FirstFed Financial Corp. (OTC:FFED.PK), parent company of First Federal Bank of California, today announced preliminary results for the third quarter of 2009. Non-performing assets (NPAs) as of September 30, 2009 have dropped $78.5 million from June 30, 2009. Loans delinquent less than ninety days at September 30, 2009 have declined to $74.7 million from their peak of $262.0 million in February of this year. Only $7.5 million of the shorter term delinquencies as of September 30, 2009 were past due more than 60 days.

The Company has $150.0 million in outstanding unsecured fixed/floating rate senior debentures on which it has not paid interest since December 15, 2008. On June 19, 2009, the Company commenced a cash tender offer and consent solicitation for these debentures with an offer to pay $200.00 per $1,000.00 principal amount of securities. As of October 15, 2009, 95% of the debentures have tendered. The tendered notes are to be paid with proceeds from additional capital raised by the Company. See the Company’s press release dated October 16, 2009 for more information.

The Company’s modification program (see press release dated October 15, 2009 for more details) has been very successful in shoring up both the Bank’s loan documentation and reducing the levels of Option ARM loans. After modification, only 17% of loans in the total portfolio had low documentation as of September 30, 2009. Non-modified loans originated between 2004 and 2007 yet to recast were reduced to 22% of the single family loan portfolio at September 30, 2009.

The net loss of $46.0 million or $3.36 per diluted share of common stock for the third quarter of 2009 compared to a net loss of $46.0 million or $3.37 per diluted share of common stock for the second quarter of 2009 and a net loss of $51.6 million during the third quarter of 2008. The 2008 third quarter loss was net of a $27.6 million tax benefit. No such benefit was available during 2009.

Non-performing Assets

Non-performing assets for the Bank include loans delinquent over 90 days (non-accrual loans), current loans with interest recognized on a cash basis, loans in foreclosure and real estate acquired by foreclosure (REO). The following is an analysis of non-performing assets at the dates indicated:

Single family REO has increased as the Bank has worked through its large volume of delinquent loans. Non-performing assets as of September 30, 2009 include REO of $175.7 million which has been written down to fair market value less estimated selling costs and $113.9 million of severely delinquent non-accrual loans which have been written down to net collateral value.

Single family non-accrual loans at September 30, 2009, June 30, 2009 and March 31, 2009 include $95.8 million, $61.8 million and $26.6 million in loans which were current, but for which the Bank has capitalized interest into the loan balance as part of the modification process. It is the Bank’s policy that these loans remain classified as non-accrual loans until the loans have performed by making all contractual payments required by their loan for six months.

Delinquent Loans

Delinquent loans have declined for the past seven months, from their peak in February 2009. Management believes that the decline in single family loan delinquencies is the result of several factors including the success of the Bank’s loan modification programs, improving real estate prices and home sales in California and the overall lowering of interest rates upon which the Bank’s adjustable mortgages are based. The following table shows the outstanding balances of our loans that were delinquent by 30-59 days, 60-89 days and 90 or more days, or were in foreclosure, as of the respective dates shown:

Loan Payment Recast

The “recast” of adjustable loans to a higher payment amount was a factor in the higher delinquency levels experienced by the Bank during 2008 and the nine months ended September 30, 2009 because many borrowers were unable to afford the higher payments. The percentage increase in the payment amount and the loan-to-value (LTV) ratios are important considerations in the future collectability of the loans.

The following table shows the reduction in the amount of Option ARM loans in our portfolio that have not yet recast from $5.8 billion, as of December 31, 2006, to $816.5 million, as of September 30, 2009, or a reduction from 91% to 22% of all the loans in our single-family mortgage loan portfolio.

The Bank estimates that 129 loans with balances totaling approximately $56.1 million remain scheduled to recast during 2009. Another 771 loans, with balances totaling $344.0 million, are scheduled to recast during 2010. In comparison, 1,960 loans with balances totaling approximately $907.3 million were scheduled to recast during 2008.

