Edgar Filing: FIRSTFED FINANCIAL CORP

q063008edgar.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

R QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2008

* TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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 incorporation or organization)	(I.R.S. Employer Identification No.)

12555 W. Jefferson Boulevard, Los Angeles, California	90066
(Address of principal executive offices)	(Zip Code)

(310) 302-5600

(Registrant's telephone number, including area code)

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 R No *

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer * Accelerated filer R Non-accelerated filer *

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes * No R

As of August 1, 2008, 13,684,553 shares of the Registrant's $0.01 par value common stock were outstanding.

FirstFed Financial Corp.
Index
Report on Form 10-Q
For the Quarterly Period Ended June 30, 2008


			Page
Part I.	Financial Information

	Item 1.	Financial Statements

		Consolidated Balance Sheets as of June 30, 2008, December 31, 2007 and June 30, 2007	3

		Consolidated Statements of Operations for the three and six months ended June 30, 2008 and 2007	4

		Consolidated Statements of Cash Flows for the six months ended June 30, 2008 and 2007	5

		Notes to Consolidated Financial Statements	6

	Item 2.	Management’s Discussion and Analysis of Consolidated Balance Sheets and Consolidated Statements of Operations	16

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33

	Item 4.	Controls and Procedures	33

Part II.	Other Information	(omitted items are inapplicable)

	Item 4.	Submission of Matters to a Vote of Security Holders	34

	Item 6.	Exhibits	34

Signatures			35

Exhibits
	31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	36

	31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	37

	32.1	Certification of Chief Executive Officer pursuant to 18 USC Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	38

	32.2	Certification of Chief Financial Officer pursuant to 18 USC Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	39

PART I - FINANCIAL STATEMENTS

Item 1. Financial Statements

FirstFed Financial Corp. and Subsidiary

Consolidated Balance Sheets

(Dollars in thousands, except share data)

(Unaudited)

	June 30, 2008			December 31, 2007			June 30, 2007
ASSETS
Cash and cash equivalents	$	49,869		$	53,974		$	89,896
Investment securities, available-for-sale (at fair value)		340,586			316,788			296,046
Mortgage-backed securities, available-for-sale (at fair value)		43,233			46,435			50,569
Loans receivable, held for sale (fair value $0, $0 and $63,056)		—			—			62,338
Loans receivable, net of allowances for loan losses of $259,695, $128,058 and $114,894		6,299,039			6,518,214			6,932,088
Accrued interest and dividends receivable		35,409			45,492			46,083
Real estate owned, net (REO)		96,665			21,090			11,774
Office properties and equipment, net		20,197			17,785			16,480
Investment in Federal Home Loan Bank (FHLB) stock, at cost		121,307			104,387			84,431
Other assets		171,831			98,816			79,581
	$	7,178,136		$	7,222,981		$	7,669,286

LIABILITIES
Deposits	$	3,850,828		$	4,156,692		$	4,848,040
FHLB advances		2,199,000			2,084,000			945,000
Securities sold under agreements to repurchase		370,000			120,000			900,900
Senior debentures		150,000			150,000			150,000
Accrued expenses and other liabilities		57,411			57,790			101,012
		6,627,239			6,568,482			6,944,952

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share; authorized 100,000,000 shares;
issued 24,002,093, 23,970,227 and 23,966,227 shares; outstanding 13,684,553, 13,640,997, and 16,009,977 shares		240			240			240
Additional paid-in capital		56,504			55,232			54,313
Retained earnings		760,118			865,411			833,992
Unreleased shares to employee stock ownership plan		—			(339	)		(1,365	)
Treasury stock, at cost, 10,317,540, 10,329,230, and 7,956,250 shares		(266,040	)		(266,040	)		(160,291	)
Accumulated other comprehensive income (loss), net of taxes		75			(5	)		(2,555	)
		550,897			654,499			724,334
	$	7,178,136		$	7,222,981		$	7,669,286

The accompanying notes are an integral part of these consolidated financial statements.

FirstFed Financial Corp. and Subsidiary

Consolidated Statements of Operations

(Dollars in thousands, except per share data)

(Unaudited)

	Three months ended June 30,						Six months ended June 30,
	2008			2007			2008			2007
Interest and dividend income:
Interest on loans	$	95,193		$	148,512		$	204,666		$	311,833
Interest on mortgage-backed securities		523			681			1,116			1,390
Interest and dividends on investments		5,876			5,543			11,398			11,930
Total interest income		101,592			154,736			217,180			325,153
Interest expense:
Interest on deposits		33,122			54,053			73,458			115,118
Interest on borrowings		23,766			30,991			49,677			65,125
Total interest expense		56,888			85,044			123,135			180,243

Net interest income		44,704			69,692			94,045			144,910
Provision for loan losses		90,200			3,100			240,500			6,900
Net interest (loss) income after provision for loan losses		(45,496	)		66,592			(146,455	)		138,010

Other income:
Loan servicing and other fees		2,785			854			3,258			1,814
Banking service fees		1,752			1,686			3,458			3,372
Gain on sale of loans		7			1,482			20			4,438
Net gain (loss) on real estate owned		3,371			(103	)		3,187			(189	)
Other operating income		1,706			423			2,724			759
Total other income		9,621			4,342			12,647			10,194

Non-interest expense:
Salaries and employee benefits		13,143			12,044			24,351			24,753
Occupancy		2,849			2,997			7,903			5,800
Advertising		300			208			335			442
Amortization of core deposit intangible		126			126			253			625
Federal deposit insurance		1,352			924			1,896			1,552
Data processing		571			582			1,108			1,203
OTS assessment		454			577			908			1,153
Legal		494			522			1,183			993
Real estate owned operations		3,153			369			4,389			555
Other operating expense		2,632			2,591			4,866			4,711
Total non-interest expense		25,074			20,940			47,192			41,787

(Loss) income before income taxes		(60,949	)		49,994			(181,000	)		106,417
Income taxes (benefit) expenses		(25,437	)		20,923			(75,707	)		44,962
Net (loss) income	$	(35,512	)	$	29,071		$	(105,293	)	$	61,455

Net (loss) income	$	(35,512	)	$	29,071		$	(105,293	)	$	61,455
Other comprehensive (loss) income, net of taxes (benefits)		(1,052	)		(656	)		80			(711	)
Comprehensive (loss) income	$	(36,564	)	$	28,415		$	(105,213	)	$	60,744

(Loss) earnings per share:
Basic	$	(2.60	)	$	1.77		$	(7.71	)	$	3.72
Diluted	$	(2.60	)	$	1.74		$	(7.71	)	$	3.66

Weighted average shares outstanding:
Basic		13,668,097			16,458,283			13,661,856			16,539,440
Diluted		13,668,097			16,671,802			13,661,856			16,774,887

The accompanying notes are an integral part of these consolidated financial statements.

FirstFed Financial Corp. and Subsidiary

Consolidated Statements of Cash Flows

(Dollars in thousands)

(Unaudited)

	Six months ended June 30,
	2008			2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income	$	(105,293	)	$	61,455
Adjustments to reconcile net income to
Net cash provided by operating activities:
Net change in loans held for sale		—			79,548
Stock option compensation		1,082			912
Excess tax benefits related to stock option awards		(29	)		(794	)
Depreciation and amortization		1,239			1,233
Provision for loan losses		240,500			6,900
Amortization of fees and premiums/discounts		7,830			20,601
Increase in interest income accrued in excess of borrower payments		(586	)		(51,679	)
Gain on sale of real estate owned, net		(9,705	)		80
REO write down		6,518			109
Gain on sale of loans		(20	)		(4,438	)
FHLB stock dividends		(2,755	)		(2,933	)
Change in deferred taxes		(54,496	)		(15,210	)
Change in current taxes		(20,315	)		1,412
Decrease in interest and dividends receivable		10,083			8,729
Decrease in interest payable		(4,451	)		(28,771	)
Amortization of core deposit intangible asset		253			625
Decrease in other assets		1,468			2,064
Increase (decrease) in accrued expenses and other liabilities		4,071			(251	)
Total adjustments		180,705			18,137
Net cash provided by operating activities		75,412			79,592

CASH FLOWS FROM INVESTING ACTIVITIES:
Loans made to customers and principal collections on loans, net		(154,344	)		1,456,973
Loans purchased		(5,935	)		—
Proceeds from sale of real estate		59,100			4,343
Proceeds from maturities and principal payments of investment securities, available for sale		26,715			34,630
Principal reductions on mortgage-backed securities, available for sale		3,198			6,485
Purchase of investment securities, available for sale		(50,129	)		(20,000	)
(Purchase) redemption of FHLB stock, net		(14,165	)		37,481
Purchases of premises and equipment		(3,651	)		(1,144	)
Net cash (used in) provided by investing activities		(139,211	)		1,518,768

CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in retail and commercial deposits		17,649			158,061
Net decrease in brokered deposits		(323,513	)		(1,199,902	)
Net increase (decrease) in short term borrowings		70,000			(622,548	)
Net increase in long term borrowings		295,000			50,000
Proceeds from stock options exercised		529			2,473
Purchases of treasury stock		—			(46,515	)
Excess tax benefits related to stock option awards		29			794
Other		—			(1,917	)
Net cash provided by (used in) financing activities		59,694			(1,659,554	)
Net decrease in cash and cash equivalents		(4,105	)		(61,194	)
Cash and cash equivalents at beginning of period		53,974			151,090
Cash and cash equivalents at end of period	$	$49,869		$	89,896

The accompanying notes are an integral part of these consolidated financial statements.

FirstFed Financial Corp. and Subsidiary

Notes to Consolidated Financial Statements

(Unaudited)

1. Basis of Presentation

The unaudited consolidated financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission and in accordance with accounting principles generally accepted in the United States. In the opinion of the Company, all adjustments (which include only normal recurring adjustments) necessary to present fairly the results of operations for the periods covered have been made. Certain information and note disclosures normally included in financial statements presented in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. The Company believes that the disclosures are adequate to make the information presented not misleading.

It is suggested that these condensed financial statements be read in conjunction with the financial statements and the notes thereto included in the Company’s latest annual report on Form 10-K, which contains the latest available audited consolidated financial statements and notes thereto, which are as of and for the year ended December 31, 2007. The results for the periods covered hereby are not necessarily indicative of the operating results for a full year.

2. (Loss) Earnings per Share

Basic (loss) earnings per share were computed by dividing net (loss) income by the weighted average number of shares of common stock outstanding for the period. Additionally diluted earnings per share include the effect of stock options and non-vested restricted stock, if dilutive. (Loss) earnings per common share have been computed based on the following:

		Three months ended June 30,
		2008		2007
		(Dollars in thousands, except share data)
Net (loss) income	$	(35,512)	$	29,071

Average number of common shares outstanding		13,668,097		16,458,283
Effect of dilutive stock options		—		213,519
Average number of common shares outstanding used to calculate (loss) earnings per common share		13,668,097		16,671,802

There was no dilutive effect during the second quarter of 2008, since the Company was in a net loss position. There were 866,747 and 248,944 anti-dilutive shares excluded from the weighted average shares outstanding calculation during the second quarter of 2008 and 2007.

	Six months ended June 30,
	2008			2007
	(Dollars in thousands, except share data)

Net (loss) income	$	(105,293	)	$	61,455

Average number of common shares outstanding		13,661,856			16,539,440
Effect of dilutive stock options		—			235,447
Average number of common shares outstanding used to calculate diluted (loss) earnings per common share		13,661,856			16,774,887

There was no dilutive effect during the first six months of 2008, since the Company was in a net loss position. There were 866,747 and 248,944 anti-dilutive shares excluded from the weighted average shares outstanding calculation during the six months of 2008 and 2007.

3. Cash and Cash Equivalents

For purposes of reporting cash flows on the Consolidated Statements of Cash Flows, cash and cash equivalents include cash, overnight investments and securities purchased under agreements to resell which mature within 90 days of the date of purchase.

4. Loan Loss Allowances

Listed below is a summary of activity in the general valuation allowance and the valuation allowance for impaired loans during the periods indicated.

