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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 1995
OR
TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 1-9594
UNIONFED FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 95-4074126
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1055 W. Seventh Street, Suite 100
Los Angeles, California 90017
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (213) 688-8417
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No
----- -----
As of October 31, 1995, 27,201,993 shares of the Registrant's $.01 par value
common stock were outstanding.
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UNIONFED FINANCIAL CORPORATION
INDEX
PAGE
PART I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Financial Condition 3
(unaudited) as of September 30, 1995 and
June 30 1995
Consolidated Statements of Operations (unaudited) 4
for the three month periods ended
September 30,1995 and 1994
Consolidated Statements of Cash Flows (unaudited) 5
for the three month periods ended
September 30, 1995 and 1994
Notes to Consolidated Financial Statements 7
(unaudited)
Item 2. Management's Discussion and Analysis of 8
Financial Condition and Results of Operations
PART II. Other Information (omitted items are inapplicable) 21
Item 1. Legal Proceedings
SIGNATURES 23
2
UNIONFED FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION - UNAUDITED
(DOLLARS IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
September 30, June 30,
1995 1995
------------- ---------
ASSETS
Cash and cash equivalents $1,975 $5,802
Investment securities, net -- 2,499
Loans receivable 5,034 2,744
Valuation allowance for possible credit losses (400) (500)
Interest receivable 33 91
Real estate, net 24,762 24,982
Investment in Federal Home Loan Bank stock, at cost 163 100
Premises and equipment, net 323 343
Other assets 921 1,095
------- -------
$32,811 $37,156
------- -------
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Savings deposits $30,777 $34,170
Accounts payable and accrued liabilities 782 594
Deferred income taxes 391 391
------- -------
Total liabilities 31,950 35,155
Commitments and contingencies -- --
Stockholders' equity
Preferred stock-par value $.01 per share; authorized,
1,000,000 shares, issued and outstanding, none -- --
Common stock-par value $.01 per share; authorized
60,000,000 shares, issued and outstanding,
27,201,993 shares (1994) 272 272
Additional paid-in capital 107,943 107,943
Accumulated deficit (107,354) (106,214)
---------- ----------
Total stockholder's equity 861 2,001
---------- ----------
$32,811 $37,156
---------- ----------
---------- ----------
3
UNIONFED FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Three Months Ended
September 30,
1995 1994
------- -------
Interest on loans $74 $10,708
Interest on mortgage-backed securities -- 2,900
Interest and dividends on investments 59 1,342
------- -------
Total interest income 133 14,950
------- -------
Interest on savings deposits 435 8,051
Interest on borrowings -- 293
------- -------
Total interest expense 435 8,344
------- -------
Net interest income( loss) before provision
for estimated loan losses (302) 6,606
Provision for estimated loan losses (100) 3,859
------- -------
Net interest income( loss) after provision
for estimated loan losses (202) 2,747
------- -------
Non-interest income:
Gain on sales of loans and loan servicing 163 135
Gain/(loss) on sales of mortgage-backed
securities and investment securities -- 8
Loan servicing fees, net -- 239
Loan fees -- 106
Loss on sale of branches (364) --
Other, net 117 544
------- -------
Total non-interest income (84) 1,032
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Non-interest expense:
Compensation and related expenses 246 2,858
Premises and occupancy 119 1,111
SAIF insurance premium 66 627
Other general and administrative 286 2,199
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Total general and administrative expense 717 6,795
Real estate operations, net 132 438
Core deposit intangible amortization -- 222
------- -------
Total non-interest expense 849 7,455
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Loss before income taxes (1,135) (3,676)
Income tax expense (benefit) 5 --
------- -------
NET LOSS ($1,140) ($3,676)
------- -------
------- -------
Net loss per common share ($0.04) ($0.14)
------- -------
------- -------
4
UNIONFED FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(DOLLARS IN THOUSANDS)
Three Months Ended
September 30,
1995 1994
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($1,140) ($3,676)
Adjustments to reconcile net loss to cash provided by
operating activities:
Net decrease in loan fees and discounts -- (244)
Depreciation and amortization 20 656
Provisions for loan and real estate losses (155) 3,994
(Gain)/loss on sale of investment securities and
mortgage-backed securities, net -- (8)
(Gain)/loss on sales of loans and loan servicing (163) (135)
(Gain)/Loss on sale of real estate -- 8
Gain(Loss) on sales of branches (364) --
Federal Home Loan Bank stock dividends (63) (75)
Loans originated and purchased, held for sale -- (42,870)
Proceeds from sales of loans, held for sale -- 25,856
Decrease in interest and dividends receivable 58 230
Decrease/(increase) in prepaid expenses and other assets 174 1,045
Increase/(decrease) in interest payable 138 44
Increase/(decrease) in accounts payable and accrued liabilities 50 17
-------- --------
Net cash used in operating activities (1,794) (15,158)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of investment securities -- 968
Proceeds from sale of investment securities available for sale 2,499 --
Principal reductions on mortgage-backed securities -- 3,312
Principal reductions on loans 10 9,438
Purchases of mortgage-backed securities -- (30,519)
Purchases of mortgage-backed securities, available for sale -- (2,000)
Proceeds from sale of mortgage-backed securities,
available for sale -- 6,733
Loans originated and purchased, held for investment (2,299) (6,810)
Net change in undisbursed loan funds -- (139)
Acquisitions of real estate -- (713)
Proceeds from disposition of real estate 91 10,042
Other, net 1,059 6
-------- --------
Net cash (used in) provided by investing activities 1,360 (9,862)
-------- --------
5
UNIONFED FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED (CONTINUED)
(DOLLARS IN THOUSANDS)
Three Months Ended
September 30,
1995 1994
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase/(decrease) in deposits (3,393) 332
Proceeds from short-term borrowings -- 74,806
Repayment of short-term borrowings -- (63,456)
-------- --------
Net cash provided by (used in)
financing activities (9,652) 11,682
-------- --------
Net (decrease) increase in cash and cash equivalents 3,827 (13,338)
Cash and cash equivalents at beginning of period 5,802 38,091
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $1,975 $24,753
-------- --------
-------- --------
SALE OF BRANCHES:
Loans and mortgage-backed securities $ -- $ --
Premises and equipment -- --
Excess of cost over net assets acquired -- --
Other assets -- --
Deposits -- --
Other liabilities -- --
Gain on sale (364) --
-------- --------
Net cash used by sale of branches, net
$ (364) $ --
-------- --------
-------- --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest (net of amount capitalized) $297 $8,333
Delaware franchise tax 5 --
Non-cash Investing and Financing activities:
Additions to real estate acquired in
settlement of loans -- 4,265
Loans exchanged for mortgage-backed securities
-- 4,732
6
UNIONFED FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
1- In the opinion of the Company, the accompanying consolidated financial
statements contain all adjustments necessary to present fairly the
financial condition as of September 30, 1995 and June 30, 1995, the
results of operations for the three month periods ended September 30, 1995
and 1994, and the cash flows for the three month periods ended September
30, 1995 and 1994. The results of operations for the three month period
ended September 30, 1995, are not necessarily indicative of operations to
be expected for the entire year.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and, therefore do
not include all information and footnotes necessary for a fair presentation
of financial condition, results of operations and statement of cash flows
in conformity with generally accepted accounting principles. Item 2,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", is written with the presumption that the users of the interim
financial statements have read or have access to the most recent 10-K
report that 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 June 30, 1995, and for the year
then ended.
2- The Company has adopted FASB Statement of Financial Accounting Standards
No. 114 "Accounting for Impairment of a Loan" (SFAS 114) and No. 118
"Accounting by Creditors for Impairment of a Loan-Income Recognition and
Disclosures" (SFAS 118) effective July 1, 1995. Accordingly, all impaired
loans are carried at fair value of the collateral, and any valuation
adjustments have been reflected through the provision for loan losses. The
adoption of SFAS 114 and SFAS 118, applied prospectively as of July 1,
1995, has not had a material effect on the Company's financial statements.
7
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
UNIONFED Financial Corporation, (the "Company") parent of Union Federal Bank,
a federal savings bank (the "Bank") reported a net loss of $1.1 million or
($0.04) per share for the first quarter ended September 30, 1995. This
compares to a loss of $3.7 million or ($0.14) per share in the corresponding
quarter during fiscal year 1994. The loss for the September 1995 quarter
was primarily due to negative net income of $302 thousand and additional
losses of $364 thousand, related to the June 1995, Glendale Federal
transaction and other administrative expenses.
In order to comply with a prompt corrective action directive (the "Directive")
of the Office of Thrift Supervision ("OTS") requiring a sale, merger or
recapitalization transaction, the Bank in June 1995 completed two significant
transactions. First, the Bank sold approximately $136 million of its classified
commercial, industrial and multi-family loan and real estate portfolio (the
"Asset Sales"), principally to "bulk sale" institutional buyers, for cash
proceeds of $101 million, including a $3.6 million holdback of funds held in
escrow accounts for potential representation and warranty breaches. Second, the
Bank sold 13 of its 14 retail banking offices and approximately $820 million of
related deposit liabilities to Glendale Federal Bank, a federal savings bank
("Glendale Federal"). At closing the Bank transferred cash and other assets,
principally single family and non-classified commercial and multi-family real
estate loans valued at Union Federal's book value, to Glendale Federal in an
amount necessary to offset the deposit and other liabilities assumed by Glendale
Federal . The Bank received a $6.9 million purchase price for the transfer plus
a right to receive a contingent payment based upon the actual performance of
certain multi-family, commercial and industrial real estate loans transferred to
Glendale Federal to the extent that such loans are repaid or other wise resolved
by June 30, 1998.
Following the Asset Sales and the Glendale Federal transaction, the Bank has
continued its business through its downtown Los Angeles retail banking office.
Under its agreement with Glendale Federal, the Bank is prohibited until June 23,
1998 from opening additional branches using the Union Federal
or UnionFed name without Glendale Federal's consent. At September 30, 1995, the
Company had deposits of $30.8 million and a net worth of $861 thousand. At
September 30, 1995, the Bank had core capital of 2.33%, Tier 1 risk-based
capital of 2.46% and total risk-based capital of 3.23%. The Bank was
considered a "significantly undercapitalized" savings institution as of
September 30, 1995. See "FDICIA Prompt Corrective Action Requirements" below.
The potential sources for generating a future return for the Company's
stockholders primarily consist of the gain, if any, realized upon the
disposition of the classified assets retained by the Bank, the contingent
consideration, if any, to be received form Glendale Federal in 1998 and any
consideration received from the sale of the Company's business operations. The
Company is waiting on the final review of the refund claim and tax examination,
which may result in a refund form the Internal Revenue Service in the amount of
$1.0 million. The Company has been advised that the refund has been approved at
the field examination level and is being reviewed by senior Internal Revenue
Service personnel. The Company expects that this refund, if any, would be paid
in the fourth quarter of calendar 1995 or first quarter of calendar 1996. There
can be no assurance that this refund will be approved and paid or that the
Company will be able to provide any future return to stockholders. The
Company's financial condition for the remainder of fiscal 1996 and thereafter
will be principally dependent upon the performance of the Company's remaining
assets, principally its real estate owned and loans. The Company has no
significant resources other than the Bank. At present, the Bank does not have
any other significant income generation capabilities other than income from its
relatively small loan portfolio and realization of its real estate assets.