Modified Loans

Based on an underwriting of the borrower and the property, the Bank attempts to arrive at an appropriate loan modification that will allow the borrower to stay in their home. At September 30, 2009, the Bank had modified 2,724 loans with principal balances totaling $1.3 billion. These loans were modified into a variety of loan products, as summarized below:

Based on the underwriting at the time of the modification, the Bank makes a determination whether or not the loan is a troubled debt restructuring (“TDR”). Modified loans are not considered TDRs when the loan terms are consistent with the Bank’s current product offerings and the borrowers meet the Bank’s current underwriting standards with regard to Fair Isaac Corporation (“FICO”) score, debt-to-income ratio, and LTV ratio. At September 30, 2009, 2,654 modified loans, with balances totaling $1.2 billion, were considered TDRs and 70 loans, with balances totaling $34.9 million, were not considered TDRs.

Negative amortization totaled $213.0 million at September 30, 2009, $262.9 million at December 31, 2008 and $289.6 million at September 30, 2008. The dollar amount of negative amortization decreased by $49.9 million from the level at the end of the year and $76.6 million from the September 30, 2008 level due to loan payoffs, charge-offs, declines in the underlying indices on adjustable rate loans, and payment increases required under the terms of the Bank’s adjustable rate loan notes.

The percentage of negative amortization that has been added to the original balances of single family loans that allow negative amortization increased to 10.20% at September 30, 2009 from 9.63% at December 31, 2008 and 9.29% at September 30, 2008. The increase was due to shrinkage in the loan portfolio due to loan payoffs and charge-offs.

Capital

The Bank’s risk-based capital ratio was 8.91% at September 30, 2009 and its core and tangible capital ratios were 4.25%. These capital ratios are below the levels required by the Bank’s federal regulators to be considered “well capitalized.” As previously disclosed, the Company and the Bank are operating under Amended Orders to Cease and Desist issued by the Office of Thrift Supervision (OTS) on May 28, 2009. Under the terms of the Bank’s Order, the Bank was required to meet and thereafter maintain a minimum Tier 1 Core Capital ratio of 7% and a minimum Total Risk-Based Capital ratio of 14% by September 30, 2009. The Bank failed to meet these required capital ratios, and, accordingly, as required by the Bank’s Order, the Bank submitted to the OTS a contingency plan to accomplish either a merger of the Bank with, or an acquisition of the Bank by, another federally insured institution or holding company thereof or a voluntary liquidation of the Bank. The Bank continues to pursue alternatives to increase the Bank’s capital ratios to preclude the need to implement the contingency plan.

Results of Operations for the Quarter Ended September 30, 2009

The net loss recorded during the third quarter of 2009 was due primarily to a $70.0 million provision for loan losses relating to the Bank’s single family loan portfolio. The Bank’s estimate of losses on single family loans is based on the continued weakness in the California real estate market and the increase in unemployment in California. However, the loan loss provision decreased compared to the third quarter of last year because fewer loans are facing payment recast, newly delinquent single family loans have decreased and slightly greater than half (51%) of the Bank’s non-performing assets have already been adjusted to fair market value less estimated selling costs.

Single family net loan charge-offs during the third quarter of 2009 were $94.1 million. This compares with $94.1 million during the second quarter of 2009, and $103.5 million during the third quarter of 2008. The general valuation allowance associated with single family loans totaled $230.9 million or 6.32% of single family loans outstanding at September 30, 2009. This compares with $259.0 million or 6.49% at June 30, 2009, $312.1 million or 7.13% at December 31, 2008 and $250.2 million or 5.53% at September 30, 2008. The decrease in general valuation allowance over the last year was partially due to the fact that severely delinquent single family loans have been written down to fair value less estimated selling costs and therefore required no general valuation allowance.

Overall net loan charge-offs were $95.0 million and $284.7 million for the third quarter and the nine months ended September 30, 2009. This compares to net loan charge-offs of $103.5 million and $212.3 million for the third quarter and the nine months ended September 30, 2008. The overall allowance for loan losses totaled $244.0 million or 4.27% of gross loans outstanding at September 30, 2009. This compares with $326.9 million or 4.97% at December 31, 2008 and $264.1 million or 3.96% at September 30, 2008.

Net interest income during the third quarter of 2009 increased 20% compared to the second quarter of 2009 due to improved delinquencies and decreased 21% compared to the third quarter of last year due to decreased interest-earning assets. The interest rate spread during the third quarter of 2009 increased by 57 basis points compared to the second quarter of 2009 and decreased by 14 basis points compared to the third quarter of last year. Early payoff fees and late charges on loans, which are calculated as part of the loan yield, decreased to $508 thousand for the third quarter of 2009 from $874 thousand during the second quarter of 2009 and $699 thousand during the third quarter of 2008. The majority of Bank’s loans have passed the period for which there is a prepayment penalty.

