term provided that the person assuming the loan meets the Bank's credit
standards and enters into a separate written agreement with the Bank.
Additionally, the new borrower is required to pay assumption fees customarily
charged for similar transactions.
The Bank offers two primary AML products based on the Index, the "COFI ONE"
and the "COFI THREE." The initial interest rate on the COFI THREE is
below-market for the first three months of the loan term. The COFI ONE has no
below-market initial interest rate but starts with a pay rate similar to the
COFI THREE. This results in immediate negative amortization but allows the loan
to earn at the fully indexed interest rate immediately. The difference in
negative amortization on these two products is minor. The Bank also originates
adjustable rate loans based on the one year U.S. Treasury Security and 12-month
average U.S. Treasury Security rates.
The Bank also originates adjustable rate loans with initial fixed interest
rates for periods ranging from 3 to 10 years. By policy, the Bank will either
match the fixed rate period of these loans with borrowings for the same term or
will hold unmatched fixed rate loans in its portfolio up to 5%of total assets.
Loans originated under this program totaled $1.0 billion in 2001, $75.9 million
in 2000 and $205.7 million in 1999. Adjustable rate loans with initial fixed
interest rates were popular during 2001 because their initial interest rates
were competitive with longer term fixed rate loan products.
Under current portfolio loan programs, the Bank normally lends no more than
95% of a single family property's appraised value at the time of loan
origination. In addition, the Bank has special Community Reinvestment Act loan
programs in which it lends up to 95% of the property's appraised value.
The Bank generally requires that borrowers obtain private mortgage
insurance on loans in excess of 80% of the appraised property value. On certain
loans originated for the portfolio, the Bank charges premium rates and/or fees
in exchange for waiving the insurance requirement. Management believes that the
additional rates and fees that the Bank receives for these loans compensate for
the additional risk associated with this type of loan. Subsequent to the
origination of a portfolio loan, the Bank may purchase private mortgage
insurance with its own funds. Under certain mortgage insurance programs the Bank
acts as co-insurer and participates with the insurer in absorbing any future
loss. As of December 31, 2001, 2000 and 1999, loans with co-insurance totaled
$140.4 million, $212.6 million and $176.7 million, respectively. Loans over 80%
loan-to-value, for which there was no private mortgage insurance, totaled $354.5
million at December 31, 2001, $268.2 million at December 31, 2000 and $274.2
million at December 31, 1999.
Because AML loan-to-value ratios may increase above those established at
the time of loan origination due to negative amortization, the Bank rarely lends
in excess of 90% of the appraised value on AMLs. When the Bank does lend in
excess of 90% of the appraised value, additional fees and higher rates are
charged. The amount of negative amortization recorded by the Bank increases
during periods of rising interest rates. As of December 31, 2001, negative
amortization on all loans serviced by the Bank was immaterial.
Although regulations permit a maximum loan term of 40 years for real estate
secured home loans and 30 years for other real estate loans, the majority of the
Bank's real estate loans provide for a maximum maturity period of 30 years or
less. Loans with 40-year terms constituted 4%, 6% and 8% of loan originations
during 2001, 2000 and 1999, respectively.
The following table shows the contractual remaining maturities of the
Bank's loans at December 31, 2001:
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............... $3,946,047 $80,962 $743,297 $638,758 $1,385,898 $1,018,555 $78,577
Fixed-rate loans... 70,713 3,413 25,094 24,759 11,692 5,742 13
Commercial business loans 18,882 4,534 14,348 - - - -
Construction loans. 38,060 17,505 20,555 - - - -
Consumer and other loans 20,813 18,437 1,879 487 10 - -
Total.............. $4,094,515 $124,851 $805,173 $664,004 $1,397,600 $1,024,297 $78,590
6
Non-accrual, Past Due, Impaired and Restructured Loans
The Bank establishes allowances for delinquent interest equal to the amount
of accrued interest on all loans 90 days or more past due or in foreclosure.
This practice effectively places such loans on non-accrual status for financial
reporting purposes.
The following is a summary of non-accrual loans for which delinquent
interest allowances had been established as of the end of each of the periods
indicated:
% of % of % of % of % of
2001 Total 2000 Total 1999 Total 1998 Total 1997 Total
(Dollars In Thousands)
Non-accrual Loans:
Single family......... $6,062 93% $5,603 89% $9,626 70% $12,270 42% $16,799 49%
Multi-family.......... 422 6 662 11 3,995 29 13,005 44 15,785 46
Commercial .. - - - - 225 1 4,040 14 1,533 5
Consumer 16 1 - - - - - - - -
Total Non-accrual
Loans............. $6,500 100% $6,265 100% $13,846 100% $29,315 100% $34,117 100%
The allowance for delinquent interest, based on loans past due more than 90
days or in foreclosure, totaled $504 thousand, $511 thousand, $720 thousand,
$1.9 million and $1.8 million at December 31, 2001, 2000, 1999, 1998 and 1997,
respectively.
The Bank's modified loans result primarily from temporary modifications of
principal and interest payments. Under these arrangements, loan terms are
typically reduced to no less than a monthly interest payment required under the
note. If the borrower is unable to return to scheduled principal and interest
payments at the end of the modification period, foreclosure proceedings are
initiated or the modification period may be extended. As of December 31, 2001,
the Bank had modified loans totaling $7.4 million, net of loan loss allowances
of $1.9 million. This compares with modified loans totaling $9.6 million, net of
loan loss allowances of $1.9 million as of December 31, 2000 and $7.4 million,
net of loan loss allowances of $2.6 million as of December 31, 1999. No modified
loans were 90 days or more delinquent as of December 31, 2001, 2000 or 1999.
Statement of Financial Accounting Standards No. 114, "Accounting by
Creditors for Impairment of a Loan" ("SFAS No. 114"), requires the measurement
of impaired loans based on the present value of expected future cash flows
discounted at the loan's effective interest rate, or at the loan's observable
market price or at the fair value of its collateral. SFAS No. 114 does not apply
to large groups of homogeneous loans that are collectively reviewed for
impairment.
Pursuant to SFAS No. 114, a loan is considered to be impaired when management
believes that it is probable that the Bank will be unable to collect all amounts
due under the contractual terms of the loan. Estimated impairment losses are
recorded as separate valuation allowances and may be subsequently adjusted based
upon changes in the measurement of impairment. Impaired loans, which are
disclosed net of valuation allowances, include non-accrual major loans (single
family loans with an outstanding principal amount greater than or equal to $500
thousand and multi-family and commercial real estate loans with an outstanding
principal amount greater than or equal to $750 thousand), modified loans, and
major loans less than 90 days delinquent in which full payment of principal and
interest is not expected to be received.
Valuation allowances for impaired loans totaled $1.9 million, $1.8 million
and $2.6 million as of December 31, 2001, 2000 and 1999, respectively. The
following is a summary of impaired loans, net of valuation allowances for
impairment, for the periods indicated:
December 31,
2001 2000 1999
(Dollars In Thousands)
Non-accrual loans ..... $ 978 $ - $ 2,079
Modified loans......... 6,416 8,770 6,534
Other impaired loans... - - 2,820
$ 7,394 $ 8,770 $ 11,433
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
7
loan is "collateral-dependent" or a probable foreclosure, impairment is measured
based on the fair value of the collateral. When the measure of an impaired loan
is less than the recorded investment in the loan, the Bank records an impairment
allowance equal to the excess of the Bank's recorded investment in the loan over
its measured value. As of December 31, 2001, December 31, 2000, and December 31,
1999, impaired loans totaling $3.9 million, $5.1 million, and $3.9 million,
respectively, had no valuation allowances established. All impaired loans were
measured using the fair value method as of December 31, 2001, December 31, 2000
and December 31, 1999, with values totaling $7.4 million, $8.8 million and $11.4
million, respectively.
The present value of an impaired loan's expected future cash flows will
change from one reporting period to the next because of the passage of time and
also may change because of revised estimates in the amount or timing of those
cash flows. The Bank records the entire change in the present value of the
expected future cash flows as an impairment valuation allowance, which may
necessitate an increase in the provision for loan losses. Similarly, the fair
value of the collateral of an impaired collateral-dependent loan may change from
one reporting period to the next. The Bank also records a change in the measure
of these impaired loans as an impairment valuation allowance, which may
necessitate an adjustment to the provision for loan losses.
The following is an analysis of the activity in the Bank's valuation
allowance for impaired loans during the periods indicated (dollars in
thousands):
Balance at December 31, 1998.. $ 7,634
Provision for loan losses... -
Net charge-offs............. (5,038)
Balance at December 31, 1999.. 2,596
Provision for loan losses... -
Net charge-offs............. (804)
Balance at December 31, 2000.. 1,792
......Provision for loan losses 58
Net charge-offs............. -
Balance at December 31, 2001.. $ 1,850
Cash payments received from impaired loans are recorded in accordance with
the contractual terms of the loan. The principal portion of the payment is used
to reduce the principal balance of the loan, whereas the interest portion is
recognized as interest income.
The average recorded investment in impaired loans during 2001, 2000 and
1999 was $7.4 million, $8.8 million and $11.4 million, respectively. The amount
of interest income recognized from impaired loans during 2001, 2000 and 1999 was
$597 thousand, $706 thousand and $1.0 million, respectively, under the cash
basis method of accounting. Interest income that was recognized under the
accrual basis method of accounting for 2001, 2000 and 1999 totaled $587
thousand, $712 thousand and $997 thousand, respectively.
The table below shows the Bank's net investment in non-accrual loans which
were determined to be impaired, by property type, as of the periods indicated:
December 31,
2001 2000 1999
(Dollars In Thousands)
Single family ....... $ 978 $ - $ 987
Multi-family......... - - 1,092
$ 978 $ - $ 2,079
8
Loan Loss Allowance
The Bank maintains a general valuation allowance for loan losses for the
inherent risks in the loan portfolio which have yet to be specifically
identified. Management evaluates the adequacy of the valuation allowance on a
quarterly basis. This evaluation is based on a detailed analysis of the entire
loan portfolio; considering both internal and external factors that may impact
collectibility and risks involved with the various types of lending. The Bank's
Internal Asset Review System is used to determine the adequacy of the valuation
allowance. In accordance with SFAS No. 114, the Bank identifies and evaluates
loans for impairment on an individual basis. The remainder of the portfolio is
segmented into groups of loans with similar risk characteristics for evaluation
and analysis under Statement of Financial Accounting Standards No. 5,
"Accounting for Contingencies" ("SFAS No.5").
Internal Asset Review System. In accordance with the regulations of the
Office of Thrift Supervision ("OTS"), the Bank maintains a risk grading system
for all assets based on an assessment of the repayment capacities of the
borrower, the collateral property, guarantors and endorsers. The risk grading
system provides a tool for risk measurement, early problem asset identification
and proper pricing for new extensions of credit. Loans are assigned an
appropriate risk grade by underwriters at the time of loan origination. These
assignments are reviewed by employees responsible for monitoring and classifying
assets on an ongoing basis.
Assets are classified according to a nine-tiered risk grade system. The
nine risk grades are segmented into three general groups: "unclassified" (risk
grades 1 through 5), "criticized" (risk grade 6 - special mention), and
"classified" (risk grade 7 - substandard, risk grade 8 - doubtful and risk grade
9 - loss). In determining the appropriate risk grade for a loan asset,
consideration is given to information on repayment prospects, including the
value of and cash flow provided by the collateral supporting the loan, and any
support provided by the borrowers and financially responsible guarantors.
Several factors are considered in assigning a risk grade - income, cash flow to
service existing debt, stability of income sources, liquidity, credit history,
access to alternative financing, collateral type, value, property condition and
market influences.
All assets are subject to on-going classification through the Bank's
internal review system. For internal asset review purposes, the Bank's asset
portfolio is segregated into three distinct groups: assets subject to review by
the Loan Workout Committee, a committee of officers responsible for resolving
problem asset situations, homogeneous assets and non-homogeneous assets.
Asset Subject to Review by the Loan Workout Committee - The Loan Workout
Committee monitors and develops repayment strategies for the Bank's most complex
problem assets, such as residential loans greater than $500,000, income property
loans with unpaid principal balances of $750,000 or greater, 30 days more
contractually delinquent, or with collateral properties currently managed by a
court- appointed receiver.
Non-Homogeneous Assets. These are performing income property loans with
unpaid balances greater than $1.5 million, 36+ unit apartment loans, and
commercial business loans. Other non-homogeneous assets may include investments
in subsidiaries, investments in securities, and significant off-balance sheet
items.
Homogeneous Assets. These assets are other than non-homogeneous assets and
those reviewed by the Loan Workout Committee. Generally, these assets include
residential loans, lower-balance income property loans, and consumer loans.
These assets are reviewed through a series of monthly tracking reports.
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 a detailed discussion of
impaired loans, see "Business - Non-accrual, Past Due and Restructured Loans".
For loans evaluated on a group basis under SFAS No.5, the Bank defined
segments of the loan portfolio by identifying risk characteristics that are
common to specified groups of loans. All loans in the Bank's portfolio are
subject to this analysis.
The Bank's asset classification system serves as a foundation for
determining the appropriate level of General Valuation Allowances (GVA). Within
the classification categories, loans are stratified based on factors affecting
the perceived level and concentration of risk, such as type of collateral, year
of origination, original loan-to-value ratio and geographic location.
The Bank calculates the appropriate level of GVA by applying reserve
factors to the balance of assets on which the Bank has loss exposure ("exposure
base"). The reserve factors represent the expected likelihood of default
multiplied by the expected rate of loss, derived from the Bank's historical loss
experience and adjusted for current and anticipated conditions and trends.
9
Additionally, due to the economic cycle and its effect on real estate
values, the Bank believes that loans originated within the past 12-24 months
pose an additional risk. A downturn in the California economy may affect real
estate values and, consequently, loans originated at the "top of the market"
have the greatest loss exposure. Historical loss analysis provides further
insight into risk concentrations within the loan portfolio.
The Bank reviews the GVA for adequacy at least quarterly and evaluates the
performance trends in the loan portfolio to establish adequate reserve factors.
The Asset Classification Committee reviews the GVA analysis and methodology on a
quarterly basis. The Board of Directors reviews the GVA policy annually.
The following is an analysis of the activity in the Bank's general loan
valuation allowance for the periods indicated:
Year Ended December 31,
2001 2000 1999 1998 1997
(Dollars In Thousands)
Beginning General Loan Valuation
Allowance................ $70,809 $69,954 $67,638 $61,237 $54,900
Provision for Loan Losses.. (58) - - 6,560 13,155
General Loan Valuation Allowance
Obtained in Acquisition. 2,050 - - - -
Charge-offs, Net of Recoveries:
Single Family............ (322) (767) (342) (1,497) (5,633)
Multi-Family............. 286 1,692 2,650 1,354 2,341
Commercial............... - (105) 111 (32) 482
Non-Real Estate.......... 154 35 (103) 16 226
Total Net Recoveries (Charge-offs) 118 855 2,316 (159) (2,584)
Transfer to Liability Account for
Loans Sold with Recourse - - - - (4,234)
Ending General Loan Valuation
Allowance.......... $72,919 $70,809 $69,954 $67,638 $61,237
The Bank recorded net loan loss recoveries of $118 thousand during 2001 and
$51 thousand during 2000. During the previous three years, charge-offs,
including net charge-offs from the general valuation allowance and impaired loan
allowance totaled $2.7 million, $2.9 million and $12.5 million, respectively,
representing 0.09%, 0.10% and 0.39% of the average loan portfolio for such
periods. The low level of charge-offs over the last five years is due to the
improved condition of the Southern California economy and real estate market
since the recession of the mid-1990's.
Any increase in charge-offs would adversely impact the Bank's future loan
loss provisions and earnings.
The Bank's total general valuation allowance for loans was 1.70% of total
loans with loss exposure at December 31, 2001, 1.81% at December 31, 2000, 2.15%
at December 31, 1999, 2.26% at December 31, 1998, and 1.86% at December 31,
1997.
The following table details the general valuation allowance (stratified by
loan type) for the periods indicated:
% of % of % of % of % of
2001 Total 2000 Total 1999 Total 1998 Total 1997 Total
(Dollars In Thousands)
Real Estate Loans:
Single Family $30,040 41% $37,695 53% $24,985 36% $23,061 34% $23,640 39%
Multi-Family. 23,955 33 22,529 32 38,332 55 37,875 56 30,569 50
Commercial... 7,860 11 5,797 8 6,129 9 6,034 9 6,986 11
Construction. 3,687 5 - - - - - - - -
Total Real Estate Loans 65,542 90 66,021 93 69,446 99 66,970 99 61,195 100
Non-Real Estate Loans:
Commercial .. 5,120 7 3,214 5 65 - - - - -
Consumer .... 1,918 3 1,073 1 87 - 72 - 42 -
Other........ 339 0 501 1 356 1 596 1 - -
Total Non-Real Estate
Loans......... 7,377 10 4,788 7 508 1 668 1 42 -
Total ......... $72,919 100% $70,809 100% $69,954 100% $67,638 100% $61,237 100%
10
During 2001, certain changes in the exposure base of the loan portfolio
resulted in an increase of $2.1 million in the total general valuation allowance
for loans. The exposure base of single-family loans declined by $59 million and
the proportion of higher risk loans was reduced, resulting in a $7.7 million
reduction in the general valuation allowance. The increase in the multi-family
and commercial real estate loan exposure base of $216 million and $118 million,
respectively, was partially offset by the reduction in the risk composition,
resulting in an increase in general valuation allowance of $1.4 million and $2.1
million, respectively. The newly acquired construction loan portfolio added $3.7
million to the general valuation allowance. The increase in the commercial loan
exposure base of $13.3 million and the classification of certain loans as
substandard resulted in an increase of $1.9 million in the general valuation
allowance. Consumer loan exposure base increased by $31.5 million, thus adding
$845 thousand to the general valuation allowance. The remainder of the change in
the general valuation allowance for loans was attributable to changes in other
loan categories.
During 2000, the total general valuation allowance for loans increased by
$854 thousand. The increase of $12.7 million in the general valuation allowance
for single family loans was due to an increase of $361 million in the exposure
base and to increased risk concentration in the portfolio. The increase of $186
million in the exposure base of multi family loans was offset by the reduction
in risk composition, resulting in a decline in the general valuation allowance
of $15.8 million. The increase of $3.1 million in the general valuation
allowance for commercial non-real estate loans resulted from an increase of $20
million in the exposure base and an increased risk concentration. Consumer loan
exposure base increased by $38.3 million, resulting in an increase of $985
thousand in the general valuation allowance. The remainder of the change in the
general valuation allowance for loans was attributable to changes in other loan
categories.
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 Bank also maintains a repurchase liability for loans sold with
recourse, which is included in "Accrued Expenses and Other Liabilities" in the
Company's Statement of Financial Condition. The activity in the repurchase
liability for loans sold with recourse for 2001, 2000, 1999, 1998 and 1997 is
presented below (dollars in thousands):
Balance at December 31, 1996.............. $ 8,398
Transfer from general valuation allowance. 4,234
Net recoveries............................ 397
Balance at December 31, 1997.............. 13,029
Net charge-offs........................... (483)
Balance at December 31, 1998.............. 12,546
Net recoveries............................ 278
Balance at December 31, 1999.............. 12,824
Net recoveries............................ -
Balance at December 31, 2000.............. 12,824
Net recoveries............................ -
Balance at December 31, 2001.............. $ 12,824
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.
Potential Problem Loans. The Bank also had $6.2 million, $6.7 million and
$6.9 million in potential problem real estate loans as of December 31, 2001,
December 31, 2000 and December 31, 1999, respectively. These are loans that do
not meet the criteria of impaired or non-performing loans but have displayed
some past or present weakness. If the weakness is not corrected, the loan could
eventually result in a loss to the Bank.
The Bank's Asset Classification Committee meets at least quarterly to
review and monitor the condition of the loan portfolio. Additionally, a special
workout group of the Bank's officers meets at least monthly to resolve
delinquent loan situations and to initiate actions enforcing the Bank's rights
in security properties pending foreclosure and liquidation.
Non-performing Assets. For a further discussion of non-performing assets,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Non-Performing Assets."
Generally, loans greater than 60 days delinquent are placed into
foreclosure and a valuation allowance is established, if necessary. The Bank
acquires title to the property in most foreclosure actions in which the loan is
not
11
reinstated by the borrower. Once real estate is acquired in settlement of a
loan, the property is recorded at fair value less estimated costs to sell.
Following the acquisition of foreclosed real estate ("REO"), the Bank
evaluates the property and establishes a plan for marketing and disposing of the
property. After inspecting the property, the Bank determines whether the
property may be disposed of in its present condition or if repairs,
rehabilitation or improvements are necessary.
The following table provides information regarding the Bank's REO activity
for the periods indicated:
Real Estate Owned Activity
Year Ended December 31,
2001 2000 1999
(Dollars In Thousands)
Beginning Balance......... $ 2,157 $ 2,202 $ 4,755
Additions................. 5,136 5,050 10,831
Sales..................... (5,808) (5,095) (13,384)
Ending Balance............ $ 1,485 $ 2,157 $ 2,202
Other Interest-Earning Assets. The Bank owned no contractually delinquent
interest-earning assets other than loans as of December 31, 2001.
Investment Activities
It is the Bank's policy to maintain liquidity investments at a modest level
and to use available cash to originate mortgages that normally command higher
yields. Therefore, interest income on investments generally represents
approximately 5% of total revenues.
The following table summarizes the total investment portfolio at historical
cost by type at the end of the periods indicated:
December 31,
2001 2000 1999 1998 1997
(Dollars In Thousands)
U.S. Treasury Securities $ 300 $ 300 $ 300 $ 300 $ 300
U.S. Agency Securities 28,199 38,185 38,167 28,156 48,142
Collateralized Mortgage
Obligations ("CMOs") 80,013 98,562 115,704 36,380 1,009
108,512 137,047 154,171 64,836 49,451
Unrealized gain (loss) on
securities available-for-sale 1,932 (510) (2,976) (503) (541)
$110,444 $136,537 $151,195 $ 64,333 $ 48,910
Weighted average yield on
interest-earnings invest-
ments end of period. 6.07% 5.99% 5.86% 5.38% 5.17%
12
As of December 31, 2001, the Bank's U.S government and agency securities all
matured within one year with a weighted average life of two months and a
weighted average yield of 6.00%. The Bank's collateralized mortgage obligations
all have expected maturities within five years.
Sources of Funds
General. The Bank's principal sources of funds are savings deposits,
advances from the Federal Home Loan Bank of San Francisco ("FHLBSF") and
securities sold under agreements to repurchase.
Deposits. The Bank obtains deposits through three different sources: 1) its
retail branch system, 2) phone solicitations by designated employees, and 3)
national brokerage firms.