Given the structure of its balance sheet, the Bank has limited flexibility in
dealing with asset liability management or to improve its earning power.
8
The Company's ability to continue as a going concern will depend in significant
part on factors outside of its control. Since approximately 85% of the Bank's
assets are nonearning real estate assets and a nonperforming loan, the Bank's
interest income will not be sufficient to cover its interest expense for
deposits and general and administrative expenses.
The OTS is requiring the Bank to report monthly regarding its financial
condition, financial projections and the current status of its remaining
assets. To date, the OTS has not required the filing of a capital restoration
plan for the Bank despite its "undercapitalized" status.
Under legislation currently pending in Congress, the Federal Deposit Insurance
Corporation ("FDIC") would be granted authority to impose a one-time special
charge on the deposits of all savings associations, including the Bank, in order
to insure the long term solvency of the Bank Insurance Fund ("BIF") and the
Savings Association Insurance Fund ("SAIF"). In its current form, the
legislation would permit the FDIC to impose an assessment on an institutions'
total insured deposits as of the measurement date, currently March 31, 1995, and
be payable on January 2, 1996. Under the legislation as proposed, the Board of
Directors of the FDIC, in its sole discretion, would have the authority to
exempt any "weak" institution from such special assessment upon application
under criteria to be established by the Board, with the institution continuing
to pay FDIC assessments at June 1995 rates. If the assessment date remains
March 31, 1995, which is prior to the sale of deposits in June 1995 to Glendale
Federal, the special assessment, currently expected to be in the 80 to 90 basis
point range, could be up to $7.7 million for the Bank. If this legislation is
adopted in its current form, the Bank intends to apply for an exemption as a
"weak" institution since the imposition of such a special assessment would
deplete the remaining net worth of the Bank and cause it to have a significant
negative net worth relative to its asset size. There can be no assurance that
the FDIC would grant a requested exemption or that it would not determine that a
conservatorship or receivership is appropriate for the Bank.
If the Bank continues to fail to meet its required capital levels, the
operations and future prospects of the Bank will depend principally on
regulatory attitudes and actions at the time, including those of the OTS and
FDIC, within applicable legal constraints. Such failure could result in the
issuance of a cease and desist order or capital directive to the Bank, the
imposition of such operating restrictions as the OTS deems appropriate at the
time, such other actions by the OTS as it may be authorized or required to take
under applicable statutes and regulations and or/ the appointment of a
conservator or receiver for the Bank. In the event that the Bank were to become
"critically undercapitalized", it must be placed in receivership or
conservatorship not later than 90 days thereafter unless the OTS and FDIC
determine that taking other action would better serve the purposes of prompt
corrective action. Such determinations are required to be reviewed at 90-day
intervals, and if the Bank remains critically undercapitalized for more than 270
days, the decision not to appoint a receiver would require certain affirmative
findings by the OTS and FDIC regarding the viability of the institution. See
"FDICIA Prompt Corrective Action Requirements" below.
9
FINANCIAL HIGHLIGHTS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE
For the three months ended September 30 1995 1994
---------- ----------
Net interest income $ (302) $6,606
Provision for losses on loans (100) 3,859
Non-interest income (84) 1,032
Non-interest expense 849 7,455
Loss before income taxes (1,135) (3,676)
Income tax expense (benefit) 5 --
Net Loss (1,140) (3,676)
Loss per share (0.04) (0.14)
Loans originated and purchased 2,299 49,680
Mortgage-backed securities purchased -- 32,519
Loans sold -- 25,720
Mortgage-backed securities sold -- 6,725
Interest rate spread during period (1) 3.91% 3.46%
OTHER INFORMATION 09/30/95 6/30/95
---------- ----------
Total Assets $ 32,811 $ 37,156
Loan portfolio 4,634 2,244
Deposits 30,777 34,170
Stockholders' equity 861 2.001
Nonperforming assets, net 26,689 24,623
Nonperforming assets, net to total assets 81.34% 66.27%
Classified assets to total assets 88.68% 72.47%
End of period interest spread (1) 3.63% 1.85%
- ---------------------------------
(1) Since the Bank's interest bearing deposits are dramatically larger than the
Bank's interest earning
10
assets, the spread is not a meaningful measure of earnings capacity at June 30,
1995 or September 30, 1995.
FINANCIAL CONDITION
The Company's consolidated assets totaled $32.8 million at September 30, 1995
compared to $37.2 million at June 30, 1995. Stockholders' equity totaled $861
thousand at September 30, 1995, a reduction of $1.1 million from $2.0 million
at June 30, 1995. The decrease in stockholders' equity is directly attributable
to the net loss for the three month period ended September 30, 1995.
CAPITAL RESOURCES AND LIQUIDITY
The Bank's sources of funds are limited largely to the raising of deposits in
the remaining Los Angeles retail banking office. Under its agreement with
Glendale Federal , the Bank is prohibited from opening additional offices using
the Union Federal or UnionFed name for three years. Some additional funds are
expected to be generated in the future with the sale of the Bank's remaining REO
properties, one of which is currently under contract with specified take-down
requirements.
At September 30, 1995, approximately 85% of the Bank's deposit base was in
time certificates of deposit. The Bank continues to have a customer deposit
base that has allowed it to maintain its deposit levels after the Glendale
Federal transaction, with the exception of a planned decrease in July with the
sale of the IRA accounts and custodial accounts related to the loan servicing
portfolio sold to Glendale Federal.