	General Valuation Allowance			Valuation Allowances For Impaired Loans			Total
	(Dollars in thousands)
Balance at December 31, 2007	$	127,503		$	555		$	128,058
Provision for loan losses		204,648			35,852			240,500
Charge-offs:
Single family		(109,472	)		—			(109,472	)
Total charge-offs		(109,472	)		—			(109,472	)
Recoveries		609			—			609
Net (charge-offs)/recoveries		(108,863	)		—			(108,863	)
Transfers		3,589			(3,589	)		—
Balance at June 30, 2008	$	226,877		$	32,818		$	259,695

	General Valuation Allowance			Valuation Allowances For Impaired Loans		Total
	(Dollars in thousands)
Balance at December 31, 2006:	$	109,768		$	—	$	109,768
Provision for loan losses		6,900			—		6,900
Charge-offs:
Single family		(1,801	)		—		(1,801	)
Consumer loans		(50	)		—		(50	)
Total charge-offs		(1,851	)		—		(1,851	)
Recoveries		77			—		77
Net (charge-offs)/recoveries		(1,774	)		—		(1,774	)
Balance at June 30, 2007:	$	114,894		$	—	$	114,894

5. Impaired Loans and Troubled Debt Restructurings

The Company considers a loan impaired when management believes that it is probable that the Company willnot be able to collect all amounts due under the contractual terms of the loan agreement. Estimatedimpairment losses are recorded as separate valuation allowances and may be subsequently adjusted based upon changes in the measurement of impairment. Impaired loans, disclosed net of valuation allowances, include non-accrual major loans (commercial business loans with an outstanding principal amount greater than or equal to $500 thousand, single family loans greater than or equal to $1.0 million, and income property loans with an outstanding principal amount greater than or equal to $1.5 million), modified loans which are considered troubled debt restructurings because they do not meet the Company’s current product offerings and underwriting standards, and major loans less than 90 days delinquent for which full payment of principal and interest is not expected to be received.

The following is a summary of impaired loans, net of valuation allowances for impairment, at the datesindicated:

		June 30, 2008		December 31, 2007		June 30, 2007
		(Dollars in thousands)
Troubled debt restructurings	$	308,700	$	1,799	$	—
Non-accrual loans		29,910		20,112		11,489
Other impaired loans		744		1,625		3,997
	$	339,354	$	23,536	$	15,486

When a loan is considered impaired, the Company measures impairment based on the present value of expected future cash flows discounted at the loan's effective interest rate. However, if the loan is "collateral-dependent" or foreclosure is probable, impairment is measured based on the fair value of the collateral. When the measure of an impaired loan is less than the recorded investment in the loan, the Company records an impairment allowance equal to the excess of the recorded investment in the loan over its measured value.

The following is a summary of information pertaining to impaired loans at the dates indicated:

		June 30, 2008			December 31, 2007			June 30, 2007
	(Dollars in thousands)
Impaired loans without valuation allowances		$	12,941		$	16,606		$	15,486
Impaired loans with valuation allowances			359,231			7,485			—
Valuation allowances on impaired loans			(32,818	)		(555	)		—

	Six months ended
	June 30, 2008		June 30, 2007
	(Dollars in thousands)
Average investment in impaired loans	$	260,386	$	11,431
Interest recognized on impaired loans using the accrual basis of income recognition		1,952		83
Interest recognized on impaired loans using the cash basis of income recognition		1,954		82

6. Real Estate Owned Activity

The following table shows activity in real estate owned (REO) during the periods indicated:

	Six months ended
	June 30, 2008			June 30, 2007
	(Dollars in thousands)
Beginning Balance	$	21,090		$	1,094
Acquisitions		131,488			15,212
Write-downs		(6,518	)		(109	)
Sales of REO		(49,395	)		(4,423	)
Ending Balance	$	96,665		$	11,774

Net gain (loss) on real estate owned is comprised of the following items for the periods indicated:

	Three months ended June 30,
	2008			2007
	(Dollars in thousands)
Gain on sale of REO	$	7,359		$	101
Loss on sale of REO		(234	)		(180	)
Write downs on REO		(3,754	)		(24	)
	$	3,371		$	(103	)

	Six months ended June 30,
	2008			2007
	(Dollars in thousands)
Gain on sale of REO	$	10,007		$	101
Loss on sale of REO		(302	)		(181	)
Write downs on REO		(6,518	)		(109	)
	$	3,187		$	(189	)

The following items are included in real estate owned operations for the periods indicated:

	Three months ended June 30,
	2008			2007
	(Dollars in thousands)
Single family expense	$	3,098		$	277
Single family income		(23	)		—
Multi-family expense		78			92
	$	3,153		$	369

	Six months ended June 30,
	2008			2007
	(Dollars in thousands)
Single family expense	$	4,309		$	362
Single family income		(32	)		—
Multi-family expense		112			193
	$	4,389		$	555

7. Income Taxes

Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes, requires that, when determining the need for a valuationallowance against a deferred tax asset, management must asses both positive and negative evidencewith regard to the realizability of the tax losses represented by that asset. To the extent that available sources of taxable income are insufficient to absorb tax losses, a valuation allowance is necessary. Sources of taxable income for this analysis include prior years’ tax returns, the expected reversals of taxable temporary differences between book and tax income, prudent and feasible tax planning strategies and future taxable income. The Company’s tax asset has increased substantially during the first six months of 2008 due to a significant increase in its loan loss allowances. The deferred tax asset related to loan loss allowances will be realized when actual charge-offs are made against the loan loss allowances. Based on the availability of loss carry-backs and projected taxable income during the periods for which loss carry-forwards are available, management believes that no valuation allowance is necessary at this time.

The deferred tax asset increased to $135.2 million at June 30, 2008 compared to $80.7 million at December 31, 2007 and $71.4 million at June 30, 2007. Income taxes receivable increased to $29.4 million at June 30, 2008 from $9.1 million at December 31, 2007. At June 30, 2007, income taxes payable were $559 thousand.

8. Fair Value Measurements

SFAS No. 157, Fair Value Measurements, defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurement and enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follow:


•	Level 1	inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

•	Level 2	inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

•	Level 3	inputs to the valuation methodology are unobservable and significant to the fair value measurement.

The following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy:

Assets

Securities

Where quoted prices are available in an active market, securities are classified within level 1 of the valuation hierarchy. Level 1 includes securities that have quoted prices in active markets for identical assets. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow. Examples of such instruments, which would generally be classified within level 2 of the valuation hierarchy, include certain collateralized mortgage and debt obligations and certain high-yield debt securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within level 3 of the valuation hierarchy. The Company did not have any level 1 or level 3 securities as of June 30, 2008.

Loans held for sale

Loans held for sale are required to be measured based on the lower of cost or fair value. Under SFAS No. 157, market value is used to represent fair value. When management has loans held for sale, it obtains quotes or bids on all or part of these loans directly from the purchasing financial institutions. At June 30, 2008, the Company had no loans held for sale.

