<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________
Form 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
June 15, 1995
- --------------------------------------------------------------------------------
Date of Report (Date of earliest event reported)
CNB BANCSHARES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
INDIANA
- --------------------------------------------------------------------------------
(State or other jurisdiction of incorporation)
0-11510 35-1568731
- --------------------------------------------------------------------------------
(Commission File Number) (IRS Employer Identification No.)
20 N.W. THIRD STREET, EVANSVILLE, INDIANA 47739-0001
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (812) 464-3400
Not Applicable
- --------------------------------------------------------------------------------
(Former name or former address, if changed since last report)
Exhibit Index on Page 5
<PAGE>
Item 5. Other Events
- --------------------
On December 12, 1994, the Registrant and UF Bancorp, Inc., headquartered in
Evansville, Indiana ("UFB"), entered into an Agreement and Plan of Merger which
provides for the Registrant's acquisition of UFB by means of the merger of UFB
into a wholly-owned subsidiary of the Registrant.
Submitted herewith are copies of UFB's Annual Report on Form 10-K/A for the
fiscal year ended June 30, 1994 and UFB's Quarterly Report on Form 10-Q/A for
the quarter ended March 31, 1995.
2
<PAGE>
Item 7. Financial Statements and Exhibits
- ------------------------------------------
(a) Financial Statements of Business Acquired
-----------------------------------------
Not Applicable
(b) Pro Forma Financial Information
-------------------------------
Not Applicable
(c) Exhibits
--------
The following exhibits are submitted herewith:
Exhibit 99(a) UF Bancorp, Inc.'s Annual Report on Form 10-K/A for the
fiscal year ended June 30, 1994.
Exhibit 99(b) UF Bancorp, Inc.'s Quarterly Report on Form 10-Q/A for the
quarter ended March 31, 1995.
3
<PAGE>
SIGNATURE
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.
Dated: June 15, 1995
CNB BANCSHARES, INC.
By: /s/ David L. Knapp
-------------------
David L. Knapp
Executive Vice President
4
<PAGE>
EXHIBIT INDEX
-------------
Exhibit 99(a) UF Bancorp, Inc.'s Annual Report on Form 10-K/A
for the fiscal year ended June 30, 1994.
Exhibit 99(b) UF Bancorp, Inc.'s Quarterly Report on Form 10-Q/A
for the quarter ended March 31, 1995.
5
<PAGE>
================================================================================
FORM 10-K/A
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended June 30, 1994
or
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____________ to _____________
Commission File Number: 0-19523
UF BANCORP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 35-1833698
(State or other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
501 Main Street, P.O. Box 3125, Evansville, Indiana 47731
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number including area code:
(812) 425-7111
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K ((S)229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
The aggregate market value of the issuer's voting stock held by non-affiliates,
as of September 15, 1994, was $39,745,000.
The number of shares of the Registrants Common Stock, par value $.01 per share,
outstanding as of September 15, 1994, was 1,593,693 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the year ended
June 30, 1994, are incorporated into Part II. Portions of the Proxy Statement
for the 1994 Annual Meeting of Shareholders are incorporated into Part I and
Part III.
Exhibit Index on Page ___
Page 1 of ___ Pages
================================================================================
<PAGE>
UF BANCORP, INC.
FORM 10-K
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I
Item 1. Business................................................................. 1
Item 2. Properties............................................................... 35
Item 3. Legal Proceedings........................................................ 36
Item 4. Submission of Matters to a Vote of Security Holders...................... 37
Item 4.5 Executive Officers of the Registrant..................................... 37
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.... 38
Item 6. Selected Consolidated Financial Data..................................... 39
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation..................................................... 40
Item 8. Financial Statements and Supplementary Data.............................. 52
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure..................................................... 80
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation................................................... 80
Item 12. Security Ownership of Certain Beneficial Owners and Management........... 80
Item 13. Certain Relationships and Related Transactions........................... 80
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K......... 80
EXHIBIT INDEX................................................................................ 81
SIGNATURES................................................................................... 83
</TABLE>
<PAGE>
PART I
Item 1. Business.
General
UF Bancorp, Inc. (the "Holding Company") is a Delaware corporation
organized in July of 1991 for the purpose of acquiring all of the outstanding
shares of Union Federal Savings Bank, a federal savings bank (the "Bank") in
its conversion from mutual to stock form (the "Conversion"). The Holding
Company generally is authorized to engage in any activity that is permitted by
the Delaware General Corporation Law.
The assets of the Holding Company consist of the stock of the Bank and
investment securities purchased with the portion of the net proceeds from the
Conversion retained at the Holding Company level. The activities of the
Holding Company are funded by such investment securities and the income thereon
and dividends from the Bank. In the future, activities of the Holding Company
may also be funded through additional dividends from the Bank, sales of
additional stock, borrowings and income generated by other activities of the
Holding Company. At this time, there are no plans regarding such other
activities.
The principal business of the Bank consists of attracting retail
deposits from the general public and investing those funds primarily in loans
secured by first mortgages on owner-occupied, one- to four-family residences and
in mortgage-backed securities. The Bank also originates consumer and, to a much
lesser extent, commercial business loans and commercial real estate (including
multi-family residential) loans. Until June 1, 1993, the Bank conducted mortgage
banking operations through a wholly-owned subsidiary named Union Security
Mortgage, Inc. ("USM"). In January 1993, the Bank formed a new mortgage banking
subsidiary based in Virginia named Union Financial Corp. ("UFC"). Unless
otherwise indicated, discussions regarding the operations of the Bank in this
Form 10-K exclude the mortgage banking operations of USM and UFC.
The Bank's revenues are derived principally from interest on mortgage
loans and mortgage-backed securities, interest and dividends on investment
securities, loan origination and servicing fee income, income from checking
account service charges, and commissions on annuity sales.
The executive offices of the Bank are located in Evansville, Indiana.
Through its network of 16 offices, the Bank currently serves eight counties in
southern Indiana, western Kentucky and the Mt. Carmel area in southern
Illinois. This market area includes the communities of Columbus, Evansville,
Ft. Branch, Jasper, Mt. Vernon, Newburgh, Princeton and Shelbyville in Indiana,
Henderson in Kentucky, and Mt. Carmel in Illinois.
Lending Activities
General. Historically, the Bank has originated fixed-rate mortgage
loans. Since 1982, however, the Bank has emphasized the holding of adjustable
rate mortgage ("ARM") loans and loans with shorter terms to maturity than
traditional 30-year, fixed-rate loans. Management's strategy has been to
increase the percentage of assets in its portfolio with more frequent repricing
or shorter maturities, and in some cases higher yields, than fixed-rate mortgage
loans. In response to customer demand, however, the Bank continues to originate
fixed-rate mortgages. The Bank underwrites these mortgage loans under guidelines
allowing them to be saleable in the secondary market through the Federal Home
Loan Mortgage Corporation (the "FHLMC").
The Bank's primary focus in lending activities is on the origination of
loans secured by first mortgages on owner-occupied, one- to four-family
residences. The Bank also originates consumer and, to a much lesser extent,
commercial business loans and commercial real estate (including multi-family
residential) loans. The Bank has also loaned and advanced approximately
$804,000 for the construction and development of a real estate project to its
wholly-owned subsidiary, UNIFIN, Inc., the developer. See "- Subsidiary and
Other Activities." At June 30, 1994, the Bank's net loan and mortgage-backed
securities portfolio totaled $412.1 million.
Loan applications are initially approved at various levels of authority,
depending on the type, amount and loan-to-value ratio of the loan. Loan
commitments of more than $100,000 but less than $250,000 must be approved by a
committee comprised of senior officers of the Bank. Loan commitments of more
than $250,000 must be approved by the Board of Directors of the Bank. All loan
approvals are ratified by the Board of Directors.
-1-
<PAGE>
Pursuant to the Financial Institutions Reform, Recovery, and Enforcement
Act of 1989 ("FIRREA"), the aggregate amount of loans that the Bank is
permitted to make to any one borrower, including related entities, or the
aggregate amount that the Bank may invest in any one real estate project, is
limited generally to the greater of 15% of unimpaired capital and surplus or
$500,000. At June 30, 1994, the maximum amount which the Bank could have lent
to any one borrower and the borrower's related entities was approximately $5.8
million. At June 30, 1994, the Bank had no loans with outstanding balances in
excess of this amount. The principal balance of the largest amount outstanding
to any one borrower, or group of related borrowers, was $3.1 million at that
date. See "- Commercial Business Lending."
Loan Portfolio Composition. The following tables set forth information
concerning the composition of the Bank's loan and mortgage-backed securities
portfolios, in dollar amounts and in percentages (before deduction for loans in
process, deferred fees and discounts and allowance for loan losses) as of the
dates indicated.
<TABLE>
<CAPTION>
June 30,
---------------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990
----------------- ----------------- ---------------- ---------------- --------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One-to four-family...........$123,120(1) 70.58% $136,002(2) 74.41% $158,180(3) 80.47% $181,604(4) 84.93% $191,448 85.72%
Commercial real estate....... 30,945 17.74 22,901 12.53 18,707 9.52 17,304 8.09 17,314 7.75
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total real estate loans..... 154,065 88.32 158,903 86.94 176,887 89.99 198,908 93.02 208,762 93.47
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Other Loans
Consumer loans:
Auto....................... 3,738 2.14 11,412 6.24 8,994 4.58 4,307 2.01 4,291 1.92
Loans on deposits.......... 2,456 1.41 2,405 1.31 2,728 1.39 2,880 1.35 3,003 1.34
Unsecured.................. 2,432 1.40 2,400 1.31 1,903 .97 2,163 1.02 2,369 1.07
Credit card receivables.... 1,919 1.10 2,204 1.21 1,562 .79 1,429 .67 967 .43
Home improvement........... 757 .43 637 .35 807 .41 991 .46 881 .39
Education.................. 447 .26 401 .22 390 .20 409 .19 426 .19
Home equity................ 3,547 2.03 --- --- --- --- --- --- --- ---
Other...................... 779 .45 559 .31 363 .18 327 .15 392 .18
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total consumer loans....... 16,075 9.22 20,018 10.95 16,747 8.52 12,506 5.85 12,329 5.52
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Commercial business loans... 4,291 2.46 3,852 2.11 2,936 1.49 2,411 1.13 2,264 1.01
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total other loans.......... 20,366 11.68 23,870 13.06 19,683 10.01 14,917 6.98 14,593 6.53
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total gross loans.......... 174,431 100.00% 182,773 100.00% 196,570 100.00% 213,825 100.00% 223,355 100.00%
-------- ====== -------- ====== -------- ====== -------- ====== -------- ======
Less:
Loans in process............ 4,319 2,184 1,335 1,961 1,401
Deferred fees and discounts. 660 693 789 993 501
Allowance for loan losses... 1,535 800 648 620 397
-------- -------- -------- -------- --------
Total loans, net..........$167,917 $179,096 $193,798 $210,251 $221,056
======== ======== ======== ======== ========
(1) Includes $5.0 in residential construction loans.
(2) Includes $3.6 in residential construction loans.
(3) Includes $3.3 in residential construction loans.
(4) Includes $3.8 in residential construction loans.
June 30,
-----------------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990
------------------- ------------------- ------------------ ------------------ ----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
(Dollars in Thousands)
Mortgage-backed Securities:
Mortgage-backed Securities...$244,513 100.00% $245,089 100.00% $177,175 100.00% $166,686 100.00% $150,977 100.00%
Less: Discounts on mortgage-
backed securities........... 950 767 1,157 1,130 1,280
-------- -------- -------- -------- --------
Total mortgage-
backed securities...........$243,563 100.00% $244,322 100.00% $176,018 100.00% $165,556 100.00% $149,697 100.00%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
</TABLE>
-2-
<PAGE>
The following tables set forth the composition of the Bank's loan and
mortgage-backed securities portfolios by fixed and adjustable rate categories
at the dates indicated.
<TABLE>
<CAPTION>
June 30,
-------------------------------------------------
1994 1993
------------------------ -----------------------
Amount Percent Amount Percent
----------- ----------- ------------ ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Fixed Rate Loans
Real Estate:
One-to four-family................ $ 58,661 33.63% $ 67,215 36.78%
Commercial real estate............ 7,559 4.34 7,287 3.98
-------- ------ -------- ------
Total real estate loans......... 66,220 37.97 74,502 40.76
-------- ------ -------- ------
Consumer............................ 12,528 7.18 20,018 10.95
Commercial business................. 3,806 2.18 3,300 1.81
-------- ------ -------- ------
Total fixed rate loans.......... 82,554 47.33 97,820 53.52
-------- ------ -------- ------
Adjustable Rate Loans
Real Estate:
One-to four-family................ 64,459 36.95 68,787 37.64
Commercial real estate............ 23,386 13.41 15,614 8.54
-------- ------ -------- ------
Total adjustable real
estate loans.................. 87,845 50.36 84,401 46.18
-------- ------ -------- ------
Consumer............................ 3,547 2.03 --- ---
Commercial business................. 485 .28 552 .30
-------- ------ -------- ------
Total adjustable rate loans....... 91,877 52.67 84,953 46.48
-------- ------ -------- ------
Total loans..................... 174,431 100.00% 182,773 100.00%
-------- ====== -------- ======
Less:
Loans in process.................. 4,319 2,184
Deferred fees and discounts....... 660 693
Allowance for loan loss........... 1,535 800
-------- --------
Total loans, net................ $167,917 $179,096
======== ========
Fixed Rate Mortgage-backed
securities........................ $ 67,513 27.61% $ 68,985 28.15%
Adjustable Rate Mortgage-
backed securities................. 177,000 72.39% 176,104 71.85
-------- ------ -------- ------
Total Mortgage-backed
securities...................... 244,513 100.00% 245,089 100.00%
-------- ====== -------- ======
Less: Discount on mortgage-
backed securities................. 950 767
-------- --------
Total mortgage-backed
securities, net................. $243,563 $244,322
======== ========
</TABLE>
The following schedule sets forth the maturities of the Bank's loan and
mortgage-backed securities portfolio at June 30, 1994. Loans which have
adjustable or renegotiable interest rates are shown as maturing in the period
during which the contract is due. The schedule does not reflect the effects of
possible prepayments or enforcement of due-on-sale clauses. Management expects
these factors to cause actual maturities to be shorter than those set forth in
the schedule below.
-3-
<PAGE>
<TABLE>
<CAPTION>
Real Estate Loans
----------------------------------------------
One-to Four-
Family and
Due During Mortgage- Commercial
Years Backed Commercial Consumer Business
Ending June 30, Securities Real Estate Construction Loans Loans Total
- --------------- ------------ ----------- ------------ ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
1995 (1)............ $ 1,203 $ 242 $ --- $ 8,399 $1,223 $ 11,067
1996................ 10,845 88 149 1,576 1,635 14,293
1997................ 1,197 202 337 2,159 608 4,503
1998 to 1999........ 5,981 2,338 --- 3,116 703 12,138
2000 to 2004........ 34,084 10,778 73 817 122 45,874
2005 to 2009........ 40,243 6,329 60 8 --- 46,640
2010 to 2014........ 21,124 9,053 94 --- --- 30,271
2015 to 2019........ 111,634 1,915 --- --- --- 113,549
2020 and following.. 136,319 --- 4,290 --- --- 140,609
-------- ------- ------ ------- ------ -------
Total....... $362,630 $30,945 $5,003 $16,075 $4,291 418,944
======== ======= ====== ======= ====== -------
Less:
Undisbursed portion
of loans, discounts,
deferred fees and
interest, and allowance
for loan losses........ 7,464
--------
$411,480
========
</TABLE>
- ---------------
(1) Includes demand loans, loans having no stated maturity and overdraft
loans.
The total amount of loans and mortgage-backed securities due after June
30, 1995, which have predetermined interest rates is $144.0 million, while the
total amount of loans and mortgage-backed securities due after such date which
have floating or adjustable interest rates is $263.8 million.
One- to Four-Family Residential Mortgage and Construction Lending.
Residential loan originations are generated by the Bank's marketing efforts,
its present customers, walk-in customers and referrals from real estate brokers
and builders. The Bank has focused its lending efforts primarily on the
origination of loans secured by first mortgages on owner-occupied, one- to
four-family residences. At June 30, 1994, the Bank's one- to four-family
residential mortgage loans, excluding mortgage-backed securities, totaled
$123.1 million, or 29.8% of the Bank's total mortgage loans receivable and
mortgage-backed securities.
Until June 1, 1993, the Bank also originated loans through USM primarily
for sale in the secondary market. Commencing January 1993, it began originating
loans for resale through its new Virginia-based mortgage banking subsidiary,
UFC. UFC's mortgage banking activities are separately described under the
caption "- Subsidiary and Other Activities - Union Security Mortgage, Inc. and
Union Financial Corp."
During the year ended June 30, 1994, the Bank originated $31.1 million
of one- to four-family residential mortgage loans. This represented 52% of the
total loans originated by the Bank during the period. During the year ended June
30, 1994, the Bank also purchased $9.4 million of one- to four-family
residential mortgage loans. Also, the Bank originated for sale and sold $27.6
million of fixed rate one- to four-family residential loans during the fiscal
year. The majority of the sales were to the Federal Home Loan Mortgage
Corporation ("FHLMC") with the servicing retained.
-4-
<PAGE>
The Bank currently makes adjustable-rate one- to four-family residential
mortgage loans in amounts up to 95% of the appraised value of the security
property. For all loans with a loan-to-value ratio in excess of 80%, the Bank
requires private mortgage insurance on the excess amount. The Bank currently
offers one and three year ARM loans at rates determined in accordance with
market and competitive factors for a term of up to 30 years. The loans provide
for a 2% annual cap, and a 5-6 1/2% lifetime cap on interest rate increases over
the rate in effect at the date of origination. The Bank's residential ARM
loans generally do not contain interest rate floors. These loans' annual and
lifetime caps on interest rate increases, and the absence in most cases of any
limitation on interest rate decreases, reduces the extent to which they can
help protect the Bank against interest rate risk. ARM loans are convertible to
fixed-rate loans during the first five years of their life for a predetermined
fee at then current secondary market rates.
The Bank also offers fixed-rate 15- and 30-year mortgage loans that
conform to secondary market standards (i.e., FHLMC, FHA and VA standards).
Interest rates charged on these fixed-rate loans are competitively priced
according to market conditions.
In underwriting residential real estate loans, the Bank evaluates both
the borrower's ability to make monthly payments and the value of the property
securing the loan. Potential borrowers are qualified for fixed-rate loans based
upon the initial or stated rate of the loan. On ARM loans, the borrower is
qualified on the fully indexed rate or on the second year's rate, whichever is
less.
An appraisal of the property securing the loan is obtained on all loan
applications from pre-approved independent fee appraisers. A senior loan
officer with proper lending authority or a loan committee, comprised of senior
officers, reviews each loan application and establishes the terms and
conditions of each approved loan. The Bank handles substantially all of its
own loan closings. Following closing, all loan files and disbursements are
audited by Bank personnel independent of the loan origination and closing
functions. The Bank generally requires, in connection with the origination of
residential real estate loans, title insurance or an opinion of counsel, and
fire and casualty insurance coverage, as well as flood insurance, where
appropriate, to protect the Bank's interest. The cost of this insurance
coverage is paid by the borrower.
The Bank's residential mortgage loans customarily include due-on-sale
clauses giving the Bank the right to declare the loan immediately due and
payable in the event, among other things, the borrower sells or otherwise
disposes of the property subject to the mortgage and the loan is not repaid.
The Bank has enforced due-on-sale clauses in its mortgage contracts for the
purpose of increasing its loan portfolio yield. The yield increase is obtained
through the authorization of assumptions of existing loans at higher rates of
interest and the imposition of assumption fees. ARM loans may be assumed
provided home buyers meet the Bank's underwriting standards and the applicable
fees are paid.
The Bank originates a limited number of loans to finance the
construction of one- to four-family residences. At June 30, 1994, the Bank had
loans to finance the construction of one- to four-family residences totaling
$5.0 million, or approximately 1.2% of the Bank's loan and mortgage-backed
securities portfolio. Substantially all of these loans are made to individuals
who propose to occupy the premises upon completion of construction. Construction
loans are structured for up to a 30-year term with a 12 month construction
phase. Upon completion of the construction phase, these loans continue as
permanent loans of the Bank. Loan proceeds are disbursed in increments as
construction progresses and as inspections warrant.
The Bank purchases one- to four-family residential whole loans and loan
participations originated by other lenders. At June 30, 1994, the Bank had 42
groups of whole loans and loan participations (totaling $36.8 million) which
had been purchased. These loans and participation interests are secured by
properties located throughout the United States, with particular concentration
in California and Colorado. At June 30, 1994, no such loans were included in
the Bank's non-performing assets. The Bank qualifies all of its purchases
under its internal underwriting standards. See "- Originations, Purchases and
Sales of Mortgage Loans and Mortgage-Backed Securities."
Mortgage-Backed Securities. The Bank has significant investments in
mortgage-backed securities and has utilized such investments to complement its
mortgage lending activities. At June 30, 1994, mortgage-backed securities
totaled $243.6 million, or 48.3% of total assets. At such date, $177.0 million
of the Bank's mortgage-backed securities carried adjustable rates of interest.
For information regarding the carrying and market values of the Bank's
mortgage-backed
-5-
<PAGE>
securities portfolio, see Notes to Consolidated Financial Statements in the
Holding Company's 1994 Annual Shareholder Report.
At June 30, 1994, $93.6 million, or 38.4% of the mortgage-backed
securities portfolio, was insured or guaranteed by the Government National
Mortgage Association ("GNMA"), the Federal National Mortgage Association
("FNMA"), or FHLMC. Non-guaranteed Participation Certificates ("PCs") totaled
$150.0 million or 61.6% of the Bank's net mortgage-backed securities portfolio.
Non-guaranteed PCs collateralized by GNMA, FNMA, or FHLMC PCs totaled $5.1
million, while $119.4 million were rated "AA" or better and $11.1 million were
rated "A1" or "A2" by either Moody's Investors Service, Inc. ("Moody's) or
Standard & Poor's Corporation rating services. One non-guaranteed PC of $966,000
was rated "Baa3," and two PC's totalling $4.8 million were rated "Baa1," by
Moody's. Non-guaranteed and non-rated PCs totaled $8.4 million, of which $7.9
million have some form of credit enhancement, such as private mortgage insurance
covering a percentage of any losses or subordinate classes which absorb all
losses up to a certain percentage. The only non-rated PC without additional
credit enhancement has a book value of $520,000 and is backed by conventional
one- to four-family mortgage loans with a total unpaid principal balance of
$630,000.
Commercial Real Estate Lending. The Bank has originated commercial real
estate loans, including multi-family residential real estate loans, in its
market area and has purchased participation interests in loans from other
financial institutions. At June 30,1994, the Bank had $30.9 million in
commercial real estate loans, representing 7.5% of the Bank's total loan and
mortgage-backed securities portfolio. Whole commercial real estate loans
purchased and participation interests in commercial real estate loans totaled
$13.8 million at June 30, 1994, or 44.5% of the Bank's commercial real estate
loan portfolio.
The Bank's commercial real estate loan portfolio includes loans secured
by multi-family residential property, office buildings, retail stores,
warehouses, and other non-residential buildings, most of which are located in
the Bank's market area. Commercial real estate loans are generally originated in
amounts of up to 75% of the appraised value of the property securing the loan.
The Bank generally requires borrowers to provide personal guarantees on
commercial real estate loans. While in the past it has been the Bank's policy to
originate commercial real estate loans with fixed rates, it is the current
policy to originate commercial real estate loans with adjustable rates, which
adjust to a rate based upon a margin above the one year treasury bill constant
maturity index.
Multi-family residential loans comprise the largest portion of the
Bank's commercial real estate portfolio. Multi-family residential loans, like
commercial real estate loans, were in the past generally originated with fixed
interest rates. However, it is currently the Bank's policy to originate multi-
family residential loans with adjustable interest rates for terms of up to
twenty years and to carry a loan-to-value ratio not greater than 75%. The Bank
requires a positive net operating income to debt service ratio for loans secured
by multi-family residential property. Loans secured by non-owner occupied
properties of more than four units are qualified on the basis of rental income
generated by the property. On loans secured by non-owner occupied properties of
four units or less, the Bank will qualify the borrower on the basis of the
borrower's personal income and rental income generated by the property.
The Bank's largest amount of commercial real estate loans outstanding at
June 30, 1994, to any one borrower, or group of related borrowers, was $3.1
million. This amount is comprised of two (2) loans on multi-family residential
properties located in Irving and Garland, Texas with loan to value ratios of
70% and 59%, respectively, which were fully performing on June 30, 1994. The
second largest real estate loan outstanding at June 30, 1994, was $2.0 million.
This loan is a participation on a total loan of $2.9 million, is on a
commercial retail and office property in Aspen, Colorado, has a loan to value
ratio of 55%, and was fully performing at June 30, 1994. The Bank also has a
loan of $1.4 million secured by a 160 unit apartment complex in Henderson,
Kentucky. The Bank originated the loan in 1977. The Bank considers this loan
to be of concern due to minor delinquencies in the past. See "- Non-Performing
Assets - Other Loans of Concern." The Bank has 19 other commercial real estate
loans including multi-family residential loans (two of which are participations
and 13 of which were whole loan purchases), each of which has existing balances
in excess of $500,000.
The Bank generally purchases loans and loan participations with
loan-to-value ratios of 75% or less. Appraised values are required to be
estimated by independent appraisers to determine that the property to be
mortgaged satisfies
-6-
<PAGE>
these loan-to-value requirements. In purchasing any loan, the Bank must be
satisfied that the loan is based on the economic viability of the property and
the creditworthiness of the borrower. Creditworthiness is determined by
considering the character, experience, management and financial strength of the
borrower, and the ability of the property to generate adequate funds to cover
both operating expenses and debt service.
Commercial real estate lending affords the Bank an opportunity to
receive interest at rates higher than those generally available from residential
lending. Nevertheless, loans secured by commercial real estate properties are
generally larger and involve a greater degree of risk than one- to four-family
residential mortgage loans. Because payments on loans secured by commercial real
estate properties are often dependent on the successful operation or management
of the properties, repayment of such loans may be subject to adverse conditions
in the real estate market or the economy. If the cash flow from the project is
reduced (for example, if leases are not obtained or renewed), the borrower's
ability to repay the loan may be impaired. The Bank attempts to minimize these
risks through its underwriting standards and by lending primarily on existing
income-producing properties.
Consumer Lending. Federal laws and regulations permit federally
chartered savings associations to make secured and unsecured consumer loans in
an aggregate amount of up to 35% of the association's assets. In addition, a
federally chartered savings association has lending authority above this limit
for certain consumer loans, such as property improvement loans and deposit
account secured loans. Management considers consumer lending to be an important
component of its strategic plan. Specifically, consumer loans generally have
shorter terms to maturity (thus reducing the Bank's exposure to changes in
interest rates) and carry higher rates of interest than do one- to four-family
residential mortgage loans. In addition, management believes that the offering
of consumer loan products helps to expand and create stronger ties to its
existing customer base, by increasing the number of customer relationships and
providing cross-marketing opportunities.
The Bank offers a variety of secured consumer loans, including auto
loans and loans secured by savings deposits. In addition, the Bank offers home
improvement, education and other types of unsecured loans. Since April 1992, the
Bank has also offered home equity loans and classic car loans. The Bank
currently originates all of its consumer loans in its market area (other than
the classic car loans discussed below). The Bank does not originate consumer
loans on an indirect basis (i.e., where loan contracts are purchased from
retailers of goods or services which have extended credit to their customers).
The Bank's consumer loans are short-term, fixed-rate loans. Consumer
loan terms vary according to the type of collateral, length of contract and
creditworthiness of the borrower. Terms to maturity vary up to 60 months. At
June 30, 1994, the Bank's consumer loan balances totaled $16.1 million, or 3.9%
of its total loan and mortgage-backed securities portfolio.
The underwriting standards employed by the Bank for consumer loans
include a determination of the applicant's payment history on other debts and an
assessment of the ability to meet existing obligations and payments on the
proposed loan. Although creditworthiness of the applicant is a primary
consideration, the underwriting process also includes a comparison of the value
of the security, if any, in relation to the proposed loan amount.
During fiscal 1988, the Bank began offering VISA/Mastercard credit card
accounts. At June 30, 1994, approximately 3,110 credit card accounts had been
opened, with an aggregate outstanding balance of $1.9 million and unused credit
available of $3.3 million. The Bank presently charges an annual membership fee
of $15 and an annual rate of interest of 16.32%.
The Bank entered into an agreement in April 1991 with a loan broker in
Ohio for the purpose of funding loans for the purchase of classic cars. The
loans carry a fixed rate of interest, are made for a five-year term with up to a
fifteen-year amortization schedule, and are originated with a loan-to-value
ratio not greater than 70%. The Bank underwrites each appraised loan in
accordance with its normal consumer loan standards. Each of these loans is
reviewed by the Senior Vice President and Lending Operations Officer of the
Bank, and all loans over $100,000 must be approved by either the officer loan
committee or the Board of Directors. Effective April 1, 1994, the Bank sold $8.5
million of its classic car loan portfolio. At June 30, 1994, the Bank had 19
loans aggregating $1.0 million secured by classic cars, all of which were fully
performing at that date. The largest single loan totaled $144,000. The Bank's
current policy is to
-7-
<PAGE>
limit its activity in loans secured by classic cars to no more than 1.5% of the
Bank's total assets (or 2% of assets provided there are plans to sell the amount
in excess of 1.5%) and to limit its total amount of classic car loans to any one
borrower (or group of related borrowers) to $1.0 million and to $600,000 for any
one car. Because of the recent death of the chief executive officer of the loan
broker, the Bank expects future activity in its classic car lending to be
substantially less than in the past.
Consumer loans may entail greater risk than do residential mortgage
loans, particularly in the case of consumer loans which are unsecured, such as
credit card receivables, or are secured by rapidly depreciable assets, such as
automobiles. In such cases, any repossessed collateral for a defaulted consumer
loan may not provide an adequate source of repayment of the outstanding loan
balance as a result of the greater likelihood of damage, loss or depreciation.
In addition, consumer loan collections are dependent on the borrower's
continuing financial stability, and thus are more likely to be affected by
adverse personal circumstances. Furthermore, the application of various federal
and state laws, including bankruptcy and insolvency laws, may limit the amount
which can be recovered on such loans. Further, the Bank's classic car lending
activities were only recently instituted, and the Bank may experience an
increased level of delinquencies in this loan portfolio as these loans age.
Although the level of delinquencies in the Bank's consumer loan portfolio has
generally been low (at June 30, 1994, $25,000, or approximately 0.16% of the
consumer loan portfolio, was 60 days or more delinquent), there can be no
assurance that delinquencies will not increase in the future.
Commercial Business Lending. Federal regulations authorize federally
chartered thrift institutions to make secured or unsecured loans for
commercial, corporate, business and agricultural purposes. The aggregate
amount of such loans outstanding may not exceed 10% of such institution's
assets. In addition, another 10% of total assets may be invested in commercial
equipment and consumer leasing and the Bank may use any or all of the 35%
consumer category described above for inventory and floor plan financing.
The Bank engages in a limited amount of commercial business lending
activities. At June 30, 1994, the Bank had approximately $4.3 million in
commercial business loans outstanding, $3.0 million of which is for the funding
of leases for automobiles. These lease funding loans are secured by the leased
automobiles, as well as by an assignment of the automobile leases to the Bank.
All of the Bank's commercial business loans have been to borrowers in its
market area.
Unlike residential mortgage loans, which generally are made on the basis
of the borrower's ability to make repayment from his employment and other income
and which are secured by real property, the value of which tends to be more
easily ascertainable, business loans are of higher risk and typically are made
on the basis of the borrower's ability to make repayment from the cash flow of
his business, and are generally secured by business assets such as accounts
receivable, inventory and equipment. Nonetheless, the availability of funds for
the repayment of business loans may be substantially dependent on the success of
the business itself. Further, the collateral, if any, securing the loans may
depreciate over time, may be difficult to appraise and may fluctuate in value
based on the success of the business. At June 30, 1994, all of the Bank's
commercial business loans were performing in accordance with their terms.
Originations, Purchases and Sales of Mortgage Loans and Mortgage-Backed
Securities
As described above, the Bank originates real estate loans through
marketing efforts, the Bank's customer base, walk-in customers, and referrals
from real estate brokers and builders. The Bank originates both adjustable-rate
and fixed-rate loans. Its ability to originate loans is dependent upon the
relative customer demand for fixed-rate or ARM loans in the origination market,
which is affected by the term structure (short-term compared to long-term) of
interest rates as well as the current and expected future level of interest
rates.
The Bank has a portfolio of mortgage-backed securities which it holds
for investment. Such mortgage-backed securities can serve as collateral for
borrowings and, through repayments, as a source of liquidity. For information
regarding the carrying and market values of the Bank's mortgage-backed
securities portfolio, see Notes to Consolidated Financial Statements in the
Holding Company's 1994 Annual Shareholder Report. Under the risk-based capital
requirement, GNMA mortgage-backed securities have a risk-weighting of 0%, and
FNMA, FHLMC and privately issued AA-rated mortgage-backed securities have a
risk-weighting of 20%, in contrast to the 50% risk-weight carried by residential
loans.
-8-
<PAGE>
From time to time, the Bank purchases whole loans, loan participations
and mortgage-backed securities in accordance with its ongoing asset/liability
management objectives. The Bank purchases loans from private investors, such as
other thrift institutions, banks and insurance companies on the basis of its
internal underwriting standards.
The following table sets forth the loan origination, purchase, sale and
repayment activities of the Bank, exclusive of activities by its mortgage
banking subsidiary, for the periods indicated. See "- Subsidiary and Other
Activities" for a description of the activities of the Bank's mortgage banking
operations.
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------
1994 1993 1992
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Beginning balance - loans............................. $179,096 $193,798 $210,251
Loans originated:
One- to four-family residential................... 31,074 18,402 24,229
Commercial real estate............................ 12,703 991 1,383
Consumer loans.................................... 12,956 11,259 12,256
Commercial business............................... 3,605 3,001 2,749
-------- -------- --------
Total loans originated.......................... 60,338 33,653 40,617
Purchases:
One- to four-family residential..................... 9,358 11,480 5,482
Sales and repayments:
Classic car loans sold.............................. 8,541 --- ---
Real estate loans sold.............................. --- --- ---
Principal repayments and other reductions (net)..... 72,334 59,835 62,552
-------- -------- --------
Net increase (decrease) loans......................... (11,179) (14,702) (16,453)
-------- -------- --------
Ending balance-loans.................................. $167,917 $179,096 $193,798
======== ======== ========
Beginning balance - mortgage-backed securities........ $244,322 $176,018 $165,556
Purchases........................................... 69,893 115,232 61,882
Sales............................................... --- --- 5,154
Principal repayments, and other..................... 70,652 46,928 46,266
-------- -------- --------
Net increase (decrease) mortgage-backed securities.... (759) 68,304 10,462
-------- -------- --------
Ending balance-mortgage-backed securities............. $243,563 $244,322 $176,018
======== ======== ========
</TABLE>
Non-Performing Assets
When a borrower fails to make a required payment by the end of the month
in which the payment is due, the Bank generally institutes collection
procedures. In most cases, delinquencies are cured promptly; however, if a loan
has been delinquent for more than 60 days, the Bank contacts the borrower in
order to determine the reason for the delinquency and to effect a cure, and,
where appropriate, reviews the condition of the property and the financial
circumstances of the borrower. Based upon the results of any such
investigation, the Bank may (i) accept a repayment program for the arrearage
from the borrower; (ii) seek evidence, in the form of a listing contract, of
efforts by the borrower to sell the property if the borrower has stated that he
is attempting to sell; (iii) request a deed in lieu of foreclosure; or (iv)
initiate
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<PAGE>
foreclosure proceedings. When a loan payment is delinquent for three or more
months, the Bank generally will initiate foreclosure proceedings. Interest
income on loans at this point is reduced by the full amount of accrued and
uncollected interest.
Delinquent Loans. The following table sets forth information concerning
delinquent loans at June 30, 1994, in dollar amounts and as a percentage of the
Bank's total loan and mortgage-backed securities portfolio. The amounts
presented represent the total remaining principal balances of the related
loans, rather than the actual payment amounts which are overdue.
<TABLE>
<CAPTION>
Mortgage Consumer
----------------------- -----------------------
Number Amount Percent Number Amount Percent
------ ------ ------- ------ ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans delinquent for:
60-89 days................. 10 $480 .12% 2 $ 4 .00%
90 days and over........... 5 147 .04% 19 21 .01%
-- ---- --- -- --- ---
Total delinquent loans... 15 $627 .16% 21 $25 .01%
== ==== === == === ===
</TABLE>
The table below sets forth the amounts and categories of non-performing
assets of the Bank at the dates indicated. All loans which are 90 days past
due are placed on non-accrual status. For all years presented, there are no
troubled debt restructurings (which involved forgiving a portion of interest or
principal on any loans or making loans at a rate materially less than that of
market rates). Foreclosed assets include assets acquired in settlement of
loans.
<TABLE>
<CAPTION>
June 30,
------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-Performing Assets
Non-accruing loans:
One- to four-family............. $ 147 $ 298 $ 445 $1,977 $2,115
Consumer........................ 21 128 49 28 57
------ ------ ------ ------ ------
Total......................... 168 426 494 2,005 2,172
------ ------ ------ ------ ------
Foreclosed assets:
Real estate owned............... 1,472 1,702 1,475 690 662
Other repossessed assets........ --- --- 2 18 13
------ ------ ------ ------ ------
Total......................... 1,472 1,702 1,477 708 675
------ ------ ------ ------ ------
Total non-performing assets....... $1,640 $2,128 $1,971 $2,713 $2,847
====== ====== ====== ====== ======
Total as a percentage of
total assets................ 0.33% 0.43% 0.42% 0.59% 0.66%
====== ====== ====== ====== ======
</TABLE>
For the year ended June 30, 1994, gross interest income which would have
been recorded had the non-accruing loans been current in accordance with their
original terms amounted to $12,000. The amount that was included in interest
income on such loans was $6,000 for the year ended June 30, 1994.
Non-Accruing Loans. As of June 30, 1994, the Bank had $168,000 in net
book value of non-accruing loans. The Bank's largest non-accruing loan had a
carrying value of $79,000 at June 30, 1994. No other non-accruing loan
exceeded $23,000 at June 30, 1994.
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<PAGE>
Foreclosed Assets. As of June 30, 1994, the Bank had $1.5 million of
foreclosed assets. Real estate owned included 11 separate properties, 9 of
which were single family residences. The largest foreclosed asset was a single
family residence with a net carrying value of $574,000.
Other Loans of Concern. In addition to the non-performing assets set
forth in the table above, as of June 30, 1994, there was also an aggregate of
$5,220,000 in net book value of loans with respect to which known information
about the possible credit problems of the borrowers, the cash flows of the
security properties, or concerns about documentation have caused management to
have doubts as to the ability of the borrowers to comply with present loan
repayment terms and which may result in the future inclusion of such items in
the non-performing asset categories. The largest portion of this category is a
real estate loan to a single borrower totalling $1.4 million. Management does
not currently anticipate any losses on these loans. See "- Commercial Real
Estate Lending." At June 30, 1994, the Bank had no other loans (or group of
related loans) of concern with a net book value in excess of $17,000.
Classified Assets. Federal regulations provide for the classification
of loans and other assets, such as debt and equity securities considered by the
OTS to be of lesser quality, as "substandard," "doubtful" or "loss." An asset
is considered "substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the insured institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "doubtful" have all of the weaknesses
inherent in those classified "substandard," with the added characteristic that
the weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted. Assets which do not
currently expose the insured institution to sufficient risk to warrant
classification in one of the aforementioned categories but possess weaknesses
are required to be designated "special mention" by management. The OTS has
issued a notice of proposed rulemaking that would remove special mention assets
from the OTS's classification of assets scheme of adversely affected assets.
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When an insured institution classifies
problem assets as "loss," it is required either to establish a specific
allowance for losses equal to 100% of that portion of the asset so classified or
to charge off such amount. An institution's determination as to the
classification of its assets and the amount of its valuation allowances is
subject to review by the institution's Principal Supervisory Agent, who may
order the establishment of additional general or specific loss allowances.
In connection with the filing of its periodic reports with the OTS and
in accordance with its classification of assets policy, the Bank regularly
reviews the problem loans in its portfolio to determine whether any loans
require classification in accordance with applicable regulations. Total
classified assets at June 30, 1994, were $1.7 million, substantially all of
which were classified "substandard." Not all classified assets are non-
performing assets.
Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the
risk inherent in its loan portfolio and changes in the nature and volume of its
loan activity. Such evaluation, which includes a review of all loans of which
full collectibility may not be reasonably assured, considers among other
matters, the estimated net realizable value of the underlying collateral,
economic conditions, historical loan loss experience and other factors that
warrant recognition in providing for an adequate loan allowance. At June 30,
1994, the Bank had an allowance for loan losses of $1,535,000. See Notes to
Consolidated Financial Statements in the Holding Company's 1994 Annual
Shareholder Report.
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<PAGE>
The following table sets forth an analysis of the Bank's allowance for
loan losses at the dates indicated.
<TABLE>
<CAPTION>
June 30,
----------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period..... $ 800 $648 $620 $397 $213
Charge-offs:
Real estate -mortgage............ 75 102 81 56 12
Consumer......................... 114 50 133 121 135
Commercial business.............. --- --- --- 8 ---
------ ---- ---- ---- ----
Total.......................... 189 152 214 185 147
------ ---- ---- ---- ----
Recoveries:
Mortgage......................... 3 10 --- --- ---
Consumer......................... 7 9 11 17 12
------ ---- ---- ---- ----
Total.......................... 10 19 11 17 12
------ ---- ---- ---- ----
Net charge-offs.................... 179 133 203 168 135
Provision for loan losses.......... 914 285 231 391 319
------ ---- ---- ---- ----
Balance at end of period........... $1,535 $800 $648 $620 $397
====== ==== ==== ==== ====
Net charge-offs as a percentage
of average loans outstanding..... .10% .07% .10% .08% .06%
====== ==== ==== ==== ====
Allowance for loan losses as
a percentage of non-performing
loans at the end of the period... 913.69% 187.79% 131.17% 30.92% 18.28%
====== ====== ====== ====== ======
Allowance for loan losses as
a percentage of loans at
the end of the period............ .91% .44% .33% .29% .18%
=== === === === ===
</TABLE>
When the Bank repossesses property it is thereafter classified as other
real estate owned. Any gains or losses (realized or reserved for) thereafter
are treated as other real estate owned activity, not mortgage loan activity.
The distribution of the Bank's allowance for losses on loans at the
dates indicated is summarized as follows:
<TABLE>
<CAPTION>
June 30,
------------------------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990
-------------------- -------------------- -------------------- -------------------- ---------------------
Percent of Percent of Percent of Percent of Percent of
Loans in each Loans in each Loans in each Loans in each Loans in each
Category to Category to Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ ----------- ------ ----------- ------ ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate........... $ 980 88.32% $375 86.94% $321 90.0% $310 92.9% $224 93.4%
Consumer.............. 275 9.22 275 10.95 242 8.5 230 6.0 173 5.6
Commercial Business... 80 2.46 60 2.11 45 1.5 40 1.1 --- 1.0
Unallocated........... 200 --- 90 --- 40 --- 40 --- --- ---
------ ------ ---- ------ ---- ----- ---- ----- ---- -----
Total................. $1,535 100.00% $800 100.00% $648 100.0% $620 100.0% $397 100.0%
====== ====== ==== ====== ==== ===== ==== ===== ==== =====
</TABLE>
Investment Activities
The Bank must maintain minimum levels of investments that qualify as
liquid assets under OTS regulations. Liquidity may increase or decrease
depending upon the availability of funds and comparative yields on investments
in relation to the return on loans. Historically, the Bank has maintained
liquid assets at levels above minimum requirements imposed by the OTS
regulations and at levels believed adequate to meet the requirements of normal
operations, including repayments of maturing debt and potential deposit
outflows. Cash flow projections are regularly reviewed
-12-
<PAGE>
and updated to assure that adequate liquidity is maintained. For June 1994, the
Bank's liquidity ratio (liquid assets as a percentage of net withdrawable
savings deposits and current borrowings) was 8.0%.
Federally chartered savings institutions have the authority to invest in
various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, certain certificates of deposit of
insured banks and savings institutions, certain bankers' acceptances, repurchase
agreements and federal funds. Subject to various restrictions, federally
chartered savings institutions may also invest their assets in commercial paper,
investment grade corporate debt securities and mutual funds whose assets conform
to the investments that a federally chartered savings institution is otherwise
authorized to make directly.
Generally, the investment policy of the Bank is to invest funds among
various categories of investments and maturities based upon the Bank's
asset/liability management policies, investment quality and marketability,
liquidity needs and performance objectives.
At June 30, 1994, the Bank's interest-bearing deposits with banks
totaled $11.7 million, or 2.3% of total assets, and its investment securities
totaled $26.5 million, or 5.3% of total assets. It is the Bank's general policy
to purchase investment securities which are U.S. Government securities and
federal agency obligations and other issues that are rated investment grade or
have credit enhancers. At June 30, 1994, the average term to maturity or
repricing of the investment securities portfolio was 1.4 years.
The following table sets forth the composition of the Bank's investment
portfolio at the dates indicated.
<TABLE>
<CAPTION>
June 30,
--------------------------------------------------------------
1994 1993 1992
----------------- ------------------- -----------------
Book % of Book % of Book % of
Value Total Value Total Value Total
------- ------ ------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits with banks...... $11,681 100.00% $ 6,834 100.00% $14,183 100.00%
======= ====== ======= ====== ======= ======
Investment securities
U.S. government securities.............. 6,718 18.69 $ 6,580 44.69% $ 3,117 33.97
Federal agency obligations.............. 16,210 45.10 --- --- --- ---
Corporate............................... 3,616(1) 10.06 143(2) .97 171(2 ) 1.86
------- ------ ------- ------ ------- ------
Total investment securities........... 26,544 73.85 6,723 45.66 3,288 35.83
------- ------ ------- ------ ------- ------
Federal funds sold........................ 3,300 9.18 3,000 20.38 1,900 20.71
FHLB stock................................ 6,101 16.97 5,000 33.96 3,987 43.46
------- ------ ------- ------ ------- ------
Total investment securities,
Federal funds sold and FHLB stock....... $35,945 100.00% $14,723 100.00% $ 9,175 100.00%
======= ====== ======= ====== ======= ======
Average remaining life or term
to repricing of investment securities,
excluding Federal funds sold and,
FHLB stock.............................. 1.39 yrs. 1.88 yrs. 1.02 yrs.
___________________
</TABLE>
(1) This is an unrated subordinate class of a pool of $27.8 million in
classic car loans issued as a pass-through security on April 1, 1994.
Credit enhancements include an initial cash reserve fund of $1 million.
Additionally, the first $500,000 of excess servicing will also be deposited
to the cash reserve, which is then required to remain at a minimum balance
of $1.5 million. Additional credit enhancement includes the excess
servicing of the issue. (The Bank services the loans securitizing the
issue and also participates in the excess servicing of the entire issue.)
(2) Citicorp notes rated BAA2 by Moody's Investors Service, Inc.
-13-
<PAGE>
The composition and maturities of the investment securities portfolio at
June 30, 1994, excluding FHLB of Indianapolis stock and other government agency
stock, are indicated in the following table.
<TABLE>
<CAPTION>
June 30, 1994
----------------------------------------------------------------
(Dollars in Thousands)
Less than 1 to 5 5 to 10 Over Total Investment
1 Year Years Years 10 Years Securities
------ ------ ------ -------- ----------
Book Book Book Book Book Market
Value Value Value Value Value Value
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury.................. $6,718 $ --- $ --- $ --- $ 6,718 $ 6,718
Federal agency obligations..... --- 15,210 1,000 --- 16,210 16,050
Corporate...................... --- --- --- 3,616 $ 3,616 $ 3,616
------ ------- ------ ------ ------- -------
Total investment securities.. $6,718 $15,210 $1,000 $3,616 $26,544 $26,384
====== ======= ====== ====== ======= =======
Weighted average rate.......... 3.86% 6.57% 5.00% 11.70% 6.52%
====== ======= ====== ====== =======
</TABLE>
The Bank's investment securities portfolio at June 30, 1994 contained
neither tax-exempt securities nor securities of any issuer with an aggregate
book value in excess of 10% of the Bank's retained income, excluding securities
issued by the United States Government, or its agencies.
At June 30, 1994, the Bank held $243.6 million and $26.5 million of
mortgage-backed securities and investment securities, respectively, with a
market value of $240.7 million and $26.4 million, respectively.
Sources of Funds
General. The Bank's primary sources of funds are deposits, amortization
and prepayment of loan principal (including mortgage-backed securities),
borrowings, maturities of investment securities, mortgage-backed securities and
short-term investments, and funds provided from operations.
Borrowings, predominantly from the FHLB of Indianapolis, may be used on
a short-term basis to compensate for seasonal reductions in deposits or deposit
inflows at less than projected levels, and may be used on a longer-term basis to
support expanded lending activities.
Deposits. The Bank offers a variety of deposit accounts having a wide
range of interest rates and terms. The Bank's deposits consist of passbook and
statement accounts, NOW and checking accounts, and money market and certificate
accounts. The Bank relies primarily on advertising, competitive pricing policies
and customer service to attract and retain these deposits. The Bank solicits
deposits from its market area only, and does not use brokers to obtain deposits.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and prevailing interest rates and
competition.
The variety of deposit accounts offered by the Bank has allowed it to be
competitive in obtaining funds and to respond with flexibility to changes in
consumer demand. The Bank has become more susceptible to short-term
fluctuations in deposit flows, as customers have become more interest rate
conscious. The Bank manages the pricing of its deposits in keeping with its
asset/liability management and profitability objectives. Based on its
experience, the Bank believes that its passbook and statement savings, NOW and
checking accounts are relatively stable sources of deposits. However, the
ability of the Bank to attract and maintain certificate deposits, and the rates
paid on these deposits, has been and will continue to be significantly affected
by market conditions.
Under regulations adopted by the FDIC, well capitalized insured
depository institutions (those with a ratio of total capital to risk-weighted
assets of not less than 10%, with a ratio of core capital to risk-weighted
assets of not less than 6%, with a ratio of core capital to total assets of not
less than 5% and which have not been notified that they are in troubled
condition) may accept brokered deposits without limitations. Undercapitalized
institutions (those that fail to meet minimum regulatory capital requirements)
are prohibited from accepting brokered deposits. Adequately capitalized
institutions (those that are neither well-capitalized nor undercapitalized) are
prohibited from accepting brokered deposits
-14-
<PAGE>
unless they first obtain a waiver from the FDIC. Under these standards, the Bank
would be deemed a well-capitalized institution.
An undercapitalized institution may not solicit deposits by offering
rates of interest that are significantly higher than the prevailing rates of
interest on insured deposits (i) in such institution's normal market areas; or
(2) in the market area in which such deposits would otherwise be accepted.
Adequately capitalized institutions, whether or not they accept brokered
deposits pursuant to a waiver from the FDIC, are prohibited from paying a rate
of interest on such funds which, at the time such funds are accepted,
significantly exceeds (1) the rate paid on deposits of similar maturity in such
institution's normal market area for deposits accepted in the institution's
normal market area; or (2) the "national rate" paid on deposits of comparable
maturity for deposits accepted outside the institution's normal market area.
The national rate is (1) 120 percent of the current yield on similar maturity
U.S. Treasury obligations, or (2) in the case of any deposit at least half of
which is uninsured (institutional or wholesale deposits), 130 percent of such
applicable yield. A rate is deemed to be "significantly" higher or excessive
if it exceeds by more than 75 basis points the applicable benchmark (i.e., the
local rate or national rate).
The following table sets forth the dollar amount of savings deposits in
the various types of deposit programs offered by the Bank at the dates
indicated.
<TABLE>
<CAPTION>
June 30,
------------------------------------------------------------------
1994 1993 1992
----------------- ----------------- -----------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Certificates:
4.00 and under $ 89,920 23.48% $ 94,775 24.83% $ 38,521 9.86%
4.01 - 6.00% 107,368 28.04 87,964 23.04 104,811 26.83
6.01 - 8.00% 22,409 5.85 43,544 11.41 84,534 43.77
8.01 - 10.00% 10,049 2.63 18,154 4.76 43,344 11.09
10.01 - 12.00% 575 .15 822 .22 780 .20
12.01% and over 17 .00 94 .02 93 .02
-------- ------ -------- ------ -------- ------
Total certificates 230,338 60.15 245,353 64.28 272,083 69.63
-------- ------ -------- ------ -------- ------
Other Accounts:
Passbook and statement accounts 57,104 14.91 48,500 12.71 39,836 10.20
Money market accounts 26,604 6.95 27,508 11.99 26,403 6.76
NOW accounts 58,168 15.19 53,662 9.27 45,317 11.69
Non-interest bearing checking 10,702 2.80 6,689 1.75 7,112 1.72
-------- ------ -------- ------ -------- ------
Total other accounts 152,578 39.85 136,359 35.72 118,668 30.37
-------- ------ -------- ------ -------- ------
Total deposits $382,916 100.00% $381,712 100.00% $390,751 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
The following table sets forth the savings flows at the Bank during the
periods indicated. Net increase (decrease) refers to the amount of deposits
during a period less the amount of withdrawals during the period. The net
withdrawals (before interest credited) during the years ended June 30, 1992,
1993; and 1994, reflect management's strategy of conservatively pricing most
deposits to better control the Bank's cost of funds. Deposit flows at savings
institutions may also be influenced by external factors such as governmental
credit policies, market interest rate levels and alternative investment
opportunities.
-15-
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------
1994 1993 1992
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Opening Balance................... $381,712 $390,751 $400,576
Net deposits (withdrawals)........ (13,877) (20,831) (26,509)
Interest credit................... 15,081 11,792 16,684
-------- -------- --------
Ending balance.................... $382,916 $381,712 $390,751
======== ======== ========
Net increase (decrease)........... $ 1,204 $ (9,039) $ (9,825)
======== ======== ========
Percent increase (decrease)....... 0.32% (2.31)% (2.45)%
======== ======== ========
</TABLE>
The following table shows rate and maturity information for the Bank's
certificates of deposit as of June 30, 1994.
<TABLE>
<CAPTION>
0.00- 4.01- 6.01- 8.01- 10.01- 12.01% Percent
4.00% 6.00% 8.00% 10.00% 12.00% and over Total of Total
----- ----- ----- ------ ------ -------- ----- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Certificate of deposit
amounts maturing in
ended:
June 30, 1995............ $74,926 $ 33,949 $ 6,199 $ 5,261 $291 $17 $120,643 52.4%
June 30, 1996............ 14,988 33,905 5,494 4,775 284 0 59,446 25.8
June 30, 1997............ 6 14,289 10,463 2 0 0 24,760 10.7
Thereafter............... 0 25,225 253 11 0 0 25,489 11.1
------- -------- ------- ------- ---- --- -------- -----
Total.................. $89,920 $107,368 $22,409 $10,049 $575 $17 $230,338 100.0%
======= ======== ======= ======= ==== === ======== =====
Percent of total....... 39.04% 46.61% 9.73% 4.36% .25% .01% 100.0%
===== ===== ==== ==== === === =====
</TABLE>
The following table sets forth the amount of the Bank's certificates of
deposit and other deposits by time remaining until maturity as of June 30, 1994.
<TABLE>
<CAPTION>
Maturity
---------------------------------------------
3 Over Over Over
Months 3 to 6 6 to 12 12
or less Months Months Months Total
------- ------ ------- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit less than
$100,000........................ $39,372 $23,949 $42,322 $102,668 $208,311
Certificates of deposit of
$100,000 or more................ 2,893 1,962 3,250 6,841 14,946
Public funds...................... 5,874 399 622 186 7,081
------- ------- ------- -------- --------
Total certificates of deposit..... $48,139 $26,310 $46,194 $109,695 $230,338
======= ======= ======= ======== ========
</TABLE>
Borrowings. Although deposits are the Bank's primary source of funds,
the Bank's policy has been to utilize borrowings when they are a less costly
source of funds or can be invested at a positive rate of return. In addition,
the Bank has relied upon selected borrowings for short-term liquidity needs.
-16-
<PAGE>
The only borrowings utilized by the Bank in recent years have been
advances from the FHLB of Indianapolis. The Bank obtains advances from the FHLB
of Indianapolis upon the security of its capital stock of the FHLB of
Indianapolis and certain of its mortgage loans. Such advances are made pursuant
to several different credit programs, each of which has its own interest rate
and range of maturities. At June 30, 1994, the Bank's FHLB of Indianapolis
advances totaled $68.8 million, representing 13.7% of total assets.
The following table sets forth the maximum month-end balance and average
balance of FHLB advances for the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------
1994 1993 1992
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Maximum Balance:
FHLB advances............................... $120,000 $100,000 $47,000
Average Balance:
FHLB advances............................... $ 58,939 $ 57,741 $33,371
Weighted average interest rate during year.. 5.83% 5.88% 7.98%
</TABLE>
The following table sets forth certain information as to the Bank's FHLB
advances at the dates indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------
1994 1993 1992
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
FHLB advances.............................. $68,800 $58,000 $31,000
Weighted average interest rate
paid on FHLB advances.................... 5.83% 5.28% 8.41%
</TABLE>
Subsidiary and Other Activities
As a federally chartered savings bank, the Bank is permitted by OTS
regulations to invest up to 2% of its assets, or $9.9 million at June 30, 1994,
in the stock of, or unsecured loans to, service corporation subsidiaries. As
of such date, the net book value of the Bank's investment in and unsecured
loans to its service corporations, exclusive of Union Financial Corp. ("UFC"),
was $400,000. The Bank may invest an additional 1% of its assets in service
corporations where such additional funds are used for inner-city or community
development purposes. OTS regulations do not impose specific limitations on
the amount the Bank may invest in UFC, its operating subsidiary; however, the
OTS may at any time impose such limitations for supervisory, legal, safety or
soundness reasons.
During the fiscal year ended June 30, 1994, the Bank had three wholly-
owned subsidiaries, engaged in real estate development, insurance and securities
brokerage, and mortgage banking. Another of the Bank's wholly-owned
subsidiaries was sold effective May 31, 1993 to an unrelated entity. The
following is a description of the subsidiaries' principal activities.
Union Security Mortgage, Inc. and Union Financial Corp. Union Security
Mortgage, Inc. ("USM") is a mortgage banking company based in Santa Ana,
California, and was a wholly-owned subsidiary of the Bank until May 31, 1993,
the date on which complete ownership of USM was sold to an unrelated third
party. During the Bank's ownership of USM, USM originated, sold and serviced
conventional single family residential loans through its main office and a
satellite office located in Woodland Hills, California. The principal sources
of revenue for USM were loan origination fees, gains (or losses) from the sale
of loans, loan servicing fees and gains from the sale of loan servicing rights.
USM charged a $545 fee at the time of funding on all mortgages, which
represented the underwriting, loan document and wire transfer charges of USM.
-17-
<PAGE>
The primary operation of the business of USM was wholesale, which
involved the origination of loans by mortgage brokers in USM's name. Each loan
submitted by a mortgage broker was accepted only after review by one of USM's
loan underwriters. USM originated only conventional loans, although it was an
approved FHA Direct endorsement, VA Automatic and GNMA seller servicer. During
the Bank's ownership of USM, USM's guidelines for underwriting conventional
conforming loans complied with the underwriting criteria prescribed by FNMA and
FHLMC. USM originates other single-family residential loans with a view to
resale to private mortgage investors, and in underwriting these loans, USM
utilized guidelines and property standards specified by the various investors.
USM did not make loans with a loan-to-value ratio greater than 80% unless the
portion of the loans in excess of an 80% ratio was covered by private mortgage
insurance. During the eleven-month period ended June 1, 1993, USM funded $620
million of mortgage loans. Substantially all of these loans were sold to
unaffiliated third party investors.
USM customarily sold all of the loans that it originated. Loans were
generally sold to buyers in the secondary market on a non-recourse basis
(except for limited recourse provisions which generally ran from 90 to 120 days
from the date of sale), either as individual whole loans or as a packaged pool
of loans. Immediately upon origination, loans were assigned to the Bank
(where they were held for sale). The loans were reassigned back to USM
immediately prior to being sold in the secondary market. The loans were held
for sale by the Bank from their funding date until they were sold to investors,
a period which generally ranged from ten to ninety days. USM offered thirty
day interest rate locks to its borrowers prior to funding.
Through a third party, USM serviced most of the mortgage loans it
originated. USM reviewed the servicing performance on a monthly basis. Loan
servicing included collecting and remitting loan payments, accounting for
principal and interest, holding escrowed funds for payment of taxes and
insurance, making inspections as required of the mortgage premises, contacting
delinquent mortgagors, supervising foreclosures in the event of unremedied
defaults, and generally administering the loans for the investors to whom they
have been sold. USM received fees for servicing mortgage loans, generally
ranging from 25 to 30 basis points per annum on the remaining principal
balances of the loans. USM accounted for the revenues associated with the sale
of loans, in which servicing was retained, in conformity with the requirements
of Statement of Financial Accounting Standards No. 65. This method required
that the contracted sales price be adjusted, for purposes of determining gain
or loss on the sale, to provide for the recognition of a normal servicing fee
over the estimated servicing lives of the loans. The amount of revenue
recognized from the sale of loans was the estimated sales price that would have
been obtained if a normal this estimated sales present value of the difference
between the contractual and normal servicing fees over the estimated life of the
loan. This adjustment resulted in a receivable which is realized through the
receipt of the contractual servicing fee. During that portion of the 1993
fiscal year ended June 1, 1993, USM sold $623 million of loans, $229 million
with the servicing included thereon.
USM's servicing portfolio was subject to reductions by reason of normal
amortization, prepayment or foreclosure of outstanding loans and periodic sales
of loan servicing rights. In addition, in order to improve its earnings, USM,
in prior years, sold portions of its servicing portfolio to other mortgage
servicers.
USM sold, primarily to other mortgage bankers, banks, savings and loans
and other mortgage servicers, a portion of the loan servicing rights associated
with loans originated by USM during the year. In general, the decision to buy
or sell servicing rights was based upon management's assessment of USM's current
and future earnings objectives and the market value of servicing rights.
Effective June 1, 1993, the Bank sold complete ownership of its then
wholly owned subsidiary, USM, to the Knight Corporation ("Knight"). While the
Bank owned USM, USM originated, sold and serviced conventional single family
residential loans through its offices in Santa Ana and Woodland Hills,
California. USM customarily sold all of the loans that it originated to buyers
in the secondary market on a non-recourse basis, either as individual whole
loans or as a packaged pool of loans. However, subsequent to the sale of the
loans it originated USM remained potentially liable for losses incurred by a
purchaser, including unpaid principal and interest, under certain
representations and warranties made to the purchaser at the time of sale. In
certain circumstances (for example, when the debtor made fraudulent
misrepresentations to USM in the origination process), USM was liable for a
purchaser's losses on a defaulted loan, regardless of whether the loan was
recourse or non-recourse, if there had been a breach of the
-18-
<PAGE>
representations and warranties made to the purchaser by USM. Such fraud might
occur with respect to tax returns, employment verifications, and deposits and
appraisals provided at the time of origination. In connection with the sale of
USM on June 1, 1993, the Bank contractually assumed liability to the Knight
Corporation for losses and repurchase demands resulting from breaches of the
representations and warranties. Moreover, in certain cases the Bank separately
guaranteed USM's obligations to loan purchasers pursuant to guarantees signed by
the Bank prior to the sale of USM. Although USM dissolved in 1994, and the Bank
is less likely to be asked to indemnify the Knight Corporation for claims
against USM for any breach of the representations and warranties, the Bank
remains obligated under certain of the separate guarantees to loan purchasers
for losses relating to USM's prior operations.
When fraud claims relating to loans originated by USM began to surface
in fiscal 1993, they were thought to be aberrational. However, additional
repurchase claims arose in 1994, and the Company discovered that these claims,
some of which were based on fraud, were arising in California because of the
prior sharp increases in the value of single family homes. During 1990 and
1991, borrowers not capable of meeting mortgage payments obtained loans based
on fraud with the apparent expectation that they could profit from the resale
of the homes in the rising home market. However, the California economy
deteriorated and housing values dropped sharply. As a result, borrowers were
unable to sell their homes at a profit and pay off the mortgage loans. As
borrowers defaulted, the fraud was discovered and the repurchase and warranty
loss claims occurred. By fiscal 1994, lenders and the public were generally
aware of the fraud schemes in California and the California housing market had
stabilized.
In June 1994, the Company identified eight loans with an aggregate
outstanding loan balance of $1,048,000 at June 30, 1994, which had been sold to
the Federal Home Loan Mortgage Corporation and a loan sold to the Federal
National Mortgage Corporation with a loan balance of $161,000 at June 30, 1994,
which appeared to have involved broker fraud. During the year ended June 30,
1994, the Bank incurred approximately $116,000 in losses relating to warranty
claims on two loans, and provided for $1,482,000. At June 30, 1994, the Bank
had eight warranty loss claims pending and the estimated potential loss from
these known claims totalled $651,000. The Company believes six of those eight
claims are without merit and that only two, with an estimated liability of
$133,000, have any merit. The Company's allowance for warranty losses was
$1,366,000 at June 30, 1994, which management considers adequate. For the
fiscal years 1993 and 1992, USM had losses of $456,000 and $111,000,
respectively, under these guarantees.
The following table summarizes certain information as to the loan
servicing portfolios of USM and loans funded by USM at the dates and for the
periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------
1993* 1992
----- ----
(In Thousands)
<S> <C> <C>
Loans funded...................................... $619,567 $714,156
Loans serviced for others at end of period........ 720,354 405,896
</TABLE>
_____________________
* Through June 1
In January 1993, the Bank formed a new mortgage banking subsidiary based
in Virginia named Union Financial Corp. ("UFC"). UFC originates, sells and
services conventional single family residential loans through its main office.
The principal sources of revenue for UFC are loan origination fees, gains (or
losses) from the sale of loans, loan servicing fees and gains from the sale of
loan servicing rights.
The primary operation of the business of UFC is wholesale, which
involves the origination of loans by mortgage brokers in UFC's name. Each loan
submitted by a mortgage broker is accepted only after review by one of UFC's
loan underwriters. UFC originates only conventional loans, although it is an
approved FHA Direct endorsement and VA Automatic seller servicer. UFC's
guidelines for underwriting conventional conforming loans complies with the
underwriting criteria prescribed by FNMA and FHLMC. UFC originates other single-
family residential loans with a view to resale to private mortgage investors,
and in underwriting these loans, UFC utilizes guidelines and property standards
specified by the various investors. UFC does not make loans with a loan-to-
value ratio greater than 80% unless the portion of the loans in excess of an 80%
ratio is covered by private mortgage insurance.
-19-
<PAGE>
UFC customarily sells all of the loans that it originates. Loans are
generally sold to buyers in the secondary market on a non-recourse basis
(except for limited recourse provisions which generally ran from 90 to 120 days
from the date of sale), either as individual whole loans or as a packaged pool
of loans.
UFC services the mortgage loans it sells on a servicing retained basis.
Loan servicing includes collecting and remitting loan payments, accounting for
principal and interest, holding escrowed funds for payment of taxes and
insurance, making inspections as required of the mortgage premises, contacting
delinquent mortgagors, supervising foreclosures in the event of unremedied
defaults, and generally administering the loans for the investors to whom they
have been sold. UFC receives fees for servicing mortgage loans, generally
ranging from 25 to 30 basis points per annum on the remaining principal
balances of the loans. UFC accounts for the revenues associated with the sale
of loans, in which servicing is retained, in conformity with the requirements
of Statement of Financial Accounting Standards No. 65. This method requires
that the contracted sales price be adjusted, for purposes of determining gain
or loss on the sale, to provide for the recognition of a normal servicing fee
over the estimated servicing lives of the loans. The amount of revenue
recognized from the sale of loans is the estimated sales price that would have
been obtained if a normal servicing rate had been negotiated. UFC determines
this estimated sales price by adjusting the contracted sales price by the
present value of the difference between the contractual and normal servicing
fees over the estimated life of the loan. This adjustment results in a
receivable which is realized through the receipt of the contractual servicing
fee. During the 1994 fiscal year, UFC sold $413 million of loans, $328 million
with the servicing included thereon.
UFC's servicing portfolio is subject to reductions by reason of normal
amortization, prepayment or foreclosure of outstanding loans and periodic sales
of loan servicing rights.
UFC sold a portion of the loan servicing rights associated with loans
originated by UFC during the year. In general, the decision to buy or sell
servicing rights is based upon management's assessment of UFC's current and
future earnings objectives and the market value of servicing rights.
Subsequent to the sale of the loans it originates, UFC remains
potentially liable for losses incurred by a purchaser, including unpaid
principal and interest, under certain representations and warranties made to the
purchaser at the time of the sale. Under certain circumstances (for example,
when the debtor made fraudulent misrepresentations to UFC in the origination
process), UFC may become liable for a purchaser's losses on a defaulted loan,
regardless of whether the loan is recourse or nonrecourse, if there has been a
breach of the representations and warranties made to the purchaser by UFC. For
fiscal 1994, UFC had no losses under these guarantees.
UFC's operations during the year resulted in a profit of $29,000. The
following table summarizes the operations of UFC for the year ended June 30,
1994:
<TABLE>
<CAPTION>
(Dollars in thousands)
<S> <C>
Gross income,
principally fees on loans........................ $ 3,755
Operating expenses,
principally personnel expenses................... 3,711
--------
Income before taxes................................ 44
Income tax......................................... 15
--------
Net income......................................... $ 29
========
Loans funded....................................... $419,907
Loans sold......................................... $413,129
Servicing portfolio
at June 30, 1994................................. $ 44,800
</TABLE>
-20-
<PAGE>
As described above with respect to USM, UFC has potential liability
under representations and warranties made to purchasers and insurers of mortgage
loans and the purchasers of servicing rights at the time of the sale of the
mortgage loan or servicing rights. If there has been a breach of such
representations or warranties, UFC may become liable for the unpaid principal
and interest on defaulted loans (whether recourse or nonrecourse). UFC had no
losses under these guarantees during the 1994 fiscal year.
UNIFIN Inc. ("UNIFIN") is engaged in the development of real estate.
Currently UNIFIN owns and is developing a duplex condominium project on a
17-acre tract in north Evansville. At June 30, 1994, the project was
approximately 80% complete, with 42 units constructed and sold. The project
currently has four units under construction. At June 30, 1994, the Bank's
total equity investment in the project was $174,000. The Bank also had
unsecured loans to UNIFIN of $132,000 and secured loans of $671,000. The
project was originally scheduled to be completed in 1991. Sales have been
slower than projected, however, and management now expects completion of the
project to be delayed until at least 1996.
Management's policy since inception of the project has been to have a
maximum of four units under construction or completed and held for sale at any
one time. This restriction has minimized carrying costs and limited UNIFIN's
risk in this project. Also, due to the slower than anticipated sales, carrying
costs, including interest of the project, are currently being capitalized only
on units under construction or held for sale.
Real estate development activities involve risks that could have an
adverse effect on the profitability of the Bank. UNIFIN has incurred certain
costs to acquire land, develop the site, commence construction, and engage in
marketing activities. The construction phase for this project is approximately
80% complete, and the Bank had $245,000 in unallocated development costs as of
June 30, 1994. To the extent some or all of the remaining individual units are
not constructed and/or sold, the unallocated development costs relating to such
units would have to be written off.
In addition to the risks involved in real estate development activities,
pursuant to FIRREA, for purposes of determining its capital requirements, the
Bank is required to deduct from capital certain investments in and loans to
UNIFIN. FIRREA provides a transitional rule that phases in the deduction over
a five-year period for investments in and certain loans to UNIFIN for its real
estate development activities as of April 12, 1989. Loans to and investments
in UNIFIN for such activities after that date are required to be totally
deducted from capital in determining the Bank's capital requirements. Thus, as
of June 30, 1994, the Bank deducted from its capital its total investment in
and loans to UNIFIN. See "Regulation--Regulatory Capital."
Community Insurance Associates, Inc. ("CIA") is engaged in the sale of
property, life and casualty insurance, and tax-deferred annuities and
securities. Included in CIA is the Annuity and Securities Sales Division
("MOSI Division"). The MOSI Division, which is the securities brokerage
division of the subsidiary, sells products through Marketing One Securities,
Incorporated, a company not affiliated with the Bank. In December 1989 and
June 1993, CIA paid dividends of $400,000 and $500,000, respectively, to the
Bank. CIA paid no dividends to the Bank in fiscal year 1994. At June 30, 1994,
the Bank had an equity investment in CIA of $89,000.
Pedcor Investments ("Pedcor"). The Bank is a 24.75% limited partner in
Pedcor, a limited partnership organized to build, own and operate a 208 unit
apartment complex in Indianapolis, Indiana. The project, operated as a
multi-family, low income housing project, qualifies for low income housing tax
credits. The project is complete and performing as planned. The Bank
committed to invest approximately $1.4 million at inception. As of June 30,
1994, the Bank had a $515,000 net investment in Pedcor with four additional
annual capital contributions totaling $398,000 remaining to be paid by the
Bank. The additional contributions will be used for operating and other
expenses of the partnership. These payments are contingent upon the Bank not
exercising a put option which would require the general partners to buy out the
Bank's interest in the partnership for a nominal amount.
The Bank has been informed by the OTS that this investment is
permissible for a national bank and, as such, is not required to be deducted
from capital for regulatory purposes.
-21-
<PAGE>
Competition
The Bank faces strong competition, both in originating real estate and
other loans and in attracting deposits. Competition in originating real estate
loans comes primarily from other savings institutions, commercial banks and
mortgage bankers making loans secured by real estate located in the Bank's
market areas. Commercial banks and finance companies provide vigorous
competition in consumer lending.
The Bank attracts all of its deposits through its branch offices,
primarily from the communities in which those branch offices are located;
therefore, competition for those deposits is principally from other savings
institutions and commercial banks located in the same communities. The Bank
competes for these deposits by offering a variety of deposit accounts at
competitive rates, convenient business hours, and convenient branch locations
with interbranch deposit and withdrawal privileges at each. Automated teller
machine ("ATM") facilities are available at most branch locations.
The Bank considers its primary market area to be the Greater Evansville
Metropolitan Area, which is composed of Warrick, Posey, Vanderburgh and Gibson
Counties, Indiana, and Henderson County, Kentucky. As of June 30, 1994, there
were approximately 36 financial institutions serving the Bank's primary market
area. The Bank estimates its share of the savings market in its primary market
area to be less than 10%. The Bank also has branches in and serves Bartholomew
County, Indiana and the communities of Jasper and Shelbyville, Indiana and Mt.
Carmel, Illinois.
Competition has increased in recent years due to changes in Indiana law
permitting (1) state wide branching by national and state banks and savings
associations and (2) nationwide acquisitions on a reciprocal basis of and by
Indiana bank and bank holding companies.
In addition, Indiana law permits acquisitions of certain federal and
state SAIF-insured savings associations and their holding companies located in
Indiana, Ohio, Kentucky, Illinois, and Michigan (the "District") by other
savings associations located in the District. The Indiana statute also
authorizes Indiana savings associations to acquire other savings associations in
the District.
Unlike prior federal law which permitted bank holding companies to
acquire only failing savings associations, FIRREA now permits bank holding
companies to acquire healthy savings associations. Savings associations may also
acquire banks under federal law. See "Regulation--Acquisitions or Dispositions."
To date, several bank holding company/healthy savings association acquisitions
in Indiana have been completed. Affiliations between banks and healthy savings
associations based in Indiana may also increase the competition faced by the
Bank.
Employees
At June 30, 1994, the Bank and its subsidiaries had a total of 236
employees, including 59 part-time employees. The Bank's employees are not
represented by any collective bargaining group. Management considers its
employee relations to be good.
REGULATION
General
The Bank, as a federally chartered savings bank, is a member of the
Federal Home Loan Bank System ("FHLB System") and its deposits are insured by
the FDIC. The Bank is subject to extensive regulation by the OTS. Federal
associations may not enter into certain transactions unless certain regulatory
tests are met or they obtain prior governmental approval and the associations
must file reports with these governmental agencies about their activities and
their financial condition. Periodic compliance examinations of the Bank are
conducted by the OTS which has, in conjunction with the FDIC in certain
situations, examination and enforcement powers. This supervision and regulation
are intended primarily for the protection of depositors and federal deposit
insurance funds. The Bank is also subject to certain reserve requirements under
regulations of the Board of Governors of the Federal Reserve System ("FRB").
In November, 1993, the Clinton Administration announced that it is
considering legislation that would consolidate the supervision and regulation
of all U.S. financial institutions in one administrative body (the "Clinton
Legislation"). It cannot be predicted with certainty whether or when the
Clinton Legislation will be enacted or the extent to which the Bank would be
affected thereby.
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An OTS regulation establishes a schedule for the assessment of fees upon
all savings associations to fund the operations of the OTS. The regulation also
establishes a schedule of fees for the various types of applications and filings
made by savings associations with the OTS. The general assessment, to be paid on
a semiannual basis, is based upon the savings association's total assets,
including consolidated subsidiaries, as reported in a recent quarterly thrift
financial report. Currently, the assessment rates range from .0172761% of assets
for associations with assets of $67 million or less to .0045864% for
associations with assets in excess of $35 billion. The Bank's semiannual
assessment under this assessment scheme, based upon its total assets at March
31, 1994, was $53,800.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FedICIA") became effective December 19, 1991. Among other things FedICIA
requires that on-site examinations of the Bank by the OTS occur at least once
every 12 months (unless the FDIC has conducted a full-scope examination during
the period in question). FedICIA also authorizes the FDIC to assess insured
institutions for the cost of FDIC examinations and requires the OTS to assess
federal associations for the costs of its examinations.
FedICIA also requires the Bank's management to file annual reports on
the financial condition of the Bank with the FDIC and OTS for any fiscal year in
which the Bank has $500 million or more in assets at the beginning of such
fiscal year. A related provision mandates annual audits (of the Bank or the
Holding Company) by independent accountants and the establishment of an audit
committee of outside directors (which the Bank already has). The auditors will
be required to attest to certain information provided by management in the
annual report, which will be publicly available.
Pursuant to FedICIA, the OTS is required to prescribe standards for
federally insured savings associations related to (a) internal controls,
information systems and internal audit systems; (b) loan documentation; (c)
credit underwriting; (d) interest rate exposure; (e) asset growth; and (f)
compensation, fees and benefits. The compensation standards must prohibit as
an unsafe and unsound practice any employment contract, compensation or benefit
agreement, fee arrangement, perquisite, stock option plan, post-employment
benefit or other compensatory arrangement that would provide any executive
officer, employee, director or principal shareholder with excessive
compensation, fees or benefits or that could lead to material financial loss to
the institution. The OTS is also charged by FedICIA with prescribing standards
for federally insured savings associations and their holding companies
specifying (a) a maximum ratio of classified assets to capital; (b) minimum
earnings sufficient to absorb losses without impairing capital; and (c) to the
extent feasible, a minimum ratio of market value to book value for publicly
traded shares of the association or its holding company. The OTS, along with
the other banking agencies with respect to similar standards they must
establish, proposed regulations relating to such standards. The impact of
these standards on the operations of the Bank cannot be ascertained until the
final regulations are issued.
FedICIA also requires the OTS and other federal banking agencies to
develop jointly a method for insured depository institutions to provide
supplemental disclosure of the estimated fair market value of assets and
liabilities, to the extent feasible and practicable, in financial statements or
reports required to be filed with the federal banking agencies.
FedICIA also included the Truth in Savings Act, which requires the FRB
to establish regulations providing for clear and uniform disclosure of the
rates, fees and terms of deposit accounts. The FRB has adopted regulations,
which became effective June 21, 1993, requiring a specific disclosure before an
account is opened, in regularly provided statements and in advertisements,
announcements and solicitations initiated by a depository institution. The
regulations prescribe detailed disclosure of deposit account yield information,
minimum balance requirements and fee impact on the yield. The regulations also
establish certain recordkeeping requirements.
Federal Home Loan Bank System
The Bank is a member of the FHLB System, which consists of 12 regional
banks. The Federal Housing Finance Board ("FHFB"), an independent agency,
controls the FHLB System including the FHLB of Indianapolis. The FHLB System
provides a central credit facility primarily for member savings associations
and other member financial institutions. The Bank is required to hold shares
of capital stock in the FHLB of Indianapolis in an amount at least equal to the
greater of 1% of the aggregate principal amount of its unpaid residential
mortgage loans, home purchase contracts and similar obligations at the end of
each calendar year, .3% of its assets or 1/20 (or such greater fraction
established by the
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FHLB) of outstanding FHLB advances, commitments, lines of credit and letters of
credit. The Bank is currently in compliance with this requirement. At June 30,
1994, the Bank's investment in stock of the FHLB of Indianapolis was $6.1
million.
In past years, the Bank received dividends on its FHLB stock. Certain
provisions of FIRREA require all 12 FHLB's to provide funds for the resolution
of troubled savings associations and to establish affordable housing programs
through direct loans or interest subsidies on advances to members to be used
for lending at subsidized interest rates for low-and moderate-income,
owner-occupied housing projects, affordable rental housing, and certain other
community projects. These contributions and obligations could adversely affect
the value of FHLB stock in the future. For the year ending June 30, 1994,
dividends paid to the Bank totaled $329,485, for an annual rate of 5.72%. A
reduction in value of such stock may result in a corresponding reduction in the
Bank's capital.
The FHLB of Indianapolis serves as a reserve or central bank for member
institutions within its assigned region. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System. It makes
advances to members in accordance with policies and procedures established by
the FHFB and the Board of Directors of the FHLB of Indianapolis.
All FHLB advances must be fully secured by sufficient collateral as
determined by the FHLB. FIRREA prescribes eligible collateral as first
mortgage loans less than 90 days delinquent or securities evidencing interests
therein, securities (including mortgage-backed securities) issued, insured or
guaranteed by the federal government or any agency thereof, FHLB deposits and,
to a limited extent, real estate with readily ascertainable value in which a
perfected security interest may be obtained. Other forms of collateral may be
accepted as over collateralization or, under certain circumstances, to renew
advances outstanding on the date of enactment of FIRREA. All long-term
advances are required to provide funds for residential home financing and the
FHLB has established standards of community service that members must meet to
maintain access to long-term advances.
Interest rates charged for advances vary depending upon maturity, the
cost of funds to the FHLB of Indianapolis and the purpose of the borrowing.
Under current law, savings associations which cease to be Qualified Thrift
Lenders are ineligible to receive advances from their FHLB.
Liquidity
For each calendar month, the Bank is required to maintain an average
daily balance of liquid assets (cash, certain time deposits, bankers'
acceptances, specified United States Government, state or federal agency
obligations, shares of certain mutual funds and certain corporate debt
securities and commercial paper) equal to an amount not less than a specified
percentage of its net withdrawable deposit accounts plus short-term borrowings
during the preceding calendar month. This liquidity requirement may be changed
from time to time by the OTS to any amount within the range of 4% to 10%
depending upon economic conditions and the savings flows of member institutions
and is currently 5%. OTS regulations also require each member savings
institution to maintain an average daily balance of short-term liquid assets at
a specified percentage (currently 1%) of the total of its net withdrawable
deposit accounts and short-term borrowings during the preceding calendar month.
Monetary penalties may be imposed for failure to meet these liquidity
requirements. The daily average liquidity of the Bank for June, 1994, was 8.0%
which exceeded the then applicable 5% liquidity requirement. Its average short-
term liquidity ratio for June, 1994, was 4.7%. The Bank has never been subject
to monetary penalties for failure to meet its liquidity requirements.
Real Estate Lending Standards
OTS regulations require savings associations to establish and maintain
written internal real estate lending policies. Each association's lending
policies must be consistent with safe and sound banking practices and
appropriate to the size of the association and the name and scope of its
operations. The policies must establish loan portfolio diversification
standards; establish prudent underwriting standards, including loan-to-value
limits, that are clear and measurable; establish loan administration procedures
for the association's real estate portfolio; and establish documentation,
approval, and reporting requirements to monitor compliance with the
association's real estate lending policies.
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The association's written real estate lending policies must be reviewed
and approved by the association's board of directors at least annually. Further,
each association is expected to monitor conditions in its real estate market to
ensure that its lending policies continue to be appropriate for current market
conditions.
Insurance of Deposits
The FDIC administers two separate insurance funds, which are not
commingled: one primarily for federally insured banks ("BIF") and one primarily
for federally insured savings associations ("SAIF"). As the federal insurer of
deposits of savings associations, the FDIC determines whether to grant insurance
to newly-chartered savings associations, has authority to prohibit unsafe or
unsound activities and has enforcement powers over savings associations (usually
in conjunction with the OTS or on its own if the OTS does not undertake
enforcement action).
Deposit accounts in the Bank are generally insured by the SAIF to a
maximum of $100,000 for each insured depositor. As a condition to such
insurance, the FDIC is authorized to issue regulations and, in conjunction with
OTS, conduct examinations and generally supervise the operations of its insured
members. This supervision extends to a comprehensive regulatory scheme
governing, among other things, the form of deposit instruments issued by savings
associations, and certain aspects of their lending activities, including
appraisal requirements, private mortgage insurance coverage and lending
authority.
Effective January 1, 1993, the FDIC adopted a final rule that implements
a transitional risk-based assessment system whereby a base insurance premium,
yet unspecified, will be adjusted according to the capital category and
subcategory of an institution to one of three capital categories consisting of
(1) well capitalized, (2) adequately capitalized, or (3) undercapitalized, and
one of three subcategories consisting of (a) healthy, (b) supervisory concern,
or (c) substantial supervisory concern. An institution's assessment rate will
depend on the capital category and supervisory category to which it is assigned.
Assessment rates will range from 23 basis points for an institution in the
highest category (i.e., well capitalized) to 31 basis points for an institution
in the lowest category (i.e., undercapitalized and substantial supervisory
concern). The supervisory subgroup to which an institution is assigned by the
FDIC is confidential and may not be disclosed. The Bank's deposit insurance
assessments may increase depending upon the category and subcategory, if any, to
which the Bank is assigned by the FDIC. Any increase in insurance assessments
could have an adverse effect on the earnings of the Bank.
When the Resolution Trust Corporation's (the "RTC's") new case
resolution authority expires in 1995, the SAIF will assume jurisdiction over,
and the financial responsibility for, the resolution over all new troubled
associations, and will have responsibility for resolution of certain troubled
institutions prior to that time. In the absence of adequate funding, the current
SAIF insurance premium assessment schedule could rise to pay for the resolution
of troubled institutions. Moreover, since the reserve ratio of BIF is currently
higher than that of SAIF, it is anticipated that BIF premiums may start
declining in the next year or so. Such events could cause disparity between the
assessment rates of SAIF and BIF members. While the magnitude of the competitive
advantage of BIF-insured institutions and its impact on the Bank's results of
operations, cannot be determined at this time, a significant increase in SAIF
premiums or decrease in BIF premium could place the Bank at a material
competitive disadvantage. In any case, a material increase in SAIF premiums
would likely have an adverse effect on the operating expenses and results of
operations of the Bank.
Until the SAIF is recapitalized such that it reaches a 1.25% reserve
ratio (the "SAIF Capitalization Date"), banks and savings associations are
generally barred from switching insurance funds. There are limited exceptions,
such as when a bank acquires a savings association in default or in danger of
default, if the benefits to the SAIF or the RTC equal or exceed the assessment
income that will be lost during the moratorium. After the SAIF Capitalization
Date, any insured depository institution may switch insurance funds, but only
after paying an exit fee to the old fund and an entrance fee to the new fund.
See "--Acquisitions and Dispositions." Notwithstanding the foregoing, FIRREA
does not prohibit savings association to bank charter conversions during the
moratorium, as long as SAIF premiums continue to be paid.
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Regulatory Capital
Regulations under FIRREA have established three separate minimum
capital-to-assets requirements: (i) a leverage limit, (ii) a tangible capital
requirement, and (iii) a risk-based capital requirement. The leverage limit
requires that savings associations maintain "core capital" of at least 3% of
total assets. Core capital is generally defined as common stockholders' equity
(including retained income), noncumulative perpetual preferred stock and
related surplus, certain minority equity interests in subsidiaries, qualifying
supervisory goodwill (on a declining basis until 1995), purchased mortgage
servicing rights and purchased credit card relationships (which may be included
in an amount up to 50% of core capital, but which are to be reported on an
association's balance sheet at the lesser of 90% of their fair market value or
100% of their remaining unamortized book value), less nonqualifying
intangibles. Under the tangible capital requirement, a savings association
must maintain tangible capital (core capital less all intangible assets except
purchased mortgage servicing rights and purchased credit card relationships
which may be included after making the above-noted adjustments) of at least
1.5% of total assets. Under the risk-based capital requirements, a minimum
amount of capital must be maintained by a savings association to account for
the relative risks inherent in the type and amount of assets held by the
savings association. Currently, the risk-based capital requirement requires a
savings association to maintain capital (defined generally for these purposes
as core capital plus general valuation allowances and permanent or maturing
capital instruments such as preferred stock and subordinated debt less assets
required to be deducted) equal to 8.0% of risk-weighted assets. Assets are
ranked as to risk in one of four categories (0-100%) with a credit risk-free
asset such as cash requiring no risk-based capital and an asset with a
significant credit risk such as a non-accrual loan being assigned a factor of
100%. At June 30, 1994, based on the capital standards then in effect, the
Bank was in compliance with the capital requirements mandated by FIRREA.
The Comptroller of the Currency, effective December 31, 1990, adopted a
new minimum leverage ratio of 3% Tier 1 capital-to-total assets for the highest
rated national banks, with an additional requirement of 100 to 200 basis points
for all other national banks. FIRREA requires that the capital standards for
savings associations be no less stringent than those applicable to national
banks. Accordingly, the OTS has proposed revised capital regulations imposing a
minimum core capital requirement of 3% for the highest rated savings
associations, with an additional requirement of 100 to 200 basis points for all
other savings associations. These regulations have not become effective and
there can be no assurance as to whether, or in what form, such regulations will
be adopted.
The OTS has issued a final rule (which becomes effective September 30,
1994) which sets forth the methodology for calculating an interest rate risk
component to be incorporated into the OTS regulatory capital rule. Under the
new rule, only savings associations with above normal interest rate risk
(institutions whose portfolio equity would decline in value by more than 2% of
assets in the event of a hypothetical 200-basis-point move in interest rates)
will be required to maintain additional capital for interest rate risk under
the risk-based capital framework. An institution with an "above normal" level
of exposure will have to maintain additional capital equal to one half the
difference between its measured interest rate risk (the most adverse change in
the market value of its portfolio resulting from a 200-basis-point move in
interest rates divided by the estimated market value of its assets) and 2%,
times the market value of its assets. That dollar amount of capital is in
addition to an institution's existing risk-based capital requirement.
If an association is not in compliance with the capital requirements
imposed by FIRREA the OTS is required to prohibit asset growth and to impose a
capital directive that may restrict, among other things, the payment of
dividends and officers' compensation. In addition to the specific sanctions
provided in FIRREA for failing to meet the capital requirements, the OTS and the
FDIC generally are authorized to take enforcement actions against a savings
association that fails to meet its capital requirements, which actions may
include restrictions on operations and banking activities, the imposition of a
capital directive, a cease and desist order, civil money penalties or harsher
measures such as the appointment of a receiver or conservator or a forced merger
into another institution.
In FedICIA, certain regulatory action is mandated or recommended for
savings associations that are deemed to be well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized and critically
undercapitalized. At each successively lower capital category, an institution is
subject to more restrictive and numerous mandatory or discretionary regulatory
actions or limits, and the OTS has less flexibility in determining how to
resolve the problems of
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the institution. OTS regulations define these capital levels as follows: (1)
well-capitalized associations must have total risk-based capital of at least
10%, core risk-based capital (consisting only of items that qualify for
inclusion in core capital) of at least 6% and a leverage ratio of at least 5%
and are not subject to any order or written directive of the OTS to maintain a
specific capital level for any capital measure; (2) adequately capitalized
associations are those that meet the regulatory minimum of total risk-based
capital of 8%, core risk-based capital of 4% and a leverage ratio of 4% (except
for institutions receiving the highest examination rating, in which case the
requirement is 3%), but which are not well capitalized; (3) undercapitalized
associations are those that do not meet the requirements for adequately
capitalized associations, but that are not significantly undercapitalized; (4)
significantly undercapitalized associations have total risk-based capital of
less than 6%, core risk-based capital of less than 3% and a leverage ratio of
less than 3%; and (5) critically undercapitalized associations are those with
tangible capital of less than 2% of total assets. In addition, the OTS can
downgrade an association's designation notwithstanding its capital level, based
on less than satisfactory examination ratings in areas other than capital or if
the institution is deemed to be in an unsafe or unsound condition. Each
undercapitalized association must submit a capital restoration plan to the OTS
within 45 days after it becomes undercapitalized. Such institution will be
subject to increased monitoring and asset growth restrictions and will be
required to obtain prior approval for acquisitions, branching and engaging in
new lines of business. Significantly undercapitalized institutions must restrict
the payment of bonuses and raises to their senior executive officers.
Furthermore, a critically undercapitalized institution must be placed in
conservatorship or receivership within 90 days after reaching such
capitalization level, except under limited circumstances. It will also be
prohibited from making payments on any subordinated debt securities without the
prior approval of the FDIC and will be subject to significant additional
operating restrictions. The Bank's capital at June 30, 1994, meets the standards
for a well-capitalized association.
FedICIA prohibits an insured institution from making a capital
distribution to anyone or paying management fees to any person having control of
the institution if, after such distribution or payment, the institution would be
undercapitalized. In addition, each company controlling an undercapitalized
institution must guarantee that the institution will comply with its capital
plan until the institution has been adequately capitalized on an average during
each of four consecutive calendar quarters and must provide adequate assurances
of performance. The aggregate liability pursuant to such guarantee is limited to
the lesser of (a) an amount equal to 5% of the institution's total assets at the
time the institution became undercapitalized, or (b) the amount which is
necessary to bring the institution into compliance with all capital standards
applicable to such institution at the time the institution fails to comply with
its capital restoration plan.
Capital Distributions Regulation
An OTS regulation imposes limitations upon all "capital distributions"
by savings associations, including cash dividends, payments by an institution to
repurchase or otherwise acquire its shares, payments to shareholders of another
institution in a cash-out merger and other distributions charged against
capital. The regulation establishes a three-tiered system of regulation, with
the greatest flexibility being afforded to well-capitalized institutions. A
savings association which has total capital (immediately prior to and after
giving effect to the capital distribution) that is at least equal to its fully
phased-in capital requirements would be a Tier 1 institution ("Tier 1
Institution"). An institution that has total capital at least equal to its
minimum capital requirements, but less than its fully phased-in capital
requirements, would be a Tier 2 institution ("Tier 2 Institution"). An
institution having total capital that is less than its minimum capital
requirements would be a Tier 3 institution ("Tier 3 Institution"). However, an
institution which otherwise qualifies as a Tier 1 institution may be designated
by the OTS as a Tier 2 or Tier 3 institution if the OTS determines that the
institution is in need of more than normal supervision. The Bank is currently a
Tier 1 Institution.
A Tier 1 Institution could, after prior notice but without the approval
of the OTS, make capital distributions during a calendar year up to 100% of its
net income to date during the calendar year plus an amount that would reduce by
one-half its "surplus capital ratio" (the excess over its Fully Phased-in
Capital Requirements) at the beginning of the calendar year. Any additional
amount of capital distributions would require prior regulatory approval.
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Federal Reserve System
Under FRB regulations, the Bank is required to maintain reserves against
its transaction accounts (primarily checking and NOW accounts) and non-personal
money market deposit accounts. These regulations generally require that reserves
be maintained against transaction accounts in the amount of 3% of the total of
such accounts up to $51.9 million (subject to adjustment by the FRB), plus 10%
(subject to adjustment by the FRB between 8% and 14%) of the total in excess of
$51.9 million. In addition, a reserve of 3% (subject to adjustment by the FRB
between 0% and 9%) must be maintained on non-personal money market deposit
accounts that have original maturities of less than one and one-half years. No
reserve is required to be maintained on non-personal time deposits. Current law
permits savings associations to designate and exempt $4.0 million of reservable
liabilities from these reserve requirements. The effect of these reserve
requirements is to increase the Bank's cost of funds. The Bank is in compliance
with its reserve requirements.
A federal savings association, like other depository institutions
maintaining reservable accounts, may borrow from the Federal Reserve Bank
"discount window," but the FRB's regulations require the savings association to
exhaust other reasonable alternative sources, including borrowing from its
regional FHLB, before borrowing from the Federal Reserve Bank. FedICIA imposes
certain limitations on the ability of undercapitalized depository institutions
to borrow from Federal Reserve Banks.
Transactions with Affiliates
Transactions between savings associations and any affiliate are governed
by Sections 23A and 23B of the Federal Reserve Act. An affiliate of a savings
association is any company or entity which controls, is controlled by or is
under common control with the savings association. In a holding company context,
the parent holding company of a savings association (such as the Holding
Company) and any companies controlled by such parent holding company are
affiliates of the savings association. The subsidiaries of a savings
association, however, are not deemed affiliates under Section 23A and 23B;
however, transactions between a subsidiary of a savings association and any of
the affiliates of a savings association are subject to the requirements and
limitations of Sections 23A and 23B.
Generally, Sections 23A and 23B (i) limit the extent to which the
savings association or its subsidiaries may engage in covered transactions with
any one affiliate to an amount equal to 10% of such association's capital stock
and surplus, and contain an aggregate limit on all such transactions with all
affiliates to an amount equal to 20% of such capital stock and surplus and (ii)
require that all such transactions be on terms substantially the same, or at
least as favorable, to the association or subsidiary as those provided to a non-
affiliate. The term covered transaction includes the making of loans, purchase
of assets, issuance of a guarantee and similar types of transactions.
In addition to the restrictions imposed by Sections 23A and 23B, FIRREA
provides that no savings association may (i) loan or otherwise extend credit to
an affiliate, except for any affiliate which engages only in activities which
are permissible for bank holding companies, or (ii) purchase or invest in any
stocks, bonds, debentures, notes, or similar obligations of any affiliate,
except for affiliates which are subsidiaries of the savings association.
FIRREA also extended to savings associations the restrictions contained
in Section 22(h) of the Federal Reserve Act on loans to executive officers,
directors and principal shareholders. Under Section 22(h), loans to an executive
officer and to a greater than 10% shareholder of a savings association (18% in
the case of institutions located in an area with less than 30,000 in
population), and certain affiliated entities of either, may not exceed together
with all other outstanding loans to such person and affiliated entities the
association's loan-to-one-borrower limit as established by FIRREA (generally
equal to 15% of the institution's unimpaired capital and surplus and an
additional 10% of such capital and surplus for loans fully secured by certain
readily marketable collateral). Section 22(h) also prohibits loans, above
amounts prescribed by the appropriate federal banking agency, to directors,
executive officers and greater than 10% shareholders of a savings association,
and their respective affiliates, unless such loan is approved in advance by a
majority of the board of directors of the association with any "interested"
director not participating in the voting. Currently, the FRB requires board of
director approval for loans to directors, officers, and 10% shareholders
(including all other outstanding loans to such persons) above the greater of
$25,000 or 5% of capital and surplus (up to $500,000). Further, the FRB requires
that loans to directors, executive officers and principal shareholders be made
on terms
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substantially the same as offered in comparable transactions to other
unaffiliated parties. FedICIA also extends to federal savings associations
certain additional limitations found in Section 22(g) of the Federal Reserve Act
on loans made to executive officers.
Holding Company Regulation
The Holding Company is regulated as a "non-diversified unitary savings
and loan holding company" within the meaning of the Home Owners' Loan Act, as
amended ("HOLA"), and subject to regulatory oversight of the Director of the
OTS. As such, the Holding Company is registered with the OTS and thereby subject
to OTS regulations, examinations, supervision and reporting requirements. As a
subsidiary of a savings and loan holding company, the Bank is subject to certain
restrictions in its dealings with the Holding Company and with other companies
affiliated with the Holding Company.
HOLA generally prohibits a savings and loan holding company, without
prior approval of the Director of the OTS, from (i) acquiring control of any
other savings association or savings and loan holding company or controlling the
assets thereof or (ii) acquiring or retaining more than 5 percent of the voting
shares of a savings association or holding company thereof which is not a
subsidiary. Additionally, under certain circumstances a savings and loan hold
company is permitted to acquire, with the approval of the Director of the OTS,
up to 15 percent of previously unissued voting shares of an under-capitalized
savings association for cash without that savings association being deemed
controlled by the holding company. Except with the prior approval of the
Director of the OTS, no director or officer of a savings and loan holding
company or person owning or controlling by proxy or otherwise more than 25% of
such company's stock, may also acquire control of any savings institution, other
than a subsidiary institution, or any other savings and loan holding company.
The Holding Company's Board of Directors presently intends to operate
the Holding Company as a unitary savings and loan holding company. There are
generally no restrictions on the permissible business activities of a unitary
savings and loan holding company. However, if the Director of OTS determines
that there is reasonable cause to believe that the continuation by a savings and
loan holding company of an activity constitutes a serious risk to the financial
safety, soundness, or stability of its subsidiary savings association, the
Director of the OTS may impose such restrictions as deemed necessary to address
such risk and limiting (i) payment of dividends by the savings association, (ii)
transactions between the savings association and its affiliates, and (iii) any
activities of the savings association that might create a serious risk that the
liabilities of the holding company and its affiliates may be imposed on the
savings association.
Notwithstanding the above rules as to permissible business activities of
unitary savings and loan holding companies, if the savings association
subsidiary of such a holding company fails to meet the Qualified Thrift Lender
(QTL) test, then such unitary holding company would become subject to the
activities restrictions applicable to multiple holding companies. (Additional
restrictions on securing advances from the FHLB also apply). See "--Qualified
Thrift Lender." At June 30, 1994, the Bank's asset composition was in excess
of that required to qualify the Bank as a Qualified Thrift Lender.
If the Holding Company were to acquire control of another savings
institution other than through a merger or other business combination with the
Bank, the Holding Company would thereupon become a multiple savings and loan
holding company. Except where such acquisition is pursuant to the authority to
approve emergency thrift acquisitions and where each subsidiary savings
association meets the QTL test, the activities of the Holding Company and any
of its subsidiaries (other than the Bank or other subsidiary savings
associations) would thereafter be subject to further restrictions. HOLA
provides that, among other things, no multiple savings and loan holding company
or subsidiary thereof which is not a savings association shall commence or
continue for a limited period of time after becoming a multiple savings and
loan holding company or subsidiary thereof, any business activity other than
(i) furnishing or performing management services for a subsidiary savings
association, (ii) conducting an insurance agency or escrow business, (iii)
holding, managing, or liquidating assets owned by or acquired from a subsidiary
savings institution, (iv) holding or managing properties used or occupied by a
subsidiary savings institution, (v) acting as trustee under deeds of trust,
(vi) those activities previously directly authorized by the FSLIC by regulation
as of March 5, 1987, to be engaged
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in by multiple holding companies or (vii) those activities authorized by the FRB
as permissible for bank holding companies, unless the Director of the OTS by
regulation prohibits or limits such activities for savings and loan holding
companies. Those activities described in (vii) above must also be approved by
the Director of the OTS prior to being engaged in by a multiple holding company.
The Director of the OTS may also approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
associations in more than one state, if the multiple savings and loan holding
company involved controls a savings association which operated a home or branch
office in the state of the association to be acquired as of March 5, 1987, or
if the laws of the state in which the institution to be acquired is located
specifically permit institutions to be acquired by state-chartered institutions
or savings and loan holding companies located in the state where the acquiring
entity is located (or by a holding company that controls such state-chartered
savings institutions). Also, the Director of the OTS may approve an
acquisition resulting in a multiple savings and loan holding company
controlling savings associations in more than one state in the case of certain
emergency thrift acquisitions.
Federal Securities Law
The shares of Common Stock of the Holding Company are registered with
the SEC under the 1934 Act. The Holding Company is subject to the information,
proxy solicitation, insider trading restrictions and other requirements of the
1934 Act and the rules of the SEC thereunder.
Shares of Common Stock held by persons who are affiliates of the Holding
Company may not be resold without registration or unless sold in accordance
with the resale restrictions of Rule 144 under the 1933 Act. If the Holding
Company meets the current public information requirements under Rule 144, each
affiliate of the Holding Company who complies with the other conditions of Rule
144 (including the two-year holding period and those that require the
affiliate's sale to be aggregated with those of certain other persons) would be
able to sell in the public market, without registration, a number of shares not
to exceed, in any three-month period, the greater of (i) 1% of the outstanding
shares of the Holding Company or (ii) the average weekly volume of trading in
such shares during the preceding four calendar weeks.
Qualified Thrift Lender
Under current OTS regulations, the QTL test requires that a savings
association have at least 65% of its portfolio assets invested in "qualified
thrift investments" on a monthly average basis in 9 out of every 12 months.
Qualified thrift investments under the QTL test include: (i) loans made to
purchase, refinance, construct, improve or repair domestic residential housing
or manufactured housing; (ii) home equity loans; (iii) mortgage-backed
securities; (iv) direct or indirect existing obligations of either the FDIC or
the FSLIC for ten years from the date of issuance, if issued prior to July 1,
1989; (v) obligations of the FDIC, FSLIC, FSLIC Resolution Fund and the
Resolution Trust Corporation for a five year period from July 1, 1989, if
issued after such date; (vi) FHLB stock; (vii) 50% of the dollar amount of
residential mortgage loans originated and sold within 90 days of origination;
(viii) investments in service corporations that derive at least 80% of their
gross revenues from activities directly related to purchasing, refinancing,
constructing, improving or repairing domestic residential real estate or
manufactured housing; (ix) 200% of the dollar amount of loans and investments
made to acquire, develop and construct one to four-family residences that are
valued at no more than 60% of the median value of homes constructed in the
area; (x) 200% of the dollar amount of loans for the acquisition or improvement
of residential real property, churches, schools, and nursing homes located
within, and loans for any purpose to any small business located within, an area
where credit needs of its low and moderate income residents are determined not
to have been adequately met; (xi) loans for the purchase, construction,
improvement or upkeep of churches, schools, nursing homes and hospitals not
qualified under (x); (xii) up to 10% of portfolio assets held in consumer loans
or loans for educational purposes; and (xiii) FHLMC and FNMA stock. However,
the aggregate amount of investments in categories (vii)-(xiii) which may be
taken into account for the purpose of whether an institution meets the new QTL
test cannot exceed 15% of portfolio assets. Portfolio assets under the new QTL
test include all of an association's assets less (i) goodwill and other
intangibles, (ii) the value of property used by the association to conduct its
business, and (iii) its liquid assets as required to be maintained under law up
to 20% of total assets.
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<PAGE>
A savings association which fails to meet the QTL test must either
convert to a bank (but its deposit insurance assessments and payments will be
those of and paid to SAIF) or be subject to the following penalties: (i) it may
not enter into any new activity except for those permissible for a national bank
and for a savings association; (ii) its branching activities shall be limited to
those of a national bank; (iii) it shall not be eligible for any new FHLB
advances; and (iv) it shall be bound by regulations applicable to national banks
respecting payment of dividends. Three years after failing the QTL test the
association must (i) dispose of any investment or activity not permissible for a
national bank and a savings association and (ii) repay all outstanding FHLB
advances. If such a savings association is controlled by a savings and loan
holding company, then such holding company must, within a prescribed time
period, become registered as a bank holding company and become subject to all
rules and regulations applicable to bank holding companies (including
restrictions as to the scope of permissible business activities).
A savings association failing to meet the QTL test may requalify as a
QTL if it thereafter meets the QTL test. In the event of such requalification it
shall not be subject to the penalties described above. A savings association
which subsequently again fails to qualify under either the QTL test shall become
subject to all of the described penalties without application of any waiting
period.
At June 30, 1994, 93.0% of the Bank's portfolio assets (as defined on
that date) were invested in qualified thrift investments (as defined on that
date), and therefore the Bank's asset composition was in excess of that required
to qualify the Bank as a QTL. Also, the Bank does not expect to significantly
change its lending or investment activities in the near future, and therefore
expects to continue to qualify as a QTL, although there can be no such
assurance.
Acquisitions or Dispositions
FIRREA amended provisions of the Bank Holding Company Act of 1956, as
amended, to specifically authorize a bank holding company, upon receipt of
appropriate approvals from the FRB and the Director of the OTS, to acquire
control of any savings association or holding company thereof wherever located.
Similarly, a savings and loan holding company may now acquire control of a
bank. Moreover, FedICIA provides that, subject to the five-year moratorium
provisions concerning conversions of SAIF to BIF members and vice versa,
federal savings associations may acquire or be acquired by any insured
depository institution. Tandem restrictions on operations of savings
association and bank affiliates were also eliminated by FIRREA. Pursuant to
rules promulgated by the FRB pursuant to FIRREA, a savings association acquired
by a bank holding company (i) may, so long as the savings association continues
to meet the QTL test, continue to branch to the same extent as permitted to
other non-affiliated savings associations similarly chartered in the state, and
(ii) cannot continue any non-banking activities not authorized for bank holding
companies. Savings associations acquired by a bank holding company may, if
located in a state where the bank holding company is legally authorized to
acquire a bank, be converted to the status of a bank but deposit insurance
assessments and payments continue to be paid by the association to the SAIF. A
savings association so converted to a bank becomes subject to the branching
restrictions applicable to banks. Also, under FedICIA, any insured depository
institution may merge with, acquire the assets of, or assume the liabilities of
any other insured depository institution with the appropriate regulatory
approvals if (i) continued payments of deposit insurance are made on the
acquired savings association's deposits (including an assumed rate of growth in
such deposits) to SAIF (if the acquired institution was a SAIF member) or to
BIF (if the acquired institution was a BIF member), (ii) the acquiring
institution and any holding company in control thereof meet all applicable
capital requirements at the time of the transaction, and (iii) if the acquiring
institution is a BIF member, the transaction meets the Douglas amendment
requirements of 3(d) of the Bank Holding Company Act of 1956.
A bank or savings association may sell branches and transfer deposit
liabilities to a savings association or bank that is a member of an insurance
fund which differs from the fund of the transferor without violating the 5-year
moratorium on switching insurance funds that is described above in "--Insurance
of Deposits." To be permitted, the transfer must be approved by the FDIC and
the amount of deposits transferred must not exceed 35% of the lesser of (a) the
transferor's deposits as of May 1, 1989 (plus net interest on those accounts)
or (b) the transferor's total deposits on the date of transfer, FIRREA requires
exit and entrance fees in connection with such dispositions. Currently, the
SAIF to BIF exit fee is .90% of the deposit base being transferred, and the
SAIF to BIF entrance fee is BIF's reserve ratio (the
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<PAGE>
ratio of the net worth of BIF to the value of the aggregate total domestic
deposits held in BIF) times the deposit base being transferred. There are also
special entrance and exit fees for insured deposits transfers in failed savings
association resolutions. The resulting or acquiring institution is liable for
the fees.
Subject to certain exceptions, commonly controlled banks and savings
associations must reimburse the FDIC for any losses suffered in connection with
a failed bank or savings association affiliate. Institutions are commonly
controlled if one is owned by another or if both are owned by the same holding
company. Such claims by the FDIC under this provision are subordinate to
claims of depositors, secured creditors, and holders of subordinated debt,
other than affiliates.
Branching
The OTS has adopted regulations which permit nationwide branching to the
extent permitted by federal statute. Federal statutes permit federal savings
associations to branch outside of their home state if the association meets the
domestic building and loan test in (S)7701(a)(19) of the Internal Revenue Code
of 1986, as amended (the "Code") or the asset composition test of (S)7701(c) of
the Code. Branching that would result in the formation of a multiple savings
and loan holding company controlling savings associations in more than one
state are permitted if the law of the state in which the savings association to
be acquired is located specifically authorizes acquisition of its
state-chartered associations by state-chartered associations or their holding
companies in the state where the acquired association or holding company is
located.
Legislation has been introduced in both houses of Congress that would
permit banks to branch on a nationwide basis and their holding companies to
acquire banks, wherever situated, without regard to the laws of the individual
states. It is uncertain whether or when such interstate banking legislation may
be passed, and, if passed, what the final contents of such legislation will be.
If passed, however, such legislation may result in increased competition within
the Bank's market area.
Community Reinvestment Act Matters
Under FIRREA, ratings of depository institutions under the Community
Reinvestment Act of 1977 ("CRA") must be disclosed. The disclosure includes
both a four-unit descriptive rating -- using terms such as satisfactory and
unsatisfactory -- and a written evaluation of each institution's performance.
Each FHLB is required to establish standards of community investment or service
that its members must maintain for continued access to long-term advances from
the FHLBs. The standards take into account a member's performance under the
Community Reinvestment Act and its record of lending to first-time home buyers.
The FHLBs have established an "Affordable Housing Program" to subsidize the
interest rate of advances to member associations engaged in lending for
long-term, low- and moderate-income, owner-occupied and affordable rental
housing at subsidized rates. The examiners have determined that the Bank has a
satisfactory record of meeting community credit needs.
TAXATION
Federal Taxation
Savings associations, such as the Bank, are permitted to compute bad
debt deductions using either the bank experience method or the percentage of
taxable income method. In the case of the percentage of taxable income method,
the portion of taxable income (as specially adjusted for purposes of application
of this method) that may be deducted as an addition to a reserve for bad debts
is set at 8%. Any savings association which holds 60% of its assets in
qualifying assets, defined as loans which are secured by an interest in improved
real property or secured by an interest in real property that is to be improved
out of the proceeds of the loan, will be eligible for the full 8% of taxable
income deduction. The 8% amount must be reduced (but not below zero) by the
amount determined to be a reasonable addition to the reserve for losses on
nonqualifying loans. Reserves for nonqualifying loans are computed on the basis
of a six-year moving average of the Bank's own experience.
The excess of the percentage of taxable income deduction over the
deduction that would have been allowable on the basis of actual experience is
treated as a preference item for the purpose of computing the corporate minimum
tax.
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<PAGE>
In addition, the bad debt deduction cannot exceed the amount necessary
to increase the year end balance in the bad debt reserve accumulated for
"qualifying real property loans" to an amount equal to 6% of such loans
outstanding at the end of the taxable year. The bad debt reserve deduction is
also limited to the amount by which 12% of deposits at year-end exceeds the sum
of the the Bank's surplus, undivided profits, and reserves, as defined for
federal income tax purposes, at the beginning of the year.
A savings bank organized in stock form which utilizes the percentage
method bad debt reserve deduction described above will be subject to recapture
taxes on such reserve in the event it makes certain types of distributions to
its shareholders. Cash dividends may be paid out of unappropriated retained
earnings without the imposition of any tax on a savings bank to the extent that
the amounts paid as dividends do not exceed such saving bank's current or
accumulated earnings and profits as calculated for federal income tax purposes.
Stock redemptions, dividends paid in excess of a saving bank's current or
accumulated earnings and profits as calculated for tax purposes, and other
distributions made with respect to a savings bank's stock, however, are deemed
under applicable provisions of the Code to be made from the savings bank's tax
bad debt reserve. To the extent additions to a savings bank's bad debt reserves
for qualifying real property loans deducted for federal income tax purposes
exceed the allowable amount of such reserves computed under the experience
method and to the extent of the saving bank's supplemental reserves for losses
on loans ("Excess"), such Excess may not, without adverse tax consequences, be
utilized for payment of cash dividends or other distributions to a shareholder
(including distributions on redemption, dissolution or liquidation) or for any
other purpose (except to absorb bad debt losses). Distribution of a cash
dividend by a savings bank to a shareholder is treated as made: first out of the
savings bank's current and post-1951 accumulated earnings and profits; second
out of the Excess; and third out of such other accounts as may be proper. To the
extent a distribution to a shareholder by the savings bank is deemed paid out of
its Excess under these rules, the Excess would be reduced and the savings bank's
gross income for tax purposes would be increased by the amount which, when
reduced by the income tax, if any, attributable to the inclusion of such amount
in its gross income, equals the amount deemed paid out of the Excess. The amount
of tax that would be payable upon any distribution which is being treated as
having been made from a savings bank's bad debt reserve could result in a tax
which is equal to approximately 50% of the amount of such distributions, unless
offset by net operating losses. At June 30, 1994, the Bank had $19 million of
tax-paid retained earnings from which cash dividends could be paid without
causing any federal income tax to be paid by the Bank.
Depending on the composition of its items of income and expense, a
savings association may be subject to the alternative minimum tax. A savings
association must pay an alternative minimum tax equal to the amount (if any) by
which 20% of alternative minimum taxable income ("AMTI"), as reduced by an
exemption varying with AMTI, exceeds the regular tax due. AMTI equals regular
taxable income increased or decreased by certain tax preferences and
adjustments, including depreciation deductions in excess of that allowable for
alternative minimum tax purposes, tax-exempt interest on most private activity
bonds issued after August 7, 1986 (reduced by any related interest expense
disallowed for regular tax purposes), the amount of the bad debt reserve
deduction claimed in excess of the deduction based on the experience method and
75% of the excess of adjusted current earnings over AMTI (before this adjustment
and before any alternative tax net operating loss). AMTI may be reduced only up
to 90% by net operating loss carryovers, but alternative minimum tax paid that
is attributable to most preferences can be credited against regular tax due in
later years.
For federal income tax purposes, the Bank had been reporting its income
and expenses on the accrual method of accounting. The Holding Company and its
subsidiaries file consolidated federal income tax returns on a fiscal year
basis. The Holding Company's and the Bank's federal income tax returns have not
been audited in the last five years.
State Taxation
For its taxable period beginning January 1, 1990, the Bank became
subject to Indiana's new Financial Institutions Tax ("FIT"), which is imposed at
a flat rate of 8.5% on "adjusted gross income." "Adjusted gross income," for
purposes of FIT, begins with taxable income as defined by Section 63 of the Code
and, thus, incorporates federal tax law to the extent that it affects the
computation of taxable income. Federal taxable income is then adjusted by
several Indiana modifications, the most notable of which is the required addback
of interest that is tax-free for federal income
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<PAGE>
tax purposes. Other applicable state taxes include generally applicable sales
and use taxes plus real and personal property taxes.
As a Delaware holding company, the Holding Company is exempt from
Delaware corporate income tax but is required to file an annual report with and
pay an annual fee to the State of Delaware. The Holding Company is also subject
to an annual franchise tax imposed by the State of Delaware.
Current Accounting Issues
Accounting for Debt and Equity Securities. In 1993, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities ("SFAS No. 115"). SFAS No. 115
addresses the accounting and reporting for investments in equity securities
that have readily determinable fair values and for all investments in debt
securities. Those investments are classified and accounted for as follows:
Debt securities that the holder has the positive intent and ability to
hold until maturity are classified as held for investment and reported at
amortized cost. Securities that can be held for indefinite periods of time,
including those that may be used in an asset/liability management strategy, are
not classified as held for investment. This means that securities that could be
sold in response to changing interest rates, changes in prepayment risks,
increased loan demand, general liquidity needs, or other similar factors are not
classified as held for investment. However, securities that are held for
investment could be sold before they mature if the issuer's creditworthiness
deteriorates significantly. Debt and equity securities classified as available
for sale are reported at fair value, or marked to market. Unrealized gains and
losses are not included in income and are reported as a separate component of
equity. Debt and equity securities classified as held for current resale are
classified as trading securities and reported at gains and losses included in
income. Transfers between categories should be accounted for at fair value. For
any sales or transfers of securities classified as held for investment, the cost
basis, the realized gain or loss, and the circumstances leading to the decision
to sell are disclosed. SFAS No. 115 was adopted by the Company on July 1, 1994.
(See Note 2 of "Notes to Consolidated Financial Statements"). At that date,
investment securities with an approximate carrying value of $6,718,000 and
mortgage-backed securities with an approximate carrying value of $177,800,000
were reclassified as available for sale. These reclassifications resulted in a
decrease in total stockholders' equity, net of taxes, of $1,844,000. All other
investment and mortgage-backed securities were classified as "held to maturity"
at June 30, 1994.
At June 30, 1994, the book value of the Holding Company's investment and
mortgage-backed securities exceeded the market value by $3.0 million. The
Holding Company also had $9.6 million of mortgage loans held for sale at June
30, 1994.
At the time of purchase of new securities, management of the Company
makes a determination as to the appropriate classification of securities as
available for sale or held to maturity. Debt and mortgage-backed securities
purchased with the positive intent and ability to hold to maturity are
classified as held to maturity. Securities may be transferred to held to
maturity from available for sale. Other debt and mortgage-backed securities that
will be held for indefinite periods of time, such as securities that may be sold
in response to interest rate change or anticipated liquidity needs, are
classified as available for sale.
Accounting for Impairment of Loans. In 1993, FASB issued SFAS No. 114,
Accounting by Creditors for Impairment of a Loan ("SFAS No. 114"). The purpose
of SFAS No. 114 is to eliminate inconsistencies in the accounting among
different types of creditors for loans with similar collection problems by
requiring a single method for measuring impaired loans. A loan is considered
impaired when, based on current information and events it is probable that
creditor will be unable to collect all amounts due according to the contractual
terms of the loan agreement. A bank will measure certain impaired loans
pursuant to SFAS No. 114 at a discounted amount on the balance sheet based on
the present value amount of the expected future cash flows using the loan's
effective interest rate. A valuation reserve should be recorded if the present
value of the expected cash flows is less than the recorded amount of the loan.
Formally restructured loans and loans evaluated as groups or pools of
homogeneous loans (e.g. single family residence) are excluded from SFAS No.
114. In October, 1994, the FASB issued SFAS No. 118 ("SFAS No. 118"), entitled
Accounting by Creditors of Impairment of Loan - Income Recognition and
Disclosures. SFAS No. 118 amends the
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<PAGE>
disclosure requirements in SFAS No. 114 to require information about the
recorded investment in certain impaired loans and about how a creditor
recognizes interest income related to those impaired loans. The effective date
of SFAS No. 114 and 118 is for fiscal years beginning after December 31, 1994.
The Company will adopt SFAS No. 114 and 118 July 1, 1995, and management does
not anticipate a material impact on earnings or financial condition as a result
of adoption.
Derivative Financial Statements and Fair Value Disclosures. In October,
1994, FASB issued SFAS No. 119, Disclosure about Derivative Financial
Instruments and Fair Value of Financial Instruments ("SFAS No. 119"). SFAS No.
119 requires disclosures about derivative financial instruments--futures,
forward, swap and option contracts, and other financial instruments with
similar characteristics (e.g., interest rate caps or floors and loan
commitments). The definition of derivatives excludes all on-balance-sheet
receivables and payables, including those that "derive" their values or cash
flows from the price of another security or index, such as mortgage-backed
securities, and interest-only and principal-only obligations.
This Statement requires disclosures about amounts, nature and terms of
derivatives that are not subject to SFAS No. 105 because they do not result in
off-balance-sheet risk of accounting loss. It requires that distinction
between the differing disclosure be made for financial instruments held or
issued for trading purposes and financial instruments held or issued for
purposes other than for trading. The required disclosures, either in the body
of the financial statements or in the footnote, include the face or contract
amount (or notional principal amount) and the nature and terms, including, at a
minimum, a discussion of (1) the credit and market risk of those instruments,
and (2) the cash requirements of those instruments, and (3) the related
accounting policy.
This Statement amends SFAS No. 105 and 107 to require disaggregation of
information about financial instruments with off-balance-sheet risk of
accounting loss and to require that fair value information be presented without
combining, aggregating, or netting the fair values of derivatives with the fair
value of nonderivatives and be presented together with the related carrying
amounts in the body of the financial statements, a single footnote, or a
summary table in a form that makes it clear whether the amounts represent
assets or liabilities. The Company will adopt SFAS No. 119 effective June 30,
1995. The Company believes that SFAS No. 119 will not have a material impact
on its financial position or results of operations.
Accounting for Taxes. In February, 1992, the Financial Accounting
Standards Board (the FASB) issued Statement of Financial Accounting Standards
No. 109 ("FAS 109"). FAS 109 adopts an asset and liability approach for
financial accounting and reporting of income taxes which, among other things,
will require companies to take into account changes in the tax rates when
valuing the deferred income tax accounts recorded on the balance sheet. In
addition, FAS 109 provides that a deferred tax liability or asset shall be
recognized for the estimated future tax effects attributable to temporary
differences and loss carryforwards. Temporary differences include differences
between financial statement income and tax return income which are expected to
reverse in future periods as well as differences between the tax bases of
assets and liabilities and their amounts for financial reporting which are also
expected to be settled in future periods. The accounting pronouncement also
provides that to the extent a deferred tax asset is established which is not
realizable, a valuation allowance shall be established against such asset.
Among the provisions of FAS 109 impacting savings associations is the
tax treatment of bad debt reserves. FAS 109 provides that a deferred tax asset
is to be recognized for the bad debt reserve established for financial reporting
purposes and requires a deferred tax liability to be recorded for increases in
the tax bad debt reserve since January 1, 1988, the effective date of certain
changes made by the Tax Reform Act of 1986 to the calculation of savings
associations' bad debt deduction. The Holding Company adopted the Statement
effective July 1, 1993. The cumulative effect of this accounting change
increased 1994 operating results by $300,000.
Item 2. Properties
At June 30, 1994, the Bank conducted its business from its main office
at 501 Main Street, Evansville, Indiana, and 15 branch offices. All offices are
full-service offices.
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<PAGE>
The table on the following page provides certain information with
respect of the Holding Company's and the Bank's offices as of June 30, 1994. The
total net book value of the premises and equipment at June 30, 1994, was $9.2
million.
<TABLE>
<CAPTION>
Date Net Book Value at
Owned or Acquired/ June 30, 1994
Location Leased Leased -----------------
- -------- -------- --------- (In Thousands)
<S> <C> <C> <C>
501 Main
Evansville, IN Owned 1963 $2,872
300 Second Street
Henderson, KY Owned 1949 1,093
4451 First Avenue
Evansville, IN Owned 1968 226
7722 State Highway 66
Newburgh, IN Owned 1978 226
707 N. St. Joe
Evansville, IN Owned 1978 256
400 Southwind Plaza
Mt. Vernon, IN Owned 1976 124
499 N. Green River Road
Evansville, IN Owned 1983 624
1102 Newton Street
Jasper, IN Owned 1979 137
107 S. Hart
Princeton, IN Owned 1983 489
435 Washington Street
Columbus, IN Owned 1986(1) 368
2177 Twenty-Fifth Street
Columbus, IN Owned 1986(1) 213
811 E. Mulberry
Ft. Branch, IN Owned 1987 414
25 Public Square
Shelbyville, IN Owned 1989(1) 534
Highway 41 and Marywood Drive
Henderson, KY Leased - expires 1976 57
January 1996 (2)
1300 S. Green River Road
Evansville, IN Leased - expires 1990 ---
August 1998 (2)
631 Market Street
Mt. Carmel, IL Owned 1991 187
</TABLE>
__________________
(1) Acquired through merger.
(2) Lease expiration dates represent the Bank's final renewal option dates,
if applicable.
The Bank maintains an on-line data base of depositor and borrower
customer information. The net book value of the data processing and computer
equipment utilized by the Bank at June 30, 1994, was $198,000.
Item 3. Legal Proceedings
The Holding Company and its subsidiaries are involved as plaintiff or
defendant in various actions arising in the normal course of their businesses.
While the ultimate outcome of these proceedings cannot be predicted with
certainty, it is the opinion of management, after consultation with counsel,
that the resolution of these proceedings should not have a material effect on
the Holding Company's consolidated financial position.
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<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of the Holding Company's shareholders
during the quarter ended June 30, 1994.
Item 4.5 Executive Officers of the Registrant
Presented below is certain information regarding the executive officers
of the Holding Company:
Name Positions With Holding Company and the Bank
- ---- -------------------------------------------
Donald A. Rausch Chairman of the Board, President and Chief Executive
Officer of the Holding Company and the Bank
Ennis R. Griffith Senior Vice President, Chief Financial Officer, and
Secretary/Treasurer of the Holding Company and the Bank
Terry G. Johnston Senior Vice President, Lending Operations Officer of the
Holding Company and the Bank.
Paul E. Wargel Senior Vice President, Residential Lending Manager of
the Bank
J. Ray Justice Vice President/Administration of the Bank
Steven E. Fowler Vice President/Financial Services of the Bank
Donald A. Rausch. (Age 63) Mr. Rausch is Chairman of the Board,
President and Chief Executive Officer of the Holding Company and the Bank. He
joined the Bank in 1956 as a loan officer, became Executive Vice President in
1968 and President and Chief Executive Officer in 1971. Mr. Rausch is a past
director of the FHLB of Indianapolis and served on the Executive Committee of
the United States League of Savings Institutions from November 1987 to November
1990. He is a past chairman of the Indiana League of Savings Institutions. Mr.
Rausch has been a director of Southern Indiana Gas and Electric Company since
1981.
Ennis R. Griffith. (Age 51) Mr. Griffith is the Chief Financial Officer
of the Holding Company and the Bank, manages its investment and mortgage-backed
securities portfolio and is responsible for accounting functions. He has held
his current position since 1984. He also serves as Corporate Secretary and
Treasurer of the Holding Company and the Bank. Mr. Griffith joined the Bank in
1974.
Terry G. Johnston. (Age 52) Mr. Johnston joined the Bank in July 1990
as the Bank's senior lending officer. He is responsible for all Holding Company
lending operations, including real estate, consumer and commercial lending.
Prior to joining the Bank, he was a Senior Vice President and Division Manager
of Bank One, Richmond, Indiana, for 13 years.
Paul E. Wargel. (Age 59) Mr. Wargel is responsible for origination and
supervision of the Bank's one- to four-family residential lending, a position
he has held since June 1990. Mr. Wargel previously managed the Bank's home
office mortgage origination functions. He has been with the Bank since 1957.
J. Ray Justice. (Age 56) Mr. Justice is responsible for the Bank's
Human Resources functions, management of properties used for Bank operations and
the Bank's branch office network. Mr. Justice has held his current positions
since 1982. He joined the Bank in 1968.
Steven E. Fowler. (Age 46) Mr. Fowler is responsible for the funds
acquisition functions of the Bank. He manages the development of deposit
products, annuity/securities sales operations and marketing activities. He
joined the Bank in 1972.
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<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
The Bank converted from a federal mutual savings bank to a federal stock
savings bank effective October 30, 1991 (the "Conversion") and simultaneously
formed a savings and loan holding company, UF Bancorp, Inc. The Holding
Company's common stock, $.01 per share par value ("Common Stock"), is quoted on
the National Association of Securities Dealers Automated Quotation ("NASDAQ"),
National Market System, under the symbol "UFBI." The following table sets
forth the high and low prices, as reported by NASDAQ, for the quarters
indicated. Such over-the-counter quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission, and may not necessarily
represent actual transactions. The table also sets forth dividends per share
paid during such quarters.
<TABLE>
<CAPTION>
Price Range
----------- Dividends
Quarter Ended High Low Per Share
------------- ---- --- ---------
<S> <C> <C> <C>
September 30, 1992 $17 5/8 $15 .10
December 31, 1992 19 16 1/4 .11
March 31, 1993 22 5/8 17 7/8 .11
June 30, 1993 22 3/4 19 1/4 .11
September 30, 1993 27 3/4 22 3/4 .11
December 31, 1993 28 1/2 22 1/2 .125
March 31, 1994 26 1/4 23 .125
June 30, 1994 29 1/4 22 1/2 .125
</TABLE>
It is currently the policy of the Holding Company's Board of Directors
to continue to pay quarterly dividends at this rate, but any future dividends
are subject to the Board's discretion based on its consideration of the Holding
Company's operating results, financial condition, capital, income tax
considerations, regulatory restrictions and other factors.
Since the Holding Company has no independent operations or other
subsidiaries to generate income, its ability to accumulate earnings for the
payment of cash dividends to its shareholders is directly dependent upon the
earnings on its investment securities and ability of the Bank to pay dividends
to the Holding Company.
Under OTS regulations, a converted savings association may not declare
or pay cash dividends if the effect would be to reduce its net worth below the
amount required for the liquidation account created at the time it converted. In
addition, under OTS regulations, the extent to which a savings association may
make a capital distribution, which includes, among other things, cash dividends,
will depend upon in which one of three categories, based upon levels of capital,
that savings association is classified. The Bank is a Tier one institution and
therefore would be able to pay cash dividends to the Holding Company during any
calendar year up to 100% of its net income during that calendar year plus the
amount that would reduce by one half its surplus capital ratio (the excess over
its fully phased-in capital requirements) at the beginning of the calendar year.
See "Regulation -- Capital Distributions Regulation." Prior notice of any
dividend to be paid by the Bank to the Holding Company will have to be given to
the OTS.
Income of the Bank appropriated to bad debt reserves and deducted for
federal income tax purposes is not available for payment of cash dividends or
other distributions to the Holding Company without the payment of federal
income taxes by the Bank on the amount of such income deemed removed from the
reserves at the then-current income tax rate. At June 30, 1994, approximately
$8.2 million of the Bank's retained income represented bad debt deductions for
which no federal income tax provision had been made. See "Taxation -- Federal
Taxation."
Unlike the Bank, generally there is no regulatory restriction on the
payment of dividends by the Holding Company. Delaware law, however, generally
limits dividends of the Holding Company to an amount equal to the excess of its
net assets (the amount by which total assets exceed total liabilities) over its
paid-in capital or, if there is no such excess, to its net profits for the
current and immediately preceding fiscal year.
-38-
<PAGE>
Item 6. Selected Consolidated Financial Data
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------------------------
1994 1993 1992 1991 1990
---------- ----------- ----------- ---------- ----------
(In Thousands Except Per Share Data)
<S> <C> <C> <C> <C> <C>
Selected Financial Data:
Total assets......................... $503,883 $489,526 $470,677 $460,766 $430,848
Loans receivable, net................ 167,917 179,096 193,798 210,251 221,056
Mortgage backed securities........... 243,563 244,322 176,018 165,556 149,697
Investment securities................ 26,544 6,723 3,288 6,132 13,272
Deposits............................. 382,916 381,712 390,751 400,576 377,033
FHLB advances........................ 68,800 58,000 31,000 32,000 26,000
Stockholders' equity................. 46,385 44,519 41,803 22,890 20,632
Per share:
Book value................... 29.11 26.54 23.76
Selected Operations Data:
Interest income...................... $ 31,852 $ 35,791 $ 39,600 $ 40,307 $ 39,238
Interest expense..................... 18,520 20,727 26,419 29,836 30,404
-------- -------- -------- -------- --------
Net interest income................ 13,332 15,064 13,181 10,471 8,834
Provision for loan losses............ 914 285 231 391 319
-------- -------- -------- -------- --------
Net interest income after provision
for loan losses.................... 12,418 14,779 12,950 10,080 8,515
Mortgage loan origination fees....... 3,724 4,457 6,112 2,297 2,265
Loan servicing fees.................. 1,977 1,583 624 432 447
Service charges on deposit accounts.. 819 755 704 650 592
Insurance commissions................ 255 635 537 346 314
Gain on sale of subsidiary........... 962 747 -- -- --
Other operating income............... 394 256 297 168 261
Other expenses....................... (14,798) (15,168) (13,744) (10,442) (9,909)
-------- -------- -------- -------- --------
Income before income taxes and
change in accounting method....... 5,751 8,044 7,480 3,531 2,485
Income tax expense................... 2,072 3,094 2,735 1,273 759
-------- -------- -------- -------- --------
Net income before change in
accounting method.................. 3,679 4,950 4,745 2,258 1,726
-------- -------- -------- -------- --------
Cumulative effect of
accounting change.................. 300 -- -- -- --
-------- -------- -------- -------- --------
Net income........................... $ 3,979 $ 4,950 $ 4,745 $ 2,258 $ 1,726
======== ======== ======== ======== ========
Per share:
Net income before cumulative
effect of accounting change...... $2.14 $2.74 (1)
Net income......................... 2.31 2.74 (1)
Cash dividends..................... .49 .43 $.10
Year Ended June 30,
------------------------------------------------------------
1994 1993 1992 1991 1990
---------- ----------- ----------- ---------- ----------
Other Data:
Interest rate spread information:
Average during period.............. 2.56% 2.95% 2.65% 2.33% 2.02%
At end of period................... 2.71 3.12 2.88 2.63 2.07
Net interest margin (2).............. 2.86 3.27 2.95 2.52 2.21
Net interest income to operating
expenses (excluding the mortgage
banking subsidiaries).............. .92x 1.68x 1.49x 1.33x 1.17x
Average interest-earning assets to
average interest-bearing
liabilities........................ 1.08% 1.07% 1.05% 1.03% 1.02%
Non-performing assets to total
assets at end of period (3)........ .33 .43 .42 .59 .66
Return on assets (net income to
average assets).................... .80 1.02 1.00 .51 .41
Net income to average equity......... 8.69 11.42 13.60 10.38 8.73
Stockholders' equity to total assets
(end of period).................... 9.21 9.09 8.88 4.97 4.79
Average stockholders' equity to average
total assets....................... 9.25 8.89 7.35 4.94 4.67
Operating expenses to average total
assets (excluding the mortgage.....
banking subsidiary)................ 2.24 1.80 1.86 1.77 1.72
Operating expenses to average total
assets (including the mortgage
banking subsidiary)................ 2.99 3.11 2.90 2.34 2.34
Number of full-service offices....... 16 16 16 16 15
Number of NOW and checking accts..... 19,672 18,751 17,997 16,256 15,723
Number of other deposit accounts..... 39,006 40,018 42,522 45,752 46,037
Mortgage loans serviced for others
(in thousands)..................... $661,980 $787,270 $448,995 $164,629 $84,626
</TABLE>
- -------------------------------------
(1) Common Stock was issued in the conversion of the Bank to stock form on
October 30, 1991. Net income per share is not meaningful because shares were
outstanding for only a portion of the year.
(2) Net interest income divided by average interest-earning assets.
(3) Loans that are 90 days or more delinquent, non-performing investment and
mortgage-backed securities (of which the Bank has had none during the
periods indicated), as well as foreclosed assets.
-39-
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation
General
The Company was formed as part of the conversion of the Bank from a
federal mutual savings bank to a federal stock savings bank and is a unitary
savings and loan holding company. The Company has no other business activity
other than being the holding company for the Bank and its subsidiaries.
The Company's net income is primarily dependent upon the difference (or
"spread") between the average yield earned on loans, mortgage-backed securities
and investments and the average rate paid on deposits and borrowings, as well
as the relative amounts of such assets and liabilities. The interest rate
spread is affected by regulatory, economic and competitive factors that
influence interest rates, loan demand and deposit flows. The Bank, like other
thrift institutions, is subject to interest rate risk to the degree that its
interest-bearing liabilities mature or reprice at different times, or on a
different basis, than its interest-earning assets.
The Company's interest expense is a product of the interest paid on
deposits and borrowed funds. The Company emphasizes and promotes consumer
checking and NOW accounts principally from its market area. These types of
deposits tend to be less susceptible to rapid changes in volume and interest
rate.
In January 1993, the Company formed a new mortgage banking subsidiary
based in Virginia, Union Financial Corp. (UFC), and effective May 31, 1993, sold
its California mortgage banking subsidiary, Union Security Mortgage (USM).
The Company's net income is also affected by, among other things, gains
and losses on sales of foreclosed property, provisions for loan losses, service
charge fees and subsidiary activities, operating expenses and income taxes.
Additionally, net income is also affected by the risks inherent in the
operations of the mortgage banking subsidiary. These risks are, among other
things, (i) the effect of changing economic conditions and interest rates on
loan demand; (ii) fluctuating interest rates; and (iii) significant changes in
the secondary mortgage market, including the operations, level of activity or
underwriting criteria of the Federal National Mortgage Association, Federal Home
Loan Mortgage Corporation or Government National Mortgage Association. Moreover,
the mortgage banking subsidiary has, in the normal course of its business,
commitments to fund loans and commitments to sell loans each of which has off-
balance sheet risk which ultimately may affect the Company's net income. In
addition, UFC and the Bank are subject to certain repurchase obligations or
potential liability for loans sold by UFC and USM if certain representations and
warranties made to the purchaser at the time of sale prove false. See
"Comparison of Years Ended June 30, 1994 and June 30, 1993 - Other Expenses."
The Company's operating strategy over the past several years has been to
strengthen capital and increase profitability, while controlling interest rate
risk and credit risk, and also attempting to increase its loans serviced for
others.
Asset Quality
The Company has historically maintained a high level of quality assets.
Non-performing assets (including repossessed assets), as a percentage of total
assets, were .33% at June 30, 1994, and .43% at June 30, 1993. Of the
Company's $1.6 million of non-performing assets at June 30, 1994, the largest
single asset was a single family home with a book value of $574,000, and no
other single asset (or group of related assets) exceeded $321,000 in book
value. Management believes that the Company's favorable asset quality results
from its emphasis on the origination and purchasing of loans secured by one- to
four-family, owner-occupied homes and on the purchase of mortgage-backed
securities secured by similar types of loans as well as from favorable economic
conditions which have prevailed in its market area. At June 30, 1994,
approximately 88% of the Bank's loan and mortgage-backed securities portfolio
consisted of one- to four-family mortgage loans (exclusive of construction
loans) and mortgage-backed securities.
-40-
<PAGE>
Asset/Liability Management
The Company's asset/liability management is primarily dependent on the
Bank's asset/liability management which has been directed since the early 1980s
toward reducing its exposure to fluctuations in interest rates. At June 30,
1994, the Bank's cumulative one-year gap was a positive 20.5%. The effect of
this positive one year interest rate sensitivity gap position is to tend to
minimize the extent to which the Bank's operations are negatively affected by
increases in interest rates. Consequently, a general rise in interest rates
may not reduce net interest income to the extent that might occur if the Bank's
balance sheet was more evenly matched. Despite its positive interest rate
sensitivity gap position, it is still possible for the Bank to be adversely
affected by changes in interest rates.
A positive gap for a given period means that the amount of interest-
earning assets maturing or otherwise repricing within such period is greater
than the amount of interest-bearing liabilities maturing or otherwise repricing
within the same period. Accordingly, in a rising interest rate environment, an
institution with a positive gap generally experiences a greater increase in the
yield on its assets than in the cost of its liabilities. Conversely, a falling
interest rate environment will generally have an unfavorable impact on an
institution with a positive gap because its cost of funds will generally
decrease less rapidly than the yield on its assets. Changes in interest rates
generally have the opposite effect on an institution with a negative gap. A
rising interest rate environment imposes risks on an institution with a negative
gap, because the increased interest cost of its liabilities generally will
exceed the increased yield on its assets.
The Bank's asset/liability management strategy emphasizes the holding of
adjustable rate loans and adjustable rate mortgage-backed securities in its
portfolio. In addition, other loans are originated and fixed rate
mortgage-backed securities are purchased which have shorter terms to maturity
or reprice more frequently than do long term fixed rate mortgage loans, yet
which provide a positive margin over the Bank's cost of funds. At June 30,
1994, adjustable rate loans and adjustable rate mortgage-backed securities
totaled $260.3 million, or 63% of the Bank's total loan and mortgage-backed
securities portfolio. In response to customer demand, however, the Bank has
continued to originate fixed rate mortgage loans. To the extent the Bank can
maintain its positive interest rate sensitivity gap, management does not
believe this decision will have a material effect on its operating results and
intends to continue to hold fixed rate products in its portfolio.
The Bank has also emphasized retail checking accounts, which generally
are considered to be low interest rate, long term core deposits. At June 30,
1994, checking account deposits totaled $68.9 million, or 18.0% of total
deposits. In recent years, the Bank has not engaged in the purchase or sale of
financial futures, options or interest rate swaps as part of its asset/liability
management strategies.
In preparing the table below, it has been assumed that: (i) adjustable-
rate first mortgage loans will prepay at a rate of 18% per year; (ii) fixed-
maturity deposits will not be withdrawn prior to maturity; and (iii) other
deposits are withdrawn or reprice as follows: passbook accounts at the rate of
17% within one year, 25.8% between one and three years, 16.8% between three and
five years, and 40.4% over five years; transaction accounts at the rate of 37%
within one year, 33.9% between one and three years, 9.1% between three and five
years, and 20% over five years; and money market accounts at the rate of 79%
within one year, 11% between one and three years, 5.2% between three and five
years and 4.8% over five years.
Weighted average interest rates have been calculated for fixed-rate
first mortgage loans and mortgage-backed securities based on contractual
maturities within the following categories: 1 month; 2 months; 3 months; 4
months; 5 months; 6 months; greater than 6-9 months; greater than 9 months - 1
year; greater than 1-3 years; greater than 3-5 years; greater than 5-10 years;
greater than 10-20 years; and greater than 20 years. Using these
classifications, fixed-rate mortgage loans and mortgage-backed securities are
assumed to prepay annually as follows:
<TABLE>
<CAPTION>
Weighted Average Prepayment
Interest Rate: Assumption
-------------- ----------
<S> <C>
Less than 8.00%............ 9.00%
8.00 to 8.99%............ 15.00
9.00 to 9.99%............ 24.00
10.00 to 10.99%............ 35.00
11.00 and over............. 49.00
</TABLE>
The effect of these assumptions is to quantify the dollar amount of
items that are interest-sensitive and can be repriced within each of the periods
specified. Such repricing can occur in one of three ways: (i) the rate of
interest to
-41-
<PAGE>
be paid on an asset or liability may adjust periodically on the basis of an
index; (ii) an asset or liability such as a mortgage loan may amortize,
permitting reinvestment of cash flows at the then-prevailing interest rates; or
(iii) an asset or liability may mature, at which time the proceeds can be
reinvested at current market rates. The following table does not necessarily
indicate the impact of general interest rate movements on the Bank's net
interest yield because the repricing of certain categories of assets and
liabilities is subject to competitive and other pressures beyond the Bank's
control. As a result, certain assets and liabilities indicated as maturing or
otherwise repricing within a stated period may, in fact, mature or reprice at
different times and at different volumes.
<TABLE>
<CAPTION>
At June 30, 1994
-------------------------------------------------------------------------
Maturing or Repricing
-------------------------------------------------------------------------
1-3 4-12 Over
Months Months 1-3 Yrs. 3-5 Yrs. 5 Years Total
------ ------ -------- -------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Fixed rate one- to four-family
(including mortgage-backed securities),
commercial real estate and
construction loans....................... $ 15,053 $ 21,015 $ 40,507 $16,628 $38,170 $131,373
Adjustable rate one- to four-family
(including mortgage-backed
securities), commercial real estate
and construction loans................... 92,823 167,503 0 0 0 260,326
Commercial business loans.................. 1,185 1,309 1,511 179 107 4,291
Consumer loans............................. 7,006 2,304 4,810 5,328 243 19,691
Advances collateralized by loans
held for sale............................ 9,623 0 0 0 0 9,623
Investment securities and other............ 16,203 5,496 5,210 10,000 7,101 44,010
-------- -------- -------- ------- ------- --------
Total interest-earning assets.......... 141,893 197,627 52,038 32,135 45,621 469,314
-------- -------- -------- ------- ------- --------
Deposits:
Passbook and statement accounts.......... 2,539 7,167 14,746 9,613 23,039 57,104
NOW and Money Market Accounts............ 17,352 35,568 21,630 3,281 6,941 84,772
Certificates of Deposit.................. 53,696 75,888 76,739 22,899 1,116 230,338
-------- -------- -------- ------- ------- --------
Total interest-bearing deposits........ 73,587 118,623 113,115 35,793 31,096 372,214
FHLB advances.............................. 48,000 0 20,000 0 800 68,800
-------- -------- -------- ------- ------- --------
Total interest-bearing liabilities..... 121,587 118,623 133,115 35,793 31,896 441,014
-------- -------- -------- ------- ------- --------
Interest-earning assets less interest-
bearing liabilities...................... $ 20,306 $ 79,004 $(81,077) $(3,658) $13,725 $ 28,300
======== ======== ======== ======= ======= ========
Cumulative interest rate
sensitivity gap.......................... $ 20,306 $ 99,310 $ 18,233 $14,575 $28,300
======== ======== ======== ======= =======
Cumulative interest rate sensitivity gap
as percentage of total assets at
June 30, 1994............................ 4.20% 20.53% 3.77% 3.02% 5.85%
Cumulative interest rate sensitivity gap
as percentage of total assets at
June 30, 1993............................ 4.25 16.80 (2.96) (8.20) 4.79
Cumulative interest rate sensitivity gap
as percentage of total assets at
June 30, 1992............................ -- 13.23 (.10) (4.88) 5.11
Cumulative interest rate sensitivity gap
as percentage of total assets at
June 30, 1991............................ -- 5.37 (7.97) (9.33) 1.04
</TABLE>
Certain shortcomings are inherent in the method of analysis presented in
the foregoing table. For example, although certain assets and liabilities may
have similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Additionally, certain assets, such as adjustable rate mortgage
("ARM") loans, have features which restrict changes in interest rates on a
short-term basis and over the life of the asset. Further, in the event of a
change in
-42-
<PAGE>
interest rates, prepayment and early withdrawal levels would likely deviate
significantly from those assumed in calculating the table. Finally, the ability
of many borrowers to service their debt may decrease in the event of an interest
rate increase.
Results of Operations
Average Balances, Interest Rates and Yields. The following table
presents for the Company for the periods indicated the average balance sheet
including the average balances of each category of interest-earning assets,
together with resultant yields, and interest-bearing liabilities, together with
the net interest margin. The table does not reflect any effect of income taxes.
The average loan balances include the balances of non-accruing loans. The yields
and costs for the periods indicated include fees which are considered
adjustments to yield.
<TABLE>
<CAPTION>
Year Ended June 30,
1994 1993 1992
---------------------------- ---------------------------- ----------------------------
Average Interest Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
----------- -------- ----- ----------- ------- ------ ------------ -------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans......................... $176,310 $14,742 8.36% $189,713 $17,049 8.99% $205,162 $20,472 9.98%
Mortgage-backed securities.... 234,634 13,978 5.96 200,570 14,164 7.06 165,626 13,500 8.15
Investment securities......... 8,214 412 5.02 5,472 242 4.42 6,278 451 7.18
Other interest-earning assets. 47,159 2,720 5.77 65,184 4,336 6.65 69,960 5,177 7.40
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest-earning assets. 466,317 31,852 6.83 460,939 35,791 7.76 447,026 39,600 8.86
-------- ------- ---- -------- ------- ---- -------- ------- ----
Other assets.................... 28,496 26,460 26,686
-------- -------- --------
Total assets............... $494,813 $487,399 $473,712
======== ======== ========
Interest-bearing liablilities:
NOW and Money Market Accounts. $ 85,498 2,493 2.92 $ 78,897 2,584 3.28 $ 68,155 3,126 4.59
Passbook Accounts............. 55,625 1,436 2.58 44,749 1,461 3.26 34,742 1,570 4.52
Certificates of Deposit....... 233,518 11,152 4.78 249,919 13,284 5.32 288,917 19,061 6.60
--------- ------- ---- -------- ------- ---- -------- ------- ----
Total deposits................ 374,641 15,081 4.03 373,565 17,329 4.64 391,814 23,757 6.06
FHLB advances................. 58,939 3,439 5.83 57,741 3,398 5.88 33,371 2,662 7.98
--------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest-bearing
liabilities................. 433,580 18,520 4.27 431,306 20,727 4.81 425,185 26,419 6.21
--------- ------- ---- -------- ------- ---- -------- ------- ----
Non-interest bearing liabilities 15,469 12,779 13,695
Stockholders' equity............ 45,764 43,314 34,832
--------- -------- --------
Total liabilities and
stockholders' equity.......... $494,813 $487,399 $473,712
========= ======== ========
Net interest income/interest
rate spread................... $13,332 2.56% $15,064 2.95% $13,181 2.65%
======= ==== ======= ==== ======= ====
Net interest margin(1)......... 2.86% 3.27% 2.95%
==== ==== ====
Average interest-earning assets
to average interest-bearing
liabilities.................... 1.08 1.07 1.05
========= ======== ========
__________________
(1) Net interest margin is net interest income divided by average interest-earning assets.
</TABLE>
Rate/Volume Analysis of Net Interest Income
The following schedule presents the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between the increase related to
higher outstanding balances and that due to changes in interest rates. For
each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in rate (i.e.,
changes in rate multiplied by prior volume) and (ii) changes in volume (i.e.,
changes in volume multiplied by prior rate). Changes attributable to both rate
and volume which cannot be segregated have been allocated proportionately to
the changes due to volume and the changes due to rate.
-43-
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30 Year Ended June 30
--------------------------------------------- -----------------------------------------
1994 vs. 1993 1993 vs. 1992
--------------------------------------------- -----------------------------------------
Increase Increase
(Decrease) (Decrease)
Due to Total Due to Total
------------------------- Increase -------------------------- Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------- -------- ------------ ---------- --------- -------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans................................ ($1,200) ($1,107) ($2,307) ($1,543) ($1,880) ($3,423)
Mortgage-backed securities........... 2,542 (2,728) (186) 2,857 (2,193) 664
Investment securities................ 121 49 170 (58) (151) (209)
Other interest-earning assets........ (1,200) (416) (1,616) (353) (488) (841)
------- -------- ---------- --------- -------- ------------
Total interest-earning assets..... 263 (4,202) (3,939) 903 (4,712) (3,809)
------- -------- ---------- --------- -------- ------------
Interest-bearing liabilities:
NOW and Money Market Accounts........ 217 (308) (91) 494 (1,036) (542)
Passbook Savings..................... 386 (411) (25) 440 (549) (109)
Certificates of Deposit.............. (872) (1,260) (2,132) (2,576) (3,201) (5,777)
------- -------- ---------- --------- -------- ------------
Total deposits..................... (269) (1,979) (2,248) (1,642) (4,786) (6,428)
FHLB advances........................ 72 (31) 41 1,956 (1,220) 736
------- -------- ---------- --------- -------- ------------
Total interest-bearing liabilities. (197) (2,010) (2,207) 314 (6,006) (5,692)
------- -------- ---------- --------- -------- ------------
Increase (decrease) in net
interest income.................... $ 460 ($2,192) ($1,732) $ 589 $1,294 $ 1,883
======= ======== ========== ========= ======== ============
</TABLE>
-44-
<PAGE>
The following table presents the yields received on loans, investments and
other interest-earning assets, the rates paid on savings deposits and borrowings
and the resultant interest rate spreads at the dates and for the periods
indicated. Weighted average balances are based on average daily balances.
<TABLE>
<CAPTION>
At June 30,
----------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Weighted average yield on:
Loans receivable............................. 7.89% 8.60% 9.35%
Mortgage-backed securities................... 6.29 6.98 8.18
Investment securities........................ 6.51 4.60 5.24
Other interest-earning assets................ 5.66 6.12 6.78
---- ---- ----
Total interest-earning assets.............. 6.84 7.55 8.46
---- ---- ----
Weighted average rate paid on:
NOW and Money Market Accounts................ 2.57 3.15 3.94
Passbook Savings............................. 2.75 3.10 4.00
Certificates of Deposit...................... 4.60 4.92 5.93
---- ---- ----
Total interest-bearing deposits............ 3.82 4.30 5.36
FHLB advances and other borrowings........... 5.83 5.28 8.31
---- ---- ----
Total interest-bearing liabilities......... 4.13 4.43 5.58
---- ---- ----
Spread......................................... 2.71% 3.12% 2.88%
==== ==== ====
Year Ending June 30,
----------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Average yield on:
Loans receivable............................. 8.36% 8.99% 9.98%
Mortgage-backed securities................... 5.96 7.06 8.15
Investment securities........................ 5.02 4.42 7.18
Other interest-earning assets................ 5.77 6.65 7.40
---- ---- ----
Total interest-earning assets.............. 6.83 7.76 8.86
---- ---- ----
Average rate paid on:
NOW and Money Market Accounts................ 2.92 3.28 4.59
Passbook Savings............................. 2.58 3.26 4.52
Certificates of Deposit...................... 4.78 5.32 6.60
---- ---- ----
Total interest-bearing deposits............ 4.03 4.64 6.06
FHLB advances and other borrowings........... 5.83 5.88 7.98
---- ---- ----
Total interest-bearing liabilities......... 4.27 4.81 6.21
---- ---- ----
Spread......................................... 2.56 2.95 2.65
---- ---- ----
Net interest margin (net interest earnings
divided by average interest-earning assets).. 2.86% 3.27% 2.95%
==== ==== ====
</TABLE>
-45-
<PAGE>
Condensed Consolidating Income Statement
The following are condensed consolidating income statements for the years
ended June 30, 1994 and 1993, showing the operations of the Company, the Bank
and other subsidiaries ("Company and other subsidiaries") separately from the
operations of the mortgage banking subsidiaries, Union Financial Corp. ("UFC")
and Union Security Mortgage, Inc. ("USM"). USM was sold effective May 31, 1993
while UFC began operations in January, 1993. The loan servicing portfolio of USM
of approximately $720 million was transferred to Union Federal immediately prior
to the sale. Loan servicing income and the related servicing expense of USM was
$1,250,000 and $423,000, respectively, for the year ended June 30, 1993.
<TABLE>
<CAPTION>
Year Ended Year Ended
June 30, 1994 June 30, 1993
--------------------------------- -------------------------------------------
Company Company
and other and other
Subsidiaries UFC Total Subsidiaries USM UFC Total
------------ ------ ----- ------------ ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
(In Thousands)
Net interest income............... $13,266 $ 66 $13,332 $14,728 $ 344 $ (8) $15,064
Provision for loan losses....... 914 -- 914 285 -- -- 285
------- ------ ------- ------- ------ ------ -------
Net interest income after
provision for loan losses....... 12,352 66 12,418 14,443 344 (8) 14,779
------- ------ ------- ------- ------ ------ -------
Other income...................... 4,442 3,689 8,131 3,297 4,786 350 8,433
Other expenses.................... 11,087 3,711 14,798 8,748 5,829 591 15,168
------- ------ ------- ------- ------ ------ -------
Income (loss) before taxes........ 5,707 44 5,751 8,992 (699) (249) 8,044
Income taxes...................... 2,057 15 2,072 3,328 (150) (84) 3,094
------- ------ ------- ------- ------ ------ -------
Net income (loss) before change
in accounting method............ 3,650 29 3,679 5,664 (549) (165) 4,950
Change in accounting
method.......................... 300 -- 300 -- -- -- --
------- ------ ------- ------- ------ ------ -------
Net income (loss)................. $ 3,950 $ 29 $ 3,979 $ 5,664 $ (549) $ (165) $ 4,950
======= ====== ======= ======= ====== ====== =======
</TABLE>
COMPARISON OF YEARS ENDED JUNE 30, 1994 AND JUNE 30, 1993.
General. Total assets were $503.9 million at June 30, 1994 compared to
$489.5 million at June 30, 1993. This $14.4 million increase resulted primarily
from increases in investment securities of $19.8 million and cash and cash
equivalents of $6.0 million, partially offset by decreases in loans of $11.2
million. The increase in assets was funded primarily by an increase in FHLB
advances of $10.8 million and the net earnings for the year of approximately
$4.0 million.
Net income decreased $971,000 or 19.6% to $3,979,000 or $2.31 per share for
the year ended June 30, 1994 compared to $4,950,000 or $2.74 per share for the
prior year. The 1994 figures include a $300,000 or $.17 per share increase
resulting from the cumulative effect of the Company's adoption of Financial
Accounting Standards Board Statement No. 109, Accounting for Income Taxes, in
the first quarter of the fiscal year 1994. Net income of $3,679,000 or $2.14 per
share before the accounting change was down $1,271,000 or 25.7% from the prior
year's figure. Because of a lesser amount of average shares outstanding, net
income on a per share basis was down $.60 or 21.9%. UFC had net income of
$29,000 in fiscal 1994 compared to a net loss of $165,000 in fiscal 1993, while
USM, which was sold effective May 31, 1993, had a net loss of $549,000 in fiscal
1993. (See "Condensed Consolidating Income Statement"). As discussed in more
detail below, this $743,000 increase in net after tax income of the Company's
mortgage banking subsidiaries was offset at the other Company operations by a
$1,462,000 decrease in interest income over interest expense and an increase in
other expense of $2,339,000 offset by an increase in other income of $1,145,000
and a decrease in income taxes of $1,022,000. (See "Condensed Consolidated
Income Statement").
Interest Income. The $3,939,000 decrease in interest income in fiscal 1994
was primarily the result of a decrease in average yield on earning assets to
6.83% from 7.76% the prior year, which more than offset the increased earnings
on the $5.4 million increase in average interest earning assets. While market
interest rates have recently risen, the decrease in yield was due to prior
market declines in interest rates which caused: (1) rates on the adjustable rate
loans and mortgage-backed securities in the Company's portfolio to decrease; and
(2) a continuing increased level of prepayments of the higher rate fixed rate
loans and mortgage-backed securities which could be replaced only with items
paying lesser rates.
-46-
<PAGE>
Interest Expense. Although average deposits increased $1.1 million,
deposit interest expense declined by $2,248,000 as a result of a decline in the
average rates paid on total deposits to 4.03% from 4.64% and a decline in the
average balance of certificates of deposit of $16.4 million. (Certificates of
Deposit generally pay higher rates than other types of deposits such as
passbook accounts and checking accounts.)
Provision for Loan Losses. The Company provided $914,000 for loan losses
for the year ended June 30, 1994. This amount was provided primarily because of
the increased risks related to eight California loans with a principal balance
of $1,444,000 at June 30, 1994, repurchased by USM or the Bank pursuant to
obligations based on representations and warranties made to the purchasers of
such loans and because of concerns about three large credits with a principal
balance of $5,159,000 at June 30, 1994. With net charge-offs and recoveries of
$179,000 during the year, the allowance for loan losses increased from $800,000
to $1,535,000. With this $735,000 increase in allowance for loan losses and with
non-performing loans declining to $168,000 at June 30, 1994, from $426,000 at
the prior year end, the ratio of allowance for loan losses to non-performing
loans increased to 914% at June 30, 1994 compared to 188% at June 30, 1993. The
allowance for loan losses to net total loans was .91% at June 30, 1994 compared
to .45% at June 30, 1993. The Company believes the allowance for loan losses to
be adequate under its circumstances.
Other Income. Other income declined a net $302,000 for the year ended June
30, 1994 from fiscal 1993. The primary components of the decline were
decreases of mortgage loan origination fees of $733,000 and insurance
commissions of $380,000 offset by increases in loan servicing fees of $394,000,
gain on sale of subsidiary of $215,000 and gain on sale of consumer loans of
$150,000.
Mortgage loan origination fees include fees received from closing loans,
fees received for the sale of loans on a "servicing released" basis, and gains
from the sale of loan servicing rights. While fiscal 1994 includes $575,000 in
gains from UFC's sale of approximately $50 million of loan servicing rights on
loans which were originally sold "servicing retained", mortgage loan
origination fees declined because of an overall decrease in total loan sales
production. (See following table.)
<TABLE>
<CAPTION>
Loan Sales Of The Mortgage Banking Subsidiaries
(In Thousands)
<S> <C> <C> <C>
Year Servicing Servicing
Ending Retained Released Total
------ --------- --------- -----
June 30, 1994 (1) $ 85,580 $327,549 $413,129
June 30, 1993 (2) $394,192 $228,654 $622,846
___________
(1) 100% are sales of UFC.
(2) 100% are sales of USM, which was sold effective May 31, 1993.
</TABLE>
Insurance commissions are primarily fees the Company receives from various
insurance companies on the sale of tax deferred annuity products. The Company
believes the sales volume has declined from prior year's volumes because of a
combination of a decline in the interest rates offered by the insurance
companies and new local competition from several financial institutions.
Loan servicing fees increased because of an increase in the average loan
servicing portfolio to $719 million for fiscal 1994 from $627 million average
the prior year.
On May 31, 1993, the Bank sold the operations and stock of its wholly owned
California mortgage bank subsidiary, Union Security Mortgage, Inc. (USM). The
sale price consisted of a cash payment for the net assets and liabilities sold
and post-closing date payments to be made based on a percentage of loans funded
by USM over the twelve months following May 31, 1993.
$962,000 of net post-closing date payments for loans closed in fiscal 1994
were recorded as additional gain on sale which exceeded the fiscal 1993 portion
of the gain on sale of $747,000 by $215,000.
Other Expenses. Other expenses decreased $370,000 for the year ended June
30, 1994 from fiscal 1993. The major components of the decrease were a
decrease in salary and benefits expense of $1,427,000 and communications
-47-
<PAGE>
and supplies, etc. of $131,000 offset by increased deposit insurance expense of
$208,000 and increased warranty loss expense of $1,026,000. The decreases in
salary and benefits expense and communications expense relates almost entirely
to USM expenses and their no longer being a part of the Company. Increased
deposit insurance expenses relates primarily to a one time $175,000 FDIC
secondary reserve refund which was credited to expense in fiscal 1993.
Effective June 1, 1993, the Bank sold complete ownership of its then
wholly owned subsidiary, USM, to the Knight Corporation ("Knight"). While the
Bank owned USM, USM originated, sold and serviced conventional single family
residential loans through its offices in Santa Ana and Woodland Hills,
California. USM customarily sold all of the loans that it originated to buyers
in the secondary market on a non-recourse basis, either as individual whole
loans or as a packaged pool of loans. However, subsequent to the sale of the
loans it originated USM remained potentially liable for losses incurred by a
purchaser, including unpaid principal and interest, under certain
representations and warranties made to the purchaser at the time of sale. In
certain circumstances (for example, when the debtor made fraudulent
misrepresentations to USM in the origination process), USM was liable for a
purchaser's losses on a defaulted loan, regardless of whether the loan was
recourse or non-recourse, if there had been a breach of the representations and
warranties made to the purchaser by USM. Such fraud might occur with respect to
tax returns, employment verifications, and deposits and appraisals provided at
the time of origination. In connection with the sale of USM on June 1, 1993, the
Bank contractually assumed liability to the Knight Corporation for losses and
repurchase demands resulting from breaches of the representations and
warranties. Moreover, in certain cases the Bank separately guaranteed USM's
obligations to loan purchasers pursuant to guarantees signed by the Bank prior
to the sale of USM. Although USM dissolved in 1994, and the Bank is less likely
to be asked to indemnify the Knight Corporation for claims against USM for any
breach of the representations and warranties, the Bank remains obligated under
certain of the separate guarantees to loan purchasers for losses relating to
USM's prior operations.
When fraud claims relating to loans originated by USM began to surface
in fiscal 1993, they were thought to be aberrational. However, additional
repurchase claims arose in 1994, and the Company discovered that these claims,
some of which were based on fraud, were arising in California because of the
prior sharp increases in the value of single family homes. During 1990 and
1991, borrowers not capable of meeting mortgage payments obtained loans based
on fraud with the apparent expectation that they could profit from the resale
of the homes in the rising home market. However, the California economy
deteriorated and housing values dropped sharply. As a result, borrowers were
unable to sell their homes at a profit and pay off the mortgage loans. As
borrowers defaulted, the fraud was discovered and the repurchase and warranty
loss claims occurred. By fiscal 1994, lenders and the public were generally
aware of the fraud schemes in California and the California housing market had
stabilized.
In June 1994, the Company identified eight loans with an aggregate
outstanding loan balance of $1,048,000 at June 30, 1994, which had been sold to
the Federal Home Loan Mortgage Corporation and a loan sold to the Federal
National Mortgage Corporation with a loan balance of $161,000 at June 30, 1994,
which appeared to have involved broker fraud. At June 30, 1994, no claims had
been made regarding these loans.
During the year ended June 30, 1994, the Bank incurred approximately
$116,000 in losses relating to warranty claims on two loans, and provided for
$1,482,000. At June 30, 1994, the Bank had eight warranty loss claims pending
and the estimated potential loss from these known claims totalled $651,000.
The Company believes six of those eight claims are without merit and that only
two, with a potential liability of $133,000, have any merit. The Company's
allowance for warranty losses was $1,366,000 at June 30, 1994, which management
considers adequate.
COMPARISON OF YEARS ENDED JUNE 30, 1993 AND JUNE 30, 1992
General. Total assets were $489.5 million at June 30, 1993, compared to
$470.7 million at June 30, 1992. This $18.8 million increase resulted
primarily from increases in mortgage-backed securities of $68.3 million,
investment securities of $3.4 million, and prepaid expenses and other assets of
$4.1 million, partially offset by decreases in loans of $14.7 million, loans
held for sale of $38 million, and cash and cash equivalents of $7 million. The
increase in assets was funded primarily by increases in FHLB advances of $27
million offset by a decrease in deposits of $9 million.
-48-
<PAGE>
Net income increased $205,000 or 4.3%, to $4,950,000 for the year ended
June 30, 1993, compared to $4,745,000 for the prior year. USM, which was sold
effective May 31, 1993, had a net loss of $549,000 in fiscal 1993 versus net
income of $959,000 in fiscal 1992. This $1,508,000 decrease in net after tax
income at USM was more than offset at the other Company operations, primarily
as follows: interest income over interest expense increased $1,883,000; other
income, which includes the gain on the sale of USM of $747,000, increased
$1,847,000; and other expenses and income taxes increased $539,000 and
$1,186,000, respectively.
Interest Income. The $3,809,000 decrease in interest income in fiscal
1993 was primarily the result of a decrease in the average yield on interest
earning assets for fiscal 1993 to 7.76% from 8.86% the prior year, which more
than offset the increased earnings on the $13.9 million increase in average
interest earnings assets. The decrease in yield was due to the recent years'
decline in market rates which caused: (1) rates on the adjustable rate loans and
mortgage-backed securities in the Company's portfolio to decrease; and (2) a
continuing increased level of prepayments of the higher rate fixed rate loans
and mortgage-backed securities which could be replaced only with items paying
lesser rates.