Non-interest income increased to $14.5 million during the third quarter of 2009 from $14.3 million during the second quarter of 2009 and $8.5 million during the third quarter of 2008. The slight increase during the third quarter of 2009 compared to the second quarter of 2009 was due to increased net gains on the sale of REO which offset the gain on the sale of investment securities during the second quarter. The increase during the third quarter of 2009 compared to the third quarter of 2008 was also due to increased net gains on the sale of real estate owned and additional trustee fees earned by the Bank’s wholly-owned subsidiary, Seaside Financial Corporation.

Gains on sale of REO result from write downs taken at the time of foreclosure and throughout the holding period which create gains upon the ultimate disposition of the properties. Operating costs on foreclosed real estate, which are included in non-interest expense, totaled $5.7 million during the third quarter of 2009 compared to $3.6 million during the second quarter of 2009 and $4.3 million during the third quarter of 2008.

Non-interest expense was $26.5 million during the third quarter of 2009, $27.3 million during the second quarter of 2009 and $23.2 million for the third quarter of 2008. The decrease in non-interest expense during the third quarter of 2009 compared to the second quarter of 2009 was due primarily to a $3.0 million FDIC special assessment during the second quarter which was partially offset by increased operating costs on REO and higher professional fees during the third quarter. The increase in non-interest expense during the third quarter of 2009 compared to the third quarter of 2008 was due to increased operational costs on REO and higher federal deposit insurance rates which were offset by lower employment costs. The Bank reduced its workforce by 10% in January 2009 when it curtailed its lending efforts to comply with the original Order to Cease and Desist issued by the OTS. The ratio of non-interest expense to average total assets was 1.69% for the third quarter of 2009, 1.65% for the second quarter of 2009 and 1.28% for the third quarter of 2008 due to the increased expenses mentioned above and decreases in average total assets over the last year.

Consolidated Balance Sheets

At September 30, 2009, the Company had consolidated stockholders’ equity of $111.1 million compared to $258.7 million at December 31, 2008 and $499.2 million at September 30, 2008. Stockholders’ equity decreased from December 31, 2008 to September 30, 2009 due to a $145.4 million loss recorded during the nine months ended September 30, 2009.

Total assets decreased to $6.2 billion at September 30, 2009 from $7.5 billion at December 31, 2008 and $7.4 billion at September 30, 2008 primarily due to loan payoffs and the sale of the Bank’s investment securities and mortgage-backed securities during the second quarter of 2009. Loan originations decreased to $108.0 million during the nine months ended September 30, 2009 from $1.3 billion during the nine months ended September 30, 2008, given the Bank’s curtailment of its lending efforts.

First Federal Bank of California operates 39 retail banking offices in Southern California.

This news release contains certain forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Act of 1995. These forward-looking statements are subject to various factors, many of which are beyond the Company’s control, which could cause actual results to differ materially from such statements. Such factors include, but are not limited to, the general business environment, interest rate fluctuations that may affect operating margin, changes in laws and regulations affecting the Company’s business, the California real estate and employment markets, and competitive conditions in the business and geographic areas in which the Company conducts its business and regulatory actions. In addition, these forward-looking statements are subject to assumptions as to future business strategies and decisions that are subject to change. The Company makes no guarantees or promises regarding future results and assumes no responsibility to update such forward-looking statements.

The following table summarizes the Bank’s total loan originations by type for the periods indicated:

The following table summarizes the Bank’s single family loan fundings by borrower documentation type for the periods indicated:

The following table shows the composition of the Bank’s single family loan portfolio by borrower documentation type at origination for the dates indicated:

The following table shows the composition of the Bank’s single family loan portfolio by borrower documentation type with weighted average LTV ratio and FICO score all at origination for the dates indicated:

The following table shows the composition of the Bank’s single family loan portfolio at the dates indicated by original LTV ratio:

The following table shows the composition of the Bank’s single family loan portfolio by geographic distribution at the dates indicated:

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

The following table shows the number and dollar amount of loans expected to recast by projected payment increase for the periods indicated: