Edgar Filing: FIRSTFED FINANCIAL CORP

q093009edgar.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 September 30, 2009

*	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)

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232,405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes * No R

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” ”accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer * Accelerated filer R Non-accelerated filer * Smaller reporting company *

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 November 13, 2009, 13,684,553 shares of the Registrant's $.01 par value common stock were outstanding.

On November 9, 2009, the Registrant received notification from Grant Thornton LLP of their resignation as the Registrant’s independent registered public accounting firm. The Registrant is currently conducting a search for a successor accounting firm, however no successor accounting firm has been selected or engaged as of the date of this filing. As a result of Grant Thornton LLP’s resignation, the unaudited interim consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q have not been reviewed in accordance with Statement of Auditing Standards No. 100, as required by Rule 10-01(d) of Regulation S-X promulgated under the Securities Exchange Act of 1934, as amended.

The Registrant will file an amendment to this Quarterly Report on Form 10-Q as soon as practicable after the required review is completed. As such, the unaudited interim consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q are subject to restatement.

Disclosure Regarding Forward-looking Statements

This Quarterly Report on Form 10-Q for the quarter ended September 30, 2009 includes certain statements that may be deemed to be “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 the Company expects, believes or anticipates will or may occur in the future, including, but not limited to, such matters as future product development, business development, competition, future revenues, business strategies, expansion and growth of the Company’s operations and assets and other such matters are forward-looking statements. These kinds of statements are signified by words such as “believes,” “anticipates,” “expects,” “intends,” “may”, “could,” and other similar expressions. However, these words are not the exclusive means of identifying such statements. These statements are based on certain assumptions and analyses made by the Company in light of its experience and perception of historical trends, current conditions, expected future developments and other factors it believes are appropriate in the circumstances. Such statements are subject to a number of assumptions, risks and uncertainties, including the risk factors discussed below, general economic and business conditions, the business opportunities (or lack thereof) that may be presented to and pursued by the Company, changes in law or regulations and other factors, many of which are beyond the Company’s control. Investors are cautioned that any such statements are not guarantees of future performance and that actual results or developments may differ materially from those projected in the forward-looking statements. Specific factors that could cause results to differ materially from historical results or those anticipated are: (1) the ability and willingness of borrowers to pay their mortgage loans, which is affected by external factors such as interest rates, the California real estate markets and the strength of the California economy; (2) fluctuations between consumer interest rates and the cost of funds; (3) federal and state regulation of lending, deposit and other operations, including the regulatory enforcement actions to which we and the Bank are currently, and may in the future be, subject; (4) competition for financial products and services within the Bank’s market areas; (5) operational and infrastructural risks; (6) capital market activities; (7) critical accounting estimates; and (8) other risks detailed in reports filed by the Company with the Securities and Exchange Commission. The Company does not undertake to update any forward-looking statements, except to the extent that it is obligated to do so under applicable law. Readers are advised to carefully review the detailed discussion of risk factors contained in “Item 1A – Risk Factors” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 as well as additional disclosures contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Item 7 of that Form 10-K and Item 2 of this Form 10-Q.

FirstFed Financial Corp.
Index
Report on Form 10-Q
For the Quarterly Period Ended September 30, 2009


			Page
Part I.	Financial Information

	Item 1.	Financial Statements

		Consolidated Balance Sheets as of September 30, 2009, December 31, 2008 and September 30, 2008	1

		Consolidated Statements of Operations for the nine months ended September 30, 2009 and 2008	2

		Consolidated Statements of Cash Flows for the nine months ended September 30, 2009 and 2008	3

		Notes to Consolidated Financial Statements	4

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	38

	Item 4.	Controls and Procedures	38

Part II.	Other Information (omitted items are inapplicable)

	Item 3.	Defaults Upon Senior Securities	39

	Item 4.	Submission of Matters to a Vote of Security Holders	40

	Item 6.	Exhibits	41

Signatures			42

PART I - FINANCIAL STATEMENTS

Item 1. Financial Statements

These Financial Statements have not been reviewed by an independent registered public accounting firm.

FirstFed Financial Corp. and Subsidiary

Consolidated Balance Sheets

(In thousands, except share data)

(Unaudited)

	September 30, 2009			December 31, 2008			September 30, 2008
ASSETS
Cash and cash equivalents	$	298,661		$	391,469		$	62,661
Investment securities, available-for-sale (at fair value)		—			323,048			329,042
Mortgage-backed securities, available-for-sale (at fair value)		—			40,504			41,510
Loans receivable, net of allowances for loan losses of $244,048, $326,920 and $264,092		5,464,538			6,254,686			6,395,706
Accrued interest and dividends receivable		19,163			30,061			32,260
Real estate owned (REO), net		175,725			117,664			132,957
Office properties and equipment, net		21,262			24,102			21,140
Investment in Federal Home Loan Bank (FHLB) stock, at cost		115,150			115,150			130,496
Other assets		56,114			153,902			209,524
	$	6,150,613		$	7,450,586		$	7,355,296

LIABILITIES
Deposits	$	4,524,487		$	4,907,356		$	4,328,850
FHLB advances		1,300,000			2,085,000			2,313,000
Senior debentures		150,000			150,000			150,000
Accrued expenses and other liabilities		65,046			49,488			64,250
		6,039,533			7,191,844			6,856,100

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share; authorized 100,000,000 shares; issued 24,002,093 shares; outstanding 13,684,553 shares		240			240			240
Additional paid-in capital		58,391			57,880			57,176
Retained earnings		318,336			463,759			708,532
Unreleased shares to employee stock ownership plan		—			—			(31	)
Treasury stock, at cost, 10,317,540 shares		(266,040	)		(266,040	)		(266,040	)
Accumulated other comprehensive income (loss), net of taxes		153			2,903			(681	)
		111,080			258,742			499,196
	$	6,150,613		$	7,450,586		$	7,355,296

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

These Financial Statements have not been reviewed by an independent registered public accounting firm.