Interest Expense. Average interest bearing deposits declined by $18.2
million and the average rates paid on deposits declined to 4.64% from 6.06%,
resulting in a decrease in deposit interest expense of $6,428,000. Interest
paid on FHLB advances increased $736,000 because the effect of the average
balance increase of $24.4 million offset the decline in the average rates from
7.98% to 5.88%.
Provision for Loan Losses. The Company provided $285,000 for loan
losses for the year ended June 30, 1993. With net charge-offs and recoveries of
$133,000 during the year, the allowance for loan losses increased from $648,000
to $800,000. With this $152,000 increase in the allowance for loan losses and
with non-performing loans declining to $426,000 at June 30, 1993, from $494,000
the prior fiscal year end, the ratio of allowance for loan losses to
non-performing loans increased to 188% at June 30, 1993, compared to 131% at
June 30, 1992.
Other Income. Other income increased a net $159,000 in fiscal 1993 over
the prior year. The principal components of the increase were the $747,000
gain on sale of USM and increased loan servicing fees of $959,000 offset by a
decline in mortgage loan origination fees of $1,655,000.
Loan servicing fees increased because of the larger average balance in
the loans serviced for others' portfolios. Loan origination fees declined
because of a decrease in the total volume of loan sales in fiscal 1993 compared
to 1992 as well as a decline in the "servicing released" portion of the total
sales. (Generally, when loans are sold "servicing released", they are priced at
a premium when compared to sales on a "servicing retained" basis. Therefore,
immediate income or loss is recognized on "servicing released" sales while,
generally, servicing income is recognized over the life of the loans on
"servicing retained" sales.)
Also included in loan origination fee income for the year ended June 30,
1992, was a pre-tax gain of $467,000 on the bulk sale of a $60.6 million of the
loan servicing portfolio. There were no similar bulk sales in fiscal 1993.
The following table summarizes the loan sales of USM: (dollars in
thousands)
<TABLE>
<CAPTION>
Year Servicing Servicing
Ending Retained Released Total
------ -------- -------- -----
<S> <C> <C> <C>
June 30, 1993 $394,192 $ 228,654 $622,846
June 30, 1992 356,730 351,360 708,090
-------- --------- --------
Increase (Decrease) $ 37,462 $(122,706) $(85,244)
======== ========= ========
</TABLE>
The amount of loans serviced for others by the Company at June 30, 1993,
was $787 million, up from $449 million at June 30, 1992, and $165 million at
June 30, 1991.
Other Expenses. Other expenses increased $1,424,000 for the year ended
June 30, 1993, over fiscal 1992, $885,000 of which relates to USM and $539,000
to the remainder of the Company.
-49-
<PAGE>
USM's major components of other expense changes were: (a) During fiscal
1993 USM experienced warranty losses on sold loans of $456,000 compared to
$111,000 for fiscal 1992. A loss of $375,000 was experienced on one loan which
the borrowers fraudulently falsified their income and subsequently defaulted.
The security property had experienced dramatic depreciation. (b) Loan
servicing expenses (included in "Other Operating Expenses") increased
approximately $222,000 due to the larger loans serviced for others' portfolio.
(c) Salary and benefits were up $138,000, premises and equipment expenses were
up $70,000, and data processing expenses were up $63,000, all due to continued
increase in operations at USM.
For the Company operations exclusive of USM, the major components of
other expense changes were:
(a) Salaries and benefits were up $464,000, of which $410,000 was the
amount recorded by UFC which began operation in January, 1993. (b) Deposit
insurance was $185,000 less than in fiscal 1992 because of lesser amount of
deposits and because the FDIC elected to refund a secondary reserve of
$175,000, which was credited to expense. (c) The remaining increases primarily
represent the expenses of UFC which began operations in January, 1993.
Income Taxes. Income taxes increased for the year ended June 30, 1993
due to the increase in income before taxes as compared to the prior year.
Liquidity and Capital Resources
The Company's principal sources of funds are deposits, advances from the
FHLB of Indianapolis, amortization and prepayment of loan principal (including
mortgage-backed securities) and, to a lesser extent, sales or maturities of
investment securities, mortgage-backed securities, and short-term investments
and operations. While scheduled loan repayments and maturing investments are
relatively predictable, deposit flows and early loan repayments are more
influenced by interest rates, general economic conditions, and competition,
and, most recently, the restructuring of the thrift industry. The Bank
generally manages the pricing of its deposits to maintain a steady deposit
balance, but has from time to time decided not to pay deposit rates that are as
high as those of its competitors, and, when necessary, to supplement deposits
with longer term and/or less expensive alternative sources of funds.
Federal regulations historically have required the Bank to maintain
minimum levels of liquid assets. The required percentage has varied from time to
time based upon economic conditions and savings flows and is currently 5% of net
withdrawable savings deposits and borrowings payable on demand or in one year or
less during the preceding calendar month. Liquid assets for purposes of this
ratio include cash, certain time deposits, U.S. Government and corporate
securities and other obligations generally having remaining maturities of less
than five years. The Bank has historically maintained its liquidity ratio at
levels in excess of those required. For June, 1994, the Bank's liquidity ratio
was 8.0%.
The primary investing activities of the Company are lending and
purchasing mortgage-backed securities and investment securities. For fiscal
1994, investment activities used a net $8.2 million of cash. Loan repayments
exceeded originations by $19.2 million and mortgage-backed securities repayments
of $71.9 million provided part of the funds for the purchase of $69.9 million of
mortgage-backed securities, $9.4 million of loans and $28.5 million of
investment securities. With the recent increases in market interest rates, the
Company is expecting a decrease in prepayments of its mortgage loans and
mortgage-backed securities. For fiscal 1993, investment activities used a net
$59.7 million of cash. Loan repayments exceeded originations by $25.3 million
and mortgage-backed securities repayments of $47.4 million provided part of the
funds for the purchase of $115.2 million of mortgage-backed securities and $11.5
million of loans. The additional mortgage-backed securities were purchased
primarily in anticipation of the decline in loans held for sale of USM and to
augment the Company's net interest income. The increased activities in
originations and repayments during fiscal 1993 were caused by increased loan
demand and refinancings primarily due to declining interest rates during the
period.
The primary financing activities of the Company are deposits and FHLB
advances. For the year ended June 30, 1994, partially offsetting the funds
provided by the increase in FHLB advances of $10.8 million, was a $2.2 million
purchase of treasury stock. For the year ended June 30, 1993, partially
offsetting the funds provided by the increase in FHLB advances of $27 million,
were a net decrease of deposits of $9 million and a $2 million purchase of
treasury stock.
-50-
<PAGE>
Liquidity management is both a daily and long-term responsibility of
management. The Company adjusts its investments in liquid assets based upon
management's assessment of (i) expected loan demand, (ii) the projected amount
of loans to be originated by the mortgage banking subsidiary and held for
re-sale by the Bank, (iii) expected deposit flows, (iv) yields available on
interest-bearing deposits, and (v) the objective of its asset/liability
management program. Excess liquidity is invested generally in interest-bearing
overnight deposits and other short-term government and agency obligations. If
the Bank requires funds beyond its ability to generate them internally, it has
additional borrowing capacity with the FHLB and collateral eligible for reverse
repurchase agreements. The Company's liquidity depends on earnings on its
investment securities and cash dividends from the Bank. See Notes to
Consolidated Financial Statements.
The Company anticipates that it will have sufficient funds available to
meet current loan commitments. At June 30, 1994, the Bank (excluding UFC) had
outstanding commitments to extend credit which amounted to $5.6 million. UFC
had commitments to fund loans of $35.6 million at June 30, 1994. UFC had
commitments to sell $27.7 million of loans and $8 million of mortgage-backed
securities to offset the commitments to fund loans. See Notes to Consolidated
Financial Statements.
Certificates of deposit scheduled to mature in one year or less at June
30, 1994, totaled $120.6 million. Management believes that a significant portion
of such deposits will remain with the Bank. At June 30, 1994, the Bank had $5
million of fixed-rate advances from the FHLB of Indianapolis which mature in one
year or less.
At June 30, 1994, the Bank is in full compliance with its capital
requirements as follows:
<TABLE>
<CAPTION>
Core Tangible Risk-Based
Capital Capital Capital
------- ------- -------
<S> <C> <C> <C>
Amount $36,898 $36,898 $37,711
As a percent of assets,
as defined 7.48% 7.48% 19.71%
Required Amount $14,800 $ 7,200 $15,307
As a percent of assets,
as defined 3.00% 1.50% 8.00%
Capital in excess of
required amount $22,098 $29,698 $22,404
</TABLE>
-51-
<PAGE>
Item 8. Financial Statements and Supplementary Data
Quarterly Results of Operations
The following is a summary of the quarterly results of operations for
the years ended June 30, 1994, and 1993:
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------
June 30, March 31, December 31, September 30,
1994 1994 1993 1993
------- --------- ----------- -------------
(Dollars in Thousands, except Per Share Data)
<S> <C> <C> <C> <C>
Fiscal 1994
Interest income.......... $7,252 $7,569 $8,720 $8,311
Interest expense......... 4,251 4,395 5,009 4,865
------ ------ ------ ------
Net interest income..... 3,001 3,174 3,711 3,446
Provision for loan
losses.................. 667 83 82 82
------ ------ ------ ------
Net interest income
after provision for
loan losses............ 2,334 3,091 3,629 3,364
====== ====== ====== ======
Other income............. 1,769 1,782 2,416 2,164
Other expenses........... 4,481 3,361 3,700 3,256
------ ------ ------ ------
Income before income
taxes and change in
accounting method...... (378) 1,512 2,345 2,272
Income taxes............. (213) 487 916 882
------ ------ ------ ------
Net income before change
in accounting method.... (165) 1,025 1,429 1,390
------ ------ ------ ------
Change in accounting
method................. 0 0 0 300
------ ------ ------ ------
Net Income.............. $ (165) $1,025 $1,429 $1,690
====== ====== ====== ======
Earnings per share...... $ (.10) $ .61 $ .83 $ .96
Dividends declared per
share.................. $ .125 $ .125 $ .125 $ .11
Three Months Ended
--------------------------------------------------
June 30, March 31, December 31, September 30,
1993 1993 1992 1992
-------- --------- ------------ -------------
(Dollars in Thousands, except Per Share Data)
Fiscal 1993
Interest income.......... $8,893 $8,551 $9,325 $9,022
Interest expense......... 5,191 4,758 5,277 5,501
Net interest income..... 3,702 3,793 4,048 3,521
Provision for loan losses 83 82 60 60
Net interest income
after provision for
loan losses............ 3,619 3,711 3,988 3,461
Other income............ 3,009 1,672 1,638 2,114
Other expenses.......... 4,194 3,585 3,877 3,512
Income before income
taxes................. 2,434 1,798 1,749 2,063
Income taxes............ 1,045 693 594 762
Net income.............. $1,389 $1,105 $1,155 $1,301
Earnings per share...... $ .79 $ .61 $ .63 $ .71
Dividends declared per
share.................. $ .11 $ .11 $ .11 $ .10
</TABLE>
-52-
<PAGE>
Independent Auditor's Report
Board of Directors
UF Bancorp, Inc.
Evansville, Indiana
We have audited the consolidated statement of financial condition of UF Bancorp,
Inc. and subsidiary corporations as of June 30, 1994 and 1993, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the three years in the period ended June 30, 1994. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We did not audit the financial
statements of Union Security Mortgage, Inc., a wholly-owned subsidiary (sold
effective May 31, 1993), which statements reflect net profit (loss) of
$(549,000) and $959,000 for the eleven months and year ended June 30, 1993, and
1992. Those statements were audited by another auditor whose report has been
furnished to us and our opinion, insofar as it relates to the amounts included
for Union Security Mortgage, Inc., is based solely on the report of the other
auditor.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditor provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditor, the
consolidated financial statements described above present fairly, in all
material respects, the consolidated financial position of UF Bancorp, Inc. and
subsidiary corporations as of June 30, 1994, and 1993, and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 1994, in conformity with generally accepted accounting principles.
As discussed in the notes to consolidated financial statements, the Company has
restated its June 30, 1994 financial statements for both the Company's allowance
for loan and warranty losses.
As discussed in the notes to consolidated financial statements, the Company
changed its method of accounting for income taxes on July 1, 1993.
Geo S. Olive & Co. LLC
Evansville, Indiana
August 6, 1994, except for the
restatement and subsequent
events note, for which the
date is June 7, 1995.
-53-
<PAGE>
UF Bancorp, Inc. and Subsidiary Corporations
Consolidated Statement of Financial Condition
(Dollars in Thousands)
<TABLE>
<CAPTION>
June 30 1994 1993
- ------- --------- ---------
<S> <C> <C>
(Restated)
Assets
Cash $ 13,021 $ 12,193
Federal funds sold 3,300 3,000
Short-term interest-bearing deposits 11,681 6,834
--------- ---------
Total cash and cash equivalents 28,002 22,027
Investment securities--market value $26,384 and $6,730 26,544 6,723
Mortgage-backed securities--market value $240,710 and
$246,541 243,563 244,322
Loans, net 167,917 179,096
Loans held for sale 9,623 10,066
Real estate acquired in settlement of loan, net 1,472 1,702
Premises and equipment 9,166 10,153
Federal Home Loan Bank of Indianapolis stock, at cost 6,101 5,000
Interest receivable 2,955 3,157
Prepaid expenses and other assets 8,540 7,280
--------- ---------
Total assets $503,883 $489,526
========= =========
Liabilities
Deposits $382,916 $381,712
Advances from Federal Home Loan Bank of Indianapolis 68,800 58,000
Interest payable 1,424 1,485
Other liabilities 4,358 3,810
--------- ---------
Total liabilities 457,498 445,007
========= =========
Stockholders' Equity
Preferred stock, $.01 par value
Authorized and unissued--1,000,000 shares
Common stock, $.01 par value
Authorized--4,000,000 shares
Issued--1,858,463 shares 19 19
Additional paid-in capital 17,334 17,241
Retained earnings-substantially restricted 34,852 31,661
--------- ---------
52,205 48,921
Treasury stock--at cost--264,770 and 180,892 shares (5,308) (3,070)
ESOP loan guarantee (272) (972)
Unearned compensation (240) (360)
--------- ---------
Total stockholders' equity 46,385 44,519
--------- ---------
Total liabilities and stockholders' equity $503,883 $489,526
========= =========
</TABLE>
See notes to consolidated financial statements.
-54-
<PAGE>
UF Bancorp, Inc. and Subsidiary Corporations
Consolidated Statement of Operations
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year Ended June 30 1994 1993 1992
------------------ -------- -------- --------
<S> <C> <C> <C>
(Restated)
Interest Income
Loans $ 14,742 $ 17,049 $ 20,472
Mortgage-backed securities 13,978 14,164 13,500
Federal funds sold 257 253 261
Time deposits 262 287 416
Investment securities 412 242 451
Other interest and dividends 301 526 467
Loans held for sale 1,900 3,270 4,033
-------- -------- --------
31,852 35,791 39,600
-------- -------- --------
Interest Expense
Deposits 15,081 17,329 23,757
Advances from Federal Home Loan Bank
of Indianapolis 3,145 3,312 2,600
Other 294 86 62
-------- -------- --------
18,520 20,727 26,419
-------- -------- --------
Net Interest Income 13,332 15,064 13,181
Provision for loan losses 914 285 231
-------- -------- --------
Net Interest Income After Provision For
Loan Losses 12,418 14,779 12,950
-------- -------- --------
Other Income
Gain on sale of subsidiary 962 747
Loss on sale of securities (61)
Service charges on deposit accounts 819 755 704
Mortgage loan origination fees 3,724 4,457 6,112
Mortgage loan servicing fees 1,977 1,583 624
Insurance commissions 255 635 537
Other operating income 394 256 358
-------- -------- --------
$ 8,131 $ 8,433 $ 8,274
-------- -------- --------
</TABLE>
-55-
<PAGE>
UF BANCORP, INC. AND SUBSIDIARY CORPORATIONS
CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
(Continued)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30 1994 1993 1992
- ------------------ ---- ---- ----
(Restated)
<S> <C> <C> <C>
Other Expense
Salaries and employee benefits $ 6,639 $ 8,066 $ 7,463
Premises and equipment expense 1,446 1,572 1,481
Deposit insurance 872 664 850
Data processing 474 535 420
Communication, postage, printing and
office supplies 833 964 902
Advertising 469 437 420
Warranty losses on sold loans 1,482 456 111
Loan sub-servicing fees 416 423 202
Other operating expenses 2,167 2,051 1,895
------ ------ ------
14,798 15,168 13,744
------ ------ ------
Income Before Income Taxes and
Cumulative Effect of Change
in Accounting Method 5,751 8,044 7,480
Income taxes 2,072 3,094 2,735
------ ------ ------
Net Income Before Cumulative Effect of
Change in Accounting Method 3,679 4,950 4,745
Cumulative Effect of Change in Method of
Accounting for Income Taxes 300
Net Income $ 3,979 $ 4,950 $ 4,745
Per Share
Income Before Cumulative Effect of
Accounting Change $2.14 $2.74
Cumulative Effect of Change in Accounting
for Income Taxes .17
Net Income 2.31 2.74
</TABLE>
See notes to consolidated financial statements.
-56-
<PAGE>
UF Bancorp, Inc. and Subsidiary Corporations
Consolidated Statement of Changes in Stockholders' Equity
(Dollars in Thousands)
<TABLE>
<CAPTION>
Additional Total
Common Paid-in Retained Treasury ESOP Loan Unearned Stockholders'
Shares Amount Capital Earnings Stock Guarantee Compensation Equity
--------- ------ ---------- -------- -------- --------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, July 1, 1991 $22,890 $22,890
Net income for 1992 4,745 4,745
Cash dividends ($.10 per share) (176) (176)
Issuance of common stock 1,851,981 $19 $17,072 17,091
Recognition of ESOP loan
guarantee $(1,296) (1,296)
Unearned compensation--RRP $(600) (600)
Purchase of treasury stock (92,599) $(1,109) (1,109)
Amortization of unearned
compensation 120 120
Principal repayments on ESOP
loan 138 138
--------- --- ------- ------- ------- ------ ----- -------
Balances, June 30, 1992 1,759,382 19 17,072 27,459 (1,109) (1,158) (480) 41,803
Net income for 1993 4,950 4,950
Cash dividends ($.43 per share) (748) (748)
Tax benefits of ESOP, stock
options and RRP 104 104
Exercise of stock options 6,482 65 65
Purchase of treasury stock (88,293) (1,961) (1,961)
Amortization of unearned
compensation 120 120
Principal repayments on ESOP
loan 186 186
--------- --- ------- ------- ------- ------ ----- -------
Balances, June 30, 1993 1,677,571 19 17,241 31,661 (3,070) (972) (360) 44,519
Net income for 1994/1/ 3,979 3,979
Cash dividends ($.485 per share) (788) (788)
Tax benefits of ESOP, stock
options and RRP 93 93
Purchase of treasury stock (83,878) (2,238) (2,238)
Amortization of unearned
compensation 120 120
Principal repayments on ESOP
loan 700 700
--------- --- ------- ------- ------- ------ ----- -------
Balances, June 30, 1994/1/ 1,593,693 $19 $17,334 $34,852 $(5,308) $ (272) $(240) $46,385
========= === ======= ======= ======= ====== ===== =======
</TABLE>
__________
/1/These amounts are restated.
See notes to consolidated financial statements.
-57-
<PAGE>
UF Bancorp, Inc. and Subsidiary Corporations
Consolidated Statement of Cash Flows
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year Ended June 30 1994 1993 1992
- ------------------ ---- ---- ----
<S> <C> <C> <C>
(Restated)
Operating Activities
Net income $ 3,979 $ 4,950 $ 4,745
Adjustments to reconcile net income to
net cash provided (used) by operating activities
Provision for loan losses 914 285 231
Depreciation and amortization 759 787 787
Premium and discount amortization on investment
and mortgage-backed securities (1,242) (446) (373)
Accretion of net origination fees (311) (340) (307)
Origination fee receipts 246 363 310
Loss on sale of mortgage-backed securities 61
Changes in
Interest receivable 202 (334) 641
Prepaid expenses and other assets (1,061) (4,146) 346
Interest payable (61) (489) (863)
Loans held for sale 443 37,982 (9,091)
Other liabilities 1,267 (1,258) 2,607
Other adjustments, net (26) 50 (1,841)
-------- --------- --------
Net cash provided (used) by operating activities 5,109 37,404 (2,747)
-------- --------- --------
Investing Activities
Purchase of mortgage-backed securities (69,893) (115,232) (61,882)
Proceeds from mortgage-backed securities maturities
and principal repayments 71,894 47,373 45,419
Proceeds from sale of mortgage-backed securities 5,154
Purchase of investment securities (28,461) (5,497) (6,794)
Proceeds from investment securities maturities and
principal repayments 8,825 2,219 10,877
Net change in loans 19,249 25,291 21,701
Purchase of loans (9,358) (11,480) (5,482)
Proceeds from sale of real estate owned 431 474 423
Purchases of premises and equipment (486) (2,253) (709)
Proceeds from sale of fixed assets 714 376
Purchases of FHLB stock (1,101) (1,013) (400)
-------- --------- --------
Net cash provided (used) by investing activities (8,186) (59,742) 8,307
-------- --------- --------
</TABLE>
-58-
<PAGE>
UF Bancorp, Inc. and Subsidiary Corporations
Consolidated Statement of Cash Flows
(Dollars in Thousands)
(Continued)
<TABLE>
<CAPTION>
Year Ended June 30 1994 1993 1992
- ------------------ ---- ---- ----
<S> <C> <C> <C>
(Restated)
Financing Activities
Net increase in noninterest-bearing deposits,
NOW accounts and statement savings accounts $ 10,844 $ 17,691 $ 21,551
Net increase (decrease) in certificates of deposit (9,640) (26,730) (31,376)
Repayment of FHLB advances (100,000) (115,000) (61,000)
Proceeds from FHLB advances 110,800 142,000 60,000
Net increase (decrease) in advances by borrowers
for taxes and insurance (19) (81) 79
Net proceeds from issuance of stock 17,091
Proceeds from exercise of stock options 65
Tax benefits of ESOP, stock options and RRP 93 104
Purchase of treasury stock (2,238) (1,961) (1,109)
Purchase of stock for RRP (600)
Cash dividends (788) (748) (176)
--------- --------- --------
Net cash provided by financing activities 9,052 15,340 4,460
--------- --------- --------
Net Increase (Decrease) in Cash and
Cash Equivalents 5,975 (6,998) 10,020
Cash and Cash Equivalents, Beginning of Year 22,027 29,025 19,005
--------- --------- --------
Cash and Cash Equivalents, End of Year $ 28,002 $ 22,027 $ 29,025
========= ========= ========
Additional Cash Flows and Supplementary
Information
Cash paid for interest $ 18,581 $ 21,130 $ 27,223
Income taxes paid 1,940 3,438 2,717
ESOP loan guarantee 1,296
</TABLE>
See notes to consolidated financial statements.
-59-
<PAGE>
UF Bancorp, Inc. and Subsidiary Corporations
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
. Summary of Significant Accounting Policies
The accounting and reporting policies of UF Bancorp, Inc. (the "Company")
and its wholly-owned subsidiary, Union Federal Savings Bank (the "Bank"), and
its wholly-owned subsidiaries, Unifin, Inc., Community Insurance Associates,
Inc., Union Security Mortgage, Inc. (USM), which was sold effective May 31,
1993, and the Union Financial Corp. (UFC), conform to generally accepted
accounting principles and reporting practices followed by the thrift industry.
The more significant of the policies are described below.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries after elimination of all material intercompany
transactions and accounts.
Description of Business
The Bank generates real estate, mortgage, consumer and commercial loans and
receives deposits from customers located primarily in southern Indiana, western
Kentucky and southern Illinois. The Bank's loans are generally secured by
specific items of collateral including real property, consumer assets and
business assets. USM, which was sold on May 31, 1993, was in the mortgage
banking business, which included the origination, funding, selling, brokering
and servicing of mortgage loans in southern California. UFC, which was formed
in January, 1993, is in the same line of business as USM and serves the middle
Atlantic coast states.
Investments and Mortgage-Backed Securities
Investments and mortgage-backed securities are carried at amortized cost,
because management has the ability and intent to hold to maturity. Gain or
losses on the sale of investment and mortgage-backed certificates are
determined on a specific-identification basis. Premiums and discounts on
investment and mortgage-backed securities are amortized into income over the
life of the security using the level-yield method. Mortgage-backed securities
represent primarily participating interests in pools of long-term first
mortgage loans originated and serviced by the issuers of the securities.
In May, 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 115 (SFAS No. 115), Accounting for Certain
Investments in Debt and Equity Securities. This statement requires that
securities be classified in three categories and provides specific accounting
treatment for each. "Trading" securities are bought and held primarily for
sale in the near term and are carried at fair value, with unrealized holding
gains and losses included in earnings; "held-to-maturity" securities, for which
the intent is to hold to maturity, are carried at amortized cost; and
"available-for-sale" securities are all others and are carried at fair value
with unrealized holding gains and losses excluded from earnings and reported as
a separate component of stockholders' equity. The Company adopted SFAS No. 115
on July 1, 1994. At that date, investment securities with an approximate
carrying value of $6,718,000 and mortgage-backed securities with an approximate
carrying value of $177,800,000 were reclassified as available for sale. These
reclassifications resulted in a decrease in total stockholders' equity, net of
taxes, of $1,844,000. All other investment and mortgage-backed securities were
classified as "held to maturity".
-60-
<PAGE>
UF Bancorp, Inc. and Subsidiary Corporations
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Loans
Loans are carried at the principal amount outstanding. Interest income is
accrued on the principal balances of loans. Loans are placed in a nonaccrual
status when the loans become delinquent ninety days or more. Interest income
previously accrued but not deemed collectible is reversed and charged against
current income. Interest on these loans is then recognized as income when
collected. Certain loan fees and direct costs are being deferred and amortized
as an adjustment of yield on the loans.
Mortgage Banking Activities
Mortgage loans held for sale are carried at the lower of cost or market
determined on an individual loan basis. The weighted average interest rate of
such loans at June 30, 1994 and 1993 was 7.5% and 6.6%. All mortgage loans
held for sale at June 30, 1994 and 1993 had commitments for sale to permanent
investors.
Mortgage loan origination fees incorporate all income associated with the
generation and selling of mortgage loans and includes loan origination,
processing, placement and commitment fees, gains and losses on sales of loans
and loan servicing rights and forward loan commitments. Loan origination and
processing fees, net of related direct costs, are recognized when the related
loans are sold to permanent investors. Loan placement fees are recognized when
all significant services have been performed. Loan commitment fees paid
relating to commitments with permanent investors are recognized when the
related loans are sold to permanent investors or recognized as an expense when
it becomes evident the commitment will not be used. Gains on sales of loans
and/or loan servicing rights are recognized when title and all risks and
rewards irrevocable pass to the buyer. Gains and losses on mandatory forward
commitments are recognized when the related loans are sold or management
determines that the commitment will not be utilized.
Real Estate Acquired in Settlement of Loans
Real estate properties acquired in settlement of loans are initially
recorded at the lower of the related loan balance or fair value, less estimated
selling costs, at the date of acquisition. When a reduction from the loan
balance to the fair value is required at the time of foreclosure, the
difference is charged to the allowance for loan losses. Further reduction from
recorded value to net realizable value are made through increases in the
allowance for losses on real estate owned. Costs relating to the development
and improvement of the property are capitalized, whereas costs relating to
holding the property are charged to expense.
Allowances for Loan and Real Estate Losses
Allowances for losses on loans and real estate owned are maintained to
absorb potential losses based on management's continuing review and evaluation
of the portfolios and its judgement as to the impact of economic conditions on
the portfolios. The evaluation by management includes consideration of past
loss experience, changes in the composition of the portfolios and the current
condition and amounts of loans outstanding and real estate owned.
-61-
<PAGE>
UF Bancorp, Inc. and Subsidiary Corporations
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Premises and Equipment
Premises and equipment are stated at cost net of accumulated depreciation.
Depreciation is computed on the straight-line method over their estimated
useful lives: buildings and land improvements, 20 to 50 years and furniture
fixtures and equipment, 3 to 7 years. Maintenance and repairs are expensed as
incurred while major additions and improvements are capitalized. Gains and
losses on dispositions are included in current operations.
Federal Home Loan Bank Stock
Federal Home Loan Bank (FHLB) stock is required investment for institutions
that are members of the FHLB system. The required investment in common stock
is based on a predetermined formula.
Pension Plan Costs
Pension plan costs are based on actuarial computations and charged to
current operations. The funding policy is to pay at least the minimum amounts
required by the Employee Retirement Income Security Act of 1974.
Income Taxes
Income taxes provided in the consolidated statement of operations includes
deferred income tax provisions or benefits for all significant temporary
differences in recognizing income and expenses for financial reporting and
income tax purposes. The Company has adopted the provisions of Statement of
Financial Accounting Standards No. 109 (SFAS No. 109), Accounting for Income
Taxes, for the year ended June 30, 1994. The Company and its subsidiaries file
consolidated income tax returns.
Net Income Per Share
Income per share computations are based on the weighted average number of
common shares and common share equivalents outstanding during the year. Common
stock options are considered common stock equivalents. Earnings per share for
the year ended June 30, 1994, based upon 1,718,909 average common and common
equivalent shares outstanding, was $2.31 and included a $.17 per share increase
resulting from the Company's adoption of SFAS No. 109.
Earnings per share for the year ended June 30, 1993 was $2.74, based upon
1,806,567 average common and common equivalent shares outstanding.
Net income per share is not meaningful for the year ended June 30, 1992
because all shares were issued October 30, 1991 and, therefore, only
outstanding for a portion of the year. Earnings per share for the six months
ended June 30, 1992, based on the average weighted common shares and common
equivalent shares outstanding for the six-month period would have been $1.34
(unaudited).
-62-
<PAGE>
UF Bancorp, Inc. and Subsidiary Corporations
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
. Restatement and Subsequent Events:
On December 13, 1994, CNB Bancshares, Inc. (CNB) and the Company jointly
announced the execution of a definitive merger agreement whereby CNB would
acquire the Company. Under the terms of the agreement, shareholders of UF
Bancorp will receive 1.366 shares of CNB common stock for each of the 1,607,693
outstanding common shares of UF Bancorp, assuming CNB's market price just prior
to the closing is not less than $26.66 per share or more than $36.06 per share.
In addition, CNB will reserve shares for future issuance pursuant to the
outstanding UF Bancorp options. The merger is subject to approval by the UF
Bancorp shareholders, the receipt of appropriate regulatory approvals and
certain other conditions. Under certain circumstances, should UF Bancorp not
complete this transaction, it may become obligated to pay CNB a termination fee
of $2 million.
During the continuous process of evaluating the adequacy of the Company's
valuation allowances management has concluded that certain facts and
circumstances were not completely considered in evaluating the adequacy of the
allowance for loan and warranty losses at June 30, 1994. Consideration of these
factors has led management to believe that the best estimate of potential losses
resulted in an increase in its allowance for loan losses of $585,000 and an
increase in its allowance for warranty losses of $1,086,000.
Therefore, the consolidated financial statements as of June 30, 1994, have
been restated to reflect the above adjustments. The effect of these
adjustments on the June 30, 1994, financial statements is as follows:
<TABLE>
<CAPTION>
As Previously
Reported As Restated
-------- -----------
<S> <C> <C>
Net interest income after provision of loan
losses $13,003 $12,418
Income before income taxes and cumulative
effect of change in accounting method 7,422 5,751
Net income 4,986 3,979
Earnings per share $ 2.90 $ 2.31
</TABLE>
During December, 1994, the Company, due to its intent to convert to a commercial
bank, recorded as an expense an income tax liability of $2,775,000 pertaining to
an allocation of income to bad debt deductions as of December 31, 1987 (as
discussed in the income taxes note). Also, subsequent to the issuance of the
June 30, 1994, financial statements, the Company canceled its proposed directors
stock option plan that at June 30 was subject to shareholder approval.
-63-
<PAGE>
. Sale of Union Security Mortgage, Inc.
On May 31, 1993, the Bank sold the operations and stock of its wholly owned
California mortgage bank subsidiary, USM. Immediately prior to the sale, all
non-acquired assets and liabilities, principally loans held for sale and the
loans serviced by others portfolio of $720,000,000, were transferred to the
Bank. The sales price consisted of a cash payment for the net assets and
liabilities sold and post-closing date payments to be made based on a
percentage of loans funded by USM over the twelve months following May 31,
1993. Post-closing date payments pertaining to the volume of loans funded
during June and July, 1993 were computed based upon a larger percentage factor
than payments thereafter.
The sale resulted in a fourth quarter 1993 pre-tax gain of $747,000, which
included $237,000 of post-closing date payments for loans closed in June, 1993.
Remaining post-closing date payments of $962,000 were recorded as additional
gain on sale in fiscal 1994.
Summarized operating results of USM are as follows:
<TABLE>
<CAPTION>
Eleven Months
Ended Year Ended
May 31, June 30,
1993 1992
---- ----
<S> <C> <C>
Net interest income $ 344 $ 106
Operating income 4,786 6,474
------ ------
5,130 6,580
Operating expenses 5,829 4,944
------ ------
Income (loss) before taxes (699) 1,636
Income taxes (benefit) (150) 677
------ ------
Net income (loss) $ (549) $ 959
</TABLE>
-64-
<PAGE>
UF Bancorp, Inc. and Subsidiary Corporations
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
. Investment Securities
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
At June 30, 1994
U. S. Treasury $22,928 $18 $178 $22,768
Corporate 3,616 3,616
------- --- ---- -------
Totals $26,544 $18 $178 $26,384
======= === ==== =======
At June 30, 1993
U. S. Treasury $ 6,580 $11 $ 6,591
Corporate 143 $ 4 139
------- --- ---- -------
Totals $ 6,723 $11 $ 4 $ 6,730
======= === ==== =======
</TABLE>
The amortized cost and estimated market value of investments at June 30,
1994, by contractual maturity, are shown below:
<TABLE>
<CAPTION>
Amortized Market
Cost Value
---- -----
<S> <C> <C>
Due in one year or less $ 6,718 $ 6,718
Due after one year through five years 15,210 15,128
Due after five years through ten years 4,616 4,538
------- -------
$26,544 $26,384
</TABLE>
There were no sales of investment securities during the years ended June 30,
1994, 1993 and 1992.