The principal measure of liquidity in the savings and loan industry is the
regulatory ratio of cash and eligible investments to the sum of withdrawable
savings and borrowings due within one year. The minimum set by federal
regulators is 5%. At September 30, 1995, the Bank's ratio was 6.01% compared
to 13.17% at June 30, 1995 and 8.15% at September 30, 1994. The quarterly
decrease in liquidity was due to the sale of $3.0 million deposits in July
and a required repurchase of a loan from the Asset Sales for $2.9 million
plus interest. These cash outflows, coupled with the Bank's operations
caused the liquidity to drop below the required level in October. The Bank
anticipates compliance with the required level through the raising of
additional deposits and other means before the end of November. No
additional deposit sales or loan repurchases are anticipated. The Bank
intends to maintain liquidity above the required minimum, but its ability to
do so is principally dependent upon its ability to raise deposits.
The primary source of cash for the Company is dividends from the Bank. As long
as the Bank remains "undercapitalized" for regulatory purposes, the OTS cannot
approve any capital distributions (including dividends) except in connection
with a capital-raising transaction by the Bank.
REGULATORY CAPITAL COMPLIANCE
FDICIA established three capital standards for savings institutions: a "leverage
(core) limit," a "tier 1 risk-based limit" and a "total risk-based capital
requirement. Certain assets or portions thereof are required to be deducted
immediately from capital, while the inclusion of others in capital under one or
all of the capital standards is subject to various transitional rules or other
limitations. As of September 30, 1995 the Bank did not meet any of the
components of the regulatory capital requirements and was considered to be
"significantly undercapitalized".
The following is a reconciliation of the Bank's stockholders' equity to federal
regulatory capital, and a
11
comparison of such regulatory capital to the industry minimum requirements of
the OTS, as of September 30, 1995:
Leverage Tier 1 Total
(Core) % Risk Based % Risk Based %
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
GAAP Equity $792 $792 $792
Non-allowable assets:
Investment in Uni-Cal
Financial (25) (25) (25)
Additional capital items:
General loan loss
reserves -- -- 247
------ ------ ------ ------ -------- ------
Bank Regulatory Capital 767 2.33 767 2.46 1,009 3.23
Minimum capital
requirement 1,314 4.00 1,249 4.00 2,497 8.00
------ ------ ------ ------ -------- ------
Capital excess
(deficiency) ($548) (1.67) ($482) (1.54) ($1,489) (3.18)
------ ------ ------ ------ -------- ------
------ ------ ------ ------ -------- ------
FDICIA PROMPT CORRECTIVE ACTION REQUIREMENTS
FDICIA requires the OTS to implement a system requiring regulatory sanctions
against institutions that are not adequately capitalized, with the sanctions
growing more severe the lower the institution's capital. The OTS must establish
specific capital ratios for five separate capital categories: "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized," and "critically undercapitalized."
Under the OTS regulations implementing FDICIA, an institution is treated as well
capitalized if its risk-based capital ratio is at least 10.0%, its ratio of
core capital to risk - weighted assets (the "Tier 1 risk-based capital ratio")
is at least 6.0%, its leverage (core) capital ratio is at least 5.O%, and it is
not subject to any order or directive by OTS to meet a specific capital level.
An institution will be "adequately capitalized" if its risk-based capital ratio
is at least 8.0%, its tier 1 risk-based capital ratio is at least 4.0%, and its
leverage (core) capital ratio is at least 4.0% (3.0% if the institution receives
the highest rating on the CAMEL financial institutions rating system). An
institution whose capital does not meet the amounts required in order to be
adequately capitalized will be treated as "undercapitalized." Additionally, an
institution will be treated as "significantly undercapitalized" if the above
capital ratios are less than 6.0%, 3.0%, or 3.0% respectively. An institution
will be treated as "critically undercapitalized" if its ratio of "tangible
equity" (core capital plus cumulative preferred stock minus intangible assets
other than supervisory goodwill and purchased mortgage servicing rights) to
total assets is equal to or less than 2.0%. At September 30, 1995, the Bank's
ratio of tangible equity to total assets was 2.33%.
MANDATORY SANCTIONS TIED TO PROMPT CORRECTIVE ACTION CAPITAL CATEGORIES:
CAPITAL RESTORATION PLAN. An institution that is undercapitalized must submit a
capital restoration plan to the OTS within 45 days after becoming
undercapitalized. The capital restoration plan must specify the steps the
institution will take to become adequately capitalized, the levels of capital
the institution will attain while the plan is in effect, the types and levels of
activities the institution will conduct, and such
12
other information as the OTS may require. The OTS must act on the capital
restoration plan expeditiously, and generally not later than 60 days after the
plan is submitted. The OTS may approve a capital restoration plan only if the
OTS determines that the plan is likely to succeed in restoring the institution's
capital and will not appreciably increase the risks to which the institution is
exposed. As September 30, 1995, the OTS has not required the Bank to submit a
Capital Restoration Plan, but is requiring monthly meetings with the management
of the institution.
LIMITS ON EXPANSION. An institution that is undercapitalized, even if its
capital restoration plan has been approved, may not acquire an interest in any
company, open a new branch office, or engage in a new line of business unless
the OTS determines that such action would further the implementation of the
institution's capital plan or the FDIC approves the action. An undercapitalized
institution also may not increase its average total assets during any quarter
except in accordance with an approved capital restoration plan.
CAPITAL DISTRIBUTIONS. An undercapitalized savings institution may not pay
dividends or other capital distributions, with the exception of repurchases or
redemptions of the institution's shares that are made in connection with the
issuance of additional shares to improve the institution's financial condition
and that are approved by the FDIC. Undercapitalized institutions also may not
pay management fees to any company or person that controls the institution.
