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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 December 31, 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 January 31, 1996, 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 December 31, 1995 and
June 30, 1995
Consolidated Statements of Operations (unaudited) 4
for the three and six month periods ended
December 31,1995 and 1994
Consolidated Statements of Cash Flows (unaudited) 5
for the six month periods ended
December 31, 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) 20
Item 1. Legal Proceedings
SIGNATURES 22
2
UNIONFED FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION - UNAUDITED
(DOLLARS IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
December 31, June 30,
1995 1995
------------ ------------
ASSETS
Cash and cash equivalents $4,024 $5,802
Investment securities, net --- 2,499
Loans receivable 4,845 2,744
Valuation allowance for possible credit losses (512) (500)
Interest receivable 57 91
Real estate, net 24,763 24,982
Investment in Federal Home Loan Bank stock, at cost 163 100
Premises and equipment, net 301 343
Other assets 1,355 1,095
--------- ---------
$34,966 $37,156
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Savings deposits $32,385 $34,170
Accounts payable and accrued liabilities 640 594
Deferred income taxes 391 391
--------- ---------
Total liabilities 33,416 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 (106,635) (106,214)
--------- ---------
Total stockholder's equity 1,580 2,001
--------- ---------
$34,996 $37,156
--------- ---------
--------- ---------
3
UNIONFED FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Three Months Ended Six Months Ended
December 31, December 31,
1995 1994 1995 1994
------- ------- ------- -------
Interest on loans $ 78 $10,772 $ 152 $21,480
Interest on mortgage-backed securities --- 3,118 --- 6,018
Interest and dividends on investments 15 1,179 74 2,521
------- ------- ------- -------
Total interest income 93 15,069 226 30,019
------- ------- ------- -------
Interest on savings deposits 508 8,602 943 16,653
Interest on borrowings --- 343 --- 636
------- ------- ------- -------
Total interest expense 508 8,945 943 17,289
------- ------- ------- -------
Net interest income( loss) before provision
for estimated loan losses (415) 6,124 (717) 12,730
Provision for estimated loan losses --- 2,420 (100) 6,279
------- ------- ------- -------
Net interest income( loss) after provision
for estimated loan losses (415) 3,704 (617) 6,451
------- ------- ------- -------
Non-interest income:
Gain on sales of loans and loan servicing 77 664 199 799
Gain/(loss) on sales of mortgage-backed
securities and investment securities --- (32) --- (24)
Loan servicing fees, net --- 252 --- 491
Loan fees --- 68 --- 174
Loss on sale of branchs (80) --- (445) ---
Other, net 16 440 174 984
------- ------- ------- -------
Total non-interest income 13 1,392 (72) 2,424
------- ------- ------- -------
Non-interest expense:
Compensation and related expenses (641) 2,431 (395) 5,289
Premises and occupancy 103 1,086 222 2,197
SAIF insurance premium 27 627 93 1,254
Other general and administrative 382 2,133 668 4,332
------- ------- ------- -------
Total general and administrative expense (129) 6,277 588 13,072
Real estate operations, net (1,002) 1,878 (870) 2,316
Core deposit intangible amortization --- 213 --- 435
------- ------- ------- -------
Total non-interest expense (1,131) 8,368 (282) 15,823
------- ------- ------- -------
Income (loss) before income taxes 729 (3,272) (407) (6,948)
Income tax expense (benefit) 3 4 8 4
------- ------- ------- -------
NET INCOME (LOSS) $ 726 ($3,276) ($415) ($6,952)
------- ------- ------- -------
------- ------- ------- -------
Net income (loss) per common share $0.03 ($0.12) ($0.02) ($0.26)
------- ------- ------- -------
------- ------- ------- -------
4
UNIONFED FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(DOLLARS IN THOUSANDS)
Six Months Ended
December 31,
1995 1994
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($415) ($6,952)
Adjustments to reconcile net loss to cash provided by
operating activities:
Net decrease in loan fees and discounts -- (343)
Depreciation and amortization 41 1,266
Provisions for loan and real estate losses (100) 7,268
(Gain)/loss on sale of investment securities and
mortgage-backed securities, net -- 24
(Gain)/loss on sales of loans and loan servicing (240) (799)
(Gain)/Loss on sale of real estate (1,290) (157)
Gain(Loss) on sales of branches (444) --
Federal Home Loan Bank stock dividends (63) (147)
Loans originated and purchased, held for sale -- (80,632)
Proceeds from sales of loans, held for sale -- 55,426
Proceeds from sales of loan servicing -- 794
Decrease in interest and dividends receivable 34 167
(Increase/decrease in prepaid expenses and other assets (260) 2,071
Increase/(decrease) in interest payable 181 (181)
Decrease in accounts payable and accrued liabilities (135) (243)
Increase in deferred income taxes -- 1
-------- --------
Net cash used in operating activities (2,691) (22,437)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of investment securities -- 3,187
Proceeds from sale of investment securities available for sale 2,499 3,247
Principal reductions on mortgage-backed securities -- 6,471
Principal reductions on loans 13 35,028
Purchases of mortgage-backed securities -- (30,519)
Purchases of mortgage-backed securities, available for sale -- (7,000)
Proceeds from sale of mortgage-backed securities,
available for sale -- 16,488
Loans originated and purchased, held for investment (4,436) (14,629)
Net change in undisbursed loan funds -- (166)
Acquisitions of real estate -- (605)
Proceeds from disposition of real estate 3,905 14,015
Other, net 717 --
-------- --------
Net cash provided by(used in) investing activities 2,698 (9,862)
-------- --------
5
UNIONFED FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED (CONTINUED)
(DOLLARS IN THOUSANDS)
Three Months Ended
December 31,
1995 1994
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) in deposits $(1,785) $(2,913)
Repayment of short-term borrowings -- (754)
Repayment of FHLB Advances -- (8,000)
-------- --------
Net cash provided by (used in) financing activities (1,785) (11,667)
-------- --------
Net (decrease) increase in cash and cash equivalents (1,778) (8,587)
Cash and cash equivalents at beginning of period 5,802 38,091
-------- --------
Cash and cash equivalents at end of period $ 4,024 $29,504
-------- --------
-------- --------
Sale of Branches:
Loans and mortgage-backed securities $ -- $ --
Premises and equipment -- --
Excess of cost over net assets acquired -- --
Other assets -- --
Deposits -- --
Other liabilities -- --
Gain (loss) on sale (444) --
-------- --------
Net cash used by sale of branches, net $ (444) $ --
-------- --------
-------- --------
Supplemental disclosures of cash flow information:
Cash paid for:
Interest (net of amount capitalized) 357 17,515
Delaware franchise tax 3 --
Non-cash Investing and Financing activities:
Additions to real estate acquired in settlement of loans 2,286 6,816
Loans exchanged for mortgage-backed securities -- 9,522
Loans to facilitate the sales of real estate 2,031 1,061
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 December 31, 1995 and June 30, 1995, the
results of operations for the three and six month periods ended December
31, 1995 and 1994, and the cash flows for the six month periods ended
December 31, 1995 and 1994. The results of operations for the three
month period ended December 31, 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 income of $726 thousand or
$0.03 per share for the quarter ended December 31, 1995. This compares to a
loss of $3.3 million or ($0.12) per share in the corresponding quarter during
fiscal year 1994. The net income for the December 1995 quarter was primarily
due to the receipt of $2.0 million resulting from settlements by the Office
of Thrift Supervision (OTS) Enforcement Division related to certain of the
Bank's prior lending relationships. Without the impact of the OTS
settlements, the Bank had an operating loss of $724 thousand for the quarter,
primarily due to net interest expense of $415 thousand and other general and
administrative expenses of $382 thousand. For the six months ended December
31, 1995, the Company reported a net loss of $415 thousand, compared to a loss
of $6.95 million for the equivalent six month period in 1994.
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. These warranties have all expired by December 31, 1995, and the
holdback escrows have been returned to the Bank with the exception of $405
thousand, $395 thousand of which continues to be held in escrow for two
disputed items. 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 otherwise 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 December 31, 1995, the Company
had deposits of $32.4 million and a net worth of $1.58 million. At December
31, 1995, the Bank had core capital of 4.29%, Tier 1 risk-based capital of
4.71% and total risk-based capital of 5.01%. The Bank was considered a
"significantly undercapitalized" savings institution as of December 31, 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 from 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 first half 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
8
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. In addition, one of
the Bank's major assets is subject to ongoing litigation. (See Part II, Item
1. "Legal Proceedings".)
The Company's ability to continue as a going concern will depend in
significant part on factors outside of its control. Since approximately 71%
of the Bank's assets are nonearning real estate assets, 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 solvency of the Savings Association Insurance Fund
("SAIF"). In its current form, the legislation would permit the FDIC to
impose an assessment on an institution's total insured deposits as of the
measurement date, proposed to be March 31,1995. If the legislation is passed
with this assessment date, which is prior to the sale of deposits in June 1995
to Glendale Federal, the special assessment could be up to $7.7 million for
the Bank. 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 this legislation is adopted in its current
form, which is uncertain at this time, the Bank intends to apply for an
exemption as a "weak" institution to avoid this substantial assessment, which
would more than deplete the remaining net worth of the Bank. 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 all of 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 December 31, 1995 1994
-------- --------
Net interest income $ (415) $ 6,124
Provision for losses on loans --- 2,420
Non-interest income 13 1,392
Non-interest expense (1,131) 8,368
Income (loss) before income taxes 729 (3,272)
Income tax expense (benefit) 3 4
Net Income (loss) 726 (3,276)
Income (loss) per share 0.02 (0.12)
Loans originated and purchased 2,073 45,783
Mortgage-backed securities purchased -- 5,000
Loans sold -- 29,756
Mortgage-backed securities sold -- 9,787
Interest rate spread during period (1) (1.27)% 3.16%
For the six months ended December 31, 1995 1994
-------- --------
Net interest income $ (717) $ 12,730
Provision for losses on loans (100) 6,279
Non-interest income (72) 2,424
Non-interest expense (282) 15,823
Loss before income taxes (407) (6,948)
Income tax expense (benefit) 8 4
Net Loss (415) (6,952)
Loss per share (0.03) (0.26)
Loans originated and purchased 4,865 95,261
Mortgage-backed securities purchased -- 37,519
Loans sold -- 55,275
Mortgage-backed securities sold -- 16,512
Interest rate spread during period (1) 2.27% 3.26%
Other Information 12/31/95 6/30/95
-------- --------
Total Assets $ 34,996 $ 37,156
Loan portfolio 4,333 2,244
Deposits 32,385 34,170
Stockholders' equity 1,580 2,001
Nonperforming assets, net 24,404 24,623
Nonperforming assets, net to total assets 69.73% 66.27%
Classified assets to total assets 77.41% 72.47%
End of period interest spread (1) (0.25)% 1.85%
(1) Since the Bank's interest bearing deposits are dramatically larger than
the Bank's interest earning assets, the spread is not a meaningful measure of
earnings capacity at June 30, 1995 or December 31, 1995.
10
FINANCIAL CONDITION
The Company's consolidated assets totaled $35.0 million at December 31, 1995
compared to $37.2 million at June 30, 1995. Stockholders' equity totaled $1.6
million at December 31, 1995, a reduction of $0.4 million
from $2.0 million at June 30, 1995. The decrease in stockholders' equity is
directly attributable to the net loss for the six month period ended
December 31, 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. In December 1995, the buyers exercised an
option, taking
down approximately $2.7 million.
At December 31, 1995, approximately 88% 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. In the December 1995 quarter, the Bank raised deposits over the
September 1995 level in order to provide additional funds to maintain minimum
regulatory liquidity requirements.
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 December 31, 1995, the Bank's ratio was 11.01% compared
to 6.01% at September 30, 1995 and 13.17% at June 30, 1995. The quarterly
increase in liquidity was due to the sale of several parcels of the Key West,
Florida, REO for $2.7 million, with 25% received in cash, the receipt of $1.5
million of cash with respect to the OTS settlements and a net increase in
deposits from September 1995 of $1.6 million. 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 "significantly 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 December 31, 1995, the Bank did not meet
the "total risk-based capital" component of the regulatory capital
requirements and was considered to be "significantly undercapitalized".
11
The following is a reconciliation of the Bank's stockholders' equity to
federal regulatory capital, and a comparison of such regulatory capital to the
industry minimum requirements of the OTS, as of
December 31, 1995:
Leverage Tier 1 Total
(Core) % Risk Based % Risk Based %
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
GAAP Equity $1,513 $1,513 $1,513
Non-allowable assets:
Investment in Uni-Cal Financial (15) (15) (15)
Additional capital items:
General loss reserves -- -- 187
---------- ----- ---------- ----- ---------- -----
Bank Regulatory Capital 1,498 4.29 1,498 4.71 1,595 5.01
Minimum capital requirement 1,397 4.00 1,272 4.00 2,549 8.00
---------- ----- ---------- ----- ---------- -----
Capital excess (deficiency) $101 0.29 $226 0.71 ($864) (2.99)
---------- ----- ---------- ----- ---------- -----
---------- ----- ---------- ----- ---------- -----
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 December 31, 1995, the Bank's ratio of tangible equity
to total assets was 4.29%.