Impaired loans

SFAS No. 157 applies to loans measured for impairment using the practical expedients permitted by SFAS No. 114, Accounting by Creditors for Impairment of a Loan, including impaired loans measured at an observable market price (if available), or at the fair value of the loan’s collateral (if the loan is collateral dependent). When a modified loan is considered impaired, the Company measures impairment based on the present value of expected future cash flows discounted at the loan's effective interest rate. The effective interest rate of the loan is the interest rate of the loan prior to restructuring, including adjustment for deferred loan fees or costs. However, if the loan is "collateral-dependent" or a probable foreclosure, impairment is measured based on the fair value of the collateral. Fair value of the loan’s collateral, when the loan is dependent on collateral, is determined by appraisals or independent valuation which is then adjusted for the cost related to liquidation of the collateral. When the measure of an impaired loan is less than the recorded investment in the loan, the Company records an impairment allowance equal to the excess of our recorded investment in the loan over its measured value.

Real estate owned

Certain assets such as real estate owned (REO) are measured at fair value less the estimated cost to sell. The Company believes that using fair value as a basis for measuring REO follows the provisions of SFAS No. 157. The fair value of REO at June 30, 2008 was determined either by appraisals or independent valuations which are then adjusted for the cost related to liquidation of the subject property, or by sales agreement.

Assets measured at fair value at June 30, 2008 are as follows:


			Fair Value Measurements at Reporting Date Using
Description	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
			(Dollars in thousands)
Recurring Items:
Available-for-sale securities:
Collateralized mortgage obligations	$	340,586	—	$	340,586	—
Mortgage-backed securities		43,233	—		43,233	—
Total available-for-sale securities	$	383,819	—	$	383,819	—

			Fair Value Measurements at Reporting Date Using
Description	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
			(Dollars in thousands)
Non-Recurring Items:
Impaired loans	$	339,354	—	$	339,354	—
Real estate owned		96,665	—		96,665	—
	$	436,019	—	$	436,019	—

Liabilities

The Bank did not identify any liabilities to be presented at fair value as of June 30, 2008.

9. Stock Options and Restricted Stock

The Company recorded stock-based compensation expense of $482 thousand and $968 thousand, net of tax, for the second quarter and the first six months of 2008, respectively. For the second quarter and the first six months of 2007, the Company recorded stock-based compensation expense of $363 thousand and $1.0 million, net of tax, respectively.

At June 30, 2008, the Company had options outstanding issued under two share-based compensation programs, the 1994 Stock Option and Appreciation Rights Plan (“1994 Plan”) and the 1997 Non-employee Directors Stock Incentive Plan (“Directors 1997 Plan”). At June 30, 2008, the number of shares available to be granted for option awards under the 1994 Plan totaled 1,666,215. The Directors 1997 Plan was terminated in connection with the implementation of a new restricted stock plan during 2007. No new grants were made in 2008 under the Directors 1997 Plan.

Options granted under the 1994 Plan are vested over a six year period and have a maximum contractual term of 10 years. Options previously granted to non-employee directors under the Directors 1997 Plan vest in one year and have a maximum contractual term of 10 years.

Options under all of the share-based compensation programs are granted with an exercise price equal to the market price of the Company’s stock at the date of grant. The fair value of each grant has been estimated as of the grant date using the Black-Scholes option valuation model. The expected life is estimated based on the actual weighted average life of historical exercise activity of the grantee population. The volatility factors are based on the historical volatilities of the Company’s stock, and these are used to estimate volatilities over the expected life of the options. The risk-free interest rate is the implied yield available on zero coupons (U.S. Treasury Rate) at the grant date with a remaining term equal to the expected life of the options. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by employees who receive stock incentive awards, and subsequent events are not indicative of the reasonableness of the original estimates of fair value calculated by the Company.

The weighted average fair value of options granted under the 1994 Plan during the first quarter of 2008 was $10.91 per share using the following assumptions: expected volatility of 24%; risk-free interest rate of 3.15%; and an expected average life of 5.9 years. The weighted average fair value of options granted under the 1994 Plan during the first quarter of 2007 was $25.30 per share using the following assumptions; expected volatility of 27%; risk-free interest rate of 4.87%; and an expected average life of 6.0 years.

The following is a summary of the Company’s stock option activity for the six months ended June 30, 2008:

Stock Options:	Number of Shares			Weighted Average Exercise Price ($)		Weighted Average Remaining Contractual Term (years)		Aggregate Intrinsic Value (In thousands)

Outstanding at January 1, 2008		781,787		$	42.67
Granted		160,800			36.07
Exercised		(31,866	)		16.59
Forfeited		(58,364	)		42.54
Outstanding at June 30, 2008		852,357		$	42.41		6.16	$	—
Exercisable at June 30, 2008		388,145		$	29.27		5.55	$	—

The total intrinsic value of options exercised during the second quarter and the first six months of 2008 was $6 and $445 thousand, respectively. This compares to $1.2 million and $5.2 million during the second quarter and the first six months of 2007, respectively. Cash received from options exercised during the second quarter and the first six months of 2008 was $117 thousand and $529 thousand, respectively. Cash received from options exercised during the second quarter and the first six months of 2007 was $1.2 million and $2.5 million, respectively.

As of June 30, 2008, the unearned compensation cost related to non-vested stock options totaled $3.4 million to be recognized over a weighted average period of 4.27 years.

Restricted Stock

On April 26, 2007, the stockholders of the Company adopted the 2007 Non-employee Directors Restricted Stock Plan (“2007 Plan”). Under the 2007 Plan, the Company may grant up to 200,000 shares to non-employee directors of the Company. 50% of the restricted shares will vest on the first anniversary date of the issuance and the remaining 50% will vest on the second anniversary date of the issuance. The Company issued 1,670 shares of restricted stock to each of the seven non-employee directors during the first quarter of 2008 compared to 900 shares during the first quarter of 2007. Upon retirement of a non-employee director, any non-vested shares of stock shall automatically vest.

The following is a summary of the Company’s non-vested restricted stock as of June 30, 2008.

Non-vested Stock:	Number of Shares			Weighted Average Grant Date Fair Value

Outstanding at January 1, 2008		5,400		$	67.26
Granted		11,690		$	36.07
Vested		(2,700	)	$	67.26
Forfeited		—
Outstanding at June 30, 2008		14,390		$	41.92

The total fair value of the restricted stock awards that vested during the six months ended June 30, 2008 was $97 thousand compared to $54 thousand during the same period in prior year.