FirstFed Financial Corp. and Subsidiary

Consolidated Statements of Operations

(Dollars in thousands, except per share data)

(Unaudited)

	Three months ended September 30,						Nine months ended September 30,
	2009			2008			2009			2008
Interest and dividend income:
Interest on loans	$	73,678		$	93,141		$	232,407		$	297,807
Interest on mortgage-backed securities		—			427			691			1,543
Interest and dividends on investments		410			6,356			6,519			17,754
Total interest income		74,088			99,924			239,617			317,104
Interest expense:
Interest on deposits		25,797			32,280			92,984			105,738
Interest on borrowings		12,306			21,864			40,607			71,541
Total interest expense		38,103			54,144			133,591			177,279

Net interest income		35,985			45,780			106,026			139,825
Provision for loan losses		70,000			110,300			208,000			350,800
Net interest loss after provision for loan losses		(34,015	)		(64,520	)		(101,974	)		(210,975	)

Other income:
Loan servicing and other fees		296			149			1,037			3,407
Banking service fees		1,786			1,848			5,562			5,306
Gain on sale of loans		116			—			138			20
Gain on sale of investment securities		—			—			4,770			—
Net gain on REO		9,584			4,170			19,505			7,357
Other operating income		2,759			2,374			5,937			5,098
Total other income		14,541			8,541			36,949			21,188

Non-interest expense:
Salaries and employee benefits		8,867			11,105			28,479			35,456
Occupancy		3,647			3,029			11,225			10,932
Advertising		66			284			220			619
Amortization of core deposit intangible		—			127			—			380
Federal deposit insurance		4,073			1,074			16,477			2,970
Data processing		589			559			1,890			1,667
OTS assessment		615			439			1,880			1,347
Legal		616			497			1,123			1,805
Real estate owned operations		5,726			4,277			13,285			8,541
Other operating expense		2,322			1,776			5,819			6,642
Total non-interest expense		26,521			23,167			80,398			70,359

Loss before income taxes		(45,995	)		(79,146	)		(145,423	)		(260,146	)
Income tax benefit		—			(27,560	)		—			(103,267	)
Net loss	$	(45,995	)	$	(51,586	)	$	(145,423	)	$	(156,879	)

Net loss	$	(45,995	)	$	(51,586	)	$	(145,423	)	$	(156,879	)
Other comprehensive loss, net of taxes		—			(756	)		(2,750	)		(676	)
Comprehensive loss	$	(45,995	)	$	(52,342	)	$	(148,173	)	$	(157,555	)

Loss per share:
Basic	$	(3.36	)	$	(3.77	)	$	(10.63	)	$	(11.48	)
Diluted	$	(3.36	)	$	(3.77	)	$	(10.63	)	$	(11.48	)

Weighted average shares outstanding:
Basic		13,678,708			13,668,576			13,677,947			13,663,059
Diluted		13,678,708			13,668,576			13,677,947			13,663,059

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

These Financial Statements have not been reviewed by an independent registered public accounting firm.

FirstFed Financial Corp. and Subsidiary

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

	Nine months ended September 30,
	2009			2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(145,423	)	$	(156,879	)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Stock option compensation		511			1,551
Excess tax benefits related to stock option awards		—			(29	)
Depreciation and amortization		2,317			1,901
Provision for loan losses		208,000			350,800
Yield adjustments on troubled debt restructured		(6,219	)		(2,434	)
Amortization of fees and premiums/discounts		1,395			10,355
Decrease in interest income accrued in excess
of borrower payments		49,855			12,035
Net gain on REO		(19,505	)		(7,357	)
Gain on sale of loans		(138	)		(20	)
Gain on sale of investment securities		(4,770	)		—
Deferred gain on sale of branch facility		(1,194	)		—
FHLB stock dividends		—			(4,518	)
Valuation allowance for deferred tax assets		2,330			—
Change in deferred taxes		(1,861	)		(54,536	)
Change in current taxes		104,445			(45,957	)
Decrease in interest and dividends receivable		10,898			13,232
Decrease in interest payable		(6,292	)		(7,967	)
Amortization of core deposit intangible asset		—			380
Increase in other assets		(5,131	)		(10,104	)
Increase in accrued expenses and other liabilities		21,850			16,861
Total adjustments		356,491			274,193
Net cash provided by operating activities		211,068			117,314

CASH FLOWS FROM INVESTING ACTIVITIES:
Loans made to customers and principal collections
on loans, net		236,442			(495,091	)
Loans purchased		(402	)		(6,484	)
Proceeds from sale of real estate		262,712			146,194
Proceeds from maturities and principal payments
of investment securities, available for sale		23,215			38,597
Principal reductions on mortgage-backed securities,
available for sale		2,793			4,763
Purchase of investment securities, available for sale		—			(51,647	)
Proceeds from sale of investment securities, available for sale		337,515			—
Purchases of FHLB stock, net		—			(21,591	)
Proceeds from sale of branch facility		2,039			—
Purchases of premises and equipment		(321	)		(5,256	)
Net cash provided by (used in) investing activities		863,993			(390,515	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in retail and commercial deposits		719,571			(250,104	)
Net (decrease) increase in brokered deposits		(1,102,440	)		422,262
Net decrease in short term borrowings		(455,000	)		(386,000	)
Net (decrease) increase in long term borrowings		(330,000	)		495,000
Proceeds from stock options exercised		—			529
Excess tax benefits related to stock option awards		—			29
Other		—			172
Net cash (used in) provided by financing activities		(1,167,869	)		281,888
Net (decrease) increase in cash and cash equivalents		(92,808	)		8,687
Cash and cash equivalents at beginning of period		391,469			53,974
Cash and cash equivalents at end of period	$	298,661		$	62,661

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

FirstFed Financial Corp. and Subsidiary

Notes to Consolidated Financial Statements

(Unaudited)

Explanatory Note

The Company will file an amendment to this Quarterly Report on Form 10-Q as soon as practicable after the required review is completed. As such, the unaudited interim consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q are subject to restatement.

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.

These condensed financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008. The results for the periods covered hereby are not necessarily indicative of the Company’s operating results for a full year.

2. Subsequent Event

Management has evaluated subsequent events through November 13, 2009.

On November 6, 2009, President Barack Obama signed into law the Worker, Homeownership, and Business Assistance Act of 2009 which includes, among other things, a provision allowing all businesses - except those that received funds under the Troubled Asset Relief Program - to elect a five-year carry back of net operating losses. The Act allows taxpayers to elect to increase the present-law carry back period for an applicable net operating loss from two years up to five years for taxable years ending after December 31, 2007. A taxpayer may elect an extended carry back period for only one taxable year.

The following table summarizes the pro forma impact of the five-year net operating loss carry back would have on the Company’s Consolidated Balance Sheet and Consolidated Statements of Operations as of September 30, 2009:

	Pro Forma Results
	As Reported			5-Year Loss Carry Back		Pro Forma
	(Dollars in thousands, except per share data)

Other assets (income taxes receivable)	$	56,114		$	76,284	$	132,398
Total Assets	$	6,150,613		$	76,284	$	6,226,897

Shareholders’ Equity	$	111,080		$	76,284	$	187,364
Total Liabilities and Stockholders’ Equity	$	6,150,613		$	76,284	$	6,226,897

Loss before income taxes	$	(145,423	)	$	—	$	(145,423	)
Income tax benefit		—			76,284		76,284
Net loss	$	(145,423	)	$	76,284	$	(69,139	)

Loss per share:
Basic	$	(10.63	)	$	5.58	$	(5.05	)
Diluted	$	(10.63	)	$	5.58	$	(5.05	)

The following table summarizes the Bank’s capital ratios at September 30, 2009 after giving effect to the subsequent event:

		As Reported						Pro Forma

					5-Year Loss
		Amount	Ratio		Carry Back			Amount	Ratio
	(Dollars in thousands)

Tangible Capital	$	261,051	4.25	%	$	76,284	$	337,335	5.49	%
Core Capital	$	261,051	4.25	%	$	76,284	$	337,335	5.49	%
Tier 1 Risk-Based Capital	$	261,051	7.59	%	$	76,284	$	337,335	9.81	%
Risk-Based Capital	$	306,519	8.91	%	$	76,284	$	382,803	11.13	%

3. Regulatory Matters and Uncertainties

To understand the impact of these regulatory matters and uncertainties on the Company, you should carefully review the detailed discussion of risk factors applicable to the Company contained in “Item 1A – Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 as well as additional disclosures contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Item 7 of that Form 10-K and Item 2 of this Form 10-Q.