-65-
<PAGE>
- --------------------------------------------------------------------------------
UF Bancorp, Inc. and Subsidiary Corporations
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
. Mortgage-Backed Securities
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
At June 30, 1994
FNMA participation certificates $ 24,704 $ 34 $ 392 $ 24,346
GNMA participation certificates 1,529 41 1,570
FHLMC participation certificates 50,344 190 699 49,835
Collateralized mortgage obligations 22,091 364 21,727
Other participation certificates 144,895 773 2,436 143,232
-------- ------ ------ --------
Totals $243,563 $1,038 $3,891 $240,710
======== ====== ====== ========
At June 30, 1993
FNMA participation certificates $ 34,614 $ 158 $ 12 $ 34,760
GNMA participation certificates 2,160 156 2,316
FHLMC participation certificates 19,062 770 39 19,793
Collateralized mortgage obligations 11,962 49 57 11,954
Other participation certificates 176,524 1,533 339 177,718
-------- ------ ------ --------
Totals $244,322 $2,666 $ 447 $246,541
======== ====== ====== ========
</TABLE>
Proceeds from sales of investments in mortgage-backed securities during the
year ended June 30, 1992 were $5,154,000. Gross losses of $61,000 were
realized on those sales. There were no sales of mortgage-backed securities
during the years ended June 30, 1994 or 1993.
-66-
<PAGE>
- -------------------------------------------------------------------------------
UF Bancorp, Inc. and Subsidiary Corporations
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
. Loans Receivable
<TABLE>
<CAPTION>
June 30 1994 1993
- ------- ---- ----
<S> <C> <C>
(Restated)
Real estate mortgage loans
One-to-four family residential $118,116 $132,426
Multi-family dwellings 14,574 9,141
Non-residential real estate 16,371 13,760
Construction 5,004 3,576
Consumer loans 16,075 20,018
Commercial loans 4,291 3,852
-------- --------
Total loans 174,431 182,773
-------- --------
Undisbursed portion of loans (4,319) (2,184)
Unearned interest and fees (660) (693)
Allowance (1,535) (800)
-------- --------
(6,514) (3,677)
-------- --------
Totals $167,917 $179,096
======== ========
Year Ended June 30 1994 1993 1992
- ------------------ ---- ---- ----
(Restated)
Allowance for loan losses
Balances at beginning of period $ 800 $ 648 $ 620
Provision for loan losses 914 285 231
Loans charged off (189) (152) (214)
Recoveries 10 19 11
------ ----- -----
Balances at end of period $1,535 $ 800 $ 648
====== ===== =====
</TABLE>
At June 30, 1994, the Bank had real estate mortgage loans totaling
$116,960,000 (170% of outstanding advances) pledged as collateral for advances
from the Federal Home Loan Bank of Indianapolis.
-67-
<PAGE>
- -------------------------------------------------------------------------------
UF Bancorp, Inc. and Subsidiary Corporations
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
The amount of loans serviced for the benefit of others was $661,980,000,
$787,270,000, $448,995,000 at June 30, 1994, 1993 and 1992. Of these loans
serviced, $551,834,000, $730,450,000 and $405,896,000 pertain to loans
originated by USM which are serviced by a subservicing agency. Loan servicing
fees for loans originated by USM, net of costs of this subservicing
arrangement, were $1,233,000, $827,000 and $290,000 for June 30, 1994, 1993 and
1992. Costs of subservicing are included in other operating expenses.
The Bank had a total of $168,000, $426,000 and $494,000 of nonaccrual loans
at June 30, 1994, 1993 and 1992. Additional interest of approximately $6,000,
$25,000 and $24,000 would have been recorded for the same periods had income on
these loans been accounted for on the accrual basis.
. Real Estate Owned
<TABLE>
<CAPTION>
June 30 1994 1993
- ------- ---- ----
<S> <C> <C> <C>
Real estate owned $1,624 $1,861
Allowance for losses (152) (159)
------ ------
Totals $1,472 $1,702
====== ======
Year Ended June 30 1994 1993 1992
- ----------------- ---- ---- ----
Balances at beginning of period $159 $ 211 $ 259
Provision for losses 31 61 89
Real estate charged off (38) (113) (137)
---- ----- -----
Balances $152 $ 159 $ 211
==== ===== =====
</TABLE>
. Premises and Equipment
<TABLE>
<CAPTION>
June 30 1994 1993
- ------- ---- ----
<S> <C> <C>
Cost
Land $ 2,637 $ 2,926
Buildings and land improvements 8,915 9,340
Furniture, fixtures and equipment 7,227 6,741
------- -------
Total cost 18,779 19,007
Accumulated depreciation (9,613) (8,854)
------- -------
Net $ 9,166 $10,153
======= =======
</TABLE>
-68-
<PAGE>
- -------------------------------------------------------------------------------
. Accrued Interest Receivable
<TABLE>
<CAPTION>
June 30 1994 1993
- ------- ---- ----
<S> <C> <C>
Mortgage-backed securities $1,792 $1,956
Loans receivable 941 1,169
Investments and other 222 32
------ ------
Totals $2,955 $3,157
====== ======
</TABLE>
. Deposits
<TABLE>
<CAPTION>
1994 1993
---------------- ----------------
Weighted Weighted
Average Average
June 30 Amount Rate Amount Rate
- ------- ------ ---- ------ ----
<S> <C> <C> <C> <C>
Deposits
Certificates $230,338 4.60% $245,353 4.92%
Passbook savings account 57,104 2.75 48,500 3.10
NOW and checking accounts 58,168 2.92 53,662 3.16
Money market deposit accounts 26,604 2.85 27,508 3.10
Non-interest bearing accounts 10,702 6,689
-------- --------
Total deposits $382,916 $381,712
======== ========
</TABLE>
<TABLE>
<CAPTION>
1994 1993
---------------- ----------------
June 30 Amount Per Cent Amount Per Cent
- ------- ------ -------- ------ --------
<S> <C> <C> <C> <C>
Certificates maturing in
1 year and less $120,643 52.4% $147,358 60.1%
1 to 2 years 59,446 25.8 56,509 23.0
2 to 3 years 24,760 10.7 16,669 6.8
Over 3 years 25,489 11.1 24,817 10.1
-------- ----- -------- -----
Totals $230,338 100.0% $245,353 100.0%
======== ===== ======== =====
</TABLE>
-69-
<PAGE>
UF Bancorp, Inc. and Subsidiary Corporations
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
The table below sets forth the amount, by interest rates, of savings deposits in
the Bank as of the dates indicated:
<TABLE>
<CAPTION>
June 30 1994 1993
- ------- ---- ----
<S> <C> <C>
4% and under $242,498 $231,133
4.01% to 6% 107,368 87,965
6.01% to 8% 22,409 43,544
8.01% to 10% 10,049 18,154
Over 10% 592 916
-------- --------
Totals $382,916 $381,712
======== ========
</TABLE>
Interest expense for deposit accounts is summarized as follows:
<TABLE>
<CAPTION>
Year Ended June 30 1994 1993 1992
- ------- ---- ---- ----
<S> <C> <C> <C>
NOW and money market accounts $ 2,493 $ 2,584 $ 3,126
Passbook savings accounts 1,436 1,461 1,829
Certificate accounts 11,152 13,284 18,802
------- ------- -------
$15,081 $17,329 $23,757
======= ======= =======
</TABLE>
The aggregate amount of certificates of deposit with a minimum denomination of
$100,000 was approximately $22,027,000 and $22,072,000 at June 30, 1994 and
1993.
. Advances From Federal Home Loan Bank
<TABLE>
<CAPTION>
1994 1993
---------------- ----------------
Weighted Weighted
Average Average
Years Ending June 30 Amount Rate Amount Rate
- -------------------- ------ ---- ------ ----
<S> <C> <C> <C> <C>
1994 $38,000 3.50%
1995 $33,000 4.92% 5,000 6.75
1996 15,000 9.29 15,000 9.29
1999 and after 20,800 4.78
------- -------
Totals $68,800 $58,000
======= =======
</TABLE>
-70-
<PAGE>
UF Bancorp, Inc. and Subsidiary Corporations
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
The terms of a security agreement with the FHLB require the Bank to pledge as
collateral for advances both qualifying first mortgage loans and mortgage-backed
securities in an amount equal to at least 170 percent of these advances and all
stock in the FHLB. Generally, advances are subject to restrictions or penalties
in the event of prepayment.
. Income Taxes
<TABLE>
<CAPTION>
Year Ended June 30 1994 1993 1992
- ------------------ ---- ---- ----
<S> <C> <C> <C>
(Restated)
Income tax expense (benefit)
Currently payable
Federal $2,156 $2,276 $2,260
State 560 812 666
------ ------ ------
2,716 3,088 2,926
------ ------ ------
Deferred
Federal (506) 5 (156)
State (138) 1 (35)
------ ------ ------
(644) 6 (191)
------ ------ ------
Total income tax expense $2,072 $3,094 $2,735
====== ====== ======
Deferred provision (benefit) relating to
Depreciation $ (40) $ (80)
Loan fees (109) 108
Gain on loan sales (3) (94)
Compensation 55 (51)
Other 103 (74)
------ ------
Deferred provision (benefit) $ 6 $ (191)
====== ======
Reconciliation of federal statutory income tax to actual
Tax expense (benefit)
Federal statutory income tax at 34% $1,955 $2,735 $2,543
State franchise tax, net of federal benefit 274 536 440
Tax credits (150) (150) (150)
Bad debt deduction (120) (53)
Other, net (7) 93 (45)
------ ------ ------
Actual tax expense $2,072 $3,094 $2,735
====== ====== ======
</TABLE>
-71-
<PAGE>
UF Bancorp, Inc. and Subsidiary Corporations
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
A cumulative deferred tax asset of $580,000 is included in other assets. The
components of the asset are as follows:
<TABLE>
<CAPTION>
June 30 1994
- ------- ----
(Restated)
<S> <C>
Differences in accounting for loan fees $ 197
Differences in depreciation methods (390)
Differences in accounting for stock dividend (236)
Differences in accounting for pensions and other employee benefits 285
Differences in accounting for warranty losses on sold loans 434
Other 290
------
$ 580
======
Assets $1,491
Liabilities (911)
------
$ 580
======
</TABLE>
During 1994, the Company adopted SFAS No. 109. As a result, the beginning
deferred tax liability was reduced by $300,000, which is reported as the
cumulative effect of a change in accounting method. A valuation allowance was
not required at any time during fiscal year 1994.
Retained earnings include approximately $8,163,000 for which no deferred federal
income tax liability has been recognized. This amount represents an allocation
of income to bad debt deductions as of December 31, 1987 for tax purposes only.
Reduction of amounts so allocated for purposes other than tax bad debt losses or
adjustments arising from carryback of net operating losses would create income
for tax purposes only, which income would be subject to the then-current
corporate income tax rate. The unrecorded deferred income tax liability on the
above amount was approximately $2,775,000.
. Stockholders' Equity and Regulatory Matters
The Financial Institutions Reform, Recovery and Enforcement Act of 1989 requires
thrifts to maintain core capital and tangible capital of at least 3% and 1.5%,
respectively, of adjusted total assets and, subject to a phase-in period, risk-
based capital of at least 8% of risk-weighted assets. At June 30, 1994, the Bank
exceeded these capital requirements.
The Company's principal source of income and funds is dividends from its savings
association banking subsidiary and is not subject to any regulatory restrictions
on the payment of dividends to its stockholders. However, the Office of Thrift
Supervision (OTS) regulations set restriction on the amount of dividends the
Bank may pay. At June 30, 1994, total stockholder's equity of the banking
subsidiary was $37,481,000 of which $10,536,000 was available for the payment of
dividends without prior approval by the OTS.
-72-
<PAGE>
UF Bancorp, Inc. and Subsidiary Corporations
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
At the time of conversion, a liquidation account was established in an amount
equal to the Bank's net worth as reflected in the latest statement of condition
used in its final conversion offering circular. The liquidation account is
maintained for the benefit of eligible deposit account holders who maintain
their deposit accounts in the Bank after conversion. In the event of a complete
liquidation (and only in such an event), each eligible deposit account holder
will be entitled to receive a liquidation distribution from the liquidation
account in the amount of the then current adjusted subaccount balance for
deposit accounts then held, before any liquidation distribution may be made to
stockholders. Except for the repurchase of stock and payment of dividends, the
existence of the liquidation account will not restrict the use or application of
net worth. The initial balance of the liquidation account was $22,890,000.
The Company is authorized to issue 1,000,000 shares of preferred stock, $.01 par
value, which remain unissued at June 30, 1994. In the event any preferred shares
are issued, the Board of Directors is authorized to fix the designation, powers,
preferences and rights of the shares and any qualifications, limitation or
restrictions thereon.
Effective October 30, 1991, Union Federal Savings Bank converted from a mutual
savings bank to a stock savings bank with all of its stock being issued to the
Company which issued 1,851,981 shares of its common stock with a $.01 per share
par value. Net proceeds of the Company's stock issuance after costs were
$17,091,000. The acquisition of the Bank by the Company was accounted for as if
it were a pooling of interest.
The Bank is required to maintain reserve funds in cash and/or on deposit with
the Federal Reserve Bank. The reserve required was $3,048,000 at June 30, 1994.
. Employee Benefit Plans
The Bank is a participant in a pension fund known as the Financial Institutions
Retirement Fund (FIRF). This plan is a multi-employer plan; separate actuarial
valuations are not made with respect to each participating employer. According
to FIRF administrators, the market value of the fund's assets exceeded the value
of vested benefits in the aggregate as of June 30, 1993, the date of the latest
actuarial valuation. No pension expense was recorded for any of the three years
ended June 30, 1994. Due to the Internal Revenue Service's full funding limit,
contributions to the plan have not been required since June, 1987. This plan
provides pension benefits for substantially all of the Bank's employees.
The Bank has adopted an employee savings plan under which employees can
contribute up to 12% of their annual salaries. The Bank will match, as a
minimum, 25% of employees' contributions up to 6% of salaries. At the discretion
of the Board of Directors, additional matching up to 100% can be made.
-73-
<PAGE>
UF Bancorp, Inc. and Subsidiary Corporations
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Also, at the discretion of the Board of Directors, an officer and employee bonus
can be paid based upon a predetermined formula based on earnings and net worth.
For the years ended June 30, 1994, 1993 and 1992, the Bank expensed $649,000,
$752,000 and $697,000 for the bonus arrangement. Amounts expensed by the Company
under this bonus arrangement can be used to fund contributions to the Company's
Employee Stock Ownership Plan (ESOP), or can be paid directly to employees.
As noted above, the Company has established an ESOP to provide Bank employees an
opportunity to acquire shares of the Company's common stock. The costs of the
ESOP are expensed by the Bank through contributions in amounts determined by the
Board of Directors. These contributions are allocated among participants based
upon compensation. The bank's contributions to the ESOP were $690,000, $117,710
and $295,000 for fiscal years 1994, 1993 and 1992, of which $40,800, $68,960 and
$62,000 (the amounts of interest incurred on the ESOP debt) are classified as
interest expense. The ESOP borrowed $1,296,390 from a third party lender which
is repayable over seven years and guaranteed by the Company. The loan is
included in other liabilities on the Company's balance sheet and also as an
offset in stockholders' equity. The Company had $676,000 of overnight deposits
pledged as collateral for this loan at June 30, 1994. The proceeds from the loan
were used to purchase 129,639 shares of the Company's common stock.
Also, in conjunction with the conversion, the Board of Directors of the Company
established a Recognition and Retention Plan and Trust (RRP). The Company
contributed $600,050 to the RRP for the purchase of 55,560 shares of Company
common stock. Effective with the conversion on October 30, 1991, awards of
grants for these shares were issued to various officers and employees of the
Company. These awards vest at a rate of 20% per year commencing June 30, 1992.
The unearned compensation portion of these stock awards is presented as a
reduction of stockholders equity.
The Board of Directors of the Company adopted (subsequently ratified by the
stockholders), a Stock Option and Incentive Plan (Option Plan) with
authorization to grant incentive stock options, non-qualified stock options,
stock appreciation rights, limited stock appreciation rights and restricted
stock. Upon the conversion, the Company reserved 185,198 shares of its common
stock and also granted options to purchase 161,308 shares of common stock at $10
per share (the stock issuance price at conversion) to various officers and non-
employee directors. These options are exercisable over a ten-year period. During
1993, 6,482 options were exercised and none awarded. During 1994, options to
purchase 17,170 shares were granted under this Option Plan to various officers
at an exercise price of $23.06. Also, additional options to purchase 6,720
shares under a new directors' stock option plan (subject to stockholder
approval) were granted to non-employee directors at an exercise price of $24.06.
No options were exercised during 1994. At June 30, 1994, there were a total of
178,716 options outstanding at an average option price of $11.78, of which
129,871 were exercisable at that date.
-74-
<PAGE>
UF Bancorp, Inc. and Subsidiary Corporations
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
. Commitments and Contingent Liabilities and Financial Instruments
With Off Balance Sheet Risk
In the normal course of business, there are outstanding commitments and
contingent liabilities which are not included in the accompanying consolidated
financial statements.
At June 30, 1994, the Bank, excluding UFC, had outstanding commitments to extend
credit, which amounted to $5,629,000, consisting of $4,594,000 with adjustable
rates and $1,035,000 with fixed rates ranging from 8% to 9.38%. At June 30,
1993, the Bank, excluding UFC, had outstanding commitments to extend credit,
which amounted to $14,338,000 consisting of $12,007,000 with adjustable rates
and $2,331,000 with fixed rates ranging from 7% to 9%.
At June 30, 1994, UFC had commitments to fund loans of approximately
$35,575,000, consisting of $18,745,000 with adjustable rates and $16,830,000
with fixed rates varying from 6.9% to 10.5%. Offsetting these commitments to
fund loans, at June 30, 1994, UFC had commitments to sell loans of $27,700,000
and mortgage-backed securities of $8,000,000. At June 30, 1993, UFC had
commitments to fund loans of approximately $28,478,000, consisting of $5,229,000
with adjustable rates and $23,249,000 with fixed rates varying from 6.625% to
8.25%. UFC had commitments to sell all but $1,537,000 of these loans.
Commitments to fund loans are agreements to lend to a customer as long as there
is no violation of any condition established in the contract. Commitments to
sell loans to permanent investors generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Also, external market
forces impact the probability of commitments being exercised; therefore, total
commitments outstanding do not necessarily represent future cash requirements.
In the ordinary course of business, the Bank and UFC have liability under
representations and warranties made to purchasers and insurers of mortgage loans
and the purchasers of servicing rights. Under certain circumstances, they may
become liable for the unpaid principal and interest on defaulted loans (whether
recourse or nonrecourse) or other loans if there has been a breach of
representations or warranties. With the sale of USM on May 31, 1993, the Bank
assumed these representations and warranties for all loans sold by USM prior to
May 31, 1993. For the years ended June 30, 1994, 1993 and 1992, the Company
provided for losses of $1,482,000, $456,000 and $111,000 under these assumed
guarantees. The allowance for future losses at June 30, 1994 was $1,366,000.
The Company is also subject to claims and lawsuits which arise primarily in the
ordinary course of business. Based on information presently available and advice
received from legal counsel representing the Company in connection with such
claims and lawsuits, it is the opinion of management that the disposition or
ultimate determination of such claims and lawsuits will not have a material
adverse effect on the consolidated financial position or the results of
operations of the Company.
-75-
<PAGE>
UF Bancorp, Inc. and Subsidiary Corporations
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
The Bank has entered into employment contracts with six of its officers which
provide for the continuation of salary and certain benefits for specified
periods of time under certain conditions. Under the terms of the agreements,
these payments could occur in the event of involuntary termination for other
than cause following a change in control of the Company. The contingent
liability under the agreements in the event of a change in control is
approximately $1,300,000 at June 30, 1994.
. Business Segment Information
The Company's operations have been classified into two business segments:
community banking and mortgage banking. The community banking segment involves
primarily the traditional activities of obtaining retail deposits and the making
of mortgage and other types of loans and other traditional community banking
activities. The mortgage banking segment involves the making, purchasing,
selling and servicing of one-to-four family and single family loans.
Financial information by business segment is summarized as follows:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
(Restated)
<S> <C> <C> <C>
Net Interest Income Before Provision for Loan Losses
Community banking $ 13,266 $ 14,728 $ 13,075
Mortgage banking 66 336 106
-------- -------- --------
$ 13,332 $ 15,064 $ 13,181
======== ======== ========
Net Income Before Taxes
Community banking $ 4,994 $ 7,860 $ 5,844
Mortgage banking 757 184 1,636
-------- -------- --------
$ 5,751 $ 8,044 $ 7,480
======== ======== =========
Total Assets
Community banking $493,848 $476,177 $419,711
Mortgage banking 10,035 13,349 50,966
-------- -------- --------
$503,883 $489,526 $470,677
======== ======== ========
Loans Serviced for Others
Community banking $ 65,380 $ 56,800 $ 43,095
Mortgage banking 596,600 730,470 405,900
-------- -------- --------
$661,980 $787,270 $448,995
======== ======== ========
</TABLE>
The gain on the sale of the California mortgage bank subsidiary of $962,000 and
$747,000 for 1994 and 1993 is included in the mortgage banking net income before
taxes presented above.
-76-
<PAGE>
UF Bancorp, Inc. and Subsidiary Corporations
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
. Fair Value of Financial Instruments
In December, 1991, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 107, Disclosures About Fair Value of
Financial Instruments. This standard extends the existing fair value disclosure
practices for some instruments by requiring entities to disclose the fair value
of financial instruments for which it is practicable to estimate fair value. The
following methods and assumptions were used to estimate the fair value of each
type of financial instrument.
Cash, Cash Equivalents and FHLB Stock
For these instruments, the carrying value on reporting date is a reasonable
estimate of fair value.
Investment Securities and Mortgage-Backed Securities
For investment securities and mortgage-backed securities, fair values are
based on quoted market prices, if available. For securities where quoted
prices are not available, fair value is estimated based on market prices of
similar securities.
Loans and Loans Held for Sale
For most residential mortgage loans and certain other homogeneous categories
of loans, fair value is estimated by discounting future cash flows using
current rates at which similar loans would be made to borrowers with similar
credit rates for the same remaining maturities.
Deposit Liabilities
The fair value of demand deposits, savings accounts and certain money market
deposits is the amount payable on demand at the reporting date. The fair value
of fixed-maturity certificates of deposit is estimated using the rates
currently offered for deposits of similar remaining maturities.
Borrowings
The carrying amount of short-term borrowings is a reasonable estimate of
fair value. For long-term borrowings, the fair value is estimated using the
rates currently offered for borrowings of similar remaining maturities.
Commitments to Extend Credit and Standby Letters of Credit
The carrying values of these items are not material to the Company's
financial condition.
-77-
<PAGE>
UF Bancorp, Inc. and Subsidiary Corporations
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
The extended fair values of the Company's financial instruments at June 30, 1994
are as follows:
<TABLE>
<CAPTION>
1994 1993
-------------------- --------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- ------- --------
<S> <C> <C> <C> <C>
(Restated)
Cash and short-term investments $ 28,002 $ 28,002 $ 22,027 $ 22,027
FHLB stock 6,101 6,101 5,000 5,000
Investment securities 26,544 26,384 6,723 6,723
Mortgage-backed securities 243,563 240,710 244,322 246,541
Mortgage loans held for sale 9,623 9,623 10,066 10,070
Loans 167,917 169,252 179,096 185,448
Deposits 382,916 380,903 381,712 384,445
Short-term borrowings 33,000 33,000 38,000 38,000
Long-term borrowings 35,800 36,378 20,000 21,693
</TABLE>
. Condensed Financial Information (Parent Company Only)
Presented below is condensed financial information as to financial position,
results of operations and cash flows of the Company:
<TABLE>
<CAPTION>
Condensed Statement of Financial Condition
June 30 1994 1993
- ------- ---- ----
<S> <C> <C>
(Restated)
Assets
Cash $ 737 $ 434
Investments 6,718 4,579
Investment in subsidiary 37,481 37,848
Other assets 1,182 1,711
------- -------
$46,118 $44,572
======= =======
Liabilities and Stockholders' Equity
Accounts payable and accrued expenses $ (267) $ 53
Stockholders' equity 46,385 44,519
------- -------
$46,118 $44,572
======= =======
</TABLE>
-78-
<PAGE>
UF Bancorp, Inc. and Subsidiary Corporations
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Condensed Statement of Income
<TABLE>
<CAPTION>
Year Ended June 30 1994 1993 1992
- ------------------ ---- ---- ----
<S> <C> <C> <C>
(Restated)
Income
Dividends from subsidiary $ 5,149 $5,760 $ 185
Interest income 176 210 110
------- ------ ------
Total income 5,325 5,970 295
Expenses 331 415 156
------- ------ ------
Income before income tax benefit and equity in
undistributed earnings of subsidiary 4,994 5,555 139
Income tax benefit 53 70 23
------- ------ ------
Income before equity in undistributed earnings of subsidiary 5,047 5,625 162
Equity in undistributed earnings of subsidiary (1,068) (675) 4,583
------- ------ ------
Net income $ 3,979 $4,950 $4,745
======= ====== ======
Condensed Statement of Cash Flows
<CAPTION>
Year Ended June 30 1994 1993 1992
- ------------------ ---- ---- ----
<S> <C> <C> <C>
(Restated)
Operating activities
Net income $ 3,979 $ 4,950 $ 4,745
Adjustments to reconcile net income to net cash
provided (used) by operating activities
Equity in undistributed earnings of subsidiary 1,068 675 (4,583)
Amortization of unearned compensation 120 120 120
Changes in other assets and accrued expenses 1,034 (1,140) (518)
------- ------- --------
Net cash provided (used) by operating activities 6,201 4,605 (236)
------- ------- --------
Investing activities
Purchase of investment securities (5,459) (4,497) (6,794)
Proceeds from investment securities maturities 3,320 2,034 4,678
Investment in limited partnership (826)
------- ------- --------
Net cash (used) by investing activities (2,965) (2,463) (2,116)
------- ------- --------
Financing activities
Net proceeds from issuance of stock 17,091
Contributions to RRP (600)
Capital contributed to Bank subsidiary (12,022)
Purchase of treasury stock (2,238) (1,961) (1,109)
Cash dividends (788) (748) (176)
Proceeds from exercise of stock options 65
Proceeds from tax benefits of ESOP, stock options and RRP 93 104
------- ------- --------
Net cash provided (used) by financing activities (2,933) (2,540) 3,184
------- ------- --------
Net increase (decrease) in cash 303 (398) 832
Cash, beginning of year 434 832
Cash, end of year $ 737 $ 434 $ 832
======= ======= ========
-79-
</TABLE>
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this item with respect to directors is
incorporated by reference to pages 3 through 5 of the Holding Company's Proxy
Statement for its 1994 Annual Shareholder Meeting (the "1994 Proxy Statement").
Information concerning the Holding Company's executive officers is included in
Item 4.5 in Part I of this report.
Item 11. Executive Compensation
The information required by this item with respect to executive
compensation is incorporated by reference to pages 6 through 10 of the 1994
Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated by reference to pages
3 through 4 of the 1994 Proxy Statement.
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated by reference to pages
10 through 11 of the 1994 Proxy Statement.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) List the following documents filed as part of the report:
Financial Statements
--------------------
Consolidated Statement of Financial
Condition at June 30, 1994, and 1993
Consolidated Statement of Operations for
the Fiscal Years Ended June 30, 1994,
1993 and 1992
Consolidated Statement of Changes in Stockholders'
Equity for the Fiscal Years ended June 30,
1994, 1993, and 1992
Consolidated Statement of Cash Flows for the
Fiscal Years ended June 30, 1994, 1993, and 1992
Notes to Consolidated Financial Statements
(b) The Holding Company filed no reports on Form 8-K during the fourth
quarter of fiscal year 1994.
(c) The exhibits filed herewith or incorporated by reference herein are
set forth on the Exhibit Index on page 39.
(d) All schedules are omitted as the required information either is not
applicable or is included in the Consolidated Financial Statements or
related notes.
-80-
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
Exhibit Index* Page
- -------------- ----
<C> <S> <C>
3(1) The Certificates of Incorporation of the Registrant is incorporated
by reference to Exhibit 3.1 to the Registration Statement on Form
S-1 (Registration No. 33-41377).
3(2) The Code of By-Laws of the Registrant is incorporated by reference to
Exhibit 3.2 to the Registration Statement on Form S-1
(Registration No. 33-41377).
10(1) Supplemental Executive Retirement Plan between the Bank and Donald
Rausch dated 3/19/91 is incorporated by reference to exhibit 10(1) of the
Registrant's Form 10-K for the fiscal year ended June 30, 1992 (1992 10-K).
First Amendment to the Union Federal Savings Bank Supplemental Executive
Retirement Plan dated January 20, 1994.
10(2) Director Deferred Compensation Master Agreement and related Director
Deferred Compensation Joinder Agreements, all dated August 1, 1993.
10(3) Employment Agreement between the Bank and Donald A. Rausch dated
10/30/91 is incorporated by reference to exhibit 10(3) of the Registrant's
1992 10-K. First Amendment to Employment Agreement dated November 18, 1992.
Second Amendment to Employment Agreement dated October 30, 1993.
10(4) Employment Agreement between the Bank and Ennis R. Griffith dated 10/30/91 is
incorporated by reference to exhibit 10(4) of the Registrant's 1992 10-K.
First Amendment to Employment Agreement dated November 18, 1992. Second
Amendment to Employment Agreement dated October 30, 1993.
10(5) Employment Agreement between the Bank and Terry G. Johnston dated 10/30/91
is incorporated by reference to exhibit 10(5) of the Registrant's 1992 10-K.
First Amendment to Employment Agreement dated November 18, 1992. Second
Amendment to Employment Agreement dated October 30, 1993.
10(6) Employment Agreement between the Bank and Paul E. Wargel dated 10/30/91 is
incorporated by reference to exhibit 10(6) of the Registrant's 1992 10-K.
First Amendment to Employment Agreement dated November 18, 1992. Second
Amendment to Employment Agreement dated October 30, 1993.
10(7) Termination Agreement between the Bank and J. Ray Justice dated 10/30/91 is
incorporated by reference to exhibit 10(7) of the Registrant's 1992 10-K.
First Amendment to Special Termination Agreement dated November 18, 1992.
Second Amendment to Special Termination Agreement dated October 30, 1993.
10(8) Termination Agreement between the Bank and Steven E. Fowler dated 10/30/91
is incorporated by reference to exhibit 10(8) of the Registrant's 1992 10-K.
First Amendment to Special Termination Agreement dated November 18, 1992.
Second Amendment to Special Termination Agreement dated October 30, 1993.
10(9) UF Bancorp, Inc. 1991 Stock Option and Incentive Plan is incorporated by
reference to Exhibit A to the Registrant's definitive Proxy Statement in
respect of its 1992 Annual Shareholder Meeting.
10(10) Recognition and Retention Plan and Trust Plan is incorporated by reference to
Exhibit B to the Registrant's definitive Proxy Statement in respect of its
1992 Annual Shareholder Meeting.
11 Computation of Per Share Earnings
-81-
</TABLE>
<PAGE>
21 Subsidiaries of the Registrant
23 Consent of Geo. S. Olive & Co. LLC
______________
* Management contracts and plans required to be filed as exhibits are included
as Exhibits 10(1) - 10(10).
-82-
<PAGE>
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant had duly caused this report
to be signed on behalf of the undersigned, thereto duly authorized.
UF BANCORP, INC.
Date: June 14, 1995 By: /s/ Donald A. Rausch
---------------------------
Donald A. Rausch,
Chairman of the Board,
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the report has been signed below by the following persons on behalf
of the Registrant and in the capacities indicated on this 14th day of
June, 1995.
/s/ Donald A. Rausch
- ----------------------------------- ------------------------------
Donald A. Rausch James D. Foulke, Director
Chairman of the Board,
President and Chief
Executive Officer
(Principal Executive Officer)
/s/ Ennis R. Griffith /s/ Andrew E. Goebel
- ----------------------------------- ------------------------------
Ennis R. Griffith Andrew E. Goebel, Director
Senior Vice President,
Chief Financial Officer,
and Secretary/Treasurer
(Principal Financial and Accounting Officer)
------------------------------
Robert R.C. Miller, Director
/s/ James H. Muehlbauer
------------------------------
James H. Muehlbauer, Director
/s/ John R. Stalling
------------------------------
John R. Stalling, Director
/s/ W. Earl Williams
------------------------------
W. Earl Williams, Director
-83-
<PAGE>
FORM 10-Q/A
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 1995
___________________________
Commission File Number 0-19523
____________
UF Bancorp, Inc.
_______________________________________________________________
(Exact name of registrant as specified in its charter)
Delaware 35-1833698
________________________________________________________________
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
501 Main Street, Evansville, Indiana 47708
________________________________________________________________
(Address of principal executive office) (Zip Code)
(812) 425-7111
________________________________________________________________
(Registrant's telephone number, including area code)
Not Applicable
________________________________________________________________
(Former name, former address and former fiscal year,
if changed since last report)
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 May 12, 1995, there were outstanding 1,627,139 common shares, with $.01
par value, of the registrant.
<PAGE>
UF BANCORP, INC.
FORM 10-Q/A
INDEX
Page No.