Deposits acquired through telemarketing efforts are typically placed with
the Bank by professional money managers and represented 4%, 2% and 3% of total
deposits at December 31, 2001, 2000 and 1999, respectively. The level of
telemarketing deposits varies based on yields available to depositors on other
investment instruments and the depositors' perception of the Bank's
creditworthiness.
Deposits acquired through national brokerage firms represented 14%, 18% and
22% of total deposits at December 31, 2001, 2000 and 1999, respectively. Any
fees paid to deposit brokers are amortized over the term of the deposit. Based
on historical renewal percentages, management believes that these deposits are a
stable source of funds. Institutions meeting the regulatory capital standards
necessary to be deemed well-capitalized are not required to obtain a waiver from
the FDIC in order to accept brokered deposits. See "Management's Discussion and
Analysis - Capital Resources and Liquidity."
Deposits obtained through the retail branch system were $2.1 billion at
December 31, 2001, $1.7 billion at December 31, 2000 and $1.6 billion at
December 31, 1999. Retail deposits comprised 82% of total deposits at December
31, 2001, 80% of total deposits at December 31, 2000 and 75% of total deposits
at December 31, 1999. Management attributes the increase in retail deposits
during 2001 to increased deposits from stock market investors wanting more
security for their investments due to variability in the stock market.
Additionally, the Bank acquired four retail offices with deposits totaling
$174.8 million as part of the purchase of two small banks on November 30, 2001.
As of December 31, 2001, deposits at these acquired branches totaled $174.4
million. The increase in retail deposits during 2000 was the result of two
branch purchases during that year.
The Bank has concentrated its marketing efforts over the last several years
on the attraction and retention of non-term accounts. As a result, the
percentage of fixed-term certificates of deposit in the Bank's total deposits
has decreased from 62% as of December 31, 1999 and 57% as of December 31, 2000
to 52% as of December 31, 2001.
The following table shows the average balances and average rates paid on
deposits by deposit type for the periods indicated:
During the Year Ended December 31,
2001 2000 1999
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
(Dollars In Thousands)
Passbook Accounts $ 94,067 1.53% $ 81,330 1.98% $ 82,634 1.96%
Money Market Deposit Accounts 613,745 3.84 501,084 4.63 380,971 4.17
Interest-bearing Checking Accounts 141,282 0.97 128,678 1.19 109,928 1.07
Fixed Term Certificate Accounts 1,468,650 4.64 1,421,835 5.20 1,492,179 4.59
$2,317,744 4.08% $2,132,927 4.70% $2,065,712 4.22%
The following table shows the maturity distribution of jumbo certificates
of deposit ($100,000 and greater) as of December 31, 2001 (dollars in
thousands):
Maturing in:
1 month or less...................... $ 66,378
Over 1 month to 3 months............. 80,548
Over 3 months to 6 months............ 88,591
Over 6 months to 12 months........... 68,798
Over 12 months....................... 1,939
Total.............................. $ 306,254
13
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.
The following tables set forth information regarding the amount of deposits
in the various types of savings programs offered by the Bank at the end of the
years indicated and the balances and average rates for those dates:
December 31,
2001 2000 1999
Amount % Amount % Amount %
(Dollars In Thousands)
Variable rate non-term accounts:
Money market deposit accounts
(weighted average rate of 2.76%,
4.79% and 4.34%)......... $ 741,978 29% $ 537,475 25% $ 446,771 22%
Interest-bearing checking accounts
(weighted average rate of 0.72%
1.22% and 1.06%)......... 162,309 7 140,151 6 111,366 5
Passbook accounts (1.59%, 2.00%
and 2.00%)............... 104,488 4 80,536 4 78,547 4
Non-interest bearing checking
Accounts................. 205,597 8 176,059 8 144,310 7
1,214,372 48 934,221 43 780,994 38
Fixed-rate term certificate accounts:
Under six month term (weighted
average rate of 2.57%, 5.26%
and 5.21%)............... 54,626 2 61,954 3 113,324 5
Six month term (weighted average
rate of 3.29%, 6.41% and 5.68%) 246,161 10 282,922 13 322,696 16
Nine-month term (weighted average of
3.98%, 6.74% and 5.73%).. 170,190 7 240,598 11 250,460 12
One year to 18-month term (weighted
average rate of 4.45%, 6.11% and
4.99%)................... 469,113 18 367,603 17 284,464 14
Two year or 30-month term (weighted
average rate of 5.38%, 5.83% and
5.13%)................... 45,993 2 31,685 2 19,081 1
Over 30-month term (weighted
average rate of 5.31%, 5.49%
and 5.33%)............... 39,938 1 31,088 1 36,529 2
Negotiable certificates of $100,000
and greater, 30 day to one year terms
(weighted average rate of 3.84%,
6.19% and 5.20%)......... 306,254 12 214,976 10 253,809 12
1,332,275 52 1,230,826 57 1,280,363 62
Total deposits (weighted average
rate of 3.02%, 4.90% and 4.42%) $2,546,647 100% $2,165,047 100% $2,061,357 100%
The cost of funds, operating margins and net earnings of the Bank
associated with brokered and telemarketing deposits are generally comparable to
the cost of funds, operating margins and net earnings of the Bank associated
with retail deposits, FHLBSF borrowings and securities sold under agreements to
repurchase. As the cost of each source of funds fluctuates from time to time,
the Bank seeks funds from the lowest cost source until the relative cost
changes. As the costs of funds, operating margins and net earnings of the Bank
associated with each source of funds are generally comparable, the Bank does not
deem the impact of a change in incremental use of any one of the specific
sources of funds at a given time to be material.
Borrowings. The Federal Home Loan Bank System functions as a source of
credit to financial institutions that are members of a regional Federal Home
Loan Bank. The Bank may apply for advances from the FHLBSF secured by the FHLBSF
capital stock owned by the Bank, certain of the Bank's mortgages and other
assets (principally obligations issued or guaranteed by the United States
government or agencies thereof). Advances can be requested for any sound
business purpose which an institution is authorized to pursue. Any institution
not meeting the qualified thrift lender test will be subject to restrictions on
its ability to obtain advances from the FHLBSF. See "Summary of Material
Legislation and Regulation - Qualified Thrift Lender Test." In granting
advances, the FHLBSF also considers a member's creditworthiness and other
relevant factors.
14
Total advances from the FHLBSF were $1.6 billion at December 31, 2001 at a
weighted average rate of 5.01%. This compares with advances of $1.6 billion at
December 31, 2000 and $1.2 million at December 31, 1999 with weighted average
rates of 6.42% and 5.91%, respectively. The level of FHLB borrowings increased
because they were often the lowest cost source of funds available to the Bank.
The Bank has credit availability with the FHLBSF, which allows it to borrow up
to 50% of its assets or approximately $2.4 billion at December 31, 2001.
The Bank enters into sales of securities under agreements to repurchase
(reverse repurchase agreements) which require the repurchase of the same
securities. The agreements are treated as borrowings in the Company's
Consolidated Statements of Financial Condition. There are certain risks involved
with doing these types of transactions. In order to minimize these risks, the
Bank's policy is to enter into agreements only with well-known national
brokerage firms that meet their regulatory capital requirements. Borrowings
under reverse repurchase agreements totaled $211.0 million at December 31, 2001
at a weighted average rate of 2.66% and were secured by mortgage-backed
securities with principal balances totaling $221.6 million. Borrowings under
reverse repurchase agreements totaled $294.1 million at December 31, 2000 and
$363.6 million at December 31, 1999 at weighted average rates of 6.65% and
5.76%, respectively. The decrease in borrowings under agreements to repurchase
over the last three years is due to paydowns of the underlying mortgage-backed
securities.
The Company redeemed its $50 million senior unsecured 11.75% notes during
1999. The premium and related costs of $2.2 million, net of taxes, were recorded
as a loss on early extinquishment of debt, which is shown as an extraordinary
item in the Consolidated Statements of Operations and Comprehensive Earnings for
1999.
Borrowings from all sources totaled $1.8 billion, $1.9 billion and $1.5
billion at weighted average rates of 4.74%, 6.46% and 5.88% at December 31,
2001, 2000, and 1999, respectively. Due to the high level of loan payoffs and
the growth in retail branch deposits, no additional borrowings were necessary to
fund asset growth during 2001.
The Bank's portfolio of short-term borrowings includes short-term variable
rate credit advances and FHLB advances due in less than one year from the
FHLBSF, securities sold under agreements to repurchase and other short term
borrowings. The following schedule summarizes short term borrowings for the last
three years:
Maximum
Month-End
Outstanding
Balance
End of Period During the Average Period
Outstanding Rate Period Outstanding Rate
(Dollars In Thousands)
2001
Short-term FHLB Advances........... $985,000 4.86% $ 987,000 $ 900,895 5.68%
Securities sold under agreements to repurchase 211,040 2.66 290,528 251,914 4.69
2000
Short-term FHLB Advances........... $957,000 6.58% $1,250,000 $1,065,000 6.38%
Securities sold under agreements to repurchase 294,110 6.65 355,995 322,593 6.39
1999
Short-term FHLB Advances........... $920,000 5.97% $ 920,000 $ 545,000 5.49%
Securities sold under agreements to repurchase 363,635 5.76 469,655 390,691 5.22
15
Other Sources
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Sources of Funds" for a discussion of other funding
sources.
Subsidiaries
The Bank has three wholly-owned subsidiaries: Seaside Financial Corporation
("Seaside"), Oceanside Insurance Agency, Inc. ("Oceanside"), and Santa Monica
Capital Group ("SMCG"), all of which are California corporations. SMCG is an
inactive corporation.
As of December 31, 2001, the Bank's investment in these subsidiaries had
been totally repaid by dividends. Revenues and operating results of these
subsidiaries accounted for less than 1% of consolidated revenues in 2001 and no
material change is presently foreseen.
Real Estate Development Activities. Seaside has not been involved in any
real estate development activity for the last several years and there are no
plans for future real estate projects. Therefore, no gains or losses on real
estate development activities were recorded during 2001, 2000 or 1999. Seaside,
from time to time, will purchase individual properties for investment and sell
them for a gain. Income from this activity totaled $285 thousand during 2001 and
$590 thousand during 2000. The decrease during 2001 compared to 2000 resulted
from the closure of a storage facility on leased land operated by Seaside for
the last several years. Seaside's lease for this facility expired during 2001.
Seaside continues to hold one condominium unit, which is rented to the Bank
for use by its employees. At December 31, 2001, Seaside's investment in the
remaining unit totaled $30 thousand. There were no loans outstanding against the
property at December 31, 2001. The unit is located in Southern California.
Trustee Activities. Seaside acts as trustee on the Bank's deeds of trust.
Trustee fees for this activity amounted to $86 thousand, $65 thousand and $165
thousand in 2001, 2000 and 1999, respectively. The decrease in trustee fees over
the last three years is consistent with the decrease in loan foreclosure
activity.
Insurance Brokerage Activities. Oceanside engages in limited insurance
agent activities. Income to date from this source has been insignificant.
Oceanside operates as a licensed life insurance agent for the purpose of
receiving commissions on the sale of fixed and variable rate annuities and
mutual funds conducted in the Bank's offices by a licensed third party vendor,
Invest Financial Corporation, a registered broker-dealer, conducts its sales
activities in the Bank's branch offices and the Bank receives a percentage of
the commissions on such sales through its licensed insurance agency, Oceanside.
During 2001, 2000 and 1999, Oceanside received commission income of $231
thousand, $290 thousand and $451 thousand, respectively, from the sale of
non-insured investment products. Additionally, Oceanside receives insurance
commissions from the sale of insurance to its borrowers. Commissions received
from this activity totaled $35 thousand in 2001 and $444 thousand in 2000. There
was no commission income recorded during 1999. The decrease in premiums during
2001 resulted from the rebate of previously earned commissions as interim
lender-placed policies were replaced by permanent policies obtained by
borrowers.
Employees
As of December 31, 2001, the Bank had a total of 508 full time equivalent
employees, including 106 part-time employees. No employees were represented by a
collective bargaining group. At present, the Company has no employees who are
not also employees of the Bank. The Bank provides its regular full-time
employees with a comprehensive benefits program that includes basic and major
medical insurance, long-term disability coverage, sick leave, a 401(k) plan and
a profit sharing employee stock ownership plan. The Bank considers its employee
relations to be excellent.
Summary of Material Legislation and Regulations
General. FFC, as a savings and loan holding company, is registered with and
subject to regulation and examination by the 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.
16
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 $91.7 million in FHLBSF stock at
December 31, 2001.
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, 2001, the Bank's advances from the FHLBSF amounted
to $1.6 billion, or 37% of the Company's total funding sources (deposits and
borrowings).
The FHLBs provide funds for the resolution of troubled savings institutions
and are required to contribute to affordable housing programs through direct
loans or interest subsidies on advances targeted for community investment and
low and moderate income housing projects. These contributions have adversely
affected the level of dividends that the FHLBs have paid to its members. These
contributions also could have an adverse effect on the value of FHLB stock in
the future. For the year ended December 31, 2001, dividends paid by the FHLBSF
to the Bank totaled approximately $5.2 million.
Financial Services Modernization Legislation. On November 12, 1999, the
Gramm-Leach-Bliley Act of 1999 (the"Act") was signed into law. The Act makes
significant changes to the operations of financial services companies. It
repealed key provisions of the 66-year old "Glass-Steagall Act" by repealing
prohibitions on affiliations among banks, securities firms and insurance
companies. It authorizes a broad range of financial services to be conducted by
these types of companies within a new structure known as a "financial holding
company" ("FHC"). The FHC may engage in a number of activities deemed to be new
activities, such as securities underwriting and dealing activities, insurance
underwriting and sales activities, merchant banking and equity investment
activities, and "incidental" and "complementary" non-financial activities. While
the Act specifies so-called "functional regulation," various federal and state
regulators will have continued authority over certain activities of FHCs and
other regulated financial institutions. However, the Federal Reserve Board will
be the principal regulator for FHCs. These changes do not directly affect the
Company, although they are likely to dramatically affect the business activities
of many of the Company's financial institution competitors.
Other provisions of the Act also may have an impact on the Company and the
Bank. The Act limits the ability of commercial entities to obtain thrift
charters. Commencing with applications filed on and after May 5, 1999, entities
seeking control of a savings association will be required to conform their
activities to those permitted for financial holding companies. Existing thrift
holding companies that control only one insured institution (such as the
Company) are "grandfathered" with respect to their ability to continue their
activities. However, future sales of the savings institution subsidiary of such
a unitary thrift holding company will be limited to companies and entities that
limit their activities to those permitted for financial holding companies.
The Act establishes a federal right to the confidential treatment of
nonpublic personal information about consumers. These provisions of the Act
require disclosure of privacy policies to consumers and, in some circumstances,
will allow consumers to prevent disclosure of certain personal information to a
nonaffiliated third party. The OTS and other banking regulatory agencies issued
final rules to implement these provisions of the Act on May 10, 2000. The rules
were effective November 13, 2000, and compliance was mandatory starting on July
1, 2001. Pursuant to these rules, a financial institution must provide:
- initial notices to customers (as defined in the rules) about the
institution's privacy policies, describing the circumstances under
which the institution may disclose nonpublic personal information to
nonaffiliated third parties and affiliates;
- annual notices of the institution's privacy policies to all customers;
and
- a reasonable method for customers to "opt out" of disclosure to
nonaffiliated third parties (except where disclosure is required or
otherwise permitted by law).
These new rules will affect how consumer information is transmitted through
diversified financial companies and conveyed to outside vendors. It is not
possible at this time to assess the impact of the privacy provisions on the
Company's operations. However, because the Company does not sell or give its
customer information to outside third parties or its affiliates except under
very limited circumstances (e.g., providing customer information to the
Company's data processing provider or to third party providers of financial
services under certain types of narrow joint marketing arrangements), it is not
anticipated that the new rules will have a significant impact on the Company's
results of operations or financial condition.
The Act revised the Community Reinvestment Act (the "CRA", as discussed in
more detail below) by, among other things, requiring all insured depository
institution members of a FHC to hold at least a satisfactory CRA rating in order
to conduct new financial activities authorized by the Act.
17
On December 21, 2000, the federal bank regulatory agencies approved final
rules required by the Act for annual reporting and public disclosure of certain
written agreements ("covered agreements") between insured depository
institutions and non-governmental entities that are made in connection with
fulfillment of CRA. A covered agreement must be made public by being placed
immediately in the institution's public CRA file and disclosed annually as part
of the CRA statement. These new requirements are not expected to have a material
impact on the Company's operations.
The Act also significantly amends the Federal Home Loan Bank System, by
modifying membership requirements in local FHLBs to permit membership to be
voluntary for both thrift and bank members. The Act changed corporate governance
of the FHLBs by eliminating the right of the Federal Housing Finance Board to
select the management of the local FHLBs, and returning that authority to the
boards of directors of the FHLBs. Additionally, the obligations of the FHLBs to
repay federal borrowings to finance the thrift bailout has been restructured
from a fixed dollar amount to a fixed percentage of the FHLBs' annual net
earnings.
Savings and Loan Holding Company Regulations. The activities of savings and
loan holding companies are governed by the Home Owners' Loan Act, as amended.
Pursuant to that statute, the Company is subject to certain restrictions with
respect to its activities and investments.
A savings and loan holding company, like FFC, which controls only one
savings association, is exempt from restrictions on the conduct of unrelated
business activities that are applicable to savings and loan holding companies
that control more than one savings association. The restrictions on multiple
savings and loan holding companies are similar to the restrictions on the
conduct of unrelated business activities applicable to bank holding companies
under the Bank Holding Company Act. The Company would become subject to these
restrictions if it were to acquire control of another savings association or if
the Bank were to fail to meet its qualified thrift lender ("QTL") test. See
"Qualified Thrift Lender Test."
The OTS may impose restrictions when it has reasonable cause to believe
that the continuation of any particular activity by a savings and loan holding
company constitutes a serious risk to the financial safety, soundness or
stability of such holding company's savings institution. Specifically, the OTS
may, as necessary, (i) limit the payment of dividends by the savings
institution; (ii) limit transactions between the savings institution and its
holding company or its affiliates; and (iii) limit any activities of the savings
institution that create a serious risk that the liabilities of the holding
company and its affiliates may be imposed on the savings institution. Any such
limits will be issued in the form of a directive having the effect of a
cease-and-desist order.
Regulatory Capital Requirements. The capital regulations of the OTS (the
"Capital Regulations") require, federally insured institutions such as the Bank
to meet certain minimum capital requirements. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Capital Resources
and Liquidity - Capital Requirements." The OTS may establish, on a case-by-case
basis, individual minimum capital requirements for a savings institution which
vary from the requirements that would otherwise apply under the Capital
Regulations.
The OTS has adopted rules based upon five capital tiers: well-capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized, and
critically undercapitalized. An institution falls into one of these
classifications depending primarily on its capital ratios. The Bank is
considered to be "well capitalized" for purposes of these capital measures.
Insurance of Accounts. The FDIC administers two separate deposit insurance
funds. The Bank Insurance Fund ("BIF") insures the deposits of commercial banks
and other institutions that were insured by the FDIC prior to the enactment of
the Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA"). The Savings Association Insurance Fund ("SAIF") insures the deposits
of savings institutions which were insured by the Federal Savings and Loan
Insurance Corporation ("FSLIC") prior to the enactment of FIRREA. The Bank's
deposits are insured by the SAIF. The FDIC is authorized to increase deposit
insurance premiums if it determines such increases are appropriate to maintain
the reserves of either the SAIF or the BIF or to fund the administration of the
FDIC. In addition, the FDIC is authorized to levy emergency special assessments
on BIF and SAIF members.
The FDIC has implemented a risk-based assessment system, under which an
institution's deposit insurance assessment is based on the probability that the
deposit insurance fund will incur a loss with respect to the institution, the
likely amount of any such loss, and the revenue needs of the deposit insurance
fund. Under the risk-based assessment system, a savings institution is
categorized into one of three capital categories: well capitalized, adequately
capitalized, and undercapitalized. A savings institution is also categorized
into one of three supervisory subgroup categories based on examinations by the
OTS.
The FDIC may terminate the deposit insurance of any insured depository if
the FDIC determines, after a hearing, that the institution has engaged or is
engaging in unsafe or unsound practices, is in an unsafe or unsound condition to
continue operations or has violated any applicable law, regulation or order or
any condition imposed in
18
writing by the FDIC. The FDIC may also suspend deposit insurance temporarily
during the hearing process if the institution has no tangible capital (which may
be calculated under certain conditions by including goodwill). In addition, FDIC
regulations provide that any insured institution that falls below a 2% minimum
leverage ratio will be subject to FDIC deposit insurance termination proceedings
unless it has submitted, and is in compliance with, a capital plan with its
primary federal regulator and the FDIC.
The OTS also imposes assessments and examination fees on savings
institutions. OTS assessments for the Bank were $653 thousand in 2001, $568
thousand in 2000 and $567 thousand in 1999.
Liquidity. In July 2001, the OTS removed the regulation that required a
savings institution to maintain an average daily balance of liquid assets of at
least four percent of its liquidity base, and retained a provision requiring a
savings institution to maintain sufficient liquidity to ensure its safe and
sound operation. The determination of what constitutes safe and sound operation
was left to the discretion of management.
For several years it has been the Bank's strategy to keep cash and liquid
investments at a modest level due to availability of substantial credit lines.
After the repeal of the liquidity regulation, the Bank's liquidity policy was
modified to include unused borrowing capacity in the definition of available
liquidity. The Bank's current liquidity policy requires that cash and cash
equivalents, short-term investments and excess borrowing capacity be maintained
at a minimum level of 10% of the Bank's liquidity base (defined as deposits and
borrowings due within one year). At December 31, 2001, liquidity-qualifying
balances were 27.5% of the Bank's liquidity base.
Community Reinvestment Act. The Community Reinvestment Act ("CRA") requires
each savings institution, as well as commercial banks and certain other lenders,
to identify the communities served by the institution's offices and to identify
the types of credit the institution is prepared to extend within those
communities. The CRA also requires the OTS to assess an institution's
performance in meeting the credit needs of its identified communities as part of
its examination of the institution, and to take such assessments into
consideration in reviewing applications with respect to branches, mergers and
other business combinations, including acquisitions by savings and loan holding
companies. An unsatisfactory CRA rating may be the basis for denying such an
application and community groups have successfully protested applications on CRA
grounds. In connection with its assessment of CRA performance, the OTS assigns
CRA ratings of "outstanding," "satisfactory," "needs to improve" or "substantial
noncompliance." The Bank was rated "satisfactory" in its last CRA examination,
which was conducted in 2000. For examinations in 1997 and thereafter,
institutions are evaluated based on: (i) performance in lending in their
assessment areas; (ii) the provision of deposit and other community services in
their assessment areas; and (iii) the investment in housing-related and other
qualified community investments. An institution that is found to be deficient in
its performance in meeting its community's credit needs may be subject to
enforcement actions, including cease and desist orders and civil money
penalties.