Issuance of Cease and Desist Orders by the OTS

On January 26, 2009, the Company and its wholly-owned subsidiary, First Federal Bank of California (the “Bank”) each consented to the issuance of an Order to Cease and Desist (the “Company Order” and the “Bank Order,” respectively, and together, the “Orders”) by the Office of Thrift Supervision (the “OTS”).

The Company Order requires that the Company notify, or in certain cases receive the permission of, the OTS prior to (i) declaring, making or paying any dividends or other capital distributions on its capital stock; (ii) incurring, issuing, renewing, repurchasing or rolling over any debt, increasing any current lines of credit or guaranteeing the debt of any entity; (iii) making payments (including, without limitation, principal, interest or fees of any kind) on any existing debt; (iv) making certain changes to its directors or senior executive officers; (v) entering into, renewing, extending or revising any contractual arrangement related to compensation or benefits with any of its directors or senior executive officers; and (vi) making any golden parachute payments or prohibited indemnification payments. The Company Order also required that the Company submit to the OTS within fifteen (15) days a detailed capital plan to address how the Bank will remain “well capitalized” (as defined in 12 C.F.R. § 565.4) at each quarter-end through December 31, 2011, which the Company did submit in a timely manner.

The Bank Order requires that the Bank notify, or in certain cases receive the permission of, the OTS prior to (i) increasing its total assets in any quarter in excess of an amount equal to net interest credited on deposits during the quarter (other than for balance sheet increases resulting from activities to maintain liquidity); (ii) making certain changes to its directors or senior executive officers; (iii) entering into, renewing, extending or revising any contractual arrangement related to compensation or benefits with any of its directors or senior executive officers; (iv) making any golden parachute or prohibited indemnification payments; (v) paying dividends or making other capital distributions on its capital stock; (vi) entering into certain transactions with affiliates; and (vii) entering into third-party contracts outside the normal course of business.

On May 28, 2009, the Company and the Bank each consented to the issuance of an Amended Order to Cease and Desist (the "Company Amendment" and the "Bank Amendment," respectively, and together, the "Amendments") by the OTS. The Amendments amend and supplement the Orders to Cease and Desist that were issued by the OTS on January 26, 2009.

The Amendments required that the Company and the Bank submit to the OTS within thirty days a detailed capital plan to address how the Bank expected to meet and 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 capital plan addressed how the Bank will meet and maintain the foregoing capital ratios and provide for the augmentation of capital to, among other things, support the Bank's business strategy and operations. The Company and the Bank did timely submit a capital plan to the OTS as required by the Amendments. If the Bank fails to meet or maintain the foregoing capital ratios or otherwise fails to comply with the updated capital plan, the Bank must then submit to the OTS a contingency plan to accomplish either a merger with or acquisition by another federally insured institution or holding company thereof, or a voluntary liquidation of the Bank. The Bank Amendment also provides that the Bank may not accept, renew or roll over any brokered deposits, or act as a deposit broker, without the prior written approval of the Federal Deposit Insurance Corporation.

The Bank failed to meet these required capital ratios on September 30, 2009, and, accordingly, as required by the Bank 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 FDIC may at any time commence a resolution process for the Bank that would include the marketing of the Bank or its assets to prospective buyers, culminating in a potential FDIC seizure or FDIC-assisted acquisition of the Bank.

Non-Payment of Interest Due March 16, June 15, 2009 and September 15, 2009 on Outstanding Company Debt; Tender Offer and Consent Solicitation for Outstanding Company Debt

The Company has $150.0 million in outstanding unsecured fixed/floating rate senior debentures (the “Senior Notes”). The Company Order issued by the OTS prohibits the Company from making payments (including, without limitation, principal, interest or fees of any kind) on any existing debt without the consent of the OTS. The Company did not receive consent from the OTS to make the $2.3 million quarterly interest payments that were due on the Senior Notes on each of March 16, June 15 and September 15, 2009.

Under the indentures governing the Senior Notes, a default in the payment of any interest when it becomes due and payable that is not cured within 30 days is an “event of default.” If an event of default occurs and is continuing with respect to the debentures, the trustee or the holders of not less than 25% in aggregate principal amount of the Senior Notes then outstanding may declare the entire principal of the Senior Notes and the interest accrued thereon immediately due and payable. In addition, the Company may be required to pay additional interest on the Senior Notes and the costs and expenses of collection, including reasonable compensation to the trustee, its agents, attorneys, and counsel. The Company has not been notified of any such additional interest, costs or expenses as of November 9, 2009.

On June 19, 2009, the Company commenced cash tender offers and consent solicitations for its $150.0 million in Senior Notes. The terms and conditions of the tender offers and consent solicitations are described in the Offer to Purchase and Consent Solicitation Statement, dated June 19, 2009 (the “Offer to Purchase”), and the related Letter of Transmittal and Consent.

The tender offer and consent solicitation for each series of Senior Notes will expire at 5:00 p.m., New York City time, on November 25, 2009, unless extended or earlier terminated by the Company (the “Tender Expiration Date”). In order to be eligible to receive the purchase price of $200.00 per $1,000.00 principal amount of securities, which includes the $20.00 consent payment, holders must validly tender, and not validly withdraw, their Senior Notes prior to 5:00 p.m., New York City time, on November 25, 2009, unless extended or earlier terminated by the Company (the “Consent Payment Deadline”). Holders tendering their Senior Notes after the applicable Consent Payment Deadline but prior to the applicable Tender Expiration Date will be eligible to receive an amount equal to the purchase price less the consent payment, or $180.00 per $1,000.00 principal amount of securities. Senior Notes purchased in the tender offers will be paid for on the applicable settlement date for each tender offer, which, assuming the tender offers are not extended, will be promptly after the applicable Tender Expiration Date.

As of 5:00 p.m., New York City time, on November 6, 2009, the Company had received tenders and consents from holders of $50,000,000 in aggregate amount of the Senior Notes due March 15, 2016, representing 100% of such securities, $50,000,000 in aggregate amount of the Senior Notes due June 15, 2015, representing 100% of such securities, and $43,000,000 in aggregate amount of the Senior Notes due June 15, 2017, representing 86% of such securities.