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 other information as
12
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. The OTS has not required the Bank to submit a Capital
Restoration Plan, but is requiring monthly report 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.
Critically undercapitalized savings institutions must be placed in
receivership or conservatorship within 90 days
13
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 71% of the Company's total assets consisting of nonearning 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 $(415)
thousand for the three month period ended December 31, 1995 compared to $6.1
million for the same period in 1994. For the six month period ended December
31, 1995, net interest income decreased to $(717) from $12.7 million, in the
comparable period of 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 decreased in the three month period ended December
31, 1995 to (0.25)% compared to 3.91% at September 30, 1995 and 3.16% at
December 31, 1994. The decrease is primarily attributable to the composition
of the balance sheet at December 31, 1995, which consisted for a large part
of the quarter of two loans, one of which was on nonaccrual status. In
addition, the rates paid on deposits during the December quarter increased
slightly with the raising of new funds during the quarter. Net interest
income is expected to continue as a net expense, due to the fact that 71% of
the Company's assets consist of nonearning assets.
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 nonperforming assets of the Bank
at the dates indicated:
December 31, June 30,
1995 1995
----------- -----------
(DOLLARS IN THOUSANDS)
Nonaccrual loans $ -- $ --
Real estate owned 29,483 35,609
In-substance foreclosures, 2,286 ---
----------- -----------
Total nonperforming assets $31,769 35,609
----------- -----------
Specific Reserves - REO (7,365) (10,986)
----------- -----------
Total nonperforming asset, net $24,404 $24,623
----------- -----------
----------- -----------
Total assets $34,996 $37,156
----------- -----------
----------- -----------
Nonperforming assets, net as
a percentage of total assets 69.73% 66.27%
NONACCRUAL LOANS
Nonaccrual loans generally represent loans for which interest accruals have
been suspended. At December 31, 1995 and June 30, 1995, the Company had no
nonaccrual loans.
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 an 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 expense if the carrying value of real estate exceeds
16
estimated fair value. The Bank does not accrue interest income on loans
classified as in-substance foreclosures.
REO, net decreased to $24.4 million at December 31, 1995 from $24.6 million at
June 30, 1995. The decrease from June 30, 1995 is primarily attributable to
the sale of several parcels of the Key West, Florida property for $2.7 million
offset by the classification of a nonperforming loan repurchased in September
to in-substance foreclosure in December 1995. The Bank's REO portfolio at
December 31, 1995, consists of two properties, $8.0 million of land and
marina in a planned development project in Key West, Florida and $14.1
million of a mixed use retail/garment manufacturing building in Los Angeles,
California. In addition, there is an in-substance foreclosure secured by a
179 room motel in Phoenix, Arizona, carried at $2.3 million, which is in the
process of being foreclosed.
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, and is
currently under its final appeal.
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 by 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 five
loans to facilitate the sale of REO and one loan secured by a multifamily
property in Los Angeles, California ("major loans"), as well as a few
deposit secured loans and credit reserve loans, the evaluation of impaired
loans is limited to an evaluation of each of the major loans for consideration
of the impairment criteria.
At December 31, 1995, the carrying value of the loan that is considered to be
impaired under SFAS 114 totaled $2.3 million and consisted of a collateral
dependent loan secured by a multifamily property, and therefore measured
based upon the fair value of the collateral. At December 31, 1995, the
allowance for possible credit losses determined in accordance with the
provisions of SFAS 114, related to the loan considered to be impaired under SFAS
114, totaled $400 thousand. For the three months ended December 31, 1995,
the Company recognized interest income on impaired loans of $73 thousand,
none of which was recognized using the cash basis method of income.
At December 31, 1995, the impaired loan was also classified as a
substandard asset.
17
REAL ESTATE HELD FOR INVESTMENT, DEVELOPMENT OR SALE
Real estate held for investment, development or sale at December 31, 1995 is
comprised of the real estate from one of the Bank's former branch offices and
Uni-Cal's wholly owned investments. At
December 31, 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 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 obtained.