BROKERED DEPOSITS AND BENEFIT PLAN DEPOSITS. An undercapitalized savings
institution cannot accept, renew, or rollover deposits obtained through a
deposit broker, and may not solicit deposits by offering interest rates that are
more than 75 basis points higher than market rates. Savings institutions that
are adequately capitalized but not well capitalized must obtain a waiver from
the FDIC in order to accept, renew, or rollover brokered deposits, and even if a
waiver is granted may not solicit deposits, through a broker or otherwise, by
offering interest rates that exceed market rates by more than 75 basis points.
Institutions that are ineligible to accept brokered deposits can only offer FDIC
insurance coverage for employee benefit plan deposits up to $100,000 per plan,
rather than $100,000 per plan participant, unless, at the time such deposits are
accepted, the institution meets all applicable capital standards and certifies
to the benefit plan depositor that its deposits are eligible for coverage on a
per-participant basis.
RESTRICTIONS ON SIGNIFICANTLY AND CRITICALLY UNDERCAPITALIZED INSTITUTIONS. In
addition to the above mandatory restrictions which apply to all undercapitalized
savings institutions, institutions that are significantly undercapitalized may
not without the OTS's prior approval (a) pay a bonus to any senior executive, or
(b) increase any senior executive officer's compensation over the average rate
of compensation (excluding bonuses, options and profit-sharing) during the 12
months preceding the month in which the institution became undercapitalized. The
same restriction applies to undercapitalized institutions that fail to submit or
implement an acceptable capital restoration plan.
If a savings institution is critically undercapitalized, the institution is also
prohibited from making payments of principal or interest on subordinated debt
beginning sixty days after the institution becomes critically undercapitalized,
unless the FDIC permits such payments or the subordinated debt was outstanding
on July 15, 1991 and has not subsequently been extended or renegotiated. In
addition, the institution cannot without the prior FDIC approval (a) enter into
any material transaction outside the ordinary course of business, (b) extend
credit for any highly leveraged transaction, (c) amend its charter or bylaws,
(d) make any material change in accounting methods, (e) make any loan to an
affiliate, purchase the assets of an affiliate, or issue a guarantee or letter
of credit for the benefit of an affiliate, (f) pay excessive compensation or
bonuses, or (g) pay interest on its liabilities (including deposits) at a rate
that would increase the institution's average cost of funds to a rate
significantly exceeding prevailing rates of interest.
13
Critically undercapitalized savings institutions must be placed in receivership
or conservatorship within 90 days of becoming critically undercapitalized unless
the OTS, with the concurrence of the FDIC, determines that some other action
would better resolve the problems of the institution at the least possible long
term loss to the insurance fund, and documents the reasons for its
determination. A determination by the OTS not to place a critically
undercapitalized institution in conservatorship or receivership must be reviewed
every 90 days and the OTS must either make a new determination or appoint a
conservator or receiver. If the institution remains critically undercapitalized
on average during the calendar quarter beginning 270 days after it became
critically undercapitalized, the OTS must appoint a receiver unless (a) the OTS
determines, with the concurrence of the FDIC, that the institution (i) has
positive net worth, (ii) has been in substantial compliance with an approved
capital restoration plan requiring consistent improvement in the institution's
capital, (iii) the institution is profitable or has an upward trend in earnings
which the OTS determines is sustainable, and (iv) the institution is reducing
its ratio of nonperforming loans to total loans, and (b) the Director of the OTS
and the Chairperson of the FDIC both certify that the institution is viable and
not expected to fail.
DISCRETIONARY SANCTIONS TIED TO PROMPT CORRECTIVE ACTION CAPITAL CATEGORIES:.
OPERATING RESTRICTIONS. With respect to an undercapitalized institution, the
OTS will, if it deems such actions necessary to resolve the institution's
problems at the least possible loss to the insurance fund, have the explicit
authority to:
(a) order the institution to recapitalize by selling shares of capital
stock or other securities,
(b) order the institution to agree to be acquired by another depository
institution holding company or combine with another depository
institution,
(c) restrict transactions with affiliates,
(d) restrict the interest rates paid by the institution on new deposits to
the prevailing rates of interest in the region where the institution is
located,
(e) require reduction of the institution's assets,
(f) restrict any activities that the OTS determines pose excessive risk
to the institution,
(g) order a new election of directors,
(h) order the institution to dismiss any director or senior executive
officer who held office for more than 180 days before the institution
became undercapitalized, subject to the director's or officer's right to
obtain administrative review of the dismissal,
(i) order the institution to employ qualified senior executive officers
subject to the OTS's approval,
(j) prohibit the acceptance of deposits from correspondent depository
institutions,
(k) require the institution to divest any subsidiary or the institution's
holding company to divest the institution or any other subsidiary, or
14
(l) take any other action that the OTS determines will better resolve the
institution's problems at the least possible loss to the deposit
insurance fund.
If an institution is significantly undercapitalized, or if it is
undercapitalized and its capital restoration plan is not approved or implemented
within the required time periods, the OTS shall take one or more of the above
actions, and must take the actions described in clauses (a) or (b), (c) and (d)
above unless it finds that such actions would not resolve the institution's
problems at the least possible loss to the deposit insurance fund. The OTS may
also prohibit the institution from making payments on any outstanding
subordinated debt or entering into material transactions outside the ordinary
course of business without the OTS's prior approval.
The OTS's determination to order one or more of the above discretionary actions
will be evidenced by a written directive to the institution, and the OTS will
generally issue a directive only after giving the institution prior notice and
an opportunity to respond. The period for response shall be at least 14 days
unless the OTS determines that a shorter period is appropriate based on the
circumstances. The OTS, however, may issue a directive without providing any
prior notice if the OTS determines that such action is necessary to resolve the
institution's problems at the least possible loss to the deposit insurance fund.