Stock-based compensation expense recorded in connection with the 2007 Plan totaled $118 thousand, net of tax, during the six months ended June 30, 2008. As of June 30, 2008, the total unrecognized compensation cost related to non-vested restricted awards totaled $309 thousand to be recognized over a weighted average period of 1.35 years.

10. Supplementary Executive Retirement Plan

The following table sets forth the net periodic benefit cost attributable to the Company’s Supplementary Executive Retirement Plan:

	Pension Benefits

	Three months ended June 30,						Six months ended June 30,
	2008			2007			2008			2007
	(Dollars in thousands)

Service cost	$	86		$	76		$	172		$	152
Interest cost		257			216			514			432
Amortization of net loss		190			96			380			192
Amortization of prior service cost		—			—			—			—
Net periodic benefit cost	$	533		$	388		$	1,066		$	776

Weighted Average Assumptions
Discount rate		6.25	%		5.75	%		6.25	%		5.75	%
Rate of compensation increase		4.00	%		4.00	%		4.00	%		4.00	%
Expected return on plan assets		N/A			N/A			N/A			N/A

The Company does not expect any significant changes to the amounts previously disclosed as contributions for benefit payments. The quarterly expense has increased compared to the prior period mainly due to an increase in covered pay for the participants in 2007.

11. Recent Accounting Pronouncements

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities. This standard is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. This statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The Company has no derivative instruments or hedging activities.

In December 2007, the FASB issued two new statements: (a) SFAS No. 141(revised 2007), Business Combinations, and (b) SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements. These statements are effective for fiscal years beginning after December 15, 2008 and the application of these standards will improve, simplify and converge internationally the accounting for business combinations and the reporting of noncontrolling interests in financial statements. The Company is in the process of evaluating the impact, if any, on SFAS 141 (R) and SFAS 160 and does not anticipate that the adoption of these standards will have any impact on its financial statements.

(a) SFAS No. 141 (R) requires an acquiring entity in a business combination to: (i) recognize all (and only) the assets acquired and the liabilities assumed in the transaction, (ii) establish an acquisition-date fair value as the measurement objective for all assets acquired and the liabilities assumed, and (iii) disclose to investors and other users all of the information they will need to evaluate and understand the nature of, and the financial effect of, the business combination, and (iv) recognize and measure the goodwill acquired in the business combination or a gain from a bargain purchase.

(b) SFAS No. 160 will improve the relevance, comparability and transparency of financial information provided to investors by requiring all entities to: (i) report noncontrolling (minority) interests in subsidiaries in the same manner, as equity but separate from the parent’s equity, in financial statements, (ii) net income attributable to the parent and to the non-controlling interest must be clearly identified and presented on the face of the statement of income, and (iii) any changes in the parent’s ownership interest while the parent retains the controlling financial interest in its subsidiary be accounted for consistently. The Company has no minority interest in subsidiaries at the present time.

In December 2007, the SEC issued Staff Accounting Bulletin (SAB) No. 110, Share-Based Payment, which amends SAB No. 107, Share-Based Payment, to permit public companies, under certain circumstances, to continue to use the simplified method in SAB No. 107, to estimate the expected term of their plain vanilla employee options. Although the Company’s stock options fit the definition of plain vanilla according to SAB 110, because it has sufficient relevant historical option exercise data to provide a reasonable basis to estimate an option’s expected term, SAB No. 110 does not apply to the Company.

In November 2007, the SEC issued SAB No. 109, Written Loan Commitments Recorded at Fair Value Through Earnings. SAB No. 109 was effective for fiscal quarters beginning after December 15, 2007. SAB 109 was issued to clarify the SEC staff position that internally developed intangible assets should not be included in the fair value of derivative loan commitments and other written loan commitments that are accounted for at fair value through earnings. The Company did not have any derivative loan commitments or written loan commitments that were accounted for at fair value through earnings as of June 30, 2008. Therefore, this bulletin did not have any impact on the Company’s financial results.

In February 2007, SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115, was issued. This statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This statement was effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company has not chosen to measure additional financial instruments at fair value. Therefore, the adoption of this statement on January 1, 2008 did not have any impact on the Company’s financial results.

Item 2.Management’s Discussion and Analysis of Consolidated Balance Sheets and Consolidated Statements of Operations

The following narrative is written with the presumption that the users have read or have access to our 2007 Annual Report on Form 10-K, which contains the latest audited financial statements and notes thereto, together with Management's Discussion and Analysis of Financial Condition and Results of Operations, as of December 31, 2007, and for the year then ended. Therefore, only material changes in the consolidated balance sheets and consolidated statements of operations are discussed herein.

The Securities and Exchange Commission (“SEC”) maintains a web site which contains reports, proxy statements, and other information pertaining to registrants that file electronically with the SEC, including the Company. The internet address is: www.sec.gov. In addition, our periodic and current reports are available free of charge on our website at www.firstfedca.com as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC.

Note regarding forward-looking statements: This quarterly report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”). All statements, other than statements of historical facts, included in this quarterly report that address activities, events or developments that we expect, believe or anticipate will or may occur in the future, are forward-looking statements. These statements are based on certain assumptions and analyses made by us in light of our experience and perception of historical trends, current conditions, expected future developments and other factors the Company believe are appropriate in the circumstances. These forward-looking statements are subject to various factors, many of which are beyond our control, which could cause actual results to differ materially from such statements. Such factors include, but are not limited to, the general business environment, interest rate fluctuations that may affect operating margins, the California real estate market, branch openings, regulatory actions, and competitive conditions in the business and geographic areas in which the Company conducts business. In addition, these forward-looking statements are subject to assumptions as to future business strategies and decisions that are subject to change. The Company makes no guarantees or promises regarding future results and assumes no responsibility to update such forward-looking statements, except to the extent that it is required to do so under applicable law.

Consolidated Balance Sheets

At June 30, 2008, FirstFed Financial Corp. ("Company"), the holding company for First Federal Bank of California and its subsidiaries ("Bank"), had consolidated stockholders’ equity of $550.9 million compared to $654.5 million at December 31, 2007 and $724.3 million at June 30, 2007. Stockholders’ equity decreased from December 31, 2007 to June 30, 2008 due to a $105.3 million loss recorded during the first six months of 2008. Stockholders’ equity decreased from June 30, 2007 to December 31, 2007 due primarily to stock repurchases, which totaled $105.7 million during the last six months of 2007. Total assets decreased to $7.2 billion at June 30, 2008 from $7.7 billion at June 30, 2007 due to decreased loan originations and continued loan payoffs. The slight decrease from $7.2 billion at December 31, 2007 was due primarily to an increase in the allowance for loan losses.