Restrictions on Dividends and Other Capital Distributions. During the first
quarter of 1999, the OTS changed its regulations governing capital
distributions. Those changes, which became effective on April 1, 1999, require
that savings associations controlled by savings and loan holding companies (such
as the Bank) file a 30-day advance notice of a proposed capital distribution.
The OTS may disapprove a notice if it finds that (a) the savings association
will be undercapitalized, significantly undercapitalized or critically
undercapitalized following the distribution, (b) the proposed capital
distribution raises safety and soundness concerns; or (c) the proposed
distribution violates a prohibition contained in a statute, regulation or
agreement between the savings association and the OTS (or FDIC) or a condition
imposed by an OTS condition or approval.
Under these new regulations, savings associations which are not controlled
by a savings and loan holding company may pay capital distributions during a
calendar year, without notice or application to the OTS, equal to net income for
the applicable calendar year plus retained net income for the two prior calendar
years. Under certain circumstances, such savings associations must file
applications for approval of a proposed distribution. The new regulations also
require a 30-day advance notice to be filed for proposed capital distributions
that would result in the savings association being less than well-capitalized or
that involve the reduction or retirement of the savings association's stock.
No capital distributions were made to the Company during 2001. During 2000,
the Bank paid a total of $10.0 million in capital distributions to the Company.
Limits on Types of Loans and Investments. Federal savings institutions are
authorized, without quantitative limits, to make loans on the security of liens
upon residential real property and to invest in a variety of instruments such as
obligations of, or fully guaranteed as to principal and interest by, the United
States; stock or bonds of the FHLB; certain mortgages, obligations, or other
securities which have been sold by FHLMC or FNMA; and certain securities issued
by, or fully guaranteed as to principal and interest by, the Student Loan
Marketing Association and the Government National Mortgage Association. Certain
other types of loans or investments may be acquired subject to quantitative
limits: secured or unsecured loans for commercial, corporate, business, or
agricultural purposes, loans on the security of liens upon nonresidential real
property, investments in personal property, consumer loans and certain
securities such as commercial paper and corporate debt, and construction loans
without security.
19
Savings institutions are subject to the same loans-to-one borrower ("LTOB")
restrictions that are applicable to national banks, with limited provisions for
exceptions. In general, the national bank standard restricts loans to a single
borrower to no more than 15% of a bank's unimpaired capital and surplus, plus an
additional 10% if the loan is collateralized by certain readily marketable
collateral. The Bank's loans were within the LTOB limitations at December 31,
2001.
Savings institutions and their subsidiaries are prohibited from acquiring
or retaining any corporate debt security that, at the time of acquisition, is
not rated in one of the four highest rating categories by at least one
nationally recognized statistical rating organization. The Bank has no
impermissible equity investments in its investment portfolio.
Safety and Soundness Standards. OTS regulations contain "safety and
soundness" standards covering various aspects of the operations of savings
institutions. The guidelines relate to internal controls, information systems
and internal audit systems, loan documentation, credit underwriting, interest
rate exposure, asset growth, executive compensation, maximum ratios of
classified assets to capital, and minimum earnings sufficient to absorb losses
without impairing capital. If the OTS determines that a savings institution has
failed to meet the safety and soundness standards, it may require the
institution to submit to the OTS, and thereafter comply with, a compliance plan
acceptable to the OTS describing the steps the institution will take to attain
compliance with the applicable standard and the time within which those steps
will be taken.
Federal regulations contain a number of measures intended to promote early
identification of management problems at depository institutions and to ensure
that regulators intervene promptly to require corrective action by institutions.
The Bank's annual management report on the effectiveness of internal control
standards and compliance with certain designated laws will be made available in
March of 2002.
Prompt Corrective Action. The "prompt corrective action" regulations
require insured depository institutions to be classified into one of five
categories based primarily upon capital adequacy, ranging from "well
capitalized" to "critically undercapitalized." These regulations require,
subject to certain exceptions, the appropriate federal banking agency to take
"prompt corrective action" with respect to an institution which becomes
"undercapitalized" and to take additional actions if the institution becomes
"significantly undercapitalized" or "critically undercapitalized."
Only "well capitalized" institutions may obtain brokered deposits without a
waiver. An "adequately capitalized" institution can obtain brokered deposits
only if it receives a waiver from the FDIC. An "undercapitalized" institution
may not accept brokered deposits under any circumstances. The Bank met the
"well-capitalized" standards during 2001 and was eligible to accept brokered
deposits without a waiver.
Qualified Thrift Lender Test. In general, the QTL test requires that 65% of
an institution's portfolio assets be invested in "qualified thrift investments"
(primarily loans, securities and other investments related to housing), measured
on a monthly average basis for nine out of every 12 months on a rolling basis.
Any savings institution that fails to meet the QTL test must either convert to a
bank charter or become subject to national bank-type restrictions on branching,
business activities, and dividends, and its ability to obtain FHLB advances is
affected. The Bank met the QTL test at December 31, 2001, with 94% of its
portfolio assets comprised of "qualified thrift investments."
Transactions with Affiliates. Federal savings institutions are subject to
the provisions of Sections 23A and 23B of the Federal Reserve Act. Section 23A
restricts loans or extensions of credit to, or investments in, or certain other
transactions with, affiliates and as to the amount of advances to third parties
collateralized by the securities or obligations of affiliates. Section 23B
generally requires that transactions with affiliates must be on a
non-preferential basis. Federal savings institutions may not make any extension
of credit to an affiliate which is engaged in activities not permitted by bank
holding companies, and may not invest in securities issued by an affiliate
(except with respect to a subsidiary). The Company is an "affiliate" of the Bank
for the purposes of these provisions.
Transactions with Insiders. Federal savings institutions are subject to the
restrictions of Sections 22(g) and (h) of the Federal Reserve Act which, among
other things, restrict the amount of extensions of credit which may be made to
executive officers, directors, certain principal shareholders (collectively
"insiders"), and to their related interests. When lending to insiders, a savings
association must follow credit underwriting procedures that are not less
stringent than those applicable to comparable transactions with persons outside
the association. The amount that a savings association can lend in the aggregate
to insiders (and to their related interests) is limited to an amount equal to
the association's core capital and surplus. Insiders are also prohibited from
knowingly receiving (or knowingly permitting their related interests to receive)
any extensions of credit not authorized under these statutes.
Federal Reserve System. Federal Reserve Board regulations require savings
institutions to maintain non-interest bearing reserves against their transaction
accounts. The reserve for transaction accounts as of December 31, 2001 was 0% of
the first $5.5 million of such accounts, 3% of the next $37.3 million of such
accounts and 10% (subject to
20
adjustment by the Federal Reserve Board between 8% and 14%) of the balance of
such accounts. The Bank is in compliance with these requirements.
Taxation. The Company, the Bank and its subsidiaries file a consolidated
federal income tax return on a calendar year basis using the accrual method. The
maximum marginal federal tax rate is currently 35%.
The Bank is required to use the specific charge-off method of accounting
for debts for all periods beginning after 1995. Prior to that date, the Bank
used the reserve method of accounting for bad debts. The Consolidated Statements
of Financial Condition at December 31, 2001 and 2000 do not include a liability
of $5,356,000 related to the adjusted base year bad debt reserve. This reserve
was created when the Bank was on the reserve method.
These reserves are subject to recapture if: (1) the Bank fails to qualify
as a "bank" for federal income tax purposes; (2) certain distributions are made
with respect to the stock of the Bank; (3) the bad debt reserves are used for
any purpose other than to absorb bad debt losses; or (4) there is a change in
federal tax law. Management does not expect for any of these events to occur.
To the extent that distributions by the Bank to the Company that are
permitted under federal regulations exceed the Bank's earnings and profits (as
computed for federal income tax purposes), such distributions would be treated
for tax purposes as being made out of the Bank's base year reserve and would
thereby constitute taxable income to the Bank in an amount equal to the lesser
of the Bank's base year reserve or the amount which, when reduced by the amount
of income tax attributable to the inclusion of such amount in gross income, is
equal to the amount of such distribution. At December 31, 2001, the Bank's
earnings and profits (as computed for federal income tax purposes) were
approximately $340.9 million.
For state tax purposes, the Bank is allowed an addition to its tax bad debt
reserves in an amount necessary to fill up to its tax reserve balance calculated
using the experience method.
At December 31, 2001, the Bank had $44.9 million in gross deferred tax
assets. No valuation allowance was established because management believes that
it is more likely than not that the deferred tax assets will be realized. Gross
deferred tax liabilities totaled $35.3 million at December 31, 2001.
The Bank is subject to an alternative minimum tax if such tax is larger
than the tax otherwise payable. Generally, alternative minimum taxable income is
a taxpayer's regular taxable income, increased by the taxpayer's tax preference
items for the year and adjusted by computing certain deductions in a special
manner which negates the acceleration of such deductions under the regular tax.
The adjusted income is then reduced by an exemption amount and is subject to tax
at a 20% rate. No alternative minimum taxes were applicable to the Bank for tax
years 2001, 2000 or 1999.
California tax laws generally conform to federal tax laws. For California
franchise tax purposes, federal savings banks are taxed as "financial
corporations" at a rate 2% higher than that applicable to non-financial
corporations because of exemptions from certain state and local taxes. The tax
rate for 2001, 2000 and 1999 was 10.84%. The Franchise Tax Board ("FTB") has not
yet announced any new rate for 2002.
The Internal Revenue Service ("IRS") has completed examinations of the
Company's consolidated federal income tax returns for tax years up to and
including 1996. Adjustments made by the IRS related to temporary differences as
to the recognition of certain taxable income and expense items. While the
Company had provided deferred taxes for federal and state purposes, the changes
in the period of recognition of certain income and expense items resulted in
interest due to the IRS and FTB. During 2001, the Company accrued an additional
$300 thousand for interest potentially due on IRS adjustments. No interest was
paid as of December 31, 2001. During 1999 and 2000, the Company reversed
interest accruals totaling $150 thousand and $350 thousand, respectively.
21
ITEM 2--PROPERTIES
At December 31, 2001, the Bank owned the building and the land for eight of
its branch offices, owned the building but leased the land for three additional
offices, and leased its remaining offices. Properties leased by the Bank include
its home and executive offices located in a 12-story office tower in downtown
Santa Monica and a general services and corporate operations office building in
Santa Monica. For information concerning rental obligations, see Note 6 of the
Notes to Consolidated Financial Statements.
ITEM 3--LEGAL PROCEEDINGS
The Company is involved as a plaintiff or defendant in various legal
actions incident to its business, none of which are believed by management to be
material to the Company.
ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5--MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
(a) Market Information. The Company's common stock is traded on the New
York Stock Exchange ("NYSE") under the symbol "FED." Included in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" is a
chart representing the range of high and low stock prices for the Company's
common stock for each quarterly period for the last five years.
(b) Holders. As of February 5, 2002, 17,252,604 shares of Company common
stock, representing approximately 814 record stockholders, were outstanding,
which total does not include the number of stockholders whose shares are held in
street name.
(c) Dividends. As a publicly traded company, the Company has no history of
dividend payments on its common stock. However, the Company may in the future
adopt a policy of paying dividends, depending on its net earnings, financial
position and capital requirements, as well as regulatory restrictions, tax
consequences and the ability of the Company to obtain a dividend from the Bank
for payment to stockholders. OTS regulations limit amounts that the Bank can pay
as a dividend to the Company. No dividend may be paid if the Bank's net worth
falls below regulatory requirements. (See "Business - Summary of Material
Legislation and Regulations" for other regulatory restrictions on dividends.)
The Board of Directors of the Bank declared and paid to the Company $10.0
million in dividends during 2000 and $99.6 million during 1999. No dividends
were paid during 2001. The dividends paid during 2000 were for the purpose of
repurchasing 821,500 shares of Company common stock. Dividends paid during 1999
were for the purpose of repurchasing 3,298,150 shares of Company common stock
and servicing and paying off the Company's $50 million in senior unsecured
11.75% notes, which were redeemed on December 30, 1999.
22
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
2001 2000 1999 1998 1997
(Dollars In Thousands, Except Per Share Data)
For the Year Ended December 31:
Interest income...... $ 333,932 $ 314,320 $ 260,001 $ 289,769 $ 299,220
Interest expense..... 201,754 206,505 161,031 186,491 204,226
Net interest income.. 132,178 107,815 98,970 103,278 94,994
Provision for loan losses - - - 7,200 20,500
Other income......... 8,919 7,747 12,688 13,657 10,218
Non-interest expense. 53,174 48,265 49,159 48,924 44,151
Earnings before income taxes 87,923 67,297 62,499 60,811 40,561
Income taxes......... 37,621 28,832 27,052 26,182 17,461
Earnings before extra-
ordinary items..... 50,302 38,465 35,447 34,629 23,100
Extraordinary item
Loss on early extinquishment
of debt, net of taxes - - (2,195) - -
Net earnings........ 50,302 38,465 33,252 34,629 23,100
Basic earnings per share
EPS before extraordinary item 2.92 2.23 1.84 1.63 1.09
Extraordinary item - - (.11) - -
EPS after extraordinary item 2.92 2.23 1.73 1.63 1.09
Dilutive earnings per share
EPS before extraordinary item 2.85 2.20 1.83 1.60 1.07
Extraordinary item - - (.12) - -
EPS after extraordinary item 2.85 2.20 1.71 1.60 1.07
End of Year:
Loans receivable, net (2). 4,004,889 3,629,284 3,060,547 2,808,221 3,145,164
Mortgage-backed securities 284,079 374,405 428,641 556,679 676,058
Investment securities 110,444 136,537 151,195 64,333 48,910
Total assets......... 4,726,289 4,365,242 3,872,051 3,677,128 4,160,115
Deposits............. 2,546,647 2,165,047 2,061,357 2,135,909 1,943,647
Borrowings........... 1,808,040 1,873,110 1,532,635 1,235,172 1,941,670
Liabilities.......... 4,400,611 4,097,800 3,640,918 3,420,128 3,937,328
Stockholders' equity. 325,678 267,442 231,133 257,000 222,787
Book value per share(1) 18.88 15.52 12.82 12.16 10.52
Tangible book value per share 18.22 14.98 12.78 12.10 10.43
Selected Ratios:
Return on average assets 1.10% 0.93% 0.94% 0.88% 0.56%
Return on average equity 16.93% 15.85% 14.91% 14.40% 11.25%
Ratio of non-performing
assets to total assets 0.17% 0.19% 0.40% 0.84% 0.95%
Other Data:
Number of Bank full service
branches.................. 29 25 24 24 24
(1) All per share amounts have been adjusted for the two-for-one stock split
declared June 25, 1998.
(2) Includes loans held for sale.
Also see summarized results of operations on a quarterly basis for 2001,
2000 and 1999 in Note 15 of the Notes to Consolidated Financial Statements.
23
ITEM 7--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The Company's results of operations are primarily affected by its levels of
net interest income, provisions for loan losses, non-interest income,
non-interest expense and income taxes. The Company's results are strongly
influenced by the Southern California economy in which it operates.
Net earnings of $50.3 million or $2.85 per diluted share were recorded in
2001, compared to net earnings of $38.5 million or $2.20 per diluted share in
2000 and net earnings of $33.3 million or $1.71 per diluted share in 1999.
The increase in net earnings from 2000 to 2001 was primarily due to higher
net interest income, which resulted from growth in average interest-earning
assets and improved interest spreads due to repeated interest rate cuts by the
Federal Reserve Bank throughout 2001. The increase in net earnings from 1999 to
2000 was primarily due to higher net interest income due to growth in
interest-earning assets.
No loan loss provision was recorded in 2001, 2000 or 1999. The Southern
California economy and real estate market has remained stable over the last few
years. As a result, the Bank recorded net loan loss recoveries of $118 thousand
in 2001 and $51 thousand in 2000. Net loan charge-offs totaling $2.4 million
were recorded in 1999.
Certain key financial ratios for the Company are presented below:
Average
Return on Return on Equity to
Average Average Average
Assets Equity Assets
2001...... 1.10% 16.93% 6.52%
2000...... .93 15.85 5.85
1999...... .94 14.91 6.29
1998...... .88 14.40 6.09
1997...... .56 11.25 4.95
1996...... .20 4.22 4.61
Non-performing assets (primarily loans 90 days past due or in foreclosure
plus foreclosed real estate) decreased to $7.9 million or 0.17% of total assets
as of December 31, 2001 from $8.3 million or 0.19% of total assets as of
December 31, 2000 and $15.4 million or 0.40% of total assets at December 31,
1999. The decreasing amount of real estate owned over the last several years is
due to lower balances of delinquent loans and decreased foreclosures in the
improved Southern California real estate markets.
The Company repurchased common shares totaling 821,500 and 3,298,150 during
2000 and 1999, respectively. As of February 14, 2002, 889,016 shares remain
eligible for repurchase under the Company's authorized repurchase program. No
additional shares were purchased during 2001 or thus far during 2002.
At December 31, 2001 the Bank's regulatory risk-based capital ratio was
12.51% and its tangible and core capital ratios were 6.42%. The Bank met the
regulatory capital standards necessary to be deemed "well-capitalized" at
December 31, 2001.
The Bank's deposits are insured by the SAIF up to a maximum of $100,000 for
each insured depositor. The Bank's FDIC insurance premiums were $418 thousand
during 2001, $538 thousand during 2000 and $1.2 million during 1999. The lower
premiums paid during 2001 and 2000 were due to a drop in the deposit insurance
assessment rate from 5.9 basis points in 1999 to 2.07 basis points in 2000 and
1.90 basis points in 2001, due to an improvement in the Bank's regulatory
rating.
24
Risks and Uncertainties
In the normal course of business, the Company encounters two significant
types of risk: economic risk and regulatory risk.
ECONOMIC RISK
There are two main components of economic risk: credit risk and market risk
(which includes interest rate risk.)
Credit Risk
Credit risk is the risk of default in the Company's loan portfolio that
results from a borrower's inability to make contractually required payments. See
"Loss Provision" and "Non-performing Assets."
The determination of the allowance for loan losses and the valuation of
real estate collateral are based on estimates that are susceptible to changes in
the economic environment and market conditions. No loan loss provision was
recorded during 2001. A downward turn in the current economic climate could
increase the likelihood of losses due to credit risks. This could create the
need for additional loan loss provisions.
Market Risk
Market risk is the risk of loss from unfavorable changes in market prices
and interest rates. The Bank's market risk arises primarily from the interest
rate risk inherent in its lending and deposit taking activities.
See "Asset-Liability Management" for additional information relating to
market risk.
REGULATORY RISK
Regulatory risk is the risk that the regulators will reach different
conclusions than management regarding the financial position of the Company. The
OTS examines the Bank's financial results annually. The OTS reviews the
allowance for loan losses and may require the Bank to adjust the allowance based
on information available at the time of their examination.
OTHER RISKS
Inflation
Inflation substantially impacts the financial position and operations of
financial intermediaries, such as banks and savings institutions. These entities
primarily hold monetary assets and liabilities and, as such, can experience
significant purchasing power gains and losses over relatively short periods of
time. In addition, interest rate changes during inflationary periods change the
amounts and composition of assets and liabilities held by financial
intermediaries and could result in regulatory pressure for an additional equity
investment.
Pending Lawsuits
The Bank has been named as a defendant in various lawsuits, none of which
is expected to have a materially adverse effect on the Company.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared In accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements require
management to make estimates and judgements that affect the reported amounts of
assets and liabilities at the date of our financial statements. Actual results
may differ from these estimates under different assumptions or conditions.
Accounting for the allowance for loan losses involves significant
judgements and assumptions by management which have a material impact on the
carrying value of net loans; management considers this accounting policy to be a
critical accounting policy. The judgements and assumptions used by management
are based on historical experience and other factors, which are believed
reasonable under the circumstances as described in the "Business - Loan Loss
Allowance" section.
25
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 $179.2 million in 2001, $148.2 million
in 2000 and $144.4 million in 1999. The increase over the last three years was
due to improvement in asset quality and asset growth.
The Company's net interest income is also impacted by a three-month time
lag before changes in the cost of funds can be passed along to monthly
adjustable rate loan customers. Savings and borrowing costs adjust to market
rates immediately while it takes several months for the loan yield to adjust.
This time lag decreases the Company's net interest income during periods of
rising interest rates. The reverse is true during periods of declining interest
rates. See "Asset-Liability Management" for further discussion.
The following table sets forth the components of interest-earning assets
and liabilities, the excess of interest-earning assets over interest-bearing
liabilities, the yields earned and rates paid and net interest income for the
periods indicated:
2001 2000 1999
(Dollars In Thousands)
Average loans and mortgage-backed
securities (1)......... $4,181,554 $3,793,351 $3,328,723
Average investment securities 200,807 176,476 204,741
Average interest-earning assets 4,382,361 3,969,827 3,533,464
Average deposits........ 2,317,744 2,132,927 2,065,712
Average borrowings...... 1,885,426 1,688,738 1,323,362
Average interest-bearing liabilities 4,203,170 3,821,665 3,389,074
Excess of interest-earning assets
over interest-bearing liabilities $ 179,191 $ 148,162 $ 144,390
Yields earned on average interest
earning assets......... 7.50% 7.77% 7.26%
Rates paid on average interest-
bearing liabilities.... 4.79 5.40 4.76
Net interest rate spread 2.71 2.37 2.50
Effective net spread.... 2.90 2.57 2.69
Total interest income... $328,679 $308,487 $256,335
Total interest expense.. 201,420 206,473 161,160
127,259 102,014 95,175
Total other items (2)... 4,919 5,801 3,795
Net interest income..... $132,178 $107,815 $ 98,970
(1) Non-accrual loans were included in the average dollar amount of loans
outstanding, but no income was recognized during the period that each such
loan was on non-accrual status.
(2) Includes dividends on FHLB stock and other miscellaneous items.
The Bank's interest rate spread increased by 34 basis points in 2001
compared to 2000 because the yield on earning assets declined by only 27 basis
points while the cost of funds fell by 61 basis points in response to aggressive
rate cuts by the Federal Reserve Bank. The Bank's cost of funds is immediately
impacted by decreases in interest rates while the yield on earning assets
responds more slowly to changes in interest rates due to the three month time
lag inherent in the adjustable rate loan portfolio and the increased percentage
of hybrid/adjustable products originated by the Bank during 2001. The Bank's
interest rate spread fell by 13 basis points in 2000 compared to 1999 because
the cost of funds was increasing by more than the yield on earning assets during
that time. The Federal Reserve was increasing rates during the 1999 to 2000 time
frame.