In such a case, the directive will be effective immediately, but the institution
may appeal the directive to the OTS within 14 days.
RECEIVERSHIP OR CONSERVATORSHIP. In addition to the mandatory appointment of a
conservator or receiver for critically undercapitalized institutions, the OTS or
FDIC may appoint a receiver or conservator for an institution if the institution
is undercapitalized and (i) has no reasonable prospect of becoming adequately
capitalized, (ii) fails to submit a capital restoration plan within the required
time period, or (iii) materially fails to implement its capital restoration
plan.
ASSET / LIABILITY MANAGEMENT
Savings institutions are subject to interest rate risk to the degree that
interest-bearing liabilities reprice or mature more rapidly or on a different
basis than interest-earning assets. However, the Bank's current balance sheet
structure does not allow for meaningful management of interest rate risk. With
89% of the Company's total assets consisting of nonperforming assets, interest
expense will exceed interest income and deposit maturities are managed to
support the workout of real estate assets rather than to manage interest rate
risk.
NET INTEREST INCOME
Net interest income(loss), before provisions for loan losses, was $(302)
thousand for the three month period ended September 30, 1995 compared to $6.6
million for the same period in 1994. The decrease is primarily attributable to
the Asset Sales and the Glendale Federal transaction in June 1995, which were
completed in an effort to comply with a Capital Directive from the OTS.
The during-period spread increased in the three month period ended September 30,
1995 to 3.91% compared to 3.46% at September 30, 1994 and 1.85% at June 30,
1995. The increase is primarily attributable to the composition of the balance
sheet at September 30, 1995, which consists largely of two loans with a rate in
excess of 10% and investments with yields averaging 5.5%. In addition, the
rates paid on deposits during the September quarter decreased with the sale of
the higher costing IRA accounts.
15
NONPERFORMING ASSETS AND IMPAIRED LOANS
Nonperforming assets consist of real estate acquired in settlement of loans and
in-substance foreclosures (collectively, "REO") and nonaccrual loans.
The following table sets forth the amounts of non-performing assets of the Bank
at the dates indicated:
September 30, June 30,
1995 1995
------------- -------------
(DOLLARS IN THOUSANDS)
Nonaccrual loans 2,286 $ --
Real estate owned 35,334 35,609
In-substance foreclosures,
net of undisbursed funds -- --
---------- ----------
Total nonperforming assets $37,620 35,609
---------- ----------
---------- ----------
Specific Reserves - REO (10,931) (10,986)
---------- ----------
Total nonperforming asset, net $26,689 $24,623
---------- ----------
---------- ----------
16
Total assets $32,811 $37,156
---------- ----------
---------- ----------
Nonperforming assets, net as
a percentage of total assets 81.38% 66.27%
NONACCRUAL LOANS
Nonaccrual loans generally represent loans for which interest accruals have been
suspended. At September 30, 1995, nonaccrual loans were $2.3 million, which
consisted of one loan, secured by an economy motel in Arizona, which was
repurchased from one of the "bulk sale" buyers in September. The Bank is in the
process of negotiating a forbearance agreement with the borrower to bring the
loan current and to provide for certain capital improvements on the property.
There were no nonaccrual loans at June 30, 1995.
The Bank's nonaccrual policy provides that interest accruals generally cease
once a loan is past due as to interest or principal for a period of 90 days or
more. Loans may also be placed on nonaccrual status even though they are less
than 90 days past due if management concludes that there is little likelihood
that the borrower will be able to comply with the repayment terms of the loan.
REAL ESTATE OWNED (REO)
REO consists of real estate acquired in settlement of loans and loans accounted
for as in-substance foreclosures. When there is an indication that a borrower
will not make all the required payments on a loan; the borrower no longer has
equity in the property collateralizing a loan; it appears doubtful that equity
will be rebuilt in the foreseeable future; or the borrower has (effectively or
actually) abandoned control of the collateral, the property is considered
repossessed in-substance (in-substance foreclosure). Real estate acquired in
settlement of loans is recorded at the fair value of the collateral, less
estimated selling cost. Subsequently, valuation allowances for estimated losses
are charged to real estate operations expenses if the carrying value of real
estate exceeds estimated fair value. The bank does not accrue interest income on
loans classified as in-substance foreclosure and reported as real estate
acquired in settlement of loans.
REO, net decreased to $24.4 million at September 30, 1995 from $24.6 million at
June 30, 1995. The decrease from June 30, 1995 is primarily attributable to
the receipt of an option payment on Truman Annex under the sales contract and
the write-off of a condominium project in Pacoima for $126 thousand. The
Bank's REO portfolio at September 30, 1995, consists of two properties, $10.44
million of land and marina in a planned development project in Key West, Florida
and $13.96 million of a mixed use retail/garment manufacturing building in Los
Angeles, California
The Bank's investment in the Los Angeles property will continue to increase as
the Bank completes the mandatory capital expenditures to meet the requirements
of the Conditional Use Permit, which was approved in September 1995, subject to
appeal.
17
IMPAIRED LOANS
Effective July 1, 1995, the Company adopted Statement of Financial Accounting
Standards No. 114, "Accounting for Creditors for Impairment of a Loan"("SFAS
114"), as amended be Statement of Financial Accounting Standards No. 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures" ("SFAS 118"). Under SFAS 114, a loan is impaired when it is
"probable" that a creditor will be unable to collect all amounts due (i.e. both
principal and interest) according to the contractual terms of the loan
agreement. The measurement of impairment may be based on (i) the present value
of the expected future cash flows of the impaired loan discounted at the loans'
original effective interest rate, (ii) the observable market price of the
impaired loan, or (iii)the fair value of the collateral of a collateral-
dependent loan. The adoption of SFAS 114, as amended by SFAS 118, had no
material impact on the Company's consolidated financial statements as the
Company's existing policy of measuring loan impairment is consistent with
methods prescribed in these standards.