Holders tendering their Senior Notes will be required to consent to the proposed amendments to the indentures governing the Senior Notes, which would eliminate substantially all of the restrictive covenants in the indentures, including the covenant that currently prohibits the Company from merging or selling all or substantially all of its assets unless the successor entity or purchaser is substituted as the obligor. Holders may not tender their Senior Notes without also delivering consents and may not deliver consents without also tendering their Senior Notes.

Consummation of each tender offer and consent solicitation is conditioned upon satisfaction or waiver of the conditions set forth in the Offer to Purchase, including (i) the Company’s receipt of net proceeds from an offering, sale or other transaction sufficient to enable the Company to purchase the Senior Notes that are validly tendered and not withdrawn, (ii) approval by the OTS of the Company’s payment of the purchase price for the Senior Notes that are validly tendered and not withdrawn and (iii) the Company’s receipt of tenders and consents from holders of at least seventy-five percent (75%) in principal amount of each and every series of Senior Notes subject to the tender offers and consent solicitations. The Company has reserved the right to waive any condition to any tender offer and consent solicitation.

Suspension of Portfolio Lending and Reduction in Workforce

On January 26, 2009, in an effort to comply with the asset growth limitations contained in the Orders, the Company suspended lending for its own portfolio. As a result, the Company reduced the staff of the Bank by 62 persons, or approximately 10% of the Bank’s then-current workforce. The reductions came primarily from the Bank’s single family lending and commercial lending operations as well as some reduction in support areas of the Bank. As a result of these reductions, the Company paid $560 thousand for salary and benefits in accordance with the California Relocations, Terminations, and Mass Layoffs Act during the quarter ending March 31, 2009.

Going Concern Uncertainty

The ability of the Company and the Bank to continue to meet all of the requirements of the Amendments and the Orders will be affected by market conditions in the economy and other uncertainties. Declining real estate values and rising unemployment in the state of California could have a significant impact on future losses incurred on loans. In addition, there can be no assurance in the current economic environment that the Company will be able to raise capital to regain “well capitalized” status or to meet future regulatory requirements. Due to these conditions and events, substantial doubt exists in the Company’s ability to continue as a going concern.

The consolidated financial statements have been prepared on a going concern basis which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future, and do not include any adjustments to reflect possible future effects on the recoverability and classification of assets, or the amounts and classification of liabilities that may result from the outcome of any regulatory action, which would affect the ability of the Company to continue as a going concern.

4. Loss per Share

Basic loss per share was computed by dividing the net loss by the weighted average number of shares of common stock outstanding for the period. Loss per common share has been computed based on the following:

	Three months ended September 30,
	2009			2008
	(In thousands, except share data)

Net loss	$	(45,995	)	$	(51,586	)

Average number of common shares outstanding		13,678,708			13,668,576
Effect of dilutive stock options		—			—
Average number of common shares outstanding used to calculate diluted loss per common share		13,678,708			13,668,576

	Nine months ended September 30,
	2009			2008
	(In thousands, except share data)

Net loss	$	(145,423	)	$	(156,879	)

Average number of common shares outstanding		13,677,947			13,663,059
Effect of dilutive stock options		—			—
Average number of common shares outstanding used to calculate diluted loss per common share		13,677,947			13,663,059

There was no dilutive effect during the third quarter or nine months ended September 30, 2009 or 2008, since the Company was in a net loss position. There were 811,042 anti-dilutive shares excluded from the weighted average shares outstanding calculation during the third quarter and nine months ended September 30, 2009 and there were 863,197 anti-dilutive shares excluded from the weighted average shares outstanding calculation during the third quarter and nine months ended September 30, 2008.

5. 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.

6. Loan Modifications

At September 30, 2009, the Bank had 2,724 modified loans with principal balances totaling $1.3 billion.

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 loan-to-value ratio. At September 30, 2009, 2,654 of the modified loans, with balances totaling $1.2 billion, were considered TDRs and 70 loans, with balances totaling $34.9 million, were not considered TDRs.

For modified loans that are considered TDRs, the Bank calculates and records an impaired valuation allowance based on the present value of expected future cash flows discounted at the loan’s effective interest rate (based on the original contractual rate). An impaired valuation allowance is recorded when the present value of expected future cash flows is less than the recorded investment in the loan. The present value of expected future cash flows will increase from one reporting period to the next as a result of the passage of time. The Bank accomplishes the recording of this portion of the change in impairment value by amortizing the original impaired valuation allowance amount over the life of the loan as an adjustment to loan yield. The impaired valuation allowance is recomputed at the end of each reporting period if there is a significant change (increase or decrease) in the amount or timing of the expected future cash flows, or if actual cash flows are significantly different from the cash flows previously projected.

Some future payments to which the Bank is contractually entitled are not included in the expected future cash flows because of uncertainty regarding their future collection. If, as a part of the modification process, the borrower is allowed to defer making interest payments on a portion of the principal, that principal amount is assumed to be uncollectible for purposes of cash flow projections. As of September 30, 2009, the Bank had $2.2 million in deferred principal amounts that had been charged off. Similarly, for any loans that were in non-accrual status prior to modification that are brought current by capitalizing interest into the principal balances, any capitalized interest is assumed to be uncollectible and is charged off or an impaired valuation allowance is established. As of September 30, 2009, the Bank had $95.8 million in loans with capitalized interest totaling $1.8 million.

TDRs for which impaired valuation allowances are recorded based on the present value of expected future cash flows are reviewed each quarter to determine if foreclosure is probable. At September 30, 2009, the Bank had $1.2 billion of modified loans recorded based on the present value of expected future cash flows. Impaired valuation allowances on these loans totaled $66.2 million as of September 30, 2009.

Impairment of TDRs for which foreclosure is probable is measured based on the fair value of the collateral, net of all selling costs. At September 30, 2009, the Bank had $76.6 million of modified loans that were recorded at net collateral value after charge-offs totaling $22.3 million were taken. These loans were moved to non-accrual status because foreclosure was determined to be probable. Impaired valuation allowances on these loans totaled $14.5 million as of September 30, 2009.

As of September 30, 2009, $57.7 million of modified loans that were considered TDRs were 90 days or more delinquent.

7. 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
	(In thousands)

Balance at December 31, 2008:	$	280,185		$	46,735		$	326,920
Provision for loan losses		158,567			49,433			208,000
Yield adjustment on troubled debt restructurings(1)		—			(6,219	)		(6,219	)
Charge-offs:
Single family		(285,900	)		(2,210	)		(288,110	)
Commercial loan		(640	)		—			(640	)
Consumer loans		(690	)		—			(690	)
Total charge-offs		(287,230	)		(2,210	)		(289,440	)
Recoveries		4,787			—			4,787
Net charge-offs		(282,443	)		(2,210	)		(284,653	)
Balance at September 30, 2009:	$	156,309		$	87,739		$	244,048

	General Valuation Allowance			Valuation Allowances For Impaired Loans			Total
	(In thousands)

Balance at December 31, 2007:	$	127,503		$	555		$	128,058
Provision for loan losses		306,180			44,620			350,800
Yield adjustment on troubled debt restructurings(1)		—			(2,434	)		(2,434	)
Charge-offs:
Single family		(207,060	)		(6,523	)		(213,583	)
Total charge-offs		(207,060	)		(6,523	)		(213,583	)
Recoveries		1,251			—			1,251
Net charge-offs		(205,809	)		(6,523	)		(212,332	)
Transfers		(6,514	)		6,514			—
Balance at September 30, 2008:	$	221,360		$	42,732		$	264,092

(1)

The Bank establishes an impaired loan valuation allowance for the difference between the recorded investment of the original loan at the time of modification and the expected cash flows of the modified loan (discounted at the effective interest rate of the original loan during the modification period). The difference is recorded as a provision for loan losses during the current period and subsequently amortized over the expected life of the loan as an adjustment to the loan yield or as adjustment to the loan loss provision if the loan is prepaid.