26
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, 2001 December 31, 2000
Versus Versus
December 31, 2000 December 31, 1999
Change Due To Change Due To
Volume Rate Total Volume Rate Total
(Dollars In Thousands)
Interest Income:
Loans and mortgage-backed
Securities.......... $29,831 $(9,296) $20,535 $35,723 $16,485 $52,208
Investments.......... 1,379 (1,722) (343) (1,629) 1,339 (290)
Total interest income 31,210 (11,018) 20,192 34,094 17,824 51,918
Interest Expense:
Deposits............. 8,229 (13,835) (5,606) 2,910 10,037 12,947
Borrowings.......... 11,690 (11,137) 553 22,176 10,191 32,367
Total interest expense 19,919 (24,972) (5,053) 25,086 20,228 45,314
Change in net interest income 11,291 13,954 25,245 9,008 (2,404) 6,604
Change in other items (1) (882) 2,241
Total change in net interest
income including other items $24,363 $ 8,845
(1) Includes dividends on FHLB stock and other miscellaneous
items.
Note: Changes in rate/volume (change in rate multiplied by the change in
average volume) have been allocated to the change in rate or the change in
volume based upon the respective percentages of the combined totals.
Interest Rate Spreads and Yield on Average Interest-Earning Assets
Year Ended December 31,
2001 2000 1999 1998 1997
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......... 7.61% 6.57% 7.85% 8.15% 7.37% 7.31% 7.63% 7.48% 7.49% 7.48%
Weighted average yield
on investment portfolio(1) 5.20 3.52 6.11 5.63 5.41 5.69 5.29 5.14 5.40 6.06
Weighted average yield
on all interest-earning
assets.................. 7.50 6.40 7.77 8.04 7.26 7.25 7.54 7.39 7.40 7.42
Weighted average rate
paid on deposits........... 4.08 3.02 4.70 4.90 4.22 4.42 4.61 4.36 4.70 4.66
Weighted average rate
paid on borrowings and
FHLB advances............. 5.67 4.74 6.29 6.46 5.59 5.88 5.81 5.66 5.86 5.91
Weighted average rate
paid on all interest-
bearing liabilities....... 4.79 3.73 5.40 5.62 4.76 5.04 5.11 4.84 5.27 5.28
Interest rate spread(2).... 2.71 2.67 2.37 2.42 2.50 2.21 2.43 2.55 2.13 2.14
Effective net spread(3).... 2.90 2.57 2.69 2.60 2.28
(1) Dividends on FHLB stock and miscellaneous interest income were not
considered in this analysis
(2) Weighted average yield on all interest-earning assets less weighted
average rate paid on all interest-bearing liabilities
(3) Net interest income (the difference in the dollar amounts of interest
earned and paid) divided by average interest-earning assets
27
Loss Provision
The Company did not record a loan loss provision during 2001, 2000 or 1999.
No provision was recorded during the last three years because, based on analysis
done by management, existing allowances were sufficient to cover the credit
risks inherent in the loan portfolio. Non- performing assets decreased to $7.9
million in 2001 from $8.3 million in 2000 and $15.4 million in 1999 due to
improvement in the economy and real estate markets in which the Bank operates.
The Bank has a policy of providing for general valuation allowances, unallocated
to any specific loan, but available to offset any loan losses. The allowance is
maintained at an amount that management believes adequate to cover estimable and
probable loan losses. The Company also maintains valuation allowances for
impaired loans and loans sold with recourse. See "Business - Loan Loss
Allowance." Management performs regular risk assessments of the Bank's loan
portfolio to maintain appropriate valuation allowances. Additional loan loss
provisions may be required to the extent that charge-offs are recorded against
the valuation allowance for impaired loans, the general valuation allowance, or
the valuation allowance for loans sold with recourse.
The Company recorded net loan loss recoveries of $118 thousand during 2001
and $51 thousand during 2000. Net loan charge-offs totaling $2.4 million were
recorded in 1999. The recoveries recorded during 2001 and 2000 resulted from
cash payments by borrowers on loans that had been previously charged-off. The
charge-offs during 1999 were 0.08% of average loans outstanding. Charge-offs
primarily result from declines in the value of the underlying collateral of the
non-performing loans.
Non-interest Income
Loan servicing and other fees were $3.3 million in 2001 compared to $2.8
million in 2000 and $4.2 million in 1999. Fees earned during 2001 and 2000
include adjustments of $134 thousand and $500 thousand, respectively, to provide
for impairment of the Bank's servicing asset due to accelerated payoffs and
prepayments of loans serviced for others.
Gain on sale of loans was $656 thousand in 2001, $64 thousand in 2000 and
$1.2 million in 1999. The gain realized on loan sales fluctuates due to changes
in market pricing based on interest rate trends. Also, the dollar amount of
loans originated for sale varies based on the availability of attractive fixed
rate loan programs to borrowers compared to the Bank's adjustable rate loan
programs.
Real estate operations resulted in a net gain of $304 thousand in 2001,
$594 thousand in 2000 and $3.2 million in 1999. Real estate operations include
gain on sale of foreclosed properties, operational income and expenses during
the holding period, and recoveries of prior losses on real estate sold.
Non-interest Expense
The ratio of non-interest expense to average total assets was 1.17% for
both 2001 and 2000, a decrease from 1.30% for 1999. The additional costs of
acquiring and operating the four branches purchased during 2001 were offset by
asset growth during 2001. The decrease from 1999 to 2000 was attributable to
decreased legal costs and federal deposit insurance, offset by additional
amortization of core deposit intangible assets and increased data processing
costs.
Salary and benefit costs increased 12% in 2001 compared to 2000 due to
higher incentives, bonuses and profit sharing costs. Salary and benefit costs
were approximately the same in 2000 compared to 1999 because increased
compensation and incentive costs were offset by decreased bonus and other
benefit costs.
Occupancy expense increased slightly in 2001 compared to 2000 due to
additional occupancy costs associated with the four retail savings branches
acquired during the year and increased repair and maintenance costs for the
remaining branches. Occupancy expense increased slightly in 2000 compared to
1999 due to the acquisition of two branches. One branch was closed and its
deposits were transferred to one of the acquired branches.
Other operating expenses increased 10% in 2001 compared to 2000 due to
deconversion costs associated with the institutions acquired during 2001 and
other legal expense. Other operating expenses increased slightly in 2000
compared to 1999 due to increases in data processing costs associated with the
creation of the Bank's new web page and internet site. Also, the amortization of
core deposit intangible assets increased substantially in 2000 compared to 1999
due to the write off of the core deposit intangible asset associated with a
closed branch and a re-evaluation of the core deposit intangible asset on a
second branch location.
28
The following table details the components of non-interest expense for the
periods indicated:
Non-Interest Expense
Year Ended December 31,
2001 2000 1999 1998 1997
(Dollars In Thousands)
Salaries and Employee Benefits:
Salaries................... $18,119 $17,354 $16,631 $16,035 $15,157
Incentive compensation..... 2,472 1,987 1,677 1,478 883
Payroll taxes.............. 1,652 1,486 1,607 1,455 1,371
Employee benefit insurance. 1,203 1,320 1,220 1,069 1,048
Bonus compensation......... 1,500 920 1,583 1,335 1,100
Profit sharing............. 2,020 1,778 1,100 1,000 501
SERP....................... 970 906 988 795 628
401(k)..................... 356 354 299 235 392
Other salaries and benefits 1,390 339 1,559 2,409 1,660
29,682 26,444 26,664 25,811 22,740
Occupancy:
Rent....................... 4,439 4,539 4,395 5,105 4,351
Equipment.................. 1,971 2,318 2,145 1,855 1,336
Maintenance costs.......... 914 571 469 344 450
Other occupancy............ 978 603 850 1,189 741
8,302 8,031 7,859 8,493 6,878
Other Operating Expense:
Insurance.................. 582 541 430 362 345
Amortization of core
deposit intangible 1,564 1,965 452 565 839
Data processing............ 2,490 2,488 1,930 3,359 2,539
Contributions.............. 450 518 299 509 412
Professional services...... 207 301 8 259 373
Legal expenses............. 1,393 632 3,516 1,479 1,309
Supervisory exam........... 653 568 567 599 610
Federal deposit insurance
premiums 418 538 1,236 1,241 1,872
Other operating costs...... 5,633 4,822 4,334 4,288 3,439
13,390 12,373 12,772 12,661 11,738
Advertising................ 1,800 1,417 1,864 1,959 2,795
Total.................... $53,174 $48,265 $49,159 $48,924 $44,151
Non-interest expense as
% of average assets....... 1.17% 1.17% 1.30% 1.24% 1.06%
29
BALANCE SHEET ANALYSIS
Consolidated assets at the end of 2001 were $4.7 billion, representing an
8% increase from $4.4 billion at the end of 2000 and a 22% increase from $3.9
billion at the end of 1999. Assets have increased over the last two years due to
strong loan originations, which totaled $1.5 billion in 2001, $1.1 billion in
2000 and $944.1 million in 1999. Loan purchases totaled $132.6 million during
2001, $139.5 million during 2000 and $122.8 million during 1999.
Loan Portfolio
At the end of 2001, over 67% of the Bank's loans had adjustable interest
rates based on monthly changes in the FHLBSF Eleventh District Cost of Funds
Index. As part of its asset-liability management strategy, the Bank has
maintained a high level of adjustable loans in its portfolio for several years.
Management believes that the high level of adjustable rate mortgages will help
insulate the Bank from fluctuations in interest rates, notwithstanding the
several month time lag between a change in its monthly cost of funds and a
corresponding change in its loan yields. See "Asset - Liability Management."
The Bank also originates adjustable rate loans with initial fixed interest
rates with periods ranging from 3 to 10 years. By policy, the Bank will either
match the fixed rate period of these loans with borrowings for the same term or
will hold unmatched fixed rate loans in its portfolio up to 5% of total assets.
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. Loans originated under this limited program totaled $1.0 billion
in 2001, $75.9 million in 2000 and $205.7 million in 1999.
In 2001, 2000 and 1999, the Bank placed $5.0 million, $3.9 million and $9.9
million, respectively, in mortgages with other lenders under fee arrangements.
These loans are not not included in the Bank's loan originations. In 2001, loans
made on the security of single family properties (one to four units) comprised
62% of the dollar amount of new loan originations. Loans made on the security of
multi-family properties (five or more units) comprised 27% of new originations.
Loans made on the security of commercial real estate properties comprised 11% of
new loan originations. Business loans originated by the commercial lending units
totaled 1% of new loan originations. Adjustable rate mortgages comprised 18% of
new loan activity during 2001 compared with 90% during 2000 and 63% during 1999.
The following table details loan originations and loan purchases by loan
type for the periods indicated:
Loan Originations and Purchases by Type
Year Ended December 31,
2001 2000 1999 1998 1997
(Dollars In Thousands)
Single Family (one to four units) $ 924,794 $ 658,808 $779,698 $594,763 $430,223
Multi-Family............ 402,022 333,466 118,622 37,720 48,033
Commercial Real Estate.. 158,169 70,807 37,744 383 2,551
Commercial Business Loans 16,172 11,759 7,768 1,733 -
Other................... 1,178 6,170 301 2,428 444
Total................. $1,502,335 $1,081,010 $944,133 $637,027 $481,251
No loans were originated upon the sale of real estate owned
during 2001.
From time to time, the Bank converts loans into mortgage-backed securities
for use in securitized borrowings (reverse repurchase agreements). No loans were
converted into mortgage-backed securities during 2001, 2000 or 1999. Securitized
loans have a lower risk weighting for regulatory risk-based capital purposes. In
exchange for the enhanced credit risk associated with mortgage-backed
securities, the Bank pays guarantee fees to FHLMC and/or FNMA.
The Bank's adjustable rate loan products often provide for first year
monthly payments that are lower than the fully-indexed interest and principal
due. Any interest not fully paid by such lower first year payments is added to
the principal balance of the loan. This causes negative amortization until
payments increase to cover interest and principal repayment shortfalls. Due to
negative amortization, loan-to-value ratios may increase above those calculated
at the inception of the loan.
The Bank does not normally lend in excess of 90% of the appraised
collateral value on adjustable mortgage loans ("AMLs"). Where the Bank does lend
in excess of 90% of the appraised value, additional fees and rates are charged.
Mortgage insurance is required on loans in excess of 80% or premium rates and/or
fees
30
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 $354.5 million at December 31, 2001 compared to
$268.2 million at December 31, 2000 and $274.2 million at December 31, 1999. 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, 2001, approximately 55%
of the loan and mortgage-backed securities portfolio consisted of first liens on
single family properties while first liens on multi-family properties comprised
approximately 35% of the portfolio, and first liens on commercial properties
represented approximately 8% of the portfolio. Construction loans, the majority
of which were acquired in the Bank's purchase of two small banks on November 30,
2001, comprised 1% of the loan portfolio. Commercial business loans and consumer
loans comprised the remaining 1% of the loan portfolio at December 31, 2001.
Multi-family and commercial real estate loans are considered more
susceptible to market risk than single family loans and higher interest rates
and fees are charged to borrowers for these loans. Approximately 37% of loan
originations in 2001 and 2000 were multi-family, commercial and industrial loans
compared to 17% in 1999. No multi-family loans were originated upon the sale of
REO during 2001. During 2000 and 1999, 0.1% and 0.4% of total loan originations
were originated upon the sale of multi-family loans, respectively.
The Bank has loss exposure on certain loans sold with recourse. These loans
are substantially all secured by multi-family properties. Loans sold with
recourse totaled $126.4 million as of December 31, 2001, $146.5 million as of
December 31, 2000 and $178.7 million as of December 31, 1999. Although no longer
owned by the Bank, these loans are evaluated for the purposes of computing the
repurchase liability and measuring risk exposure for regulatory capital. Under
the Bank's current policy, it no longer enters into loans sold with recourse
agreements.
31
The following table sets forth the composition of the Bank's portfolio of
loans and mortgage-backed securities for each of the last five years:
December 31,
2001 2000 1999 1998 1997
(Dollars In Thousands)
REAL ESTATE LOANS:
First trust deed residential loans:
One to four units........ $2,121,899 $2,158,940 $1,813,783 $1,564,392 $1,801,608
Five or more units....... 1,525,749 1,308,440 1,123,308 1,127,228 1,217,577
Residential loans.......... 3,647,648 3,467,380 2,937,091 2,691,620 3,019,185
OTHER REAL ESTATE LOANS
Commercial and industrial 358,159 217,619 183,194 181,772 196,575
Construction............. 38,060 - - - -
Land..................... 1,481 - - - -
Second trust deeds....... 9,472 8,453 13,489 15,357 15,441
Other.................... - - - - 6,303
Real estate loans...... 4,054,820 3,693,542 3,133,774 2,888,749 3,237,504
NON-REAL ESTATE LOANS:
Manufactured housing..... - 391 613 893 1,154
Deposit accounts......... 1,267 576 683 1,002 1,644
Commercial business loans 18,882 12,600 8,140 1,259 -
Consumer................. 19,546 6,555 593 621 185
Loans receivable....... 4,094,515 3,713,664 3,143,803 2,892,524 3,240,487
LESS:
General valuation allowance 72,919 70,809 69,954 67,638 61,237
Impaired loan valuation allowance 1,850 1,792 2,596 7,634 9,775
Unrealized loan fees..... 14,857 11,779 10,706 9,031 24,311
Net loans receivable (1) 4,004,889 3,629,284 3,060,547 2,808,221 3,145,164
FHLMC AND FNMA MORTGAGE-
BACKED SECURITIES:
Secured by single family dwellings 272,419 360,210 412,469 539,079 657,342
Secured by multi-family dwellings 11,660 14,195 16,172 17,600 18,716
Mortgage-backed securities 284,079 374,405 428,641 556,679 676,058
TOTAL................ $4,288,968 $4,003,689 $3,489,188 $3,364,900 $3,821,222
(1) Includes loans held for sale.
32
ASSET QUALITY
Asset Quality Ratios
The following table sets forth certain asset quality ratios of the Bank for
the periods indicated:
December 31,
2001 2000 1999 1998 1997
Non-performing Loans to Loans Receivable(1) 0.16% 0.17% 0.42% 0.90% 0.91%
Non-performing Assets to Total Assets(2) 0.17% 0.19% 0.40% 0.84% 0.95%
Loan Loss Allowances to Non-performing
Loans(3).......................... 1122.71% 1132.19% 509.74% 242.09% 193.38%
General Loss Allowances to Assets
with Loss Exposure(4)............. 1.70% 1.81% 2.15% 2.26% 1.86%
General Loss Allowances to Total Assets with
Loss Exposure(5).................. 1.94% 2.06% 2.41% 2.51% 2.12%
(1) Non-performing loans are net of valuation allowances related to those loans.
Loans receivable exclude mortgage-backed securities and are before deducting
unrealized loan fees, general valuation allowances and valuation allowances for
impaired loans.
(2) Non-performing assets are net of valuation allowances related to those
assets.
(3) The Bank's loan loss allowances, including valuation allowances for
non-performing loans and general valuation allowances but excluding repurchase
liability for loans sold with full or limited recourse. Non-performing loans are
before deducting specific valuation allowances related to those loans.
(4) The Bank's general valuation allowances, excluding repurchase liability for
loans sold with full or limited recourse. The Bank's assets with loss exposure
includes its loan portfolio, real estate owned, loan commitments and potential
loan buybacks but excludes mortgage-backed securities.
(5) The Bank's general valuation allowances, repurchase liability for loans sold
with full or limited recourse. Assets with loss exposure include the Bank's loan
portfolio plus loans sold with recourse, but exclude mortgage-backed securities.
33
NON-PERFORMING ASSETS
Non-performing assets, as defined by the Bank, include loans delinquent
over 90 days or in foreclosure, real estate acquired in settlement of loans, and
other loans less than 90 days delinquent but for which collectibility is
questionable.
The table below details the amounts of non-performing assets by type of
collateral. Also shown is the ratio of non-performing assets to total assets.
Non-Performing Assets
December 31,
2001 2000 1999 1998 1997
$ % $ % $ % $ % $ %
(Dollars In Thousands)
Real Estate Owned:
Single Family..... $1,671 21.08% $2,507 30.21% $1,069 6.93% $3,946 12.84% $5,806 14.66%
Multi-Family...... 164 2.06 - - 1,483 9.62 1,309 4.26 4,034 10.19
Commercial and Industrial - - - - - - - - 826 2.09
Less: General Valuation
Allowance...... (350) (4.41) (350) (4.22) (350) (2.27) (500) (1.63) (500) (1.26)
Other............. - - - - - - - - 52 .13
Total Real Estate
Owned............ 1,485 18.73 2,157 25.99 2,202 14.28 4,755 15.47 10,218 25.81
Non-Performing Loans:
Single Family..... 6,062 76.46 5,603 67.51 9,626 62.41 12,270 39.92 16,799 42.43
Multi-Family...... 422 5.32 662 7.98 3,995 25.90 13,005 42.31 15,785 39.86
Commercial and Industrial - - - - 225 1.46 4,040 13.14 1,533 3.87
Other............. 16 .21 - - - - - - - -
Less Valuation
Allowances....... (57) (.72) (123) (1.48) (625) (4.05) (3,332) (10.84) (4,738)(11.97)
Total Non-Performing
Loans............ 6,443 81.27 6,142 74.01 13,221 85.72 25,983 84.53 29,379 74.19
Total............. $7,928 100.00% $8,299 100.00% $15,423 100.00% $30,738 100.00% $39,597 100.00%
Ratio of Non-Performing
Assets To Total Assets: 0.17% 0.19% 0.40% 0.84% 0.95%
The decrease in non-performing loans for the last several years is due to
reductions in delinquent loans and non-performing loans due to continued
strength in the Southern California real estate markets.
Single family non-performing loans are primarily due to factors such as
layoffs and decreased incomes. Multi-family and commercial non-performing loans
are attributable primarily to factors such as declines in occupancy rates and
decreased real estate values. The Bank actively monitors the status of all
non-performing loans.
Impaired loans totaled $7.4 million, $8.8 million and $11.4 million, net of
related allowances of $1.9 million, $1.8 million and $2.6 million as of December
31, 2001, 2000 and 1999, respectively. See "Business - Non-accrual, Past Due,
Impaired and Restructured Loans" for further discussion of impaired loans.
The Bank's modified loans result primarily from temporary modifications of
principal and interest payments. Under these arrangements, loan terms are
typically reduced to no less than a required monthly interest payment. Any loss
of revenues under the modified terms would be immaterial to the Bank. If the
borrower is unable to return to scheduled principal and interest payments at the
end of the modification period, foreclosure procedures are initiated, or, in
certain circumstances, the modification period is extended. As of December 31,
2001, the Bank had modified loans totaling $7.4 million, net of loan loss
allowances of $1.9 million. This compares with $9.6 million and $7.4 million,
net of allowances, as of December 31, 2000 and December 31, 1999 respectively.
Modified loans included as impaired loans totaled $6.4 million, $8.8 million and
$6.5 million, net of valuation allowances, as of December 31, 2001, 2000 and
1999, respectively. No modified loans were 90 days or more delinquent as of
December 31, 2001, 2000 or 1999.
34
CAPITAL RESOURCES AND LIQUIDITY
Liquidity Requirements
In July, 2001, the OTS removed the regulation that required a savings
institution to maintain an average daily balance of liquid assets of at least
four percent of its liquidity base, and retained a provision requiring a savings
institution to maintain sufficient liquidity to ensure its safe and sound
operation. The determination of what constitutes safe and sound operation was
left to the discretion of management.
For several years it has been the Bank's strategy to keep cash and liquid
investments at a modest level due to availability of substantial credit lines.
After the repeal of the liquidity regulation, the Bank's liquidity policy was
modified to include unused borrowing capacity in the definition of available
liquidity. The Bank's current liquidity policy requires that cash and cash
equivalents, short-term investments and excess borrowing capacity be maintained
at a minimum level of 10% of the Bank's liquidity base (defined as deposits and
borrowings due within one year.) As of December 31, 2001, liquidity-qualifying
balances were 27.5% of the Bank's liquidity base.
External Sources of Funds
External sources of funds include savings deposits, loan sales, advances
from the FHLBSF and reverse repurchase agreements ("reverse repos"). For
purposes of funding asset growth, the source or sources of funds with the lowest
total cost for the desired term are generally selected. The incremental source
of funds used most often during the last three years was advances from the
FHLBSF.
Deposits obtained from national brokerage firms ("brokered deposits") are
considered a source of funds similar to a borrowing. In evaluating brokered
deposits as a source of funds, the cost of these deposits, including commission
fees, is compared to other funding sources. Brokered deposits were $356.8
million at December 31, 2001. This compares to $381.2 million at December 31,
2000 and $445.9 million at December 31, 1999.
Deposits at retail savings offices were $2.1 billion at December 31, 2001,
$1.7 billion as of December 31, 2000 and $1.6 billion at December 1999.
Management attributes the increase in retail deposits during 2001 to increased
deposits from stock market investors wanting more security for their investments
due to variability in the stock market. Additionally, the Bank acquired four
retail offices with deposits totaling $174.8 million as part of the purchase of
two small banks on November 30, 2001. As of December 31, 2001, deposits at these
acquired branches totaled $174.4 million.