The Company considers a loan to be impaired when, based upon the current
information and events, it believes it is probable that the Company will be
unable to collect all amounts due according to the contractual terms of the loan
agreement. As the Company's current loan portfolio consists of two major loans
and several loans tied to deposit accounts, the evaluation of impaired loans is
limited to an evaluation of each of the two major loans for consideration of the
impairment criteria.
At September 30, 1995, the carrying value of loans that are considered to be
impaired under SFAS 114 totaled $4.6 million, including a loan for $2.3 million
which is considered nonaccrual. All of the loans are collateral dependent and
therefore measured based upon the fair value of the collateral. At September
30, 1995, the allowance for possible credit losses determined in accordance with
the provisions of SFAS 114, related to loans considered to be impaired under
SFAS 114 totaled $400 thousand. The carrying value of loans considered to be
impaired under SFAS 114 for which there is no related allowance for possible
credit losses amounted to $2.3 million at September 30, 1995. For the three
months ended September 30, 1995, the Company recognized interest income on those
impaired loans of $74 thousand, none of which was recognized using the cash
basis method of income.
At June 30, 1995, the two impaired loans were also classified as substandard
assets. The performing impaired loan carried at $2.3 million is secured by a
155 unit apartment building in Los Angeles, California. The nonperforming
impaired loan is secured by a 179-unit motel in Phoenix, Arizona.
REAL ESTATE HELD FOR INVESTMENT, DEVELOPMENT OR SALE
Real estate held for investment, development or sale at September 30, 1995 is
comprised of the real estate from one of the Bank's former branch offices and
Uni-Cal's wholly owned investments. At September 30, 1995, real estate held for
investment, development or sale totaled $359 thousand, unchanged from June 30,
1995.
ALLOWANCE FOR LOAN AND REAL ESTATE LOSSES
It is the Company's policy to provide an allowance for estimated losses on loans
and real estate when it is probable that the value of the asset has been
impaired and the loss can be reasonably estimated. Loans are generally required
to be carried at the lower of amortized cost or net realizable value. Net
realizable
18
value is the present value of the future cash flows, including the costs of
holding, refurbishment and selling, discounted at the combined cost of debt and
equity for the Bank. REO is carried at the lower of cost or fair value, less
selling costs. Consistent with the asset composition of the Company, the
monitoring system established by the Company to ensure compliance with the above
policies, requires quarterly review of each asset in excess of $500,000. This
review consists of evaluation of the cash flows of the property, along with the
considering the current economic environment surrounding the asset. This
evaluation is generally done by the preparation of internally prepared
discounted cash flow analyses, however based on the results of the review a new
appraisal may be required.
The provision for loan losses was ($100) thousand for the three months ended
September 30, 1995 compared to $3.9 million for the same period in fiscal 1995.
The negative provision for the quarter ended September 30, 1995, was
attributable to an adjustment of the valuation allowance to market of an
impaired loan based on the results of appraisals received during the quarter.
The provisions recorded in the first quarter of fiscal 1995 related to loans
that were sold during the fourth quarter 1995 transactions.
The following table sets forth the Bank's general and specific valuation
allowances for loan and real estate losses at the dates indicated:
September 30, June 30,
1995 1995
------------- ----------
(DOLLARS IN THOUSANDS)
Loan general(1) $ -- $ --
--------- ---------
Loan specific 400 500
--------- ---------
Total loan allowance $ 400 $ 500
--------- ---------
--------- ---------
Real estate general (1) $ -- $ --
Real estate specific 11,460 11,515
----------- -----------
Total real estate allowance $11,460 $10,986
----------- -----------
----------- -----------
Total valuation allowances $11,860 $11,486
----------- -----------
----------- -----------
- ----------------------------
(1) Since specific valuation allowances have been provided for each loan and
real estate asset, no general valuation allowance was recorded at June 30 or
September 30, 1995.
NON-INTEREST INCOME AND EXPENSE
Non-interest income (loss) for the quarter ended September 30, 1995 was ($84)
thousand compared to
19
$1.0 million for the same period in 1994. The quarterly decrease is
attributable to the significant change in the balance sheet with the sales of
deposits and assets in June 1995. The September 1995 quarter included
additional losses attributable to the Glendale Federal transaction of $364
thousand, related to additional costs for the discontinuance of the defined
benefit pension plan, as well as valuation adjustments for miscellaneous assets
purchased. The loss on the sale of branches was offset by recoveries of $164
related to two REO properties sold in the fourth quarter of fiscal 1995. In
addition, the Company paid $30 thousand as settlement of an outstanding lawsuit
in its real estate subsidiary. In addition, the Company recorded $40 thousand
related to the sale of loans in prior years with a shared yield agreement, $40
thousand related to the refund of expenses in prior periods and miscellaneous
other non-recurring recoveries of $65 thousand.
General and administrative expenses decreased to $717 thousand for the quarter
ended September 30, 1995 from $6.8 million for the same period in 1994. This
decrease is attributable to the reduction of the Company's retail offices to one
office and the reduction of staff to 8 full time employees at September 30,
1995. The general and administrative expenses for the quarter ended September
30, 1995 include some costs related to the wind-down of operations from the 14
branch retail banking system and the sale of assets related to the Special
Assets department. The significant non-recurring expenses included in General
and Administrative expenses were $104 thousand of benefit costs related to the
Company's health plan and 401K plan, which were terminated in July and June
1995, respectively, as well as additional compensation expense for accounting
and other personnel through the transition period of approximately $50 thousand,
$25 thousand of legal and title costs related to loans sold during the fourth
quarter of fiscal 1995.