The loss during the second quarter of 2008 was due primarily to the provision for loan losses relating to the Bank’s single family loan portfolio. The provision was necessary due to the level of charge-offs recorded in the second quarter and increases in non-performing assets. During the second quarter of 2008, the Bank was successful in modifying loan terms for borrowers with aggregate loan balances of approximately $226.4 million that were close to their payment reset date. During the first six months of 2008, the Bank modified loans of approximately $348.1 million.

Non-performing assets as a percentage of total assets increased to 8.20% at June 30, 2008 compared to 2.79% at December 31, 2007 and 0.85% at June 30, 2007. Recently published reports indicate that most financial institutions that have originated single family loans over the past few years have experienced increased loan defaults and foreclosures. The increase in loan defaults and foreclosures is due to: (1) the inability of borrowers to afford their loan payments after recast, (2) the inability of borrowers to sell their homes in the current real estate market, (3) the inability of borrowers to refinance their loans due to tighter credit, more stringent underwriting standards by mortgage lenders and home values which may be less than the mortgage indebtedness. Foreclosed properties have significantly added to the inventory of homes for sale as well as the time required to sell a single family home in California.

In a press release dated July 25, 2008, the California Association of Realtors (“CAR”) reported that the median price of an existing home in the State of California fell 37.7% compared with the same period one year ago. However, due to increased affordability as a result of recent price declines, the rate of home sales has actually started to increase over the last two months. According to CAR, “With lower prices and favorable interest rates, affordability also has improved significantly in recent months, paving the way for many buyers to purchase their first home.” CAR further reported that statewide home resale activity increased 17.5% from the pace recorded in 2007 and their June 2008 Unsold Inventory Index (the number of months needed to sell the existing inventory of homes for sale at the current sales rate) was 7.7 months, compared with 10.2 months for the same period of 2007.

However, most economists agree that the real estate market will remain weak through 2008 and possibly into 2009.

Due to the current weakness in the California real estate market, the Bank’s single family non-accrual loans (loans greater than 90 days delinquent or in foreclosure) increased to $491.7 million as of June 30, 2008 from $393.6 million at March 31, 2008 and $179.7 million as of December 31, 2007. Non-accrual loans were $53.3 million as of June 30, 2007. However, the rate of increase in the Bank’s non-performing loans has slowed in recent months. After having reached $273.3 million as of March 31, 2008, single family loans delinquent less than 90 days decreased to $207.7 million as of June 30, 2008. In comparison, single family loans delinquent less than 90 days were $236.7 million as of December 31, 2007 and $35.2 million as of June 30, 2007.

A contributing factor to the increase in foreclosures is the high volume of adjustable rate loans originated by mortgage lenders over the last few years that give borrowers the option of making less than a fully amortizing loan payment for initial periods ranging from one to five years. Borrowers who choose to make less than the fully amortizing loan payment experience high levels of negative amortization, which causes a large payment increase at the end of the initial period. Defaults may occur because, very often, the minimum required payment significantly increases when the payment adjusts to an amount that will fully amortize the loan. While the Bank did not originate sub prime loans, we did originate adjustable rate loans with lower payment options that allowed for negative amortization.

Because substantially all of our loans are collateralized by properties located in California, the Company continuously monitors the California real estate market and the sufficiency of the collateral supporting our real estate loan portfolio. The Company considers several factors when evaluating the underlying collateral of the real estate loan portfolio, including the property location, the date of loan origination, the original loan-to-value ratio and the current loan-to-value ratio.

Lending Activities

The following table shows the components of our loan portfolio (including loans held for sale) by type at the dates indicated:

	June 30, 2008		December 31, 2007			June 30, 2007
	(Dollars in thousands)
REAL ESTATE LOANS:
First trust deed residential loans
One-to-four units	$	4,495,508	$	4,652,876		$	5,151,530
Five or more units		1,787,336		1,709,815			1,649,551
Residential loans		6,282,844		6,362,691			6,801,081

OTHER REAL ESTATE LOANS:
Commercial and industrial		148,998		159,052			162,799
Second trust deeds		2,021		2,159			2,965
Other		4,226		4,242			4,270
Real estate loans		6,438,089		6,528,144			6,971,115

NON-REAL ESTATE LOANS:
Deposit accounts		1,364		2,061			1,123
Commercial business loans		86,927		75,848			78,949
Consumer loans		33,230		33,136			37,799
Loans receivable		6,559,610		6,639,189			7,088,986

LESS:
General valuation allowances		226,877		127,503			114,894
Valuation allowances for impaired loans		32,818		555			—
Deferred loan origination costs, net		876		(7,083	)		(20,334	)
Net loans receivable	$	6,299,039	$	6,518,214		$	6,994,426

Loan originations increased by 77% during the first six months of 2008 compared to the first six months of 2007 due to higher originations of both single family and multi-family real estate loans. However, the balance of single family loans decreased by $157.4 million during the first six months of the year because loan originations were offset by $228.9 million in loans transferred to real estate owned. Current loan originations are fully-documented, within our credit standards and contain no negative amortization provisions. Originations of multi-family mortgage loans increased due to the popularity of the Bank’s standard income property lending programs. Also, unlike the single family loans, the Bank's multi-family loans have shown no sign of weakness. Therefore, the Bank grew multi-family and commercial mortgage loans to 41% of total loan originations during the first six months of 2008 from 17% of total loan originations during the first six months of 2007.

The following table summarizes total loan funding by type:

	Six months ended June 30,
	2008		2007
	(Dollars in thousands)
Single family real estate	$	431,714	$	351,405
Single family loans purchased		5,935		—
Multi-family and commercial real estate		314,744		76,947
Other		24,562		11,533
Total	$	776,955	$	439,885

From time-to-time the Bank originates loans for other mortgage lenders. These loans are not funded by the Bank, but are brokered to another mortgage lender for a fee. Loan originations funded by other mortgage lenders totaled only $3.9 million during the first six months of 2008 compared to $78.6 million for the first six months of 2007. The fees received on brokered loans totaled $61 thousand during the first six months of 2008 compared to $750 thousand for the same period in 2007. Brokered loans decreased due to the Bank’s focus on originating loans for its own portfolio.