The Bank also solicits deposits through telemarketing efforts.
Telemarketing deposits are obtained by the Bank's employees via telephone, from
depositors outside of the Bank's normal service areas. Telemarketing deposits
increased by 105% to $100.7 million at the end of 2001. This compares with $49.1
million at the end of 2000 and $84.5 million at the end of 1999. The level of
telemarketing deposits varies based on the activity of investors, who are
typically professional money managers. The availability of telemarketing
deposits also varies based on the investors' perception of the Bank's
creditworthiness.
Reverse repurchase agreements are short term borrowings secured by
mortgage-backed securities. These borrowings decreased 28% to $211.0 million at
the end of 2001 from $294.1 million at the end of 2000 and $363.6 million at the
end of 1999. Borrowings under reverse repurchase agreements have decreased over
the last three years due to prepayments of the underlying collateral. The Bank
has not securitized any mortgage loans for use in collateralized borrowings for
several years.
FHLB advances remained flat at $1.6 billion at the end of 2001 and 2000
compared to and $1.2 billion at the end of 1999. FHLB advances were often the
lowest cost source funds available to the Bank. Due to high levels of loan
payoffs and the growth in retail branch deposits, no additional borrowings were
required to fund asset growth during 2001.
Loan sales were $61.2 million in 2001. This compares to $9.5 million during
2000 and $133.0 million during 1999. Loan sales increased during 2001 due to the
increased demand for 30-year and 15-year fixed rate mortgages which are only
originated by the Bank for sale.
35
Internal Sources of Funds
Internal sources of funds include scheduled loan principal payments, loan
payoffs, and positive cash flows from operations. Principal payments were $1.3
billion in 2001 compared to $560.5 million in 2000 and $670.5 million in 1999.
Principal payments include both amortization and prepayments and are a function
of real estate activity and the general level of interest rates. The increase in
prepayments during 2001 was due to the low level of interest rates available on
30-year and 15-year fixed rate loans available to customers. The decrease in
prepayments during 2000 compared to 1999 is due to higher interest rates on
fixed rate loans that decreased refinancing activity. Prepayment activity was
very high in 1999 due to refinancing activity into fixed rate loans, which were
available to borrowers at favorable interest rates for the first half of 1999.
Capital Requirements
Current OTS regulatory capital standards require that the Bank maintain
tangible capital of at least 1.5% of total assets, core capital of 4.0% of total
assets, and risk-based capital of 8.0% of total assets, risk-weighted. Among
other things, failure to comply with these capital standards will result in
restrictions on asset growth and necessitate the preparation of a capital plan,
subject to regulatory approval. Generally, any institution with a risk-based
capital ratio in excess of 10% and a core capital ratio greater than 5% is
considered well capitalized for regulatory purposes. Institutions who maintain
this capital level can take in brokered deposits at their discretion, and if
they achieve a sufficient ranking on their regulatory examination, may be
assessed a lower deposit insurance rate.
Management presently intends to maintain its capital position at levels
above those required by regulators to ensure operating flexibility and growth
capacity for the Bank. The Bank's capital position is actively monitored by
management. The Bank met the regulatory capital standards to be deemed
"well-capitalized" for purposes of the various regulatory measures of capital
including the prompt corrective action regulations.
To be considered "well capitalized" for purposes of the prompt corrective
action requirements the Bank must maintain the capital ratios as set forth in
the table below:
December 31, 2001
Amount %
(Dollars In Thousands)
Core capital requirement......... $ 235,391 5.00%
Bank's core capital.............. 302,448 6.42
Excess core capital............ $ 67,057 1.42%
Tier 1 risk-based capital requirement $ 161,388 6.00%
Bank's tier 1 risk-based capital. 302,448 11.24
Excess tier 1 risk-based capital $ 141,060 5.24%
Risk-based capital requirement... $ 268,980 10.00%
Bank's risk-based capital........ 336,556 12.51
Excess risk-based capital...... $ 67,576 2.51%
36
ASSET-LIABILITY MANAGEMENT
The Bank's primary objective in managing interest rate risk is to minimize
the adverse impact of changes in interest rates on the Bank's net interest
income and capital, while, at the same time, adjusting the Bank's
asset-liability mix to achieve the most favorable impact on earnings.
The Bank's asset-liability management policy is designed to improve the
balance between the maturities and repricings of interest-earning assets and
interest-bearing liabilities in order to better insulate net earnings from
interest rate fluctuations. Under this program, the Bank emphasizes the funding
of monthly adjustable mortgages with short term savings and borrowings and
matching the maturities of these assets and liabilities. The Bank also
originates adjustable rate loans with initial fixed interest rates for periods
ranging from 3 to 10 years. By policy, the Bank will either match the fixed rate
period of these loans with borrowings for the same term or will hold unmatched
fixed rate loans in its portfolio up to 5%of total assets.
The majority of the Bank's assets are monthly adjustable rate mortgages
with interest rates that fluctuate based on changes in the FHLBSF Eleventh
District Cost of Funds. These mortgages constitute over 67% of the loan
portfolio at the end of 2001. Comparisons over the last several years show that
a change in the Bank's cost of funds generally correlates with changes in the
Index. The Bank does not use any futures, options or swaps in its
asset-liability strategy.
Assets and liabilities that are subject to repricing are considered rate
sensitive. The mis-match in the repricing of rate sensitive assets and
liabilities is referred to as a company's "GAP." The GAP is positive if
rate-sensitive assets exceed rate-sensitive liabilities. Generally, a positive
GAP benefits a company during periods of increasing interest rates. The reverse
is true during periods of decreasing interest rates. However, because the Index
lags changes in market interest rates by three months while the Bank's
short-term savings and borrowing costs adjust immediately, the Bank's net
interest income initially decreases during periods of rising interest rates and
increases during periods of declining interest rates.
In order to minimize the impact of rate fluctuations on earnings,
management's goal is to keep the one-year GAP at less than 20% of total assets
(positive or negative). At December 31, 2001, the Company's one-year GAP was a
negative $288.7 million or 6.1% of total assets. This compares with positive GAP
ratios of 11.8% and 2.81% of total assets at December 31, 2000 and December 31,
1999, respectively. The change from a positive GAP ratio at December 31, 2000
reflects the increase in adjustable rate loans with initial fixed interest
periods which do not reprice within the first year. The Bank has also lengthened
the maturities of its borrowings, but not to the same extent due to the high
level of payoffs anticipated within the next year.
Another measure of interest rate risk, that is required to be performed by
OTS-regulated institutions, is an analysis specified by OTS Thrift Bulletin
TB-13a, "Management of Interest Rate Risk, Investment Securities, and
Derivatives Activities". Under this regulation institutions are required to
establish limits on the sensitivity of their net interest income and net
portfolio value to changes in interest rates. Such changes in interest rates are
defined as instantaneous and sustained movements in interest rates in 100 basis
point increments.
The following table shows the estimated impact of a parallel shift in
interest rates on the Bank's portfolio value at December 31, 2001 and December
31, 2000:
Percentage
Change in Interest Rates Change in Net Portfolio Value(1)
(In Basis Points) 2001 2000
+300................ (16)% (8)%
+200................ (11)% (4)%
+100................ (6)% (2)%
--100............... 6% (2)%
--200............... -%(2) (4)%
--300............... -%(2) (2)%
(1) The percentage change represents the projected change in the net
portfolio value of the Bank in a stable interest rate environment
versus the net portfolio value in the various rate scenarios. The OTS
defines net portfolio value as the present value of expected cash
flows from existing assets minus the present value of expected cash
flows from existing liabilities.
(2) A downward shift in interest rates of 200 basis points or 300
basis points from the December 31, 2001 levels would result in negative
interest rates in many cases. Therefore, modeling the impact of such
declines as of December 31, 2001 is not meaningful or practical.
37
The percentage change in net portfolio value is affected by many different
factors. While the Bank's approach to interest rate risk management has not
changed significantly since 2000, a combination of factors resulted in net
portfolio values as of December 31, 2001 that were different from those as of
December 31, 2000. The net portfolio value was affected by lower interest rates
at December 31, 2001 compared to December 31, 2000. In a decreasing rate
scenario, interest rates on certain loans within the Bank's loan portfolio
reached lifetime floors. Additionally, interest rates on interest-bearing
checking deposits and passbook accounts reached very low levels from which they
could not drop farther.
The following chart shows the interest sensitivity of the Company's assets
and liabilities by repricing period at December 31, 2001 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 0-12 Months 1-3 Years 4-10 10 Years
(Dollars In Thousands)
Interest-Earning Assets:
FHLB Interest Bearing Deposits $ 18,814 $ 18,814 $ - $ - $ -
Overnight Investments...... 123,000 123,000 - - -
Investment Securities.... 110,444 42,863 33,634 33,947 -
Mortgage-backed Securities. 284,079 283,353 480 222 24
Loans Receivable........... 4,004,890 2,914,676 712,458 372,996 4,760
Total Interest-Earning
Assets................. $4,541,227 $3,382,706 $ 746,572 $ 407,165 $ 4,784
Interest-Bearing Liabilities:
Demand Accounts........... $1,214,372 $1,214,372 $ - $ - $ -
Fixed Rate Term Certificate 1,332,275 1,260,976 58,496 11,800 1,003
Borrowings:
FHLB Advances........... 1,597,000 985,000 347,000 265,000 -
Reverse Repurchase
Agreements....... 211,040 211,040 - - -
Other Borrowings........ - - - - -
Total Interest-Bearing
Liabilities....... $4,354,687 $3,671,388 $ 405,496 $ 276,800 $ 1,003
Interest-Sensitivity Gap..... $ 188,540 $ (288,682) $ 341,076 $ 130,365 $ 3,781
....................
Interest-Sensitivity Gap as a
Percentage of Total Assets. (6.11)% 7.22% 2.76% 0.08%
Cumulative Interest-Sensitivity Gap $ (288,682) $ 52,394 $ 182,759 $ 186,540
Cumulative Interest-Sensitivity
Gap as a Percentage of Total
Assets.................... (6.11)% 1.11% 3.87% 3.95%
38
The following table shows the fair value and contract terms of the Bank's
interest-earning assets and interest-bearing liabilities as of December 31, 2001
categorized by type and expected maturity for each of the next five years and
thereafter:
Expected Maturity Date as of
December 31, (1)
There- Total Fair
2002 2003 2004 2005 2006 after Balance Value
(Dollars In Thousands)
Interest Earning Assets
Loans Receivable:
Adjustable Rate Loans:
Single family $ 578,695 $505,385 $372,304 $239,042 $148,380 $247,492 $2,091,298 $2,119,245
Average interest rate 6.76% 6.79% 6.79% 6.79% 6.79% 6.79% 6.78%
Multi-family 317,605 286,382 244,202 176,607 192,950 295,331 1,513,077 1,540,775
Average interest rate 6.68% 6.72% 6.71% 6.72% 6.88% 6.65% 6.72%
Commercial and Industrial 61,420 65,195 58,953 42,517 46,401 60,759 335,245 347,592
Average interest rate 7.36% 7.42% 7.26% 7.50% 7.60% 7.42% 7.46%
Fixed Rate Loans:
Single family 8,452 6,295 4,573 2,903 1,794 2,842 26,859 27,579
Average interest rate 7.90% 7.57% 7.34% 7.31% 7.30% 7.28% 7.56%
Multi-family 3,489 3,777 2,873 2,122 3,384 2,071 17,716 18,520
Average interest rate 8.33% 8.14% 7.93% 7.90% 7.55% 7.93% 7.98%
Commercial and Industrial 5,499 5,315 5,375 2,582 3,510 3,857 26,138 27,653
Average interest rate 8.67% 8.50% 8.39% 8.31% 8.05% 8.46% 8.43%
Commercial Business Loans 4,534 4,816 5,114 3,950 468 - 18,882 18,992
Average interest rate 6.03% 6.03% 6.03% 6.03% 6.03% - 6.03%
Construction Loans 17,506 18,911 1,643 - - - 38,060 38,571
Average interest rate 7.75% 7.75% 7.75% - - - 7.75%
Consumer loans 18,421 1,668 65 70 76 497 20,797 21,206
Average interest rate 5.90% 5.98% 8.12% 8.12% 8.12% 8.12% 5.98%
Mortgage-backed
Securities:
Adjustable 91,993 62,365 42,205 28,504 19,211 38,546 282,824 282,824
Average interest rate 4.97% 4.97% 4.97% 4.97% 4.97% 4.97% 4.97%
Fixed 490 312 196 119 71 67 1,255 1,255
Average interest rate 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00%
Investment Securities,
Overnight Investments &
Interest-Bearing Deposits 186,223 15,424 16,402 17,441 16,768 - 252,258 252,258
Average interest rate 2.64% 6.16% 6.16% 6.16% 6.15% - 3.56%
Total Interest-Earning
Assets $1,293,779 $975,013 $753,296 $515,399 $432,666 $651,027 $4,621,180 $4,577,669
Interest-Bearing Liabilities
Deposits:
Checking Accounts $ 365,790 $ - $ - $ - $ - $ - $ 367,906 $ 367,906
Average interest rate 0.30% - - - - - 0.30%
Savings Accounts 848,582 - - - - - 846,466 846,466
Average interest rate 2.64% - - - - - 2.64%
Certificate Accounts 1,260,976 40,371 18,125 8,768 2,361 1,674 1,332,275 1,347,368
Average interest rate 3.88% 4.66% 5.02% 6.04% 4.70% 4.48% 3.93%
Borrowings:
FHLB Advances 985,000 62,000 285,000 55,000 175,000 35,000 1,597,000 1,636,275
Average interest rate 4.86% 6.24% 4.74% 5.54% 5.57% 5.88% 5.01%
Reverse repurchase
agreements 211,040 - - - - - 211,040 210,921
Average interest rate 2.66% - - - - - 2.66%
Total Interest-Earning
Liabilities $3,671,388 $102,371 $303,125 $63,768 $177,361 $ 36,674 $4,354,687 $4,408,936
(1) Expected maturities are contractual maturities adjusted for
prepayments of principal. The Bank uses certain assumptions to estimate
fair values and expected maturities. For assets, expected maturities are
based upon contractual maturity, projected repayments and prepayments of
principal. The prepayment experience used is based on the Bank's historical
experience. The Bank's average CPR (Constant Prepayment Rate) is 36% for
the single family portfolio and 24% for its multi-family and commercial real
estate portfolios. The Bank used estimated deposit runoff based on
available industry information.
39
STOCK PRICES
The common stock of FirstFed Financial Corp. is traded on the New York
Stock Exchange under the trading symbol "FED." The quarterly high and low
information presented below is based on information supplied by the New York
Stock Exchange.
The Company has never declared or paid a cash dividend.
As of February 5, 2002, there remain 889,016 shares eligible for repurchase
under the Company's stock repurchase program. No shares were repurchased during
2001 or 2002. The Company repurchased 821,500 shares of its common stock during
2000 and 3,298,150 shares of its common stock during 1999.
PRICE RANGE OF COMMON STOCK
First Quarter Second Quarter Third Quarter Fourth Quarter
High Low High Low High Low High Low
2001 $32.06 $26.25 $31.00 $28.00 $36.30 $24.00 $25.95 $21.90
2000 16.63 11.88 14.56 11.69 23.00 14.06 33.13 21.31
1999 18.00 15.56 20.00 15.31 17.81 15.00 18.50 12.81
1998 21.19 15.94 26.41 20.41 26.94 14.75 18.56 14.13
1997(1) 14.00 10.75 15.53 11.25 17.44 15.38 19.75 17.50
(1) All amounts have been adjusted for the two-for-one stock split declared
June 25, 1998.
FORWARD LOOKING STATEMENTS
The preceding Management's Discussion and Analysis of the Company's
Financial Condition and Results of Operations contain certain "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995, which provides a "safe harbor" for these types of statements. This
Annual Report on form 10-K contains forward-looking statements which reflect the
current views of the Company's and the Bank's management with regard to future
events and financial performance. These forward looking statements are subject
to certain risks and uncertainties including those identified herein which could
cause actual results to differ materially form historical results or those
anticipated. Forward-looking terminology can be identified by the use of terms
such as "may", "will", "expect", "anticipate", "estimate", "should" or
"continue" or other variations or comparable terms. Readers should not place
undue reliance on these forward-looking statements, which speak only of their
date. The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. The following factors could cause actual results to differ
materially from historical results or those anticipated: (1) the level of demand
for adjustable rate mortgages, which is affected by external factors such as
interest rates, the strength of the California economy and Southern California
economy in particular, and demographics of the lending areas of the Bank, (2)
fluctuations between consumer interest rates and the cost of funds; (3) federal
and state regulation of lending and other operations, and (4) competition within
the Bank's market areas.
Investors should carefully consider the risks in an evaluation of the
Company and its common stock. The risks and uncertainties described herein are
not the only ones facing the Company. Additional risks and uncertainties,
including but not limited to credit, economic, competitive, governmental and
financial factors affecting the Company's operations, markets, financial
products, and services and other factors discussed in the Company's fillings
with the Securities and Exchange Commission, may also adversely impact and
impair its business. If any of these risks actually occur, the Company's
business, results of operation, cash flows or financial condition would likely
suffer. In such case, the trading price of the Company's common stock could
decline, and an investor may lose all or part of the money paid to buy such
common stock.
40
ITEM 8--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except share data)
December 31, December 31,
ASSETS 2001 2000
Cash and cash equivalents $ 174,171 $ 77,677
Investment securities, available-for-sale
(at fair value) (Note 2) 110,444 136,537
Mortgage-backed securities, available-for-sale
(at fair value;$224,114 and $308,836 pledged)
(Notes 3 and 10) 284,079 374,405
Loans receivable, held-for-sale (fair value of
$5,246 and $2,246) (Note 4) 5,246 2,246
Loans receivable, net (Notes 4 and 9) 3,999,643 3,627,038
Accrued interest and dividends receivable 22,076 28,488
Real estate (Note 5) 1,515 2,189
Office properties and equipment, net (Note 6) 10,822 10,651
Investment in Federal Home Loan Bank
(FHLB) stock, at cost (Notes 7 and 9) 91,713 80,885
Other assets (Note 1) 26,580 25,126
$4,726,289 $4,365,242
LIABILITIES
Deposits (Note 8) $2,546,647 $2,165,047
FHLB advances (Notes 7 and 9) 1,597,000 1,579,000
Securities sold under agreements to repurchase
(Note 10) 211,040 294,110
Accrued expenses and other liabilities 45,924 59,643
4,400,611 4,097,800
COMMITMENTS AND CONTINGENT LIABILITIES
(Notes 4, 6 and 13)
STOCKHOLDERS' EQUITY (Notes 12 and 13)
Common stock, par value $.01 per share;
authorized 100,000,000 shares; issued 23,362,196
and 23,299,707 shares, outstanding
17,251,300 and 17,232,217 shares 234 233
Additional paid-in capital 34,670 32,540
Retained earnings - substantially restricted 363,713 313,411
Unreleased shares to employee stock
ownership plan - (841)
Treasury stock, at cost, 6,110,896 shares and
6,067,490 shares (75,930) (75,743)
Accumulated other comprehensive
earnings (loss), net of taxes 2,991 (2,158)
325,678 267,442
$ 4,726,289 $ 4,365,242
See accompanying notes to consolidated financial statements.
41
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE EARNINGS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(Dollars In Thousands, Except Per Share Data)
2001 2000 1999
Interest income:
Interest on loans..................... $298,942 $274,720 $216,634
Interest on mortgage-backed securities 19,803 24,448 28,700
Interest and dividends on investments. 15,187 15,152 14,667
Total interest income ............. 333,932 314,320 260,001
Interest expense:
Interest on deposits (Note 8) ....... 94,568 100,174 87,199
Interest on borrowings (Notes 9 and 10) 107,186 106,331 73,832
Total interest expense ............ 201,754 206,505 161,031
Net interest income ................... 132,178 107,815 98,970
Provision for loan losses (Note 4) ... - - -
Net interest income after provision for
loan losses.............. 132,178 107,815 98,970
Other income:
Loan servicing and other fees ....... 3,319 2,804 4,204
Gain on sale of loans................ 656 64 1,221
Real estate operations, net ......... 304 594 3,217
Other operating income............... 4,640 4,285 4,046
Total other income ............... 8,919 7,747 12,688
Non-interest expense:
Salaries and employee benefits (Note 13) 29,682 26,444 26,664
Occupancy (Note 6) .................. 8,302 8,031 7,859
Advertising ........................ 1,800 1,417 1,864
Federal deposit insurance .......... 418 538 1,236
Other operating expense ............. 12,972 11,835 11,536
Total non-interest expense ....... 53,174 48,265 49,159
Earnings before income taxes and
extraordinary item 87,923 67,297 62,499
Income taxes (Note 11) ............... 37,621 28,832 27,052
Earnings before extraordinary item .... 50,302 38,465 35,447
Extraordinary item:
Loss on early extinguishment of debt,
net of taxes....................... - - (2,195)
Net earnings........................... $ 50,302 $ 38,465 $ 33,252
Other comprehensive earnings (loss):
Unrealized gain (loss) on mortgage-backed-
securities and securities
available-for-sale, net of taxes..... 5,149 6,122 (7,577)
Comprehensive earnings................. $55,451 $ 44,587 $ 25,675
Earnings per share (Notes 12 and 15):
Basic EPS before extraordinary item $ 2.92 $ 2.23 $ 1.84
Extraordinary item ............ - - (.11)
Basic EPS after extraordinary item. $ 2.92 $ 2.23 $ 1.73
Diluted EPS before extraordinary item $ 2.85 $ 2.20 $ 1.83
Extraordinary item ............ - - (.12)
Diluted EPS after extraordinary item $ 2.85 $ 2.20 $ 1.71
See accompanying notes to consolidated financial statements.
42
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(Dollars In Thousands)
Accumulated
Other
Retained Comprehensive
Earnings Unreleased Earnings(Loss),
(Sub- Shares to Net of
Additional stantially ESOP Taxes
Common Paid-In Restricted) (Notes 12 Treasury (Notes 2
Stock Capital (Note 12) and 13) Stock and 3) Total
Balance, December 31, 1998. $ 231 $ 29,965 $241,694 $ (833) $ (13,354) $ (703) $257,000
Exercise of employee stock options 2 1,098 - - - - 1,100
Net increase in unreleased shares
to the ESOP............... - - - (926) - - (926)
Benefit from stock option tax
adjustment. - 498 - - - - 498
Unrealized loss on securities
available-for-sale, net of taxes - - - - - (7,577) (7,577)
Common stock repurchased
(3,298,150) shares....... - - - - (52,214) - (52,214)
Net earnings 1999.......... - - 33,252 - - - 33,252
Balance, December 31, 1999. 233 31,561 274,946 (1,759) (65,568) (8,280) 231,133
Exercise of employee stock options - 793 - - - - 793
Net decrease in unreleased shares
to the ESOP............... - 186 - 918 - - 1,104
Unrealized gain on securities
available-for-sale, net of taxes - - - - - 6,122 6,122
Common stock repurchased
(821,500) shares......... - - - - (10,175) - (10,175)
Net earnings 2000.......... - - 38,465 - - - 38,465
Balance, December 31, 2000. 233 32,540 313,411 (841) (75,743) (2,158) 267,442
Exercise of employee stock options 1 764 - - - - 765
Net decrease in unreleased shares
to the ESOP............... - 1,179 - 841 - - 2,020
Unrealized gain on securities
available-for-sale, net of taxes - - - - - 5,149 5,149
Restricted common stock forfeited - 187 - - (187) - -
Net earnings 2001.......... - - 50,302 - - - 50,302
Balance, December 31, 2001. $ 234 $ 34,670 $363,713 $ - $ (75,930) $ 2,991 $ 325,678
See accompanying notes to consolidated financial statements.