There was no provision for loan losses for the three months ended December
31, 1995 compared to $2.4 million for the same period in fiscal 1995. The
provisions recorded in the second 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:
December 31, June 30,
1995 1995
(DOLLARS IN THOUSANDS)
Loan general $ 112 $ --
Loan specific 400 500
------- -------
Total loan allowance $ 512 $ 500
------- -------
------- -------
Real estate general (1) $ -- $ --
Real estate specific 7,365 11,515
------- -------
Total real estate allowance $ 7,365 $10,986
------- -------
------- -------
Total valuation allowances $ 7,877 $11,486
------- -------
------- -------
- -------------------
(1) At June 30, 1995, the Banks loan and real estate portfolios consisted of
only 5 assets. Each asset was individually evaluated, therefore no general
reserves were recorded.
18
NON-INTEREST INCOME AND EXPENSE
Non-interest income (loss) for the quarter ended December 31, 1995 was $13
thousand compared to $1.4 million for the same period in 1994. For the six
month period ended December 31, 1995, non-interest income (loss) decreased to
$(72) thousand from $2.4 million for the six months ended December 31, 1994.
The quarterly and six month decreases are both attributable to the significant
change in the balance sheet with the sales of deposits and assets in June
1995. The December 1995 quarter included additional losses attributable to
the Glendale Federal transaction of $80 thousand, related to additional costs
for the discontinuance of the defined benefit pension plan, as well as
miscellaneous expenses related to the prior assets. The loss on the sale of
branches was offset by recoveries of $41 thousand related to one REO property
sold in the fourth quarter of fiscal 1995, and the recovery of a portion of
the $400 thousand reserve for escrow holdback funds established in connection
with the Asset Sales in June 1995.
General and administrative expenses decreased to $(129) thousand for the
quarter ended December 31, 1995 from $6.3 million for the same period in
1994, due to reimbursement of $800 thousand of compensation previously paid
to former officers of the Company, as well as a reduction of the Company's
retail offices to one office and the reduction of staff to 8 full time
employees at December 31, 1995. Other general and administrative expenses
for the three months ended December 31,1995, included $150 thousand of legal
fees related to the Company's assets and reporting obligations. The Company
also incurred marketing costs of $33 thousand in connection with its drive to
raise deposits during the quarter.
Real estate operations, net decreased to $(1.0) million from $$1.8 million for
the three months ended December 31, 1995 and 1994, respectively. The change
is attributable to the receipt of $1.2 million from an OTS enforcement action
for restitution of losses related to a prior lending relationship. The
restitution was received in $700 thousand in cash and $500 thousands in a
note receivable due in one year. The note is fully secured by real estate.
The note is non-interest bearing and is due in December 1996. This recovery
was offset by real estate operating losses of $241 thousand which were largely
attributable to the legal fees associated with the mixed used commercial REO
property in Los Angeles.
INCOME TAXES
At December 31, 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.
19
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 December 31, 1995, the Company was involved in the
following additional legal proceedings:
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 Harbour Place condominium project in Key West, Florida. The
project was initially developed and 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 judgment 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 judgment
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. Based on these breach allegations,
the lessor seeks a declaration that the Bank is no longer
entitled to possession of the parcels covered by the leases. In
addition, the Bank is seeking a judgment that the Bank is
entitled to retain as liquidated damages the sum of $400,000
deposited with 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 three companion cases
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. In the above actions, the plaintiffs have demanded unpaid
rent totalling $5.0 million plus an escalation factor based on
the terms of the lease. The Bank's position in these cases is
that no unpaid rent is due. There can be no assurance that the
Bank will prevail in these matters.
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
20
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. The judge
has taken the matter under submission, but has not yet ruled on
the summary judgment.
Item 2. None
Item 3. None
Item 4. Submission of Matters to a Vote of Stockholders.
At the 1995 Annual Meeting held on November 15, 1995, the
following was approved:
The election of David J. Primuth and Thomas P. Kemp
to the Board of Directors for terms of three years each.
Mr. Primuth received 24,531,754 votes in favor of
re-election and 493,233 against re-election. Mr. Kemp
received 24,520,386 votes in favor of re-election and
504,601 votes against re-election.
A proposal to modify the Articles of Incorporation to
reduce the minimum number of Board members from seven to
five was approved. There were 24,684,419 votes in favor of
the proposal, 137,788 votes against the proposal and
260,780 votes abstaining regarding the proposal.
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 December 31, 1995.
21
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 February 13, 1996 By
----------------------- -----------------------
David S. Engelman
Chairman of the Board and
President
Date February 13, 1996 By
----------------------- -----------------------
Michelle X. Dean
Vice President
Chief Financial Officer
22