The following table summarizes single family loan funding by borrower documentation type for the periods indicated:

	Six months ended June 30,
	2008		2007
	(Dollars in thousands)
Verified Income/Verified Asset	$	426,345	$	57,097
Stated Income/Verified Asset		5,369		178,803
Stated Income/Stated Asset		—		59,897
No Income/No Asset		—		55,608
Total	$	431,714	$	351,405

On Verified Income/Verified Asset loans (VIVA), the borrower includes information on his/her income and assets, which is then verified. Loans that allow for a reduced level of documentation at origination are becoming a less significant percentage of single family loans originated in our market areas. On Stated Income/Stated Assets (SISA) loans, the borrower includes information on his/her level of income and assets that is not subject to verification. On Stated Income/Verified Assets (SIVA) loans, the borrower includes information on his/her level of income and that information is not subject to verification, although information provided by the borrower on his/her assets is verified. For No Income/No Assets (NINA) loans, the borrower is not required to submit information on his/her level of income or assets. However, all single family loans, including NINA loans, require credit reports and appraisals. The Bank required higher credit scores, higher rates and lower loan to values on NINA loans.

The Bank stopped originating NINA and SISA loans in 2007 and ceased originating SIVA loans in February 2008. All multi-family loans and other real estate loans have consistently required complete and customary documentation from the borrowers.

The creditworthiness of the borrower is based on the borrower’s credit score (“FICO”), prior use and repayment of credit, job history and stability. The average borrower FICO score and average loan-to-value ratio on single family loan originations were 755 and 67.5%, respectively, for the first six months of 2008, compared to 719 and 70.0% for the first six months of 2007.

At June 30, 2008, 79.7% of our loan portfolio was invested in adjustable rate products. Loans with interest rates that adjust monthly based on the Federal Home Loan Bank (“FHLB”).Eleventh District Cost of Funds Index (“COFI”) comprised 31.5% of the loan portfolio. Loans with interest rates that adjust monthly based on the 3-Month Certificate of Deposit Index (“CODI”) comprised 31.4% of the loan portfolio. Loans with interest rates that adjust monthly based on the 12-month average U.S. Treasury Security rate (“12MAT”) comprised 14.7% of the loan portfolio. Loans with interest rates that adjust monthly based on the London Inter-Bank Offering Rate (“LIBOR”) and other indices comprised 2.1% of the loan portfolio.

The following table summarizes total loan funding by type of index for the periods indicated:

	Six months ended June 30,
	2008		2007
	(Dollars in thousands)
CODI	$	—	$	4,275
12MAT		5,701		62,479
COFI		38,346		131,296
Other		30,497		18,774
Hybrid and Fixed		702,411		223,061
Total	$	776,955	$	439,885

Only 10% of loan originations were in adjustable rate products during the first six months of 2008 compared to 49% of originations during the first six months of 2007.

The following table shows the composition of our single family loan portfolio by borrower documentation type at the dates indicated:

Documentation Type:	June 30, 2008		December 31, 2007		June 30, 2007
			(Dollars in thousands)

Verified Income/Verified Asset	$	1,460,341	$	1,135,358	$	1,094,518
Stated Income/Verified Asset		1,275,025		1,468,686		1,676,326
Stated Income/Stated Asset		1,314,207		1,506,627		1,770,105
No Income/No Asset		445,935		542,205		610,581
Total	$	4,495,508	$	4,652,876	$	5,151,530

While the Bank originated reduced documentation loans in the past, we attempted to mitigate the inherent risk of making these loans by evaluating the other characteristics of the loan, such as the creditworthiness of the borrower and the loan-to-value ratio (“LTV”) based on the collateral’s appraised value at the origination date. The underwriting of these loans was based on the borrower’s credit score and credit history, intended occupancy, reasonableness of stated income and the value of the collateral.

The following table shows the composition of our single family loan portfolio by borrower documentation type at the dates indicated with weighted average LTV Ratio and FICO Score at origination. Due to changes in the real estate market and in borrower creditworthiness, the average LTV and FICO score at origination are subject to change.

	June 30, 2008					December 31, 2007					June 30, 2007
	LTV Ratio			FICO Score		LTV Ratio			FICO Score		LTV Ratio			FICO Score
Verified Income/Verified Asset		71.9	%		690		73.3	%		709		73.7	%		705
Stated Income/Verified Asset		74.1			713		74.0			715		73.9			715
Stated Income/Stated Asset		75.0			712		74.6			714		74.1			715
No Income/No Asset		71.1			726		70.8			728		70.4			729
Total Weighted Average		73.3	%		706		73.6	%		715		73.5	%		714

The following table shows the composition of our single family loan portfolio at the dates indicated by the

FICO score of the borrower at origination:

FICO Score at Origination:		June 30, 2008		December 31, 2007		June 30, 2007
		(Dollars In thousands)
	<620	$	26,411	$	27,667	$	31,037
	620-659		378,378		431,307		483,340
	660-719		2,042,924		2,162,687		2,390,860
	>720		1,989,698		1,982,220		2,201,498
	Not Available		58,097		48,995		44,795
	Total	$	4,495,508	$	4,652,876	$	5,151,530

The following table shows the composition of our single family loan portfolio at the dates indicated by original loan-to-value ratio:

Original LTV Ratio:		June 30, 2008		December 31, 2007		June 30, 2007
		(Dollars in thousands)
	<65%	$	816,910	$	817,580	$	930,601
	65-70%		512,392		505,320		559,165
	70-75%		608,860		593,386		638,813
	75-80%		2,236,273		2,348,772		2,581,858
	80-85%		63,043		73,564		82,049
	85-90%		210,132		262,719		303,047
>90%			47,898		51,535		55,997
Total		$	4,495,508	$	4,652,876	$	5,151,530

The following table shows the composition of our single family loan portfolio at June 30, 2008 by estimated current LTV ratio:

Current LTV Ratio Price Adjusted (1):		Loan Balance		% of Portfolio			Average Current LTV Ratio
		(Dollars in thousands)
	<70%	$	1,163,215		25.9	%		51.8	%
	70-80%		894,098		19.9			75.5
	80-90%		1,076,694		24.0			85.0
	90-100%		963,230		21.4			95.0
	100-110%		277,624		6.2			103.9
	110-120%		61,959		1.3			114.6
Not in MSAs			58,688		1.3			N/A
Total		$	4,495,508		100.0	%		78.1	%

(1) The current estimated loan to value ratio is based on Office of Federal Housing Enterprise Oversight (“OFHEO”) March 2008 data. The OFHEO housing price index provides a broad measure of the housing price movements by Metropolitan Statistical Area (MSA). In evaluating the potential for loan losses within the bank’s portfolio, the Bank considers both the fact that OFHEO data cannot reflect price movements for the most recent three months, and that individual areas within an MSA will perform worse than the average for the larger area. The Bank therefore also looks at sales data that is available by zip code, as well as the Bank’s experience with marketing foreclosed properties in estimating the loan loss allowance that is required.