43
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(Dollars In Thousands)
2001 2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings........................ $ 50,302 $ 38,465 $ 33,252
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Net change in loans held-for-sale. (3,000) 57 14,147
Depreciation and amortization..... 1,919 1,874 2,193
Provision (benefit) for losses on real estate owned - - (54)
Valuation adjustments on real estate sold (525) (491) (2,542)
Amortization of fees and discounts 5,913 1,703 (597)
Decrease in servicing asset....... 375 905 318
Change in taxes payable........... (1,738) (323) (1,643)
Increase (decrease) in tax interest accrual 300 (350) (150)
(Increase) decrease in interest and dividends
receivable....................... 7,392 (6,663) 1,651
Increase (decrease) in interest payable (13,855) 11,298 (6,819)
Amortization of core deposit intangible asset 1,564 1,964 452
Increase in other assets.......... (5,505) (5,179) (2,767)
Increase (decrease) in accrued expenses and
other liabilities................ (1,875) 675 (2,074)
Total adjustments................ (9,035) 5,470 2,115
Net cash and cash equivalents
provided by operating activities 41,267 43,935 35,367
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans made to customers and principal collections
on loans........................... (96,132) (434,026) (149,842)
Loans repurchased under recourse arrangements - (240) (1,242)
Loans purchased..................... (132,625) (14,077) (121,522)
Proceeds from sales of real estate owned 4,968 5,290 15,980
Proceeds from maturities and principal payments
of investment securities available-for-sale 48,962 20,589 6,809
Principal reductions of mortgage-backed
securities available-for-sale...... 96,770 62,332 117,440
Purchases of investment securities
available-for-sale................. (19,964) (3,547) (96,300)
Redemption (purchase) of FHLB stock. (4,025) (4,079) 4,823
Other............................... (4,105) (1,205) (5,536)
Net cash from acquisitions.......... 17,680 32,866 -
Net cash and cash equivalents
used by investing activities (88,471) (336,097) (229,390)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits. 206,824 (64,767) (74,552)
Net increase (decrease) in short term borrowings (65,070) 340,475 347,463
Repayment of long-term borrowings... - - (50,000)
Purchases of treasury stock......... - (10,175) (52,214)
Other............................... 1,944 2,499 (1,147)
Net cash and cash equivalents
provided by financing activities 143,698 268,032 169,550
Net decrease in cash and cash
equivalents........................ 96,494 (24,130) (24,473)
Cash and cash equivalents at beginning of year 77,677 101,807 126,280
Cash and cash equivalents at end of year $ 174,171 $ 77,677 $ 101,807
See accompanying notes to consolidated financial statements.
44
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
Accounting Principles Generally Accepted in the United States of America
("GAAP") requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the financial statements and the reported
operations of the Company for the periods presented. Actual results may differ
from those estimates calculated by management.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiary, the Bank. The Bank maintains 29 full-service savings
branches in Southern California. The Bank's primary business consists of
attracting retail deposits from the general public and originating loans secured
by mortgages on residential real estate. All significant inter-company balances
and transactions have been eliminated in consolidation. Certain items in the
1999 and 2000, consolidated financial statements have been reclassified to
conform to the 2001 presentation.
First Federal Bank acquired the assets and liabilities of Del Amo Savings
Bank and Frontier State Bank as of November 30, 2001. The financial results of
the acquired entities since the date of acquisition have been included herein.
Statement of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include
cash, overnight investments and securities purchased under agreements to resell
with maturities within 90 days of the date of purchase.
Financial Instruments
GAAP requires the disclosure of the fair value of financial instruments,
whether or not recognized on the Statement of Financial Condition, whenever it
is practicable to estimate the value. A significant portion of the Bank's assets
and liabilities are financial instruments as defined under GAAP. Fair values,
estimates and assumptions are set forth in Note 16, Fair Value of Financial
Instruments.
Risks Associated with Financial Instruments
The credit risk of a financial instrument is the possibility that a loss
may result from the failure of another party to perform in accordance with the
terms of the contract. The most significant credit risk associated with the
Bank's financial instruments is concentrated in its loans receivable.
Additionally, the Bank is subject to credit risk on certain loans sold with
recourse. The Bank has established a system for monitoring the level of credit
risk in its loan portfolio and for loans sold with recourse.
The market risk of a financial instrument is the possibility that future
changes in market prices may reduce the value of a financial instrument or
increase the contractual obligations of the Bank. The Bank's market risk is
concentrated in its portfolios of loans receivable and real estate acquired by
foreclosure. When a borrower fails to meet the contractual requirements of his
or her loan agreement, the Bank is subject to the market risk of the collateral
securing the loan. Likewise, the Bank is subject to the volatility of real
estate prices with respect to real estate acquired by foreclosure. The Bank's
securities available-for-sale are traded in active markets. The value of these
securities is susceptible to the fluctuations of the market.
45
(1) Summary of Significant Accounting Policies (continued)
Interest Rate Risk
Financial instruments are subject to interest rate risk to the extent that
they reprice on a frequency, degree or basis that varies from market pricing.
The Bank is subject to interest rate risk to the degree that its
interest-earning assets reprice on a different frequency or schedule than its
interest-bearing liabilities. A majority of the Bank's loans receivable and
mortgage-backed securities reprice based on the Federal Home Loan Bank Eleventh
District Cost of Funds Index (the "Index"). The repricing of the Index tends to
lag market interest rates. The Bank closely monitors the pricing sensitivity of
its financial instruments.
Concentrations of Credit Risk
Concentrations of credit risk would exist for groups of borrowers when they
have similar economic characteristics that would cause their ability to meet
contractual obligations to be similarly affected by changes in economic or other
conditions. The ability of the Bank's borrowers to repay their commitments is
contingent on several factors, including the economic condition in the
borrowers' geographic area and the individual financial condition of the
borrowers. The Company generally requires collateral or other security to
support borrower commitments on loans receivable. This collateral may take
several forms. Generally, on the Bank's mortgage loans, the collateral will be
the underlying mortgaged property. The Bank's lending activities are primarily
concentrated in Southern California. The Bank does not have significant exposure
to any individual customer.
Securities Purchased under Agreements to Resell
The Bank invests in securities purchased under agreements to resell
("repurchase agreements"). The Bank obtains collateral for these agreements,
which normally consists of U.S. treasury securities or mortgage-backed
securities guaranteed by agencies of the U.S. government. The collateral is held
in the custody of a trustee, who is not a party to the transaction. The duration
of these agreements is typically 1 to 30 days. The Bank deals only with
nationally recognized investment banking firms as the counterparties to these
agreements. The Bank's investment in repurchase agreements consisted solely of
securities purchased under agreements to resell identical securities.
Investments and Mortgage-Backed Securities
The Bank's investment in securities principally consists of U.S. Treasury
and agency securities and mortgage-backed securities. The Bank creates
mortgage-backed securities when it exchanges pools of its own loans for
mortgage-backed securities.
The Bank classifies all of its investments and mortgage-backed securities
as "available-for-sale" based upon a determination that such securities might be
sold at a future date or that there may be foreseeable circumstances under which
the Bank would sell such securities.
Securities designated as available-for-sale are recorded at fair value.
Changes in the fair value of debt securities available-for-sale are included in
stockholders' equity as unrealized gains (losses) on securities
available-for-sale, net of taxes. Unrealized losses on available-for-sale
securities, reflecting a decline in value judged to be other than temporary, are
charged to earnings in the Consolidated Statements of Operations and
Comprehensive Earnings. Unrealized gains or losses on available-for-sale
securities are computed on a specific identification basis.
The Bank did not hold any trading securities at December 31, 2001 or 2000.
46
(1) Summary of Significant Accounting Policies (continued)
Loans Held-for-Investment
The Bank's loan portfolio is primarily comprised of single family
residential loans (one to four units), and multi-family loans (five or more
units). Loans are generally recorded at the contractual amounts owed by
borrowers, less unearned interest and allowances for loan losses.
Loans Held-for-Sale
The Bank identifies loans that foreseeably may be sold prior to maturity
and classifies them as held-for-sale. These loans are carried at the lower of
amortized cost or fair value on an aggregate basis by type of asset. For loans,
fair value is calculated on an aggregate basis as determined by current market
investor yield requirements.
Impaired Loans
The Bank evaluates loans for impairment whenever the collectibility of
contractual principal and interest payments is questionable. A loan is impaired
when, based on current circumstances and events, a creditor will be unable to
collect all amounts contractually due under a loan agreement. Large groups of
smaller balance homogenous loans that are collectively evaluated for impairment
are not subject to the evaluation of impairment on an individual basis.
When a loan is considered impaired, the Bank measures impairment based on
the present value of expected future cash flows (over a period not to exceed 5
years) discounted at the loan's effective interest rate. However, if the loan is
"collateral-dependent" or a probable foreclosure, impairment is measured based
on the fair value of the collateral. When the measure of an impaired loan is
less than the recorded investment in the loan, the Bank records an impairment
allowance equal to the excess of the Bank's recorded investment in the loan over
its measured value.
Cash payments received from impaired loans are recorded in accordance with
the contractual terms of the loan. The principal portion of the payment is used
to reduce the principal balance of the loan, whereas the interest portion is
recognized as interest income.
Non-Accrual Loans
The Bank establishes allowances for delinquent interest equal to the amount
of accrued interest on all loans 90 days or more past due or in foreclosure.
This practice effectively places such loans on non-accrual status for financial
reporting purposes. Loans are returned to accrual status only when the ultimate
collectibility of current interest is no longer in doubt.
47
(1) Summary of Significant Accounting Policies (continued)
Allowances for Loan Losses
The Bank maintains a general valuation allowance for loan losses for the
inherent risk in the loan portfolio which has yet to be specifically identified.
The allowance is not allocated to any specific loan. The allowance is maintained
at an amount that management believes adequate to cover estimable and probable
loan losses based on a risk analysis of the current portfolio. Additionally,
management performs periodic reviews of the loan portfolio to identify potential
problems and to establish impairment allowances if losses are expected to be
incurred. Additions to the allowances are charged to earnings. The regulatory
agencies periodically review the allowances for loan losses and may require the
Bank to adjust the allowances based on information available to them at the time
of their examination.
General allowances are provided for all loans, regardless of any specific
allowances provided. The determination of the Bank's general allowance for loan
losses is based on estimates that are affected by changes in the regional or
national economy and market conditions. The Bank's management believes, based on
economic and market conditions, that the general allowance for loan losses is
adequate as of December 31, 2001 and 2000. Should there be an economic or market
downturn or if market interest rates increase significantly, the Bank could
experience a material increase in the level of loan defaults and charge-offs.
Loan Origination Fees and Costs
Loan origination fees and certain direct loan origination costs are
deferred and recognized over the lives of the related loans as an adjustment of
loan yields using the interest method. When a loan is repaid or sold, any
unamortized net deferred fee balance is credited to income.
Gain or Loss on Sale of Loans
The Bank primarily sells its mortgage loans on a servicing released basis
and recognizes cash gains or losses immediately in its Statement of Operations
and Comprehensive Earnings. The Bank has previously sold mortgage loans and loan
participation's on a servicing retained basis with yield rates to the buyer
based upon the current market rates which may differ from the contractual rate
of the loans sold. Under GAAP, servicing assets or liabilities and other
retained interests are required to be recorded as an allocation of the carrying
amount of the loans sold based on the estimated relative fair values of the
loans sold and any retained interests, less liabilities incurred. Servicing
assets are evaluated for impairment based on the asset's fair value. The Bank
estimates fair values by discounting servicing assets cash flows using discount
and prepayment rates that it believes market participants would use. The Bank
had no such activity during 2001, 2000 or 1999.
Servicing assets arising from the sale of loans are included in other
assets and were $1,087,000 and $1,462,000 at December 31, 2001 and 2000,
respectively. No additional servicing assets were recorded in 2001, 2000 or
1999.
Core Deposit Intangible
Loans, deposits and other assets and liabilities assumed in connection with
acquisitions are accounted for under the purchase method of accounting. Assets
and liabilities are recorded at their fair values as of the date of the
acquisition and the excess cost over fair values of the assets and liabilities
is classified as goodwill or a core deposit intangible asset. This asset is
being amortized over its estimated useful life.
48
(1) Summary of Significant Accounting Policies (continued)
Real Estate
The Bank's real estate acquired in settlement of loans ("REO") consists of
property acquired through foreclosure proceedings or by deed in lieu of
foreclosure. Generally, all loans greater than 60 days delinquent are placed
into foreclosure and, if necessary, a valuation allowance is established. The
Bank acquires title to the property in most foreclosure actions that are not
reinstated by the borrower. Once real estate is acquired in settlement of a
loan, the property is recorded as REO at fair market value, less estimated
selling costs. The REO balance is adjusted for any subsequent declines in fair
value through a valuation allowance.
The recognition of gain on the sale of real estate is dependent on a number
of factors relating to the nature of the property, terms of sale, and any future
involvement of the Bank or its subsidiaries in the property sold. If a real
estate transaction does not meet certain down payment, cash flow and loan
amortization requirements, gain is deferred and recognized under an alternative
method.
Depreciation and Amortization
Depreciation of office properties and equipment is provided by use of the
straight-line method over the estimated useful lives of the related assets.
Amortization of leasehold improvements is provided by use of the straight-line
method over the lesser of the life of the improvement or the term of the lease.
Securities Sold Under Agreements to Repurchase
The Company enters into sales of securities under agreements to repurchase
("reverse repurchase agreements"). Reverse repurchase agreements are treated as
financing arrangements and, accordingly, the obligations to repurchase the
securities sold are reflected as liabilities in the consolidated financial
statements. The mortgage-backed securities collateralizing reverse repurchase
agreements are delivered to several major brokerage firms who arranged the
transactions. These securities are reflected as assets in the Company's
consolidated financial statements. The brokerage firms may loan such securities
to other parties in the normal course of their operations and agree to return
the identical securities to the Company at the maturity of the agreements.
Income Taxes
The Company files a consolidated federal income tax return and a combined
California franchise tax report with the Bank and its subsidiaries. The Bank
accounts for income taxes using the asset and liability method. In the asset and
liability method, deferred tax assets and liabilities are established as of the
reporting date for the realizable cumulative temporary differences between the
financial reporting and tax return bases of the Bank's assets and liabilities.
The tax rates applied are the statutory rates expected to be in effect when the
temporary differences are realized or settled.
Cash Flows
Cash and cash equivalents include short-term, highly liquid investments
that generally have an original maturity date of three months or less. Non-cash
investing transactions during 2001 include the acquisition of $158,654,000 of
loans and other assets and the assumption of $176,334,000 in deposits and other
liabilities and the recognition of $3,573,000 of intangible assets. A net total
of $17,680,000 in cash was received in the acquisition of two small banks during
2001. Non-cash investing transactions during 2000 include the acquisition of
$125,171,000 of loans and the assumption of $168,457,000 in deposits and the
recognition of $10,420,000 of intangible assets. A net total of $32,866,000 in
cash was received related to the acquisition of certain branches during 2000.
49
(1) Summary of Significant Accounting Policies (continued)
Earnings Per Share
The Company reports both basic and diluted net earnings per share. Basic
net earnings per share is determined by dividing net earnings by the average
number of shares of common stock outstanding, while diluted net earnings per
share is determined by dividing net earnings by the average number of shares of
common stock outstanding adjusted for the dilutive effect of common stock
equivalents.
Comprehensive Earnings
GAAP establishes standards for reporting and presentation of comprehensive
earnings and its components in a full set of financial statements. Comprehensive
earnings consists of net earnings and net unrealized gains (losses) on
securities available-for-sale and is presented in the consolidated statements of
operations and comprehensive earnings and consolidated statements of
stockholders' equity. The Statement requires only additional disclosures in the
consolidated statements; it does not affect the Company's financial position or
results of operations.
Segment Information and Disclosures
GAAP establishes standards to report information about operating segments
in annual financial statements and requires reporting of selected information
about operating segments in interim reports to stockholders. It also establishes
standards for related disclosures about products and services, geographic areas
and major customers. The Company manages its business as one segment.
Derivative Instruments
The Company accounts for derivative instruments in accordance with SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." A
derivative is considered either an asset or liability in the statement of
financial condition and measured at fair value. If a derivative is designated as
a hedging instrument the changes in fair value of the derivative are either (a)
recognized in earnings in the period of change together with the offsetting gain
or loss on the hedged item or (b) reported as a component of other comprehensive
earnings and subsequently reclassified into earnings when the forecasted
transaction affects earnings. For a derivative not designated as a hedging
instrument, changes in fair value are recognized in earnings in the period of
change. As of December 31, 2001, the Company has approximately $9.3 million of
commitments to originate loans, which will be held for sale and approximately
$6.0 million of loan sale commitments that qualify as derivatives under SFAS No.
133. The commitments are recorded at fair value at December 31, 2001.
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement No. 141, Business Combinations ("SFAS No. 141") and Statement No. 142,
Goodwill and Other Intangible Assets ("SFAS No. 142"). SFAS No. 141 requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001. SFAS No. 141 also applies to all business
combinations using the purchase method completed after June 30, 2001. SFAS No.
141 specifies the criteria that intangible assets acquired in a purchase method
business combination must meet in order to be recognized and reported apart from
goodwill. SFAS No. 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of SFAS No. 142.
SFAS No. 142 also requires that intangible assets with estimable useful lives be
amortized over their respective estimated useful lives to their residual values,
and reviewed for impairment in accordance with SFAS No.121, Accounting for the
Impairment of Long-Lived Assets and for long-lived Assets to be Disposed Of.
50
The Company was required to adopt the provisions of SFAS No. 141
immediately and SFAS No. 142 effective January 1, 2002. As of December 31, 2001,
the Company has no assets to be classified as goodwill under these new
pronouncements. All assets and liabilities acquired in the purchase of two small
banks were deemed to be at fair value except for the retail savings deposits.
The Company recorded $3,573,000 in core deposit intangible assets related to the
acquisition of the retail savings deposits during 2001. Under the provisions of
SFAS No. 142, the Company expects to continue amortizing these intangible assets
over their estimated useful lives. Amortization of the Company's total core
deposit intangible assets was $1,564,000 and $1,965,000 for the years ended
December 31, 2001 and 2000, respectively. Total core deposit intangible assets
were $11,312,000 and $9,304,000 for the years ended December 31, 2001 and 2000,
respectively.
On October 3, 2001, the Financial Accounting Standards Board (FASB or the
Board) issued FASB Statement No. 144 (SFAS No. 144), Accounting for the
Impairment or Disposal of Long-Lived Assets, which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
While SFAS No. 144 supersedes FASB Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of", it
retains many of the fundamental provisions of that statement. The statement is
effective for fiscal years beginning after December 15, 2001 and must be adopted
as of the beginning of the fiscal year. Management does not expect the
implementation of SFAS No. 144 to have a material impact on the Company's
consolidated financial statements.
51
(2) Investment Securities
The amounts advanced under agreements to resell securities (repurchase
agreements) represent short-term investments. During the agreement period the
securities are maintained by the dealer under a written custodial agreement that
explicitly recognizes the Bank's interest in the securities. The Bank had
$123,000,000 and $33,000,000 in agreements to resell securities at December 31,
2001 and 2000, respectively, which are classified as cash and cash equivalents
in the accompanying Consolidated Statements of Financial Condition. Securities
purchased under agreements to resell averaged $62,860,000 and $5,333,000 during
2001 and 2000, and the maximum amounts outstanding at any month end during 2001
and 2000 were $123,000,000 and $33,000,000 respectively.
The Bank also had overnight deposits on hand with the Federal Home Loan
Bank of San Francisco which totaled $18,814,000 and $15,245,000, respectively,
as of December 31, 2001 and December 31, 2000.
Investment securities, available-for-sale, are recorded at fair value and
summarized below for the periods indicated:
2001
Gross Gross
Historical Unrealized Unrealized Fair
Cost Gains Losses Value
(Dollars In Thousands)
United States Government
and federal agency
obligations........... $ 28,499 $ 3 $ (34) $ 28,468
Collateralized
Mortgage Obligations.. 80,013 1,973 (10) 81,976
$108,512 $1,976 $ (44) $110,444
2000
Gross Gross
Historical Unrealized Unrealized Fair
Cost Gains Losses Value
(Dollars In Thousands)
United States Government
and federal agency
obligations........... $ 38,485 $ 3 $ (424) $ 38,064
Collateralized
Mortgage Obligations.. 98,562 254 (343) 98,473
$137,047 $ 257 $ (767) $136,537
Related maturity data for U.S. government and agency securities,
available-for-sale, is summarized below for the period indicated:
2001
Gross Gross
Historical Unrealized Unrealized Fair
Cost Gains Losses Value
(Dollars In Thousands)
Maturing within 1 year.. $ 28,499 $ 3 $ (34) $ 28,468
$ 28,499 $ 3 $ (34) $ 28,468
Collateralized Mortgage Obligations as of December 31, 2001 all have
expected maturities within five years. There were no sales of investment
securities during 2001, 2000 or 1999. Accrued interest on investments was
$1,275,000 and $1,257,000 at December 31, 2001 and 2000, respectively.
52
(3) Mortgage-backed Securities
Mortgage-backed securities, available-for-sale, are due through the year
2035 and are summarized below for the periods indicated:
2001
Gross Gross
Historical Unrealized Unrealized Fair
Cost Gains Losses Value
(Dollars In Thousands)
FNMA........... $ 11,657 $ 173 $ - $ 11,830
FHLMC.......... 269,195 3,054 - 272,249
Total.......... $ 280,852 $ 3,227 $ - $284,079
2000
Gross Gross
Historical Unrealized Unrealized Fair
Cost Gains Losses Value
(Dollars In Thousands)
FNMA........... $ 14,234 $ 17 $ (99) $ 14,152
FHLMC.......... 363,386 21 (3,154) 360,253
Total.......... $ 377,620 $ 38 $ (3,253) $374,405
There were no mortgage-backed securities created with loans originated by
the Bank in 2001, 2000 or 1999. There were no sales of mortgage-backed
securities during 2001, 2000 or 1999.