8. Impaired Loans and Troubled Debt Restructurings

The Company considers a loan impaired when management believes that it is probable that the Company will not be able to collect all amounts due under the contractual terms of the loan agreement. Estimated impairment 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), non-accrual loans less than the major loan thresholds and delinquent greater than 180 days, modified loans which are considered troubled restructurings because they do not meet the Company’s current product offerings and underwriting standards, and major loans less than 90 days delinquent in 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 dates indicated:

	September 30, 2009		December 31, 2008		September 30, 2008
	(In thousands)
Troubled debt restructurings	$	1,093,920	$	572,307	$	500,139
Non-accrual loans		169,516		152,227		30,670
Other impaired loans		12,812		1,257		—
	$	1,276,248	$	725,791	$	530,809

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 impaired valuation 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:

		September 30, 2009			December 31, 2008			September 30, 2008
	(In thousands)
Impaired loans without valuation allowances		$	88,177		$	18,050		$	31,027
Impaired loans with valuation allowances			1,275,810			754,476			542,514
Valuation allowances on impaired loans			(87,739	)		(46,735	)		(42,732	)

	Nine months ended September 30,
	2009		2008
	(In thousands)
Average investment in impaired loans	$	844,030	$	259,764
Interest recognized on impaired loans		9,451		2,961
Interest recognized on impaired loans using the cash basis		9,576		1,806

9. Real Estate Owned Activity

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

	Nine months ended September 30,
	2009			2008
	(In thousands)
Beginning Balance	$	117,664		$	21,090
Acquisitions		301,268			250,705
Write-downs		(16,853	)		(13,172	)
Sales of REO		(226,354	)		(125,666	)
Ending Balance	$	175,725		$	132,957

Net gain on REO is comprised of the following items for the periods indicated:

	Three months ended September 30,
	2009			2008
	(In thousands)
Gain on sale of REO	$	15,049		$	12,342
Loss on sale of REO		—			(1,518	)
Write down on REO		(5,465	)		(6,654	)
Net gain on REO	$	9,584		$	4,170

	Nine months ended September 30,
	2009			2008
	(In thousands)
Gain on sale of REO	$	37,050		$	22,348
Loss on sale of REO		(692	)		(1,819	)
Write down on REO		(16,853	)		(13,172	)
Net gain on REO	$	19,505		$	7,357

The following items are included in REO operations for the periods indicated:

	Three months ended September 30,
	2009			2008
	(In thousands)
Single family REO expense	$	5,743		$	4,306
Single family REO income		(17	)		(29	)
Net REO expense	$	5,726		$	4,277

	Nine months ended September 30,
		2009			2008
	(In thousands)
Single family REO expense	$	13,395		$	8,602
Single family REO income		(110	)		(61	)
Net REO expense	$	13,285		$	8,541

Operating costs on REO consist primarily of repair and clean up costs, property taxes, insurance, home owners’ association dues, if any, and utilities expenses during the holding period.

10. Income Taxes

When determining the need for a valuation allowance against a deferred tax asset, management must asses both positive and negative evidence with 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 deferred tax asset related to loan loss allowances will be realized when actual charge-offs are made against the loan loss allowances.

The Company’s federal and state deferred tax assets increased significantly during 2008 due to a significant increase in its general loan valuation allowance. To the extent that the loan loss allowance is not allocable to specific loans, it represents future tax benefits which would be realized when actual charge-offs are made against the allowance. Because the Bank recorded a net loss during 2008 and the nine months ended September 30, 2009, future earnings that would cause the future tax benefits to be realized cannot be assured. Therefore, valuation allowances were recorded to reduce the deferred tax assets to the amount management deems more likely than not to be realized through the carry back of tax losses to prior years’ federal tax returns. At September 30, 2009, the Bank had $42.7 million in federal deferred tax assets net of valuation allowances. Since the state of California does not allow net operating loss carry backs, a valuation allowance was established for the entire amount of the state deferred tax assets. No expected future earnings were considered in determining the amount of the deferred tax assets.

11. Fair Value Measurements

The Company has estimated fair value based on quoted market prices where available. In case where quoted market prices were not available, fair values were based on the quoted market price of a financial instruments with similar characteristics, the present value of expected future cash flows or other valuation techniques that utilize assumptions which are highly subjective and judgmental in nature. Subjective factors include, among other things, estimates of cash flows, the timing of cash flows, risk and credit quality characteristics, interest rates and liquidity premiums or discounts. Accordingly, the result may not be precise, and modifying the assumptions may significantly affect the values derived. In addition, fair values established utilizing alternative valuation techniques may or may not be substantiated by comparison with independent markets. Further, fair values may or may not be realized if a significant portion of the financial instruments were sold in a bulk transaction or a forced liquidation. Therefore, any aggregate unrealized gains or losses should not be interpreted as a forecast of future earnings or cash flows. Furthermore, the fair values disclosed should not be interpreted as the aggregated current value of the Company.

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:

Cash and cash equivalent

The carrying amounts reported in the Consolidated Balance Sheets for this item approximate fair value.

Federal Home Loan Bank Stock

The fair value of FHLB stock is defined as the carrying amount and periodically evaluated for impairment based on the ultimate recovery of par value.

Loans Receivable

The fair value of loans is estimated by discounting the future cash flows using the current rate at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. An additional liquidity discount is also incorporated to more closely align the fair value with observed market prices.

Loans held for sale

Loans held for sale are required to be measured based on the lower of cost or fair value. 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. There were no loans held for sale at September 30, 2009.

Impaired loans

The fair value of an impaired loan is estimated using one of several methods, including collateral value and discounted cash flows. Those impaired loans not requiring an impaired valuation allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. When the fair value of the collateral is based on an observable market price or a current appraised value, we record the impaired loan at Level 2.

Real estate owned

REO is measured at fair value less the estimated cost to sell. The fair value of REO at September 30, 2009 was determined either by appraisals or independent valuations that were then adjusted for the cost related to liquidation of the subject property, or by sales agreement.