The Bank generally requires that borrowers obtain private mortgage insurance on loans in excess of 80% of the appraised property value. Prior to April 2006, on certain loans originated for the portfolio, the Bank charged premium rates and/or fees in exchange for waiving the insurance requirement. Management believes that the additional rates and fees that the Bank received for these loans compensated for the additional risk associated with this type of loan. In certain of these cases when the Bank waived the insurance requirement, the Bank purchased private mortgage insurance with its own funds. At June 30, 2008, 71% of loans with mortgage insurance were insured by the Republic Mortgage Insurance Company (RMIC), and 27% were insured by the Mortgage Guaranty Insurance Corporation (MGIC). Under certain mortgage insurance programs, the Bank continues to act as co-insurer and participate with the insurer in absorbing any future loss.

As of June 30, 2008, December 31, 2007 and June 30, 2007, loans with co-insurance totaled $167.5 million, $212.0 million, and $225.5 million, respectively. Loans with initial loan-to-value ratios greater than 80% with no private mortgage insurance totaled $153.9 million at June 30, 2008, $175.9 million at December 31, 2007, and $215.6 million at June 30, 2007.

The following table shows the composition of our single family loan portfolio by geographic distribution at the date indicated:

		June 30,			December 31,			June 30,
		2008			2007			2007
					(Dollars in thousands)
Los Angeles County	$	1,185,376	26.4%	$	1,148,942	24.7%	$	1,228,812	23.8%
Bay Area		756,335	16.8		775,303	16.7		884,443	17.2
Central California Coast		584,317	13.0		592,547	12.7		672,711	13.0
San Diego Area		501,929	11.2		558,452	12.0		610,765	11.9
Orange County		444,080	9.9		428,667	9.2		475,324	9.2
San Bernardino/ Riverside		336,630	7.5		374,303	8.1		426,772	8.3
San Joaquin Valley		259,053	5.8		298,788	6.4		329,712	6.4
Sacramento Valley		242,384	5.4		275,313	5.9		302,458	5.9
Other		185,404	4.0		200,561	4.3		220,533	4.3
Total	$	4,495,508	100.0%	$	4,652,876	100.0%	$	5,151,530	100.0%

The following table shows the composition of our single family loan portfolio by year of origination as of June 30, 2008 (dollars in thousands):

2003 and Prior	$	346,289	7.7	%
2004		630,690	14.0
2005		1,748,128	38.9
2006		984,204	21.9
2007		357,479	8.0
2008		428,718	9.5
Total	$	4,495,508	100.0	%

Substantially all adjustable single family loans in the Bank’s loan portfolio allow for negative amortization when a scheduled monthly payment is not sufficient to pay the monthly interest accruing on the loan. Adjustable loans comprised 83.8% of the single family loan portfolio as of June 30, 2008. Negative amortization, which results when interest earned by the Bank is added to borrowers’ loan balances, was $302.3 million at June 30, 2008, $301.7 million at December 31, 2007 and $267.5 million at June 30, 2007. Negative amortization as a percentage of single family loans that have negative amortization in the Bank’s loan portfolio was 8.89% at June 30, 2008 compared to 7.68% at December 31, 2007 and 5.19% at June 30, 2007. Negative amortization increased by $586 thousand during the first six months of 2008 compared to an increase of $51.7 million during the first six months of 2007. Negative amortization is increasing at a slower rate due to loan payoffs, loan foreclosures, declines in the underlying indices on adjustable rate loans, and payment increases required under the terms of our adjustable rate loan notes. During the first six months of 2008, hybrid loans with initial fixed interest rates comprised 90.4% of originations compared to 50.7% of origination during the same period in the prior year.

The portfolio of single family loans with a one-year fixed payment period totaled $2.8 billion at June 30, 2008, compared to $3.2 billion at December 31, 2007 and $3.6 billion at June 30, 2007. The portfolio of single family loans with a three-to-five year fixed payment period totaled $901.3 million at June 30, 2008 compared to $1.1 billion at December 31, 2007 and $1.3 billion at June 30, 2007.

The amount of negative amortization that may occur in the loan portfolio is uncertain and is influenced by a number of factors outside of our control, including changes in the underlying index, the amount and timing of borrowers’ monthly payments, and unscheduled principal payments. If the applicable index were to increase and remain at relatively high levels, the amount of negative amortization occurring in the loan portfolio would be expected to trend higher, absent other mitigating factors such as increased prepayments or borrowers making monthly payments that meet or exceed the amount of interest then accruing on their mortgage loans. Similarly, if the index were to decline and remain at relatively low levels, the amount of negative amortization occurring in the loan portfolio would be expected to trend lower.

The “recast” of adjustable loans to a higher payment amount appears to have been a substantial factor in the higher delinquency levels experienced by the Bank during 2007 and the first six months of 2008 because many borrowers appear to be unable to afford the higher payments. The percentage increase in the payment amount and the loan-to-value ratios are important considerations in the future collectability of the loans.

The following tables show the number and dollar amount of performing loans expected to recast by current estimated loan-to-value ratios for the periods indicated (updated for both current loan balance and current estimated market value):

	2008				2009				Thereafter
Current LTV Ratio Price Adjusted (1):	Recast Balance		Number of Loans		Recast Balance		Number of Loans		Recast Balance		Number of Loans
	(Dollars in thousands)
< 70%	$	47,474		129	$	210,541		527	$	292,818		738
70-80%		52,077		122		146,540		324		295,094		586
80-90%		66,589		131		129,443		247		432,734		794
90-100%		76,315		156		139,506		266		403,100		760
100-110%		17,509		40		21,305		45		108,386		224
>110%		6,298		16		5,650		13		16,756		40
Grand total	$	266,262		594	$	652,985		1,422	$	1,548,888		3,142