Accrued interest receivable related to mortgage-backed securities
outstanding at December 31, 2001 and 2000 totaled $2,461,000 and $4,945,000
respectively.
53
(4) Loans Receivable
Loans receivable are summarized as follows:
2001 2000
(Dollars In Thousands)
Real estate loans:
First trust deed residential loans:
One to four units.......... $2,121,899 $2,158,940
Five or more units......... 1,525,749 1,308,440
Residential loans.......... 3,647,648 3,467,380
Other real estate loans:
Commercial and industrial.. 358,159 217,619
Construction............... 38,060 -
Land....................... 1,481 -
Second trust deeds......... 9,472 8,543
Real estate loans............. 4,054,820 3,693,542
Non-real estate loans:
Manufactured housing......... - 391
Deposit accounts............. 1,267 576
Commercial business loans.... 18,882 12,600
Consumer..................... 19,546 6,555
Loans receivable......... 4,094,515 3,713,664
Less:
General loan valuation allowance 72,919 70,809
Valuation allowances for impaired loans 1,850 1,792
Unearned loan fees........... 14,857 11,779
Subtotal................. 4,004,889 3,629,284
Less:
Loans held-for-sale.......... 5,246 2,246
Loans receivable, net.... $3,999,643 $3,627,038
Loans serviced for others totaled $257,629,000, $322,315,000 and
$377,661,000 at December 31, 2001, 2000 and 1999, respectively.
The Bank had outstanding commitments to fund $105,045,000 and $150,276,000
in real estate loans at December 31,2001 and December 31, 2000, respectively. Of
these totals, $95,770,000 and $140,007,000 had variable interest rates and
$9,275,000 and $10,269,000 had fixed interest rates. The Bank had outstanding
commitments to sell real estate loans of $5,955,000 and $2,091,000, respectively
at December 31, 2001 and December 31, 2000, respectively.
Accrued interest receivable related to loans outstanding at December 31,
2001 and 2000 totaled $17,664,000 and $21,619,000, respectively.
Loans delinquent greater than 90 days or in foreclosure were $16,205,000
and $6,265,000 at December 31, 2001 and 2000, respectively, and the related
allowances for delinquent interest were $504,000 and $511,000 respectively.
There were no loans originated upon the sale of real estate owned during
2001. Loans originated upon the sale of real estate owned totaled $645,000 and
$4,792,000 during 2000 and 1999, respectively.
Loans made to directors and officers totaled $3,386,000 and $1,767,000 as
of December 31, 2001 and 2000, respectively.
See Note 9 for loans that were pledged as security for borrowings.
54
4) Loans Receivable (continued)
The following is a summary of the activity in general loan valuation
allowances and impaired valuation allowances for the periods indicated:
General Impaired
Valuation Valuation
Allowance Allowance Total
(Dollars In Thousands)
Balance at December 31, 1998.............. $67,638 $ 7,634 $75,272
Charge-off................................ (1,362) (5,038) (6,400)
Recoveries................................ 3,678 - 3,678
Balance at December 31, 1999.............. 69,954 2,596 72,550
Charge-offs............................... (1,443) (804) (2,247)
Recoveries................................ 2,298 - 2,298
Balance at December 31, 2000.............. 70,809 1,792 72,601
Balance obtained from acquisition......... 2,050 - 2,050
Provision for loan losses................. (58) 58 -
Charge-offs............................... (369) - (369)
Recoveries................................ 487 - 487
Balance at December 31, 2001.............. $72,919 $ 1,850 $74,769
The Bank has loss exposure on certain loans sold with recourse. The dollar
amount of loans sold with recourse totaled $126,432,000 and $146,537,000 at
December 31, 2001 and 2000, respectively. The maximum potential recourse
liability totaled $27,274,000 and $32,177,000 at December 31, 2001 and December
31, 2000, respectively.
The Bank maintains a repurchase liability for loans sold with recourse.
This liability is included in accrued expenses and other liabilities in the
Consolidated Statements of Financial Condition and was $12,824,000 at December
31, 2001, December 31, 2000 and December 31, 1999.
The following is a summary of impaired loans, net of valuation allowances
for impairment, for the periods indicated:
2001 2000
(Dollars In Thousands)
Non-accrual loans......................... $ 978 $ -
Modified loans............................ 6,416 8,770
$ 7,394 $ 8,770
55
(4) Loans Receivable (continued)
The Bank considers a loan to be impaired when management believes that it
is probable that the Bank will be unable to collect all amounts due under the
contractual terms of the loan. Estimated impairment losses are included in the
Bank's impairment allowances. At December 31, 2001, the total recorded amount of
loans for which impairment had been recognized in accordance with SFAS No. 114
was $7,394,000 (after deducting $1,850,000 of impairment allowances attributable
to such loans). At December 31, 2000, the total recorded amount of loans for
which impairment had been recognized in accordance with SFAS No. 114 was
$8,770,000 (after deducting $1,792,000 of impairment allowances attributable to
such loans). The Bank's impaired non-accrual loans consist of single family
loans with an outstanding principal amount greater than or equal to $500,000 and
multi-family loans with an outstanding principal amount greater than or equal to
$750,000.
As of December 2001 and December 2000, impaired loans totaling $3,929,000
and $5,075,000, respectively, had no valuation allowances established.
The average recorded investment in impaired loans during the years ended
December 31, 2001, 2000 and 1999 was $7,429,000, $8,784,000 and $11,448,000
respectively. The amount of interest income recognized for impaired loans during
the years ended December 31, 2001, 2000 and 1999 was $597,000, $706,000, and
$1,045,000 respectively, under the cash basis method of accounting. Interest
income recognized under the accrual basis method of accounting for the years
ended December 31, 2001, 2000 and 1999 totaled $587,000, $712,000 and $997,000,
respectively. There were no commitments to lend additional funds to borrowers
whose loan terms have been modified.
(5) Real Estate
Real estate consists of the following:
2001 2000
(Dollars In Thousands)
Real estate acquired by
(or deed in lieu of) foreclosure ("REO").. $ 1,835 $ 2,507
Valuation allowance....................... (350) (350)
1,485 2,157
Real estate held-for-investment........... 30 32
Real estate, net........................ $ 1,515 $ 2,189
Listed below is a summary of the activity in the general valuation
allowance for real estate owned for the periods indicated (dollars in
thousands):
Balance at December 31, 1998.............. $500
Provision for losses on REO............... (54)
Charge-offs............................... (96)
Balance at December 31, 1999.............. 350
Provision for losses on REO............... -
Charge-offs............................... -
Balance at December 31, 2000.............. 350
Provision for losses on REO............... -
Charge-offs............................... -
Balance at December 31, 2001.............. $350
56
(5) Real Estate (continued)
The following table summarizes real estate operations, net:
For the Years Ended
December 31,
2001 2000 1999
(Dollars In Thousands)
Net income (loss) from operations:
Gain on sales of REO............... $ 1,501 $ 949 $ 3,852
Other REO operations............... (1,197) (355) (635)
Real estate operations, net .... $ 304 $ 594 $ 3,217
The Bank acquired $5,135,000, $5,050,000 and $10,831,000 of real estate in
settlement of loans during 2001, 2000 and 1999, respectively.
(6) Office Properties, Equipment and Lease Commitments
Office properties and equipment, at cost, less accumulated depreciation and
amortization, are summarized as follows:
2001 2000
(Dollars In Thousands)
Land...................................... $ 3,361 $ 3,061
Office buildings.......................... 5,615 4,603
Furniture, fixtures and equipment......... 15,101 15,129
Leasehold improvements.................... 10,386 10,076
Other..................................... 56 56
34,519 32,925
Less accumulated depreciation and amortization 23,697 22,274
$10,822 $10,651
The Bank is obligated under non-cancelable operating leases for periods ranging
from five to thirty years. The leases are for certain of the Bank's office
facilities. Approximately half of the leases for office facilities contain five
and ten year renewal options. Minimum rental commitments at December 31, 2001
under all non-cancelable leases are as follows (dollars in thousands):
2002................................ $ 4,151
2003................................ 3,857
2004................................ 3,415
2005................................ 3,192
2006................................ 2,969
Thereafter.......................... 6,212
$23,796
Rent payments under these leases were $4,309,000, $4,278,000 and $4,055,000
for 2001, 2000 and 1999, respectively. Certain leases require the Bank to pay
property taxes and insurance. Additionally, certain leases have rent escalation
clauses based on specified indices.
57
(7) Federal Home Loan Bank Stock
The Bank's investment in FHLB stock at December 31, 2001 and 2000 was
$91,713,000 and $80,885,000, respectively. The FHLB provides a central credit
facility for member institutions. As a member of the FHLB system, the Bank is
required to own capital stock in the FHLBSF in an amount at least equal to the
greater of 1% of the aggregate principal amount of its unpaid home loans, home
purchase contracts and similar obligations at the end of each calendar year,
assuming for such purposes that at least 30% of its assets were home mortgage
loans, or 5% of its advances (borrowings) from the FHLBSF. The Bank was in
compliance with this requirement at December 31, 2001. The Bank's investment in
FHLB stock was pledged as collateral for advances from the FHLB at December 31,
2001 and 2000. The fair value of the Bank's FHLB stock approximates book value
due to the Bank's ability to redeem such stock with the FHLB at par value.
Accrued dividends on FHLB stock totaled $1,173,000 and $1,178,000 as of December
31, 2001 and December 31, 2000, respectively.
(8) Deposits
Deposit account balances are summarized as follows:
2001 2000
Amount % Amount %
(Dollars In Thousands)
Variable rate non-term accounts:
Money market deposit accounts (weighted
average rate of 2.76% and 4.79%) $ 741,978 29% $ 537,475 25%
Interest-bearing checking accounts
(weighted average rate of 0.72% and
1.22%).......................... 162,309 7 140,151 6
Passbook accounts (weighted average
rate of 1.59% and 2.00%)........ 104,488 4 80,536 4
Non-interest bearing checking accounts 205,597 8 176,059 8
1,214,372 48 934,221 43
Fixed-rate term certificate accounts:
Under six-month term (weighted average
rate of 2.57% and 5.26%)........ 54,626 2 61,954 3
Six-month term (weighted average rate of
3.29% and 6.41%)................ 246,161 10 282,922 13
Nine-month term (weighted average rate of
3.98% and 6.74%)................ 170,190 7 240,598 11
One year to 18-month term (weighted
average rate of 4.45% and 6.11%) 469,113 18 367,603 17
Two year or 30-month term (weighted
average rate of 5.38% and 5.83%) 45,993 2 31,685 2
Over 30-month term (weighted average rate
of 5.31% and 5.49%)............ 39,938 1 31,088 1
Negotiable certificates of $100,000 and
greater, 30 day to one year terms (weighted
average rate of 3.84% and 6.19%) 306,254 12 214,976 10
1,332,275 52 1,230,826 57
Total Deposits (weighted average rate of
3.02% and 4.90%).............. $2,546,647 100% $2,165,047 100%
58
(8) Deposits (continued)
Certificates of deposit, placed through five major national brokerage
firms, totaled $356,819,000 and $381,196,000 at December 31, 2001 and 2000,
respectively.
Cash payments for interest on deposits (including interest credited)
totaled $96,482,000, $97,624,000 and $90,604,000 during 2001, 2000 and 1999,
respectively. Accrued interest on deposits at December 31, 2001 and 2000 totaled
$8,921,000 and $10,834,000, 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, 2001:
Non-Term There-
Accounts 2002 2003 2004 2005 after Total
(Dollars In Thousands)
Deposits at
December 31, 2001 $1,214,372 $1,260,976 $40,371 $18,125 $8,768 $4,035 $2,546,647
Weighted average
interest rates.. 2.01% 3.88% 4.66% 5.02% 6.04% 4.61% 3.02%
Interest expense on deposits is summarized as follows:
For the Years Ended
2001 2000 1999
(Dollars In Thousands)
Passbook accounts............. $ 1,443 $ 1,611 $ 1,618
Money market deposits and
interest-bearing checking accounts 24,929 24,709 17,035
Certificate accounts.......... 68,196 73,854 68,546
$ 94,568 $ 100,174 $ 87,199
59
(9) Federal Home Loan Bank Advances
Federal Home Loan Bank (FHLB) advances consist of the following:
2001 2000
(Dollars In Thousands)
Advances from the FHLB of San Francisco with a
weighted average interest rate of 5.01% and 6.42%,
respectively, secured by FHLB stock and certain
real estate loans with unpaid principal balances of
approximately $3.2 billion at December 31, 2001,
advances mature through 2010........ $1,597,000 $1,579,000
$1,597,000 $1,579,000
At December 31, 2001 and 2000, accrued interest payable on FHLB advances
totaled $219,000 and $8,687,000, respectively, which is included in accrued
expenses and other liabilities in the accompanying Consolidated Statements of
Financial Condition.
The Bank has a credit facility with the FHLB in the form of FHLB advances
and letters of credit which allow borrowings up to 50% of the Bank's assets, as
computed for regulatory purposes, or approximately $2,363,145,000 at December
31, 2001 with terms up to 30 years.
The following is a summary of FHLB advance maturities at December 31, 2001
(dollars in thousands):
2002...................$ 985,000
2003................... 62,000
2004................... 285,000
2005................... 55,000
2006................... 175,000
2008................... 10,000
2009................... 5,000
2010................... 20,000
$1,597,000
Cash payments for interest on borrowings (including reverse repurchase
agreements) totaled $118,194,000, $77,621,000 and $77,372,000 during 2001, 2000
and 1999, respectively.
Interest expense on borrowings is comprised of the following for the years
indicated:
Year Ended December 31,
2001 2000 1999
(Dollars In Thousands)
FHLB Advances............... $ 94,506 $ 85,603 $ 48,077
Reverse Repurchase Agreements 12,346 21,041 20,396
10 Year Senior Unsecured Notes - - 5,459
Other....................... 334 (313) (100)
$ 107,186 $ 106,331 $ 73,832
Other interest expense in 2001, 2000 and 1999 includes the additional
accruals and reversals of accrued interest due to the IRS. See Note 11.
60
(10) Securities Sold Under Agreements to Repurchase
The Bank enters into sales of securities under agreements to repurchase
(reverse repurchase agreements) which require the repurchase of the same
securities. Reverse repurchase agreements are treated as financing arrangements,
and the obligation to repurchase securities sold is reflected as a borrowing in
the Consolidated Statements of Financial Condition. The mortgage-backed
securities underlying the agreements were delivered to the dealer who arranged
the transactions or its trustee.
At December 31, 2001, $211,040,000 in reverse repurchase agreements were
collateralized by mortgage-backed securities with principal balances totaling
$221,618,000 and fair values totaling $224,114,000. At December 31, 2000,
$294,110,000 in reverse repurchase agreements were collateralized by
mortgage-backed securities with principal balances totaling $311,840,000 and
fair values totaling $308,836,000.
The weighted average interest rates for borrowings under reverse repurchase
agreements were 2.66% and 6.65%, respectively, as of December 31, 2001 and
December 31, 2000.
Securities sold under agreements to repurchase averaged $255,747,000 and
$326,004,000 during 2001 and 2000, respectively, and the maximum amounts
outstanding at any month-end during 2001 and 2000 were $294,110,000 and
$355,995,000 respectively.
The following is a summary of maturities at December 31, 2001 (dollars in
thousands):
Up to 30 days........... $ 19,556
30 to 90 days........... 102,058
Over 90 to 182 days..... 89,426
$211,040
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 $1,452,000 and $4,326,000 at
December 31, 2001 and 2000, respectively.
(11) Income Taxes
Income taxes (benefit) consist of the following:
2001 2000 1999
(Dollars In Thousands)
Current:
Federal..................... $30,305 $ 20,764 $ 20,093
State....................... 9,889 8,391 8,602
40,194 29,155 28,695
Deferred:
Federal..................... (2,492) 722 (456)
State....................... (81) (1,045) (1,187)
(2,573) (323) (1,643)
Total:
Federal..................... 27,813 21,486 19,637
State....................... 9,808 7,346 7,415
$37,621 $28,832 $27,052
61
(11) Income Taxes (continued)
A reconciliation of the statutory federal corporate income tax rate to the
Company's effective income tax rate follows:
2001 2000 1999
Statutory federal income tax rate 35.0% 35.0% 35.0%
Increase in taxes resulting from:
State franchise tax, net of federal income
tax benefit................... 7.2 7.3 7.7
Core deposit intangibles....... - 0.3 0.1
Other, net.................... 0.6 0.2 0.5
Effective rate............... 42.8% 42.8% 43.3%
Cash payments for income taxes totaled $43,100,000, $28,300,000 and
$29,609,000 during 2001, 2000 and 1999, respectively. The Company received cash
refunds totaling $667,000 during 2000. No refunds were received during 2001 and
1999.
Current income tax receivable were $2.0 million at December 31, 2001 and
$325,000 at December 31, 1999. Current income taxes payable at
December 31, 2000 were $530,000.
Listed below are the significant components of the net deferred tax (asset)
and liability:
2001 2000
(Dollars In Thousands)
Components of the deferred tax asset:
Bad debts............................... $ (34,501) $ (33,533)
Pension expense......................... (3,901) (3,580)
State taxes............................. (3,903) (3,003)
Tax effect of unrealized loss on
securities available-for-sale.......... - (1,566)
Other................................... (2,575) (2,592)
Total deferred tax asset.............. (44,880) (44,274)
Components of the deferred tax liability:
Loan fees............................... 11,978 14,349
Loan sales.............................. 477 639
FHLB stock dividends.................... 20,411 18,049
Tax effect of unrealized gain on
securities available for sale.......... 2,170 -
Other................................... 313 543
Total deferred tax liability.......... 35,349 33,580
Net deferred tax asset.................... $ (9,531) $(10,694)
The Company provides for recognition and measurement of deductible
temporary differences to the extent that it is more likely than not that the
deferred tax asset will be realized. The Company did not have a valuation
allowance for the deferred tax asset at December 31, 2001 or 2000, as it is more
likely than not that the deferred tax asset will be realized through loss
carrybacks and the timing of future reversals of existing temporary differences.
62
(11) Income Taxes (continued)
The Internal Revenue Service ("IRS") has examined the Company's
consolidated federal income tax returns for tax years up to and including 1996.
The adjustments proposed by the IRS were primarily related to temporary
differences as to the recognition of certain taxable income and expense items.
While the Company had provided for deferred taxes for federal and state
purposes, the change in the period of recognition of certain income and expense
items resulted in interest due to the IRS and Franchise Tax Board ("FTB"). A
liability of $300,000 was recorded during 2001 for interest on amended returns.
Interest accruals totaling $350,000 and $150,000, respectively, were reversed
during 2000 and 1999, respectively. The balance of accrued interest payable for
amended returns was $300,000 as of December 31, 2001. There was no balance of
accrued interest payable for amended returns as of December 31, 2000.
The Bank is required to use the specific charge-off method of accounting
for debts for all periods beginning after 1995. Prior to that date, the Bank
used the reserve method of accounting for bad debts. The Consolidated Statements
of Financial Condition at December 31, 2001 and 2000 do not include a liability
of $5,356,000 related to the adjusted base year bad debt reserve. This reserve
was created when the Bank was on the reserve method.
(12) Stockholders' Equity and Earnings Per Share
The Company's stock charter authorizes 5,000,000 shares of serial preferred
stock. As of December 31, 2001 no preferred shares had been issued.
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations for the years indicated:
For the Year Ended For the Year Ended For the Year Ended
December 31, 2001 December 31, 2000 December 31, 1999
Per Per Per
Earnings Shares Share Earnings Shares Share Earnings Shares Share
(Numerator)(Denominator) Amount (Numerator)(Denominator) Amount (Numerator)(Denominator) Amount
(Dollars in thousands except per share data)
Basic EPS:
Earnings before
extraordinary item $50,302 17,270,579 $2.91 $38,465 17,372,225 $2.23 $35,447 19,234,869 $1.84
Unreleased shares (35,988) (120,607) - -
Extraordinary item, net
of taxes...... - - - - - (2,195) - (0.11)
Net earnings.... $50,302 17,234,591 $2.92 $38,465 17,251,618 $2.23 $33,252 19,234,869 $1.73
Diluted EPS:
Earnings before
extraordinary item $50,302 17,270,579 $2.91 $38,465 17,372,225 $2.23 $35,447 19,234,869 $1.84
Unreleased shares (35,988) (120,607) -
Options-common stock
equivalents... 411,056 205,277 168,183
Earnings before
extraordinary item 50,302 17,645,647 2.85 38,465 17,456,895 2.20 35,447 19,403,052 1.83
Extraordinary item, net
of taxes...... - - - - - - (2,195) - (0.12)
Net earnings.... $50,302 17,645,647 $2.85 $38,465 17,456,895 $2.20 $33,252 19,403,052 $1.71
63
(12) Stockholders' Equity and Earnings Per Share (continued)
Regulatory Capital
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory - and possibly additional discretionary - actions
by regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to risk
weighted assets (as defined). Management believes that the Bank meets all
capital adequacy requirements to which it is subject as of December 31, 2001.
As of December 31, 2001, the most recent notification from the OTS
indicated that the Bank was well capitalized under the regulatory framework for
prompt corrective action. There are no conditions or events since December 31,
2001 that management believes have changed the Bank's classification.
The following table summarizes the Bank's regulatory capital and required
capital for the years indicated (dollars in thousands):
December 31, 2001
Tier 1
Tangible Core Risk-based Risk-based
Capital Capital Capital Capital
Actual Capital:
Amount...................... $302,448 $302,448 $302,448 $336,556
Ratio....................... 6.42% 6.42% 11.24% 12.51%
FIRREA minimum required capital:
Amount...................... $ 70,617 $188,522 - $215,184
Ratio....................... 1.50% 4.00% - 8.00%
FIDICIA well capitalized required capital:
Amount...................... - $235,391 $161,388 $268,980
Ratio....................... - 5.00% 6.00% 10.00%
December 31, 2000
Tier 1
Tangible Core Risk-based Risk-based
Capital Capital Capital Capital
Actual Capital:
Amount...................... $254,974 $254,974 $254,974 $286,937
Ratio....................... 5.84% 5.84% 10.13% 11.39%
FIRREA minimum required capital:
Amount...................... $ 65,471 $174,588 - $201,454
Ratio....................... 1.50% 4.00% - 8.00%
FIDICIA well capitalized required capital:
Amount...................... - $218,236 $151,091 $251,818
Ratio....................... - 5.00% 6.00% 10.00%
64
(12) Stockholders' Equity and Earnings Per Share (continued)
The payment of dividends is subject to certain federal income tax
consequences. Specifically, the Bank is capable of paying dividends to the
Company in any year without incurring tax liability only if such dividends do
not exceed both the tax basis current year earnings and profits and accumulated
tax earnings and profits as of the beginning of the year.