Deposits

The fair value of deposits with no stated term, such as regular passbook accounts, money market accounts and checking accounts, is defined as the carrying amounts reported in the Consolidated Balance Sheets. The fair value of deposits with 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. For long-term 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. The fair value of the $150.0 million holding company debt was determined based on the tender offer price.

The following table presents the carrying amounts and estimated fair values of financial instruments at September 30, 2009.

	Carrying Amount		Fair Value
	(In thousands)
ASSETS
Cash and cash equivalents	$	298,661	$	298,661
Loan receivable		5,464,538		5,374,800
Real estate owned		175,725		175,725
FHLB stock		115,150		115,150

LIABILITIES
Deposits	$	4,524,487	$	4,581,555
Short-term borrowings		600,000		600,000
Long-term borrowings		850,000		750,394

The Financial Accounting Standards Board ("FASB") has issued an accounting standard which 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 table represents fair value information for financial instruments measured at fair value at September 30, 2009:

	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
	(In thousands)
Non-Recurring Items:
Non-accrual impaired loans	$	169,516		$	—		$	169,516		$	—
Other impaired loans		12,812			—			12,812			—
Real estate owned		175,725			—			175,725			—
Total	$	358,053		$	—		$	358,053		$	—

12. Stock Options and Restricted Stock

Stock Options

At September 30, 2009, the Company had options outstanding issued under its 1994 Stock Option and Appreciation Rights Plan (“1994 Plan”), a share-based compensation program. Options granted under the 1994 Plan are vested over a nine year period and have a maximum contractual term of 10 years. At September 30, 2009, the number of shares authorized for option awards under the 1994 Plan totaled 1,713,375.

Options under the share-based compensation program 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 Company recorded stock-based compensation expense related to stock options of $300 thousand and $900 thousand for the third quarter and the nine months ended September 30, 2009, respectively. For the third quarter and the nine months ended September 30, 2008, the Company recorded such stock-based compensation expense of $426 thousand and $1.4 million, respectively.

There were no options granted under the 1994 Plan during the nine months ended September 30, 2009. The weighted average fair value of options granted under the 1994 Plan during the first quarter of 2008 was $10.91 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 following is a summary of stock option transactions for the nine months ended September 30, 2009:

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

Outstanding at January 1, 2009		848,807		$	42.32
Granted		—			—
Exercised		—			—
Forfeited		(43,610	)		52.58
Outstanding at September 30, 2009		805,197		$	41.76		4.80	$	—
Exercisable at September 30, 2009		446,928		$	33.33		5.93	$	—

There were no options exercised during the third quarter or the nine months ended September 30, 2009. The total intrinsic value of options exercised during the first nine months of 2008 was $445 thousand. Cash received from options exercised during the first nine months of 2008 was $529 thousand. No options were exercised during the third quarter of 2008.

As of September 30, 2009, the unearned compensation cost related to non-vested stock options totaled $1.8 million to be recognized over a weighted average period of 3.2 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. Of each grant, 50% of the restricted shares will vest on the one-year anniversary date of the issuance and the remaining 50% will vest on the third-year anniversary date of the issuance. Upon retirement of a non-employee director, any non-vested shares of stock shall automatically vest.

The Company recorded stock-based compensation expense of $79 thousand related to restricted stock for the nine months ended September 30, 2009. For the nine months ended September 30, 2008, the Company recorded such stock-based compensation expense of $305 thousand, net of tax.

There were no restricted shares issued to non-employee directors during the nine months ended September 30, 2009. The Company issued 1,670 shares of restricted stock to each of the seven non-employee directors during the first quarter of 2008.

The following is a summary of transactions in the Company’s non-vested restricted stock as of September 30, 2009.

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

Outstanding at January 1, 2009		14,390		$	41.92
Granted		—
Vested		(8,545	)	$	45.93
Forfeited		—
Outstanding at September 30, 2009		5,845		$	36.07

The total fair value of the restricted stock awards that vested during the nine months ended September 30, 2009 was $14 thousand.

As of September 30, 2009, the total unrecognized compensation cost related to non-vested restricted awards totaled $185 thousand to be recognized over a weighted average period of 9 months.

13. 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 September 30,				Nine months ended September 30,
	2009		2008		2009		2008
	(Dollars in thousands)

Service cost	$	63	$	86	$	189	$	258
Interest cost		221		257		663		771
Amortization of net loss		—		190		—		570
Net periodic benefit cost	$	284	$	533	$	852	$	1,599

Weighted Average Assumptions
Discount rate	6.25%	6.25%	6.25%	6.25%
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

14. Recent Accounting Pronouncements

In July 2009, the FASB Accounting Standards CodificationTM (Codification) became the single source of authoritative non-SEC U.S. generally accepted accounting principles (GAAP) for non-governmental entities. The Codification is effective for financial statements for interim and annual periods ending after September 15, 2009. For periods ending after September 15, 2009 any references to specific accounting guidance must be Codification references.

In June 2009, the FASB issued an accounting standard to improve how enterprises account for and disclose their involvement with variable interest entities (VIEs), which are special-purpose entities, and other entities whose equity at risk is insufficient or lack certain characteristics. Among other things, the standard changes how an entity determines whether it is the primary beneficiary of a VIE and whether that VIE should be consolidated. The standard requires an entity to provide significantly more disclosures about its involvement with VIEs. As a result, the Company must comprehensively review its involvements with VIEs and potential VIEs, including entities previous considered to be qualifying special purpose entities, to determine the effect on its consolidated financial statements and related disclosures. The standard is effective as of the beginning of a reporting entity’s first annual reporting period that begins after November 15, 2009 and for interim periods within the first annual reporting period. Earlier application is prohibited. The Company does not believe that the adoption of this guidance will have a significant effect on its consolidated financial statements.

In June 2009, the FASB issued an accounting standard that changes the derecognition guidance for transferors of financial assets, including entities that sponsor securitizations, to align that guidance with other guidance. The standard also eliminates the exemption from consolidation for qualifying special-purpose entities (QSPEs). As a result, all existing QSPEs need to be evaluated to determine whether the QSPE should be consolidated. The standard is effective as of the beginning of a reporting entity’s first annual reporting period beginning after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. The recognition and measurement provisions of this standard must be applied to transfers that occur on or after the effective date. Early application is prohibited. The standard also requires additional disclosures about transfers of financial assets that occur both before and after the effective date. The Company does not believe that this guidance will have a significant effect on its financial statements.

In May 2009, the FASB issued an accounting standard to incorporate the accounting and disclosure requirements for subsequent events into U.S. generally accepted accounting principles. This standard introduces new terminology, defines a date through which management must evaluate subsequent events, and lists the circumstances under which an entity must recognize and disclose events or transactions occurring after the balance-sheet date. The Company adopted this standard as of June 30, 2009, which was the required effective date. The Company evaluated its September 30, 2009 financial statements for subsequent events through November 13, 2009, the date the financial statements were available to be issued. A subsequent event is disclosed in Note 2 of the Notes to these Consolidated Financial Statements.