INCOME TAXES
At September 30, 1995, the Company had unused net operating losses (NOL) for
federal income tax and California franchise tax purposes of $102 million and
$105 million, respectively. On August 5, 1994, the Company incurred an
"ownership change" within the meaning of Section 382 of the Internal Revenue
Code ("Section 382"). Section 382 generally provides that if a corporation
undergoes an ownership change, the amount of taxable income that the corporation
may offset after the date of the ownership change (the "change date") with net
operating loss carryforwards and certain built-in losses existing on the change
date will be subject to an annual limitation. In general, the annual limitation
equals the product of (i) the fair market value of the corporation's equity on
the change date (with certain adjustments) and (ii) a long term tax exempt bond
rate of return published by the Internal Revenue Service.
The Section 382 limitation will not have a material impact on the financial
statements of the Company as the Company has not utilized any net operating
losses to offset the reversal of taxable temporary differences. Although the
Section 382 limitation will affect the Company's ability to utilize its net
operating loss carryovers and certain recognized built-in losses, any income tax
benefits attributable to those net operating loss carryovers and recognized
built-in losses will not be available until operations of the Company result in
additional taxable income. The annual amount of the Section 382 limitation
potentially available to the Company has been estimated to approximate $563
thousand per year for a period of 15 years, for a potential NOL utilization of
$8.44 million.
20
UNIONFED FINANCIAL CORPORATION
PART II OTHER INFORMATION
Item 1. Legal Proceedings
The Company is defendant in various legal actions arising in the
ordinary course of business which are not material to the
Company. At September 30, 1995, the Company was involved in the
following additional legal proceedings:
In DOYLE V. HILL AND UNION FEDERAL BANK, the plaintiff alleges
the Bank and a former loan officer conspired with the general
partner of a limited partnership of which the plaintiff was al
limited partner to defraud the plaintiff by misappropriating
construction loan proceeds advanced to the partnership by the
Bank. The court recently granted summary judgement in favor of
the Bank and awarded the Bank over $500,000 in attorneys' fees
payable by the plaintiff. The plaintiff has informed counsel for
the Bank that the plaintiff intends to appeal the judgement
against him.
In HARBOUR PLACE CONDOMINIUMS ASSOC. V. HARBOUR PLACE DEVELOPMENT
CORPORATION, ET. AL., the plaintiff condominium association
alleges a series of purported construction defects in the Harbor
Place condominium project in Key West, Florida. The project was
initially developed an sold by a limited partnership in which a
subsidiary of the Bank was a limited partner and was later
completed and the remaining units sold by a subsidiary of the
Bank after a transfer of the property to such subsidiary in lieu
of foreclosure. The Bank has denied the plaintiff's claims. The
Bank has tendered the plaintiff's claims to its liability
carriers, one of which has accepted the Bank's tender and is
providing defense counsel subject to a reservation of rights
under the Bank's liability policies.
In UNION FEDERAL BANK V. BROADWAY TRADE CENTER, the Bank seeks a
declaratory judgement regarding its possessory right to two
ground leases and one ground sublease affecting the Broadway
Trade Center. In addition to its leasehold interest, the Bank
and its subsidiary hold title to approximately 82% of the
property in fee simple absolute. In the litigation,the Bank
seeks a judgement that its leases are in full force and effect
following the Bank's foreclosure on such leases as security for a
Bank loan made to a former owner. The lessor of such leases
alleges that such leases are in default for various reasons, all
of which the Bank contends are without merit. In addition, the
Bank is seeking a judgement that the Bank is entitled to retain
as liquidated damages the sum of $400,000 deposited wit the Bank
by a former owner of the property pursuant to the terms of an
agreement with such owner which the Bank contends such owner
breached. In a companion case entitled, SECURITY TRUST COMPANY
V. UNION FEDERAL BANK, the plaintiff, representing the lessor of
the three leases at issue in the Broadway Trade Center
litigation, has filed for unlawful detainer and damages with
respect to such leases based on various alleged defaults all of
which the Bank contends are without merit. The plaintiffs have
demanded unpaid rent in the amount of $2.0 million plus an
escalation factor based on the terms of the lease. There can be
no assurance that the Bank will prevail in these matters.
21
In UNION FEDERAL BANK V. LANDMARK INSURANCE CO., the Bank seeks
to recover insurance proceeds from the defendant with respect to
fire damage to the Broadway Trade Center property. The Bank
claims that the defendant improperly distributed approximately $4
million in insurance proceeds directly to the bank's borrower as
owner of the property without notice to the Bank,
notwithstanding that the Bank was named as an additional loss
payee on the insurance policy. The defendant has moved for
summary judgment contending that the statute of limitations is an
absolute bar to the Bank's action.
Item 2. None
Item 3. None
Item 4. None.
Item 5. None
Item 6. Exhibits and Reports on Form 8-K
There were no reports on Form 8-K filed for the three-month
period ended September 30, 1995.
22
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNIONFED FINANCIAL CORPORATION
Date November 13, 1995 By /S/ David S. Engelman
--------------------- ----------------------------------
David S. Engelman
Chairman of the Board and
President
Date November 13, 1995 By /S/ Michelle X. Dean
--------------------- ----------------------------------
Michelle X. Dean
Vice President
Chief Financial Officer
23