Thirty days' prior notice to the OTS of the intent to declare dividends is
required for the declaration of such dividends by the Bank. The OTS generally
allows a savings institution which meets its fully phased-in capital
requirements to distribute without OTS approval dividends up to 100% of the
institution's net income for the applicable calendar year plus retained net
income for the two prior calendar years. However, the OTS has the authority to
preclude the declaration of any dividends or adopt more stringent amendments to
its capital regulations.
The Company may loan up to $6,000,000 to the Employee Stock Ownership Plan
("ESOP") under a line of credit loan. There was no balance outstanding as of
December 31, 2001. At December 31, 2000, the loan to the ESOP totaled $656,000.
Interest on any outstanding loan balance is due each December 31. Interest
varies based on the Bank's monthly cost of funds. The average rates paid during
2001 and 2000 were 4.79% and 5.40%, respectively.
The Company maintains 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-thousandth of a share of a new series of preferred stock for its estimated
long term value of $200.00. In the event of certain acquisitions of 15% or more
of the voting stock or a tender offer for 15% or more of the voting stock of the
Company, each holder of a Right who exercises such Right will receive shares of
the Company with a market value equal to two times the exercise price of the
Right. Also, in the event of certain business combination transactions following
the acquisition by a person of 15% or more of the Company stock, each Rights
holder will have the right to receive upon exercise of the Right common stock of
the surviving company in such transaction having a market value of two times the
exercise price of the Right. The Company may redeem the Rights at any time prior
to such acquisition or tender offer should the Board of Directors deem
redemption to be in its stockholders' best interests.
65
(13) Employee Benefit Plans
The Bank maintains a qualified defined contribution plan established under
Section 401 (k) of the Internal Revenue Code, as amended (the "401(k) Plan").
Participants are permitted to make contributions on a pre-tax basis, a portion
of which is matched by the Bank. The 401(k) Plan expense was $356,000, $354,000
and $299,000 for 2001, 2000 and 1999, respectively.
The Bank has a Supplementary Executive Retirement Plan ("SERP") which
covers any individual employed by the Bank as its Chief Executive Officer or
Chief Operating Officer. The pension expense for the SERP was $970,000, $906,000
and $988,000 in 2001, 2000 and 1999, respectively. The SERP is unfunded.
The discount rate used in determining the actuarial value of benefit
obligations were 7.00% and 7.25%, respectively, as of December 31, 2001 and
2000. The rate of increase in future compensation levels used in determining the
pension cost for the SERP was 4.0% as of December 31, 2001 and 2000. The plan
had no assets at December 31, 2001 or 2000.
The following table sets forth the funded status of the SERP and amounts
recognized in the Company's Statements of Financial Condition for the years
indicated:
2001 2000
(Dollars In Thousands)
Change in Benefit Obligation
Projected benefit obligation, beginning of the year $ 6,594 $ 5,837
Service cost.................................... 304 264
Interest cost................................... 468 441
Benefits paid................................... (287) (287)
Actuarial loss.................................. 806 339
Projected benefit obligation, end of the year... $ 7,885 $ 6,594
Change in Plan Assets
Funded status................................... $ (7,885) $ (6,594)
Unrecognized transition obligation.............. - 63
Unrecognized prior service cost................. 419 553
Unrecognized (gain)/loss........................ 1,419 613
Net amount recognized........................... $ (6,047) $ (5,365)
Components of Net Periodic Benefit Cost
Service cost.................................... $ 304 $ 264
Interest cost................................... 467 441
Amortization of unrecognized transition obligation 62 62
Amortization of unrecognized prior service cost. 135 135
Pension cost.................................... $ 968 $ 902
The projected benefit obligation, accumulated benefit obligation, and fair
value of assets were $7,885,000, $6,131,000, and $0 respectively, at December
31, 2001 and $6,594,000, $5,255,000, and $0, respectively, at December 31, 2000.
66
(13) Employee Benefit Plans (continued)
The Bank has a profit sharing plan (the "ESOP") for all salaried employees
and officers who have completed one year of continuous service. At December 31,
2001, the ESOP held 4.87% of outstanding stock of the Company. Profit sharing
expense for the years ended December 31, 2001, 2000 and 1999 $2,020,000,
$1,778,000 and $1,100,000, respectively. The amount of the contribution made by
the Bank is determined each year by the Board of Directors, but is not to exceed
15% of the participants' aggregated compensation. The Bank does not offer post
retirement benefits under this plan.
Stock Compensation Plans
At December 31, 2001, the Company had two stock-based compensation
programs, which are described below. The Company applies APB Opinion 25 and
related interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized for its stock compensation plans.
Stock Option Programs
Under the 1994 Stock Option and Stock Appreciation Rights Plan (the "1994
Plan"), the Company may grant options to employees of the Bank for up to
3,000,000 shares of common stock, subject to limitations set forth under the
1994 Plan. Under the 1994 Plan, the exercise price of each option equals the
market value of the Company's stock on the date of the grant, and an option's
maximum term is 10 years. Options typically begin to vest on the second
anniversary date of the grant.
The Company also has a stock option plan for outside directors, the 1997
Non-employee Directors Stock Incentive Plan (the "Directors Stock Plan"). The
Directors Stock Plan provides for the issuance of up to 400,000 shares of common
stock to non-employee directors of the Company. The exercise price of each
option equals the market value of the Company's stock on the date of the grant,
and an option's maximum term is 10 years plus one month. Options typically vest
100% on the one year anniversary date of the grant.
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 2001, 2000 and 1999, respectively: no dividend
yield in any year; expected volatility of 38%, 37% and 38%; risk free interest
rates of 5.1%, 6.7% and 6.6%; and expected average lives of 6 years in all three
periods. The weighted-average grant date fair value of options granted during
the year are $9.45, $23.75 and $6.04 for 2001, 2000 and 1999, respectively. The
Company has elected to recognize forfeitures in the year they occur.
Had compensation cost for the Company's stock-option programs been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of Statement of Financial Standards No. 123,
"Accounting for Stock Based Compensation," the Company's net earnings and
earnings per share would have been reduced to the pro forma amounts indicated
below:
67
(13) Employee Benefit Plans (continued)
2001 2000 1999
(Dollars In Thousands, Except Per Share Data)
Before Extraordinary Items:
Earnings before
extraordinary items:
As reported..... $50,302 $38,465 $35,447
Pro forma....... $49,368 $37,677 $35,085
Earnings per share:
Basic:
As reported..... $2.92 $2.23 $1.84
Pro forma....... $2.83 $2.18 $1.83
Diluted:
As reported..... $2.85 $2.20 $1.83
Pro forma....... $2.76 $2.16 $1.81
After Extraordinary Items:
Net earnings:
As reported..... $50,302 $38,465 $33,252
Pro forma....... $49,368 $37,677 $32,890
Earnings per share:
Basic:
As reported..... $2.92 $2.23 $1.73
Pro forma....... $2.83 $2.18 $1.71
Diluted:
As reported..... $2.85 $2.20 $1.71
Pro forma....... $2.76 $2.16 $1.70
Pro forma net earnings and earnings per share reflect only options granted
since 1995. Therefore, the full impact of calculating compensation cost for
stock options under SFAS No. 123 is not reflected in the pro forma net earnings
per share amounts presented above because compensation cost is reflected over
the options' vesting period and compensation cost for options granted prior to
January 1, 1995 is not considered.
The following table summarizes information about stock option activity during
the periods indicated:
Options Outstanding 2001 2000 1999
(Weighted average option prices) (In Shares)
Beginning of year ($12.84, $12.54 and $9.84) 796,538 653,742 713,500
Granted ($31.44, $13.13 and $16.13) 127,050 219,275 181,130
Exercised ($12.22, $7.04 and $5.68) (62,489) (30,656) (193,785)
Canceled ($18.12, $13.77 and $13.64) (41,184) (45,823) (47,103)
End of Year ($15.51, $12.84 and $12.54) 819,915 796,538 653,742
Shares exercisable at December 31..
($11.53, $11.22 and $10.09)...... 309,808 252,121 193,684
68
(13) Employee Benefit Plans (continued)
Additional information with respect to stock options outstanding at
December 31, 2001 follows:
Price Ranges
($5.63 - $14.23)($14.24 - $22.84)($22.85- $31.45)
Options outstanding:
Number of outstanding shares......... 449,195 252,620 118,100
Weighted-average contractual life ... 5.73 6.60 9.07
Weighted-average exercise price ..... $10.67 $16.66 $31.44
Options exercisable:
Number of exercisable shares......... 220,884 88,924 -
Weighted-average exercise price ..... $9.45 $16.67 $-
Restricted Stock Plan
The Company's 1991 Restricted Stock Plan (the "Restricted Stock Plan") has
expired pursuant to its terms. Under the Restricted Stock Plan, the Company
issued shares of restricted to employees of the Company, including officers and
directors. All shares issued under the Plan to current employees have been
vested. The remaining 43,406 shares which were available for issuance under the
Plan, consisting of previously issued shares reacquired by the Company, are no
longer authorized for issuance under the Plan due to the Plan's termination.
Accordingly, these shares are included in the Company's treasury stock.
(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,
2001 2000
(Dollars In Thousands)
Assets:
Cash........................... $ 6,263 $ 3,531
Fixed assets................... 419 491
Other assets................... - 1,334
Investment in subsidiary....... 319,276 262,119
$ 325,958 $ 267,475
Liabilities and Stockholders' Equity:
Other liabilities.............. 280 33
Stockholders' equity......... 325,678 267,442
$ 325,958 $ 267,475
69
(14) Parent Company Financial Information (continued)
Years Ended December 31,
CONDENSED STATEMENTS OF OPERATIONS AND 2001 2000 1999
COMPREHENSIVE EARNINGS (Dollars In Thousands)
Dividends received from Bank... $ - $10,000 $99,554
Equity in undistributed (distributed) net
earnings of subsidiary ....... 52,007 29,263 (60,508)
Other expense, net............. (1,705) (798) (5,794)
Net earnings................... $50,302 $38,465 $33,252
Other comprehensive earnings (loss),
net of taxes.................. 5,149 6,122 (7,577)
Comprehensive earnings......... $55,451 $44,587 $25,675
Years Ended December 31,
CONDENSED STATEMENTS OF CASH FLOWS 2001 2000 1999
(Dollars In Thousands)
Net Cash Flows from Operating Activities:
Net earnings........................ $ 50,302 $ 38,465 $ 33,252
Adjustments to reconcile net earnings to
net cash provided by operating
activities:
Equity in undistributed (distributed) net
net earnings of subsidiary......... (52,007) (29,263) 60,508
Write-off deferred issuance cost.... - - 1,332
Depreciation expense................ 184 89 -
Other............................... 1,581 - 1,326
Net cash provided (used) by operating activities 60 9,291 96,418
Cash Flows from Investing Activities:
Increase in fixed assets............ (112) (580) -
(Increase) decrease in unreleased shares (841) 918 (926)
Net cash (used) provided by investing
Activities......................... (953) 338 (926)
Cash Flows from Financing Activities:
Repayment of long term borrowings... - - (50,000)
Premiums paid on early extinguishment of debt - - (2,655)
Purchase of treasury stock.......... - (10,175) (52,214)
Other............................... 3,625 988 -
Net cash provided (used by) financing activities 3,625 (9,187) (104,869)
Net increase in cash.................. 2,732 442 (9,377)
Cash at beginning of period........... 3,531 3,089 12,466
Cash at end of period................. $ 6,263 $ 3,531 $ 3,089
70
(15) Quarterly Results of Operations: (unaudited)
Summarized below are the Company's results of operations on a quarterly
basis for 2001, 2000 and 1999:
Provision Non- Basic Diluted
Interest Interest For Loan Other Interest Net Earnings Earnings
Income Expense Losses Income Expense Earnings Per Share Per Share
(Dollars In Thousands, Except Per Share Data)
First quarter
2001........ $ 88,017 $ 55,865 $ - $ 2,007 $ 12,533 $ 12,373 $ 0.72 $ 0.70
2000........ 71,102 45,122 - 1,725 12,245 8,835 0.50 0.49
1999........ 64,737 39,572 - 3,133 12,588 8,915 0.43 0.43
Second quarter
2001........ $ 87,443 $ 53,881 $ - $ 1,641 $ 13,195 $ 12,592 $ 0.73 $ 0.71
2000........ 76,455 50,288 - 2,418 12,570 9,351 0.54 0.54
1999........ 63,697 38,478 - 4,157 13,113 9,103 0.47 0.47
Third quarter
2001........ $ 81,837 $ 49,397 $ - $ 3,019 $ 13,738 $ 12,427 $ 0.72 $ 0.70
2000........ 81,980 55,290 - 1,950 12,276 9,497 0.55 0.54
1999........ 63,671 39,376 - 2,813 11,990 8,358 0.44 0.44
Fourth quarter
2001........ $ 76,635 $ 42,611 $ - $ 2,252 $ 13,708 $ 12,910 $ 0.75 $ 0.73
2000........ 84,783 55,805 - 1,654 11,174 10,782 0.63 0.62
1999........ 67,896 43,605 - 2,585 11,468 6,876 0.38 0.37
Total year
2001........ $333,932 $201,754 $ - $ 8,919 $ 53,174 $ 50,302 $ 2.92 $ 2.85
2000........ 314,320 206,505 - 7,747 48,265 38,465 2.23 2.20
1999........ 260,001 161,031 - 12,688 49,159 33,252 1.73 1.71
(16) Fair Value of Financial Instruments
The following table presents fair value information for financial
instruments for which a market exists.
2001 2000
Carrying Carrying
Value Fair Value Value Fair Value
(Dollars In Thousands)
Mortgage-backed Securities ... $284,079 $284,079 $374,405 $374,405
US Government Securities ..... 28,468 28,468 38,064 38,064
Collateralized Mortgage Obligations 81,976 81,976 98,473 98,473
Loans Held-for-Sale .......... 5,246 5,246 2,246 2,246
71
(16) Fair Value of Financial Instruments (continued)
The following table presents fair value information for financial
instruments shown in the Company's Consolidated Statements of Financial
Condition for which there is no readily available market. The fair values for
these financial instruments were calculated by discounting expected cash flows.
Because these financial instruments have not been evaluated for possible sale
and because management does not intend to sell these financial instruments, the
Company does not know whether the fair values shown below represent values at
which the respective financial instruments could be sold.
2001 2000
Calculated Calculated
Historical Fair Value Historical Fair Value
Cost Amount Cost Amount
(Dollars In Thousands)
Adjustable Loans:
Single Family .......... $2,091,298 $2,119,245 $2,148,016 $2,191,467
Multi-Family ........... 1,513,077 1,540,775 1,299,356 1,327,018
Commercial ............ 335,245 347,592 206,032 213,293
Fixed Rate Loans:
Single Family .......... 26,859 27,579 8,068 8,106
Multi-Family ........... 17,716 18,520 13,924 14,175
Commercial ............. 26,138 27,653 12,004 12,480
Consumer Loans............ 20,797 21,206 7,522 7,599
Commercial Business Loans. 18,882 18,992 12,600 12,626
Construction Loans........ 38,060 38,571 - -
Non-Performing Loans ..... 6,443 6,443 6,142 6,142
Fixed-Term Certificate Accounts 1,332,275 1,347,368
1,230,826........1,229,886
Non-Term Deposit Accounts 1,214,372 1,214,372 758,162 758,162
Borrowings ............... 1,808,040 1,847,196 1,873,110 1,885,252
GAAP specifies that fair values should be calculated based on the value of
one unit. The estimates do not necessarily reflect the price the Company might
receive if it were to sell the entire holding of a particular financial
instrument at one time.
Fair value estimates are based on the following methods and assumptions,
some of which are subjective in nature. Changes in assumptions could
significantly affect the estimates.
Cash and Cash Equivalents
The carrying amounts reported in the Consolidated Statements of Financial
Condition for this item approximate fair value.
Investment Securities and Mortgage-Backed Securities
Fair values are based on bid prices published in financial newspapers or
bid quotations received from national securities dealers.
72
(16) Fair Value of Financial Instruments (continued)
Loans Receivable
The portfolio is segregated into those loans with adjustable rates of
interest and those with fixed rates of interest. Fair values are based on
discounting future cash flows by the current rate offered for such loans with
similar remaining maturities and credit risk. The amounts so determined for each
loan category are reduced by the Bank's allowance for loans losses which thereby
takes into consideration changes in credit risk. As of December 31, 2001, the
Bank had outstanding commitments to fund $105,045,000 in real estate mortgage
loans, $15,523,000 in construction loans and $3,483,000 in non-mortgage loans.
All loan commitments were substantially at fair value.
Non-performing Loans
The carrying amounts reported in the Consolidated Statements of Financial
Condition for this item approximate fair value.
Deposits
The fair value of deposits with no stated term, such as regular passbook
accounts, money market accounts and checking accounts, is defined by SFAS No.
107 as the carrying amounts reported in the Consolidated Statements of Financial
Condition. The fair value of deposits with a stated maturity, such as
certificates of deposit, is based on discounting future cash flows by the
current rate offered for such deposits with similar remaining maturities.
Borrowings
For short-term borrowings, fair value approximates carrying value. The fair
value of long term borrowings is based on their interest rate characteristics.
For variable rate borrowings, fair value is based on carrying values. For fixed
rate borrowings, fair value is based on discounting future contractual cash
flows by the current interest rate paid on such borrowings with similar
remaining maturities.
73
Independent Auditors' Report
The Board of Directors
FirstFed Financial Corp.:
We have audited the accompanying consolidated statements of financial condition
of FirstFed Financial Corp. and subsidiary (Company) as of December 31, 2001 and
2000 and the related consolidated statements of operations and comprehensive
earnings, stockholders' equity and cash flows for each of the years in the
three-year period ended December 31, 2001. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of FirstFed Financial
Corp. and subsidiary as of December 31, 2001 and 2000 and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2001 in conformity with accounting principles generally
accepted in the United States of America.
KPMG LLP
Los Angeles, California
January 25, 2002
74
ITEM 9--CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10--DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors and executive officers appearing on pages 4
through 7 of the Proxy Statement for the Annual Meeting of Stockholders dated
April 24, 2002 is incorporated herein by reference.
ITEM 11--EXECUTIVE COMPENSATION
Information regarding executive compensation appearing on pages 8 through
10, 12 through 14, and 16 of the Proxy Statement for the Annual Meeting of
Stockholders dated April 24, 2002 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, 2002 is incorporated herein by
reference.
ITEM 13--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a)Certain Relationships: None.
(b)Information regarding certain related transactions appearing on page 11
of the Proxy Statement for the Annual Meeting of Stockholders dated
April 24, 2002 is incorporated herein by reference.
75
PART IV
ITEM 14--EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8K
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
EXHIBIT
NUMBER
-------------
(3.1)Restated Certificate of Incorporation filed as Exhibit 3.1 to Form 10-K
for the fiscal year ended December 31, 1999 and incorporated by reference.
(3.2)By-laws filed as Exhibit (1)(a) to Form 8-A dated September 4,1987 and
incorporated by reference.
(4.1)Amended and Restated Rights Agreement dated as of September 25, 1998,
filed as Exhibit 4.1 to Form 8-A/A, dated September 25, 1998 and
incorporated by reference.
(10.1)Deferred Compensation Plan filed as Exhibit 10.3 to Form 10-K for the
fiscal year ended December 31, 1983 and incorporated by reference.
(10.2)Bonus Plan filed as Exhibit 10(iii)(A)(2) to Form 10 dated November 2,
1993 and incorporated by reference.
(10.3)Supplemental Executive Retirement Plan dated January 16, 1986 filed as
Exhibit 10.5 to Form 10-K for the fiscal year ended December 31, 1992 and
incorporated by reference.
(10.4)Change of Control Agreement effective September 26, 1996 filed as Exhibit
10.4 to Form 10-Q for the Quarter ended September 30, 1996 and Amendment
filed as Exhibit 10.3 10.4 for change of control to Form 10-Q for the
Quarter ended September 30, 2000 and incorporated by reference.
(10.5)1997 Non-employee Directors Stock Incentive Plan filed as Exhibit 1 to
Form S-8 dated August 12, 1997 and Amendment filed as Exhibit 10.5 to Form
10-Q for the Quarter ended September 30, 2000, and incorporated by
reference.
(21) Registrant's sole subsidiary is First Federal Bank of California, a federal
savings bank.
(23) Independent Auditors' consent.
(24) Power of Attorney (included at page 77).
This 2001 Annual Report on Form 10-K and the Proxy Statement for the Annual
Meeting of Stockholders dated April 24, 2002 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, 2002 and any beneficial owner of Company stock
on such date who has not previously received such material and who so represents
in good faith and in writing to:
Corporate Secretary
FirstFed Financial Corp.
401 Wilshire Boulevard
Santa Monica, California 90401
Other exhibits will be supplied to any such stockholder at a charge equal
to the Company's cost of copying, postage, and handling.
(b) Reports on Form 8-K
The Company filed reports on Form 8-K during the quarter ended December 31,
2001 on the following dates: October 26, 2001, November 21, 2001, November 30,
2001, and December 19, 2001. The November 30, 2001 8-K announced the completion
of the acquisition of Del Amo Savings Bank and Frontier State Bank. The
remaining reports are related to the release of the Company's third quarter
earnings and the disclosure of certain other financial data.
76
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FIRSTFED FINANCIAL CORP.,
a Delaware corporation
By: /s/ Babette E. Heimbuch .
Babette E. Heimbuch
President and
Chief Executive Officer
Date: February 27, 2002
77
POWER OF ATTORNEY
Each person whose signature appears below hereby authorizes Babette E.
Heimbuch and Douglas J. Goddard, and each of them or either of them, as
attorney-in-fact to sign on his or her behalf as an individual and in every
capacity stated below, and to file all amendments to the Registrant's Form 10-K,
and the Registrant hereby confers like authority to sign and file in its behalf.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the 27th day of February, 2002.
SIGNATURE TITLE
/s/ Babette E. Heimbuch Chief Executive Officer (Principal
Babette E. Heimbuch Executive Officer)
/s/ Douglas J. Goddard Executive Vice President and
Douglas J. Goddard Chief Financial Officer (Principal
Financial Officer)
/s/ Brenda J. Battey Senior Vice President and Controller
Brenda J. Battey (Principal Accounting Officer)
/s/ Christopher M. Harding Director
Christopher M. Harding
/s/ James L. Hesburgh Director
James L. Hesburgh
/s/ William S. Mortensen Chairman of the Board
William S. Mortensen
/s/ William G. Ouchi Director
William G. Ouchi
/s/ William P. Rutledge Director
William P. Rutledge
/s/ Charles F. Smith Director
Charles F. Smith
/s/ Steven L. Soboroff Director
Steven L. Soboroff
/s/ John R. Woodhull Director
John R. Woodhull
78