In April 2009, the FASB issued accounting standards to require disclosures about fair value of financial instruments for interim reporting periods of publicly-traded companies as well as in annual financial statements. This standard also amended existing guidance to require those disclosures in summarized financial information at interim reporting periods. This standard is effective for interim periods ending after June 15, 2009. Fair value information for the Company is presented in Note 11 of the Notes to these Consolidated Financial Statements.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following narrative is written with the presumption that the users have read the 2008 Annual Report on Form 10-K of FirstFed Financial Corp. (the “Company”), 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, 2008 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 website 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, the Company’s periodic and current reports are available free of charge on the Company’s website at www.firstfedca.com as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC.

Consolidated Balance Sheets

At September 30, 2009, the Company, the holding company for First Federal Bank of California and its subsidiaries ("Bank"), 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.

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”. The Company and the Bank are operating under Amended Orders to Cease and Desist (“Amendments”) issued by the Office of Thrift Supervision (“OTS”) on May 28, 2009. As required by the Amendments, the Company and the Bank have submitted a detailed capital plan to the OTS addressing how the Bank expected to meet and maintain a Tier 1 Core Capital ratio of 7% and a minimum Total Risk-Based Capital Ratio of 14% by September 30, 2009. The capital plan addressed how the Bank will meet and maintain the foregoing capital ratios and provides for the augmentation of capital to, among other things, support the Bank's business strategy and operations. The Bank failed to meet these required capital ratios, and, accordingly, as required by the Bank 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.

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 compared to $1.3 billion during the nine months ended September 30, 2008. The Bank curtailed its lending efforts in January of 2009 based on the original Order to Cease and Desist issued by the OTS on January 26, 2009.

The net loss 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 51% of the Bank’s non-performing assets have already been adjusted to fair market value less estimated selling costs.

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, there were 1,960 loans with balances totaling approximately $907.3 million that were scheduled to recast during the year 2008 alone. The total portfolio of loans scheduled to recast has fallen from $2.1 billion at September 30, 2008 to $824.1 million at September 30, 2009.

Single family loans less than 90 days delinquent were $74.7 million at September 30, 2009 compared to $109.2 million at June 30, 2009, $208.2 million at December 31, 2008 and $212.1 million at September 30, 2008. 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.

Non-performing assets increased to $567.7 million or 9.23% of total assets at September 30, 2009 compared to $521.5 million or 7.00% at December 31, 2008 and $579.1 million or 7.87% at September 30, 2008. The increase in non-performing assets over the last year was due to single family REO which grew to $175.7 million at September 30, 2009 from $117.7 million at December 31, 2008 and $133.0 million at September 30, 2008. The increase in single family REO resulted from: (1) the highest level of unemployment in California since 1940, (2) the inability of borrowers to afford their loan payments after recast, (3) the inability of borrowers to refinance their loans due to tighter credit and more stringent underwriting standards by mortgage lenders and (4) the continued overall weakness in the California real estate market. It is Bank’s policy to record REO based on fair market value less estimated selling costs.

Non-performing assets also included non-accrual loans, which were mostly comprised of single family loans over the last year. Single family non-accrual loans were $389.2 million at September 30, 2009 compared to $403.8 million at December 31, 2008 and $445.2 million at September 30, 2008. Single family non-accrual loans at September 30, 2009, December 31, 2008 and September 30, 2008 included $95.8 million, $14.8 million and $7.0 million in loans which were current, but for which the Bank had capitalized interest into the loan balance as part of the modification process. It is the Bank’s policy that these loans remain in non-accrual loans until the loans have performed by making all contractual payments required by their loan for six months.

Despite the inclusion of loans with capitalized interest, single family non-accrual loans decreased due to the Bank’s proactive efforts to modify loans before they reach their maximum allowed negative amortization or are otherwise subject to recast. Continued increases in the California unemployment rate could have a negative effect on this trend. Non-accrual loans at September 30, 2009, December 31, 2008 and September 30, 2008 included $113.9 million, $134.9 million and $18.9 million, respectively, of severely delinquent non-accrual loans which were written down to net collateral value less estimated costs to liquidate.

With its modification program, the Bank has been focusing on modifying loans for the last seven quarters to lessen the number of loans at risk for foreclosure due to payment recast. Modified loans totaled $1.2 billion net of valuation allowances as of September 30, 2009. Of these modified loans, $1.2 billion net of valuation allowances were considered troubled debt restructurings (“TDRs”). The other $34.9 million in adjustable rate mortgages modified as of September 30, 2009 were not considered TDRs and therefore no valuation allowances were established. Modified loans totaled $590.4 million as of December 31, 2008 and $516.3 million as of September 30, 2008.

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

In a press release dated October 7, 2009, the California Association of Realtors (CAR) projected that, at the end of 2009, the median price of an existing home in the state of California will have fallen by 21.8% from the 2008 level. A minor increase of 3.3% is projected for 2010 unless there is a heavier than expected wave of foreclosures which causes the inventory of unsold homes to increase. CAR projects that sales of existing single family homes for the year 2009 will be 22.8% higher than in 2008 due to affordable home prices, tax credits for first-time homebuyers and low interest rates. However, sales activity is projected to decrease by 2.3% during 2010 due to continued challenges in the California labor market, the inability of homebuyers to secure financing and concerns about the reliability of real estate values. The UCLA Forecast for California, September 2009 Report, projects that the California economy will start growing in 2011, but not enough to drive the unemployment rate below 10% until the end of 2011 because the California economy will likely not produce enough jobs for new entrants to the labor force over the next couple of years.

Lending Activities

The following table shows the components of the loan portfolio by type at the dates indicated:

	September 30, 2009		December 31, 2008		September 30, 2008
	(In thousands)
REAL ESTATE LOANS:
First trust deed residential loans
One-to-four units	$	3,654,209	$	4,378,731	$	4,521,889
Five or more units		1,835,117		1,936,286		1,857,634
Residential loans		5,489,326		6,315,017		6,379,523

OTHER REAL ESTATE LOANS:
Commercial and industrial		130,529		148,841		149,901
Second trust deeds		2,607		4,201		2,021
Other		4,169		1,953		4,212
Real estate loans		5,626,631		6,470,012		6,535,657

NON-REAL ESTATE LOANS:
Deposit accounts		1,108		1,354		1,330
Commercial business loans		51,398		79,378		92,605
Consumer loans		33,590		33,661		32,139
Loans receivable		5,712,727		6,584,405		6,661,731

LESS:
General valuation allowances		156,309		280,185		221,360
Valuation allowances for impaired loans		87,739		46,735		42,732
Deferred loan origination costs, net		4,141		2,799		1,933
Loans receivable, net	$	5,464,538	$	6,254,686	$	6,395,706

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

	Nine months ended September 30,
	2009		2008
	(In thousands)
Single family real estate	$	29,508	$	767,313
Single family loans purchased		402		6,484
Multi-family and commercial real estate		68,248		450,763
Other		9,808		31,676
Total	$	107,966	$	1,256,236

Loan originations decreased by 91% during the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008 due to the Bank’s suspension of lending for the its own portfolio.

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

	Nine months ended September 30,
	2009		2008
	(In thousands)
Verified Income/Verified Asset	$	29,508	$	761,944
Stated Income/Verified Asset		—		5,369
Total	$	29,508	$	767,313

On Verified Income/Verified Asset loans (VIVA), the borrower includes information on his/her income and assets, which is then verified. 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-value ratios on NINA loans.

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

The creditworthiness of the borrower is based on the borrower’s FICO score, prior use of and repayment of credit, job history and stability. The average borrower FICO score and average loan-to-value (“LTV”) ratio on single family loan originations were 758 and 64.7%, respectively, during the nine months ended September 30, 2009, compared to 754 and 65.9%, respectively, for the comparable 2008 period.

At September 30, 2009, 64.4% of the Bank’s loan portfolio was invested in adjustable rate products. Loans with interest rates that adjust monthly based on the 3-Month Certificate of Deposit Index (“CODI”) comprised 12.3% of the loan portfolio. Loans with interest rates that adjust monthly based on the 12-month average U.S. Treasury Security rate (“12MAT”) comprised 25.7% of the loan portfolio. Loans with interest rates that adjust monthly based on the Federal Home Loan Bank (“FHLB”) Eleventh District Cost of Funds Index (“COFI”) comprised 25.9% of the loan portfolio. Loans with interest rates that adjust monthly based on the London Inter-Bank Offering Rate (“LIBOR”) and other indices comprised 0.5% of the loan portfolio.

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

	Nine months ended September 30,
	2009		2008
	(In thousands)
12MAT	$	24,032	$	17,808
COFI		54,959		57,634
Other		9,808		37,611
Hybrid and Fixed		19,167		1,143,183
Total	$	107,966	$	1,256,236

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

	September 30, 2009		December 31, 2008		September 30, 2008
Documentation Type:			(In thousands)
Verified Income/Verified Asset	$	2,660,809	$	2,383,688	$	2,192,511
Stated Income/Verified Asset (1)		457,519		867,098		1,004,974
Stated Income/Stated Asset (1)		396,318		830,818		977,700
No Income/No Asset (1)		139,563		297,127		346,704
Total	$	3,654,209	$	4,378,731	$	4,521,889

(1) As part of the loan modification process, an aggregate of $1.0 billion of loans originated in these low documentation categories have become fully documented.

In the past, when the Bank originated loans with low documentation requirements, the Bank attempted to mitigate the inherent risk of making reduced documentation loans by evaluating the other characteristics of the loan, such as the creditworthiness of the borrower and the LTV ratio 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. If the loans have been modified, the Bank obtains and verifies the borrower’s income.

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 at the dates indicated:

	September 30, 2009					December 31, 2008					September 30, 2008
	LTV Ratio			FICO Score		LTV Ratio			FICO Score		LTV Ratio			FICO Score
Verified Income/Verified Asset		67.7	%		714		67.3	%		713		67.4	%		710
Stated Income/Verified Asset		66.1			710		68.4			711		69.2			711
Stated Income/Stated Asset		70.2			708		72.4			711		72.6			711
No Income/No Asset		60.1			724		64.2			726		65.0			726
Total Weighted Average		67.4	%		713		68.2	%		713		68.6	%		712

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

	September 30, 2009		December 31, 2008		September 30, 2008
FICO Score at Origination:			(In thousands)
<620	$	21,987	$	24,481	$	24,606
620-659		264,479		330,096		352,102
660-719		1,443,248		1,784,932		1,927,844
>720		1,886,685		2,198,022		2,175,160
Not Available		37,810		41,200		42,177
Total	$	3,654,209	$	4,378,731	$	4,521,889

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

	September 30, 2009		December 31, 2008		September 30, 2008
Original LTV Ratio:			(In thousands)
<65%	$	850,185	$	949,119	$	922,295
65-70%		476,456		535,765		539,725
70-75%		520,526		606,856		617,812
75-80%		1,638,678		2,047,508		2,161,945
80-85%		31,099		46,797		53,881
85-90%		103,385		153,273		182,318
>90%		33,880		39,413		43,913
Total	$	3,654,209	$	4,378,731	$	4,521,889

The following table shows the composition of the Bank’s single family loan portfolio at September 30, 2009 by estimated current LTV ratio:

	Loan Balance		% of Portfolio			Average Current LTV Ratio
Current LTV Ratio Price Adjusted (1):	(In thousands)
<65%	$	593,012		16.2	%		42.7	%
65 - 70%		129,198		3.5			67.5
70 - 75%		208,874		5.7			73.2
75 - 80%		189,075		5.2			77.9
80 - 85%		226,937		6.2			82.9
85 - 90%		264,467		7.2			87.3
>90%		1,900,119		52.0			111.1
Partially charged off		133,218		3.7			100.0
Not in MSAs		9,309		0.3			N/A
Total	$	3,654,209		100.0	%		79.9	%

(1) The current estimated loan to value ratio is based on Federal Housing Finance Agency (“FHFA”) June 2009 data. The FHFA 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 FHFA 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 required 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 own funds. At September 30, 2009, 63% of loans with mortgage insurance were insured by the Republic Mortgage Insurance Company (RMIC), and 37% 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 September 30, 2009, December 31, 2008 and September 30, 2008, loans with co-insurance totaled $70.6 million, $110.4 million, and $133.3 million, respectively. Loans with initial loan-to-value ratios greater than 80% with no private mortgage insurance totaled $97.8 million at September 30, 2009, $129.1 million at December 31, 2008 and $146.8 million at September 30, 2008.

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

	September 30,				December 31,				September 30,
	2009				2008				2008
	(Dollars in thousands)
Los Angeles County	$	1,107,597	30.3	%	$	1,233,889	28.2	%	$	1,224,568	27.1	%
Bay Area		635,366	17.4			768,262	17.5			785,080	17.4
Central California Coast		495,458	13.6			598,268	13.7			612,533	13.5
Orange County		417,113	11.4			479,464	10.9			478,161	10.6
San Diego Area		359,058	9.8			441,631	10.1			471,140	10.4
San Bernardino/Riverside		225,537	6.2			296,624	6.8			321,616	7.1
Sacramento Valley		144,048	3.9			197,861	4.6			222,163	4.9
San Joaquin Valley		136,221	3.7			194,741	4.4			227,129	5.0
Other		133,811	3.7			167,991	3.8			179,499	4.0
Total	$	3,654,209	100.0	%	$	4,378,731	100.0	%	$	4,521,889	100.0	%

The following table shows the composition of the Bank’s single family loan portfolio by year of origination as of September 30, 2009 (dollars in thousands):

2003 and Prior	$	266,780	7.3	%
2004		468,873	12.8
2005		1,076,142	29.4
2006		677,979	18.6
2007		300,003	8.2
2008