--------
PART I. Financial Information
Item 1. Financial Statements:
Consolidated Condensed Statement of Financial
Condition..................................... 1
Consolidated Statement of Operations............ 2
Consolidated Condensed Statement
of Changes in Stockholders' Equity............ 3
Consolidated Condensed Statement of Cash Flows.. 4
Notes to Consolidated Financial Statements...... 5-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 8-19
PART II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders.. 20
Item 5. Other Information.................................... 20
Item 6. Exhibits and Reports on Form 8-K..................... 20,22
Signatures.................................................... 21
<PAGE>
UF BANCORP, INC and SUBSIDIARY CORPORATIONS
Form 10-Q/A
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CONSOLIDATED CONDENSED STATEMENT OF FINANCIAL CONDITION
(In thousands) MARCH 31, JUNE 30,
(Unaudited) 1995 1994
------------ ------------
(Restated) (Restated)
<S> <C> <C>
ASSETS
Cash $ 10,542 $ 13,021
Federal funds sold 5,200 3,300
Short-term interest bearing deposits 1,014 11,681
------------ ------------
Cash and cash equivalents 16,756 28,002
Investments:
Securities held to maturity 26,544
(market value $26,384)
Securities available for sale 35,606
Mortgage-backed securities:
Mortgage-backed securities held to maturity 243,563
(market value $240,710)
Mortgage-backed securities available for sale 261,151
Loans receivable, net 200,505 167,917
Mortgage loans held for sale 8,913 9,623
Real estate acquired in settlement of loans, net 828 1,472
Premises and equipment 8,748 9,166
Federal Home Loan Bank stock, at cost 7,749 6,101
Interest receivable 3,878 2,955
Prepaid expenses and other assets 8,907 8,540
------------ ------------
Total assets $553,041 $503,883
============ ============
LIABILITIES
Deposits $359,150 $382,916
Advances from Federal Home Loan Bank 146,926 68,800
Interest payable 2,185 1,424
Other liabilities 6,061 4,358
------------ ------------
Total liabilities 514,322 457,498
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value:
Authorized and unissued--1,000,000 shares
Common Stock, $.01 par value:
Authorized - 4,000,000 shares
Issued 1,872,463 and 1,858,463 shares 19 19
Additional paid-in capital 17,810 17,334
Retained earnings--substantially restricted 30,815 34,852
------------ ------------
48,644 52,205
Less:
Treasury stock-at cost-264,770 shares (5,308) (5,308)
Reduction for ESOP loan guarantee (133) (272)
Unearned compensation (150) (240)
Unrealized loss on securities available for sale (4,334)
------------ ------------
Total stockholders' equity 38,719 46,385
------------ ------------
Total liabilities and stockholders' equity $553,041 $503,883
============ ============
</TABLE>
See notes to consolidated financial statements
-1-
<PAGE>
UF BANCORP, INC. and SUBSIDIARY CORPORATIONS
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
----------------------- ----------------------
1995 1994 1995 1994
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Interest Income (Restated)
Loans $3,987 $3,718 $11,232 $11,461
Mortgage-backed securities 4,578 3,307 13,324 10,698
Other interest and dividends 806 266 2,152 757
Loans held for resale 263 278 731 1,684
----------- ----------- ----------- -----------
9,634 7,569 27,439 24,600
----------- ----------- ----------- -----------
Interest Expense
Deposits 3,840 3,691 10,997 11,417
FHLB of Indianapolis advances 2,473 704 6,037 2,852
----------- ----------- ----------- -----------
6,313 4,395 17,034 14,269
----------- ----------- ----------- -----------
Net Interest Income 3,321 3,174 10,405 10,331
Provision for loan losses 50 83 1,065 247
----------- ----------- ----------- -----------
Net Interest Income After Provision
for Loan Losses 3,271 3,091 9,340 10,084
----------- ----------- ----------- -----------
Other Income
Gain (loss) on:
Sale of subsidiary 0 195 0 880
Sale of investment securities 0 0 (533) 0
Mortgage-backed securities available
for sale 82 0 (768) 0
Service charges on deposit accounts 196 192 641 605
Mortgage loan origination fees 293 780 1,040 2,938
Mortgage loan servicing fees 406 468 1,281 1,500
Insurance commissions 67 69 242 193
Other operating income 78 78 133 246
----------- ----------- ----------- -----------
1,122 1,782 2,036 6,362
----------- ----------- ----------- -----------
Other Expenses
Salaries and employee benefits 1,557 1,668 4,470 5,192
Premises and equipment expense 325 382 1,015 1,079
Deposit insurance 210 218 652 654
Data processing 117 130 334 374
Communication, supplies, etc. 182 239 556 648
Advertising 110 120 344 344
Warranty losses on sold loans 0 0 2,514 176
Professional fees 12 8 745 31
Other operating expenses 549 596 1,917 1,819
----------- ----------- ----------- -----------
3,062 3,361 12,547 10,317
----------- ----------- ----------- -----------
Income (Loss) Before Income Taxes and Cumulative
Effect of Change in Accounting Method 1,331 1,512 (1,171) 6,129
Income Taxes 437 487 2,187 2,285
Net Income (Loss) Before Cumulative Effect of ----------- ----------- ----------- -----------
Change in Accounting Method 894 1,025 (3,358) 3,844
Cumulative Effect of Change in Accounting Method 0 0 0 300
----------- ----------- ----------- -----------
Net Income (Loss) $894 $1,025 ($3,358) $4,144
=========== =========== =========== ===========
Per Share:
Net Income (loss) before cumulative effect of
change in accounting method $0.52 $0.61 ($1.96) $2.23
Net income (loss) $0.52 $0.61 ($1.96) $2.40
Dividends $0.150 $0.125 $0.425 $0.360
Average common and common equivalent
shares outstanding 1,724,580 1,686,993 1,710,132 1,727,752
</TABLE>
See notes to consolidated financial statements
-2-
<PAGE>
UF BANCORP, INC. and SUBSIDIARY CORPORATIONS
<TABLE>
<CAPTION>
CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands)
(Unaudited)
Nine months ended
March 31,
-------------------------
1995 1994
---------- ----------
(Restated)
<S> <C> <C>
Balance, June 30 $46,385 $44,519
Adoption of FAS 115 - Unrealized loss on available for sale
securities at July 1 (1,844)
ESOP Loan repayments 139 653
Amortization of Deferred Compensation 90 90
Sale of additional 14,000 shares of stock 476
Purchase of treasury stock (2,238)
Net change in unrealized loss on available for sale securities (2,490)
Dividends paid (679) (588)
Net income (loss), nine months ended March 31 (3,358) 4,144
---------- ----------
Balance, March 31 $38,719 $46,580
========== ==========
</TABLE>
See notes to consolidated financial statements.
-3-
<PAGE>
UF BANCORP, INC and SUBSIDIARY CORPORATIONS
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
-----------------------------
1995 1994
------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES: (Restated)
Net income ($3,358) $4,144
Adjustments to reconcile net income to
net cash used by operating activities:
Provision for loan losses 1,065 247
Depreciation and amortization 521 570
Decrease (Increase) in mortgage loans held for sale 710 (5,062)
Other adjustments, net 3,809 3,746
------------- ------------
Net cash provided (used) by operating activities 2,747 3,645
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of mortgage backed securities held to maturity (36,637) (28,272)
Proceeds from held to maturity mortgage-backed securities
maturities and principal repayments 9,263 52,421
Purchase of available for sale mortgage-backed securities (29,004)
Proceeds from available for sale mortgage-backed securities
maturities and principal repayments 31,605
Purchase of held to maturity investment securities (29,754) (8,413)
Proceeds from held to maturity investment securities
maturities and principal repayments 8,825
Proceeds from sale of held to maturity investment securities 14,210
Proceeds from available for sale investment securities
maturities and principal repayments 6,857
Net change in loans (2,741) 7,118
Purchase of loans (31,122) (2,930)
Proceeds from sale of real estate owned 737 315
Purchases of premises and equipment (103) (462)
Purchase of FHLB of Indianapolis stock (1,648) (1,101)
------------- ------------
Net cash provided (used) by investing activities (68,337) 27,501
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in non-interest bearing
deposits, NOW accounts and savings accounts (17,855) 14,541
Net increase (decrease) in certificates of deposit (5,911) (5,946)
Repayment of FHLB of Indianapolis advances (26,007) (95,000)
Proceeds obtained from FHLB of Indianapolis advances 104,133 62,800
Net increase (decrease) in advances
by borrowers for taxes and insurance 187 106
Proceeds from sale of common stock 476
Purchase of treasury stock (2,238)
Cash dividends (679) (588)
------------- ------------
Net cash provided (used) by financing activities 54,344 (26,325)
------------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (11,246) 4,821
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 28,002 22,027
------------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $16,756 $26,848
============= ============
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest:
Advances $5,676 $2,628
Deposits 10,524 11,278
Income taxes paid 1,460 1,300
Reclassification of available for sale mortgage-backed
securities and investments 194,134
</TABLE>
See notes to consolidated financial statements
-4-
<PAGE>
UF BANCORP, INC.
AND SUBSIDIARY CORPORATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: Significant Accounting Policies
The consolidated financial statements include the accounts of UF Bancorp, Inc.
(the "Company") and its wholly-owned subsidiary, Union Federal Savings Bank
("the Bank"), and the Bank's three wholly-owned subsidiaries, Unifin, Inc.,
Community Insurance Associates, Inc., and Union Financial Corp. ("UFC").
The significant accounting policies followed by the Company and its subsidiaries
for interim financial reporting are consistent with those followed for annual
financial reporting.
All adjustments, consisting of normal accruals which in the opinion of
management are necessary for a fair presentation of the financial results, have
been included in the consolidated financial statements. The interim results of
operations presented are not necessarily indicative of the results that may be
expected for the full year. The June 30, 1994, statement of financial
condition is derived from the audited financial statements of June 30, 1994.
Reclassifications: Certain amounts in the June 30, 1994 consolidated financial
statements have been reclassified to conform to the March 31, 1995 presentation.
NOTE 2: Change in Accounting Method
In May, 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 115 (SFAS No. 115), Accounting for Certain
Investments in Debt and Equity Securities. This statement requires that
securities be classified in three categories and provides specific accounting
treatment for each. "Trading" securities are bought and held primarily for sale
in the near term and are carried at fair value, with unrealized gains and losses
included in earnings; "held-to-maturity" securities, for which the intent is to
hold to maturity, are carried at amortized cost; and "available-for-sale"
securities are all others and are carried at fair value with unrealized gains
and losses excluded from earnings and reported as a separate component of
stockholders' equity. The Company adopted SFAS No. 115 on July 1, 1994. At
that date, investment securities with an approximate carrying value of
$6,718,000 and mortgage-backed securities with an approximate carrying value of
$177,800,000 were reclassified as available for sale. These reclassifications
resulted in a decrease in total stockholders' equity net of taxes, of
$1,844,000. All other investment and mortgage-backed securities were classified
as "held to maturity". At March 31, 1995, mortgage-backed securities with a
fair value of $261,151,000 and investment securities of $35,606,000 were
classified as available for sale. At March 31, 1995, the net unrealized loss on
these "available for sale" securities of $4,334,000 was recorded as a reduction
of stockholder's equity.
NOTE 3: Merger Agreement
On December 13, 1994 CNB Bancshares, Inc. (CNB) and UF Bancorp, Inc. (UFBI),
jointly announced the execution of a definitive merger agreement whereby CNB
would acquire UF Bancorp. (the "Merger Agreement".)
Under the terms of the agreement, shareholders of UF Bancorp will receive 1.366
shares of CNB common stock for each of the 1,607,693 outstanding common shares
of UF Bancorp, assuming CNB's market price just prior to closing is not less
than $26.66 per share or more than $36.06 per share. In addition, CNB will
reserve shares for future issuance pursuant to the outstanding UF Bancorp
options. The merger is subject to approval by the UF Bancorp shareholders, the
receipt of
-5-
<PAGE>
appropriate regulatory approvals and certain other conditions.
Under certain circumstances, should UF Bancorp not complete this transaction, it
may become obligated to pay CNB a termination fee of $2 million.
During the quarter ending December 31, 1994, professional fees of approximately
$700,000 were incurred in connection with the proposed merger with CNB.
NOTE 4: Federal Home Loan Bank Advances
During the nine months ended March 31, 1995, the Bank increased its borrowings
from the FHLB of Indianapolis by $78.1 million. $76 million of the new advances
have original terms to maturity of six months to two years, variable interest
rates, and $40 million may be prepaid without penalty. $2.1 million of the new
advances are community low income housing advances which have fixed rates and
are to be amortized over a 20 year term.
NOTE 5: Deferred Tax Liability
At June 30, 1994 retained earnings included approximately $8,163,000 for which
no deferred federal income tax liability had been recognized. This amount
represented an allocation of income to bad debt deductions as of December 31,
1987 for tax purposes only. The unrecorded deferred income tax liability on the
above amount was approximately $2,775,000.
The Company's intention is to convert Union Federal to commercial bank status
even if the merger with CNB is not completed. Accordingly, the deferred income
tax liability of $2,775,000 was recorded with a corresponding increase in income
tax expense during the quarter ending December 31, 1994.
NOTE 6: Increase in Loan Loss Reserves
The Company recorded a loan loss provision of $1,065,000 for the nine months
ended March 31, 1995 and had net chargeoffs of $658,000. The allowance for loan
losses at March 31, 1995, was $1,942,000 or .97 percent of loans at that date.
NOTE 7: Warranty Loss Provisions
For the nine months ended March 31, 1995, the Company provided for $2,514,000 of
warranty losses and had net chargeoffs of $1,343,000 in connection with
warranties made to purchasers and insurers of mortgage loans and the purchasers
of servicing rights by its former California mortgage banking subsidiary, USM.
The balance in the reserve for warranty losses account at March 31, 1995 was
$2,537,000, which management considers adequate to cover all future losses.
Note 8: Loss On Sale of Held to Maturity Securities
With the Company's intention to convert Union Federal to commercial bank status
(see Note 5 above), and with the current regulatory environment discouraging
"structured notes", it was determined to revise the Bank's investment policy.
Accordingly, during the quarter ending December 31, 1994, the Company
restructured its "held to maturity" investment portfolio primarily by selling
its entire portfolio of federal agency "step up" securities, which are a form of
"structured notes". A loss of $533,000 was recorded on the sale of the $14.2
million amortized cost and principal amount of these securities. As a result of
this transaction, the Company reclassified its investments and mortgage-backed
securities previously classified as "held to maturity" to "available for sale."
-6-
<PAGE>
Note 9: Loss on Available for Sale Mortgage-Backed Securities
During the current nine month period, the Company recorded a net loss of
$768,000 on available for sale mortgage-backed securities for which the Company
determined to be no longer eligible as 20% risk based capital qualifying items
under the Secondary Mortgage Market Enhancement Act ("SMMEA") provisions.
Note 10: Capital Contribution to Union Federal
During the quarter ending December 31, 1994, the Company made a capital
contribution of $5 million to its principal subsidiary, Union Federal Savings
Bank. The purpose of the contribution was to maintain Union Federal's
classification of "well capitalized" under FDIC and FEDICIA guidelines.
Note 11: Restatement
The Company has restated its September 30, 1994 and December 31, 1994 quarterly
earnings as follows:
<TABLE>
<CAPTION>
As Previously
Reported As Restated
------------- -----------
<S> <C> <C>
Three months ended September 30, 1994
- -------------------------------------
Provision for loan losses $ 60,000 $ 895,000
Warranty losses on sold loans 324,000
Three months ended December 31, 1994
- -------------------------------------
Provision for loan losses $2,040,000 $ 120,000
Warranty losses on sold loans 3,600,000 2,190,000
</TABLE>
-7-
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
- --------
Total assets were $553.0 million at March 31, 1995 compared to $503.9 million at
June 30, 1994. This $49.1 million increase resulted primarily from increases in
mortgage-backed securities of $20.9 million, loans of $31.5 million, investment
securities of $9.1 million and FHLB stock of 1.6 million, offset by a decrease
in cash and cash equivalents of $11.3 million. The net asset increase was
funded primarily by increases in FHLB advances of $78.1 million offset by a
decline in deposits of $23.8 million.
The Company recorded net income of $894,000 or $.52 per share for the three
months ended March 31, 1995 compared to net income of $1,025,000 or $.61 per
share for the comparable period of 1994.
The earnings performance in the current quarter, when compared to the 1994
quarter, was negatively affected by declines in mortgage loan origination fees
of $487,000 and loan servicing fees of $62,000. Additionally, last year's
quarter included a $195,000 gain on the sale of the Company's West Coast
mortgage banking subsidiary ("USM"). Positively affecting the comparable
results was an increase in net interest income of $147,000 and a decline in
operating expenses of $299,000. (See "Condensed Consolidating Income
Statement", "Other Income", "Net Interest Income", and "Other Expense".)
For the nine months ended March 31, 1995, the Company recorded a net loss of
$3,358,000 or $1.96 per share compared to net income of $4,144,000 or $2.40 per
share for the 1994 period. The primary factors of this $7,502,000 decrease in
after tax income were:
(a) The recognition of a deferred tax liability of $2,775,000 and a
corresponding increase in income tax expense in connection with previous
allocations of income to tax bad debt reserves. (See Note 5 of "Notes to
Consolidated Financial Statements" and "Income Taxes".)
(b) An increase in general loan loss reserves via a provision of $1,065,000
for loan losses in the nine month period ended March 31, 1995 versus
$247,000 provision in the prior year's comparable period. (See Note 6 of
"Notes to Consolidated Financial Statements" and "Provision for Loan
Losses".)
(c) An increase in reserve for warranty losses via a provision of $2,514,000
in the current nine month period as compared to $176,000 in last year's
comparable period. (See Note 7 of "Notes to Consolidated Financial
Statements" and "Other Expenses".)
(d) Losses of $533,000 and $768,000, respectively, on the sale of held to
maturity investment securities and loss on available for sale mortgage-
backed securities in the nine month period ended March 31, 1995. (See
Notes 8 and 9 of "Notes to Consolidated Financial Statements" and "Other
Income".)
(e) Professional fees of approximately $700,000 were incurred this period in
connection with the proposed merger with CNB. (See Note 3 of "Notes to
Consolidated Financial Statements" and "Other Expenses".)
(f) Mortgage loan origination fees in the current nine month period were
$1,040,000, a decline of $1,898,000 from last year's figure of
$2,938,000. This was primarily a result of declines in loan origination
and sales of UFC. (See "Other Income".)
-8-
<PAGE>
(g) The 1994 nine month period includes a $880,000 gain on the sale of the
California mortgage operations, with no comparable item included in this
year's financials. (See "Other Income".)
(h) The 1994 nine month period includes a $300,000 increase in net income
relating to a change in accounting method. (The Company adopted "FAS 109
Accounting for Income Taxes", effective July 1, 1993.)
RESULTS OF OPERATIONS
- ---------------------
AVERAGE BALANCES, INTEREST RATES AND YIELDS. The following tables present for
the periods indicated the total dollar amount of interest income from average
interest-earning assets and the resultant yields, as well as the interest
expense on average interest-bearing liabilities, expressed both in dollar
amounts and rates, and the net interest margin. The tables do not reflect any
effect of income taxes. All average balances are daily average balances and
include the balances of non-accruing loans. The yields and costs for the
periods indicated include fees which are considered adjustments to yield.
-9-
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED MARCH 31,
-------------------------------------------------------------------------------
($ thousands)
1995 1994
----------------------------------- ---------------------------------------
INTEREST INTEREST
AVERAGE EARNED/ YIELD/ AVERAGE EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE
----------- ---------- --------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
LOANS $187,317 $11,232 8.00% $178,984 $11,461 8.54%
MORTGAGE-BACKED SECURITIES 276,772 13,324 6.42% 237,236 10,698 6.01%
INVESTMENT SECURITIES 26,916 1,443 7.15% 6,692 189 3.77%
OTHER INTEREST-EARNING ASSETS 25,172 1,440 7.63% 51,518 2,252 5.83%
----------- ---------- --------- ----------- ---------- ---------
TOTAL INTEREST-EARNING ASSETS $516,177 $27,439 7.09% $474,430 $24,600 6.91%
----------- ---------- --------- ----------- ---------- ---------
OTHER ASSETS 24,118 28,321
----------- -----------
TOTAL ASSETS $540,295 $502,751
=========== ===========
INTEREST-BEARING LIABILITIES:
DEPOSITS $351,859 $10,997 4.17% $374,177 $11,417 4.07%
FHLB ADVANCES 128,904 6,037 6.24% 68,241 2,852 5.57%
----------- ---------- --------- ----------- ---------- ---------
TOTAL INTEREST-BEARING
LIABILITIES $480,763 $17,034 4.72% $442,418 $14,269 4.30%
----------- ---------- --------- ----------- ---------- ---------
NON-INTEREST-BEARING LIABILITIES 18,383 14,976
STOCKHOLDERS' EQUITY 41,149 45,357
----------- -----------
TOTAL LIAB & EQUITY $540,295 $502,751
=========== ===========
NET INTEREST INCOME/INTEREST
RATE SPREAD $10,405 2.36% $10,331 2.61%
========== ========= ========== =========
NET INTEREST MARGIN (1) 2.69% 2.90%
========= =========
THREE MONTHS ENDED MARCH 31,
-------------------------------------------------------------------------------
($ thousands)
1995 1994
----------------------------------- ---------------------------------------
INTEREST INTEREST
AVERAGE EARNED/ YIELD/ AVERAGE EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE
---------- ---------- --------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
LOANS $199,561 $3,987 7.99% $176,815 $3,718 8.41%
MORTGAGE-BACKED SECURITIES 274,262 4,578 6.68% 229,093 3,307 5.77%
INVESTMENT SECURITIES 23,069 462 8.01% 6,427 58 3.61%
OTHER INTEREST-EARNING ASSETS 29,591 607 8.21% 40,233 486 4.83%
----------- ---------- --------- ----------- ---------- ---------
TOTAL INTEREST-EARNING ASSETS $526,483 $9,634 7.32% $452,568 $7,569 6.69%
----------- ---------- --------- ----------- ---------- ---------
OTHER ASSETS 24,857 29,093
TOTAL ASSETS ----------- -----------
$551,340 $481,661
=========== ===========
INTEREST-BEARING LIABILITIES:
DEPOSITS $343,251 $3,840 4.47% $378,502 $3,691 3.90%
FHLB ADVANCES 149,432 2,473 6.62% 40,990 704 6.87%
TOTAL INTEREST-BEARING ----------- ---------- --------- ----------- ---------- ---------
LIABILITIES $492,683 $6,313 5.13% $419,492 $4,395 4.19%
----------- ---------- --------- ----------- ---------- ---------
NON-INTEREST-BEARING LIABILITIES 19,229 16,215
STOCKHOLDERS' EQUITY 39,428 45,954
TOTAL LIAB & EQUITY ----------- -----------
$551,340 $481,661
=========== ===========
NET INTEREST INCOME/INTEREST
RATE SPREAD $3,321 2.19% $3,174 2.50%
NET INTEREST MARGIN (1) ========== ========= ========== =========
2.52% 2.81%
========= =========
(1) Net interest margin is net interest income
divided by average interest-earning assets
</TABLE>
-10-
<PAGE>
RATE/VOLUME ANALYSIS OF NET INTEREST INCOME
- -------------------------------------------
The following schedule presents the dollar amount of changes in interest income
and interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between the increase related to
higher outstanding balances and that due to changes in interest rates. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in rate (i.e.,
changes in rate multiplied by prior volume) and (ii) changes in volume (i.e.,
changes in volume multiplied by prior rate). Changes attributable to both rate
and volume which cannot be segregated have been allocated proportionately to the
changes due to volume and the changes due to rate.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, NINE MONTHS ENDED MARCH 31,
----------------------------- -----------------------------
1995 VS 1994 1995 VS 1994
----------------------------- -----------------------------
($ thousands) ($ thousands)
INCREASE INCREASE
(DECREASE) (DECREASE)
DUE TO TOTAL DUE TO TOTAL
------------------ INCREASE --------------- INCREASE
VOLUME RATE (DECREASE) VOLUME RATE (DECREASE)
-------- ------ --------- -------- ------ -----------
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
LOANS $ 480 $(211) $ 269 $ 543 $ (772) $ (229)
MORTGAGE-BACKED SECURITIES 649 622 1,271 1,777 849 2,626
INVESTMENT SECURITIES 150 254 404 572 682 1,254
OTHER INTEREST-EARNING ASSETS (129) 250 121 (1,152) 340 (812)
------ ----- ------ ------- ------ ------
TOTAL INTEREST-EARNING ASSETS 1,150 915 2,065 1,740 1,099 2,839
------ ----- ------ ------- ------ ------
INTEREST-BEARING LIABILITIES:
DEPOSITS (353) 502 149 (686) 266 (420)
FHLB ADVANCES 1,862 (93) 1,769 2,536 649 3,185
------ ----- ------ ------- ------ ------
TOTAL INTEREST-BEARING
LIABILITIES 1,509 409 1,918 1,850 915 2,765
------ ----- ------ ------- ------ ------
(DECREASE) IN NET INTEREST
INCOME $ (359) $ 506 $ 147 $ (110) $ 184 $ 74
====== ===== ====== ======= ====== ======
</TABLE>
-11-
<PAGE>
CONDENSED CONSOLIDATING INCOME STATEMENTS
- -----------------------------------------
The following are condensed consolidating income statements for the three and
nine months ended March 31, 1995 and March 31, 1994, showing the operations of
the Company, the Bank and other subsidiaries ("Company and other subsidiaries")
separately from the operations of the mortgage banking subsidiary, Union
Financial Corp. ("UFC").
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31,1995 MARCH 31,1994
--------------------------------------- ---------------------------------------
(thousands) (thousands)
Company Company
and other and other
subsidiaries UFC Total subsidiaries UFC Total
------------ ---------- ----------- ------------ ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Net interest income $3,200 $121 $3,321 $3,202 ($28) $3,174
Provision for loan losses $50 50 $83 83
----------- --------- ----------- ------------ --------- -----------
Net interest income after
provision for loan losses $3,150 $121 $3,271 $3,119 ($28) $3,091
----------- --------- ------------ ------------ --------- -----------
Other income 808 314 1,122 993 789 1,782
Other Expense 2,259 803 3,062 2,408 953 3,361
----------- --------- ------------ ------------ --------- -----------
Income before taxes 1,699 (368) 1,331 1,704 (192) 1,512
Income taxes 569 (132) 437 556 (69) 487
----------- --------- ------------ ------------ --------- -----------
Net income (loss) before
acccounting method change 1,130 (236) 894 1,148 (123) 1,025
----------- --------- ------------ ------------ --------- -----------
Cumulative effect of change
in accounting method
----------- --------- ------------ ------------ --------- -----------
Net income (loss) $1,130 ($236) $894 $1,148 ($123) $1,025
=========== ========= ============ =========== ========= ===========
NINE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, 1995 MARCH 31, 1994
--------------------------------------- ----------------------------------------
(thousands) (thousands)
Company Company
and other and other
subsidiaries UFC Total subsidiaries UFC Total
------------ --------- ------------ ----------- --------- ---------
Net interest income $10,043 $362 $10,405 $10,388 ($57) $10,331
Provision for loan losses $1,065 1,065 $247 247
----------- --------- ------------ ----------- ---------- ---------
Net interest income after
provision for loan losses $8,978 $362 $9,340 $10,141 ($57) $10,084
----------- --------- ------------ ----------- ---------- ---------
Other income 916 1,120 2,036 3,502 2,860 6,362
Other Expense 10,138 2,409 12,547 7,453 2,864 10,317
----------- --------- ------------ ----------- ---------- ---------
Income before taxes (244) (927) (1,171) 6,190 (61) 6,129
Income taxes 2,521 (334) 2,187 2,308 (23) 2,285
----------- --------- ------------ ----------- ----------- ---------
Net income (loss) before
acccounting method change (2,765) (593) (3,358) 3,882 (38) 3,844
----------- --------- ------------ ----------- ----------- ---------
Cumulative effect of change
in accounting method 300 300
----------- --------- ------------ ----------- ----------- ---------
Net income (loss) ($2,765) ($593) ($3,358) $4,182 ($38) $4,144
=========== =========== ============ =========== =========== =========
</TABLE>
-12-
<PAGE>
NET INTEREST INCOME
- -------------------
Net interest income is the Company's largest component of income and represents
the difference between interest and fees earned on loans, mortgage-backed
securities, loans held for sale and investments and the interest paid on
interest bearing deposits and FHLB of Indianapolis advances. Net interest income
was $10,405,000 for the nine months ended March 31, 1995, compared to
$10,331,000 for the same period in 1994, an increase of $74,000 or 0.7%. Net
interest income was $3,321,000 and $3,174,000 for the three months ended March
31, 1995 and 1994, respectively.
The Company's net interest margin decreased to 2.52% and 2.69%, respectively,
for the three months and nine months ended March 31, 1995, from 2.81% and 2.90%
for the comparable 1994 periods. Offsetting the effect of the decreased net
interest margins were the increases in average interest earning assets for the
periods. (See "Results of Operations" and "Rate/Volume Analysis of Net
Interest Income".)
The Company's net interest margin peaked in early 1993 and has since been
erratically but slowly decreasing. The Company believes that the net interest
margin will continue to decrease in the near future, due to the following
factors: (i) the cost of funds is rising, (ii) a significant portion of the
adjustable rate mortgage-backed securities is tied to a lagging index (the
Eleventh District Cost of Funds), and (iii) low introductory rates on new
portfolio loans.
INTEREST INCOME
- ---------------
For the three and nine months ended March 31, 1995, the effect of overall
increasing yields and the increased average balances of interest-earning assets,
resulted in increases in interest income of $2,065,000 and $2,839,000,
respectively, when compared to the comparable 1994 periods. The Company's
effective average yield on earning assets was 7.32% and 7.09% for the three and
nine months ended March 31, 1995 respectively, compared to 6.69% and 6.91% for
the comparable periods of 1994. (See "Results of Operations", and "Rate/Volume
Analysis of Net Interest Income".)
The increase in average interest earning assets of $73.9 million and $41.7
million, respectively, for the three and nine months ended March 31, 1995, over
the comparable 1994 periods was due primarily to increased average balances of
mortgage-backed securities ($45.2 million and $39.5 million increases),
investment securities ($16.6 million and $20.2 million increases) and loans
($22.7 million and $8.3 million increases), offset by declines in average other
interest earning assets of $10.6 million and $26.3 million, respectively. The
decrease in average balance of "Other Interest Earning Assets" over the
comparable periods of 1994 was mainly due to the decreased average balance of
its primary component, "Mortgage Loans Held for Sale", primarily because of a
decline in the volume of business at UFC, the Company's mortgage banking
subsidiary. (See "Results of Operations", and "Rate/Volume Analysis of Net
Interest Income" and the table in part (b) of "Other Income".)
INTEREST EXPENSE
- ----------------
The $1,918,000 and $2,765,000 increases in interest expense for the three and
nine months ended March 31, 1995, respectively, compared to the same periods of
1994 were due to overall increases in total interest bearing liabilities and an
overall increase in rates paid on total interest bearing liabilities. (The
effect of the increased average balances of FHLB advances and increased average
rates paid on FHLB advances offset the effect of the decline in average deposits
for the nine months ended March 31, 1995 when compared to the comparable 1994
periods.) With the increases in market interest rates which began in early
1994, it is expected that the Company's overall cost of funds will continue to
increase. (See "Results of Operations", and "Rate/Volume Analysis of Net
Interest Income".)
-13-
<PAGE>
PROVISIONS FOR LOAN LOSSES
- --------------------------
The Company provided $1,065,000 for loan losses for the nine months ended March
31, 1995. The Company had net charge-offs of $658,000 for the current nine
months, which brought the allowance for loan losses to $1,942,000 at March 31,
1995. (During the previous quarter, a commercial real estate loan in the amount
of $835,000 began experiencing cash flow problems and became delinquent on
payments. The Company determined that collectibility on the entire loan amount
was doubtful and charged $535,000 of the loan to the loan loss reserve.) The
balance at March 31, 1995 compares to $1,889,000 at December 31, 1994,
$1,535,000 at June 30, 1994 and $800,000 at June 30, 1993.
The definitive merger agreement with CNB calls for merging the operations of
Union Federal Savings Bank, the Company's principal subsidiary, into certain
commercial bank subsidiaries of CNB. While there can be no guarantee that the
merger will be completed as contemplated by the merger agreement, the Company's
Board intends to proceed with the conversion and restructuring of Union Federal
to a commercial bank and/or seek out another commercial bank acquirer even if
the merger with CNB for some reason is not consummated.
With the decision to restructure and convert to commercial bank status, Union
Federal increased its loan loss reserves to an amount more in line with the
commercial banking industry averages. Additionally, the merger agreement with
CNB calls for Union Federal to adjust its loan classifications and levels of
reserves for possible loan losses to conform with CNB's classifications and
levels. Furthermore, as indicated above, during the quarter ended December 31,
1994, the Company charged off $535,000 of a commercial real estate loan. For
the foregoing reasons, Union Federal increased the loan loss provision to
$1,065,000 during the nine months ended March 31, 1995.
The allowance for loan losses at March 31, 1995, of $1,942,000 represents .97%
of total loans. The $1,535,000 of allowance for loan losses at June 30, 1994 was
.91% of total loans at the same date.
OTHER INCOME
- ------------
Other income decreased by $660,000 and $4,326,000, respectively, for the three
and nine months ended March 31, 1995, from the corresponding periods in 1994.
The primary components of the decreases were:
(a) For the three and nine months ended March 31, 1994, the Company had
gains on the sale of its California mortgage operations of $195,000 and
$880,000, respectively, while there were no corresponding items in the
current periods.
(b) Mortgage loan origination fees of $293,000 and $1,040,000 for the three
and nine months ended March 31, 1995, respectively, were down $487,000
and $1,898,000 (62% and 65%) from the prior year's periods. The
decreases primarily represent declines in loan origination volume at UFC
in the 1995 periods when compared to 1994. The following table
summarizes the loan sales of UFC: ($000's)
-14-
<PAGE>
<TABLE>
<CAPTION>
Quarter Servicing Servicing
Ending Retained Released Total
------- --------- --------- --------
<S> <C> <C> <C>
March 31, 1994 $27,675 $ 80,240 $107,915
December 31, 1993 31,878 146,051 177,529
September 30, 1993 4,286 76,509 80,795
------- -------- --------
9 Mos.Ended 3/31/94 $63,839 $302,800 $366,639
March 31, 1995 $ 2,623 $ 18,080 $ 20,703
December 31, 1994 4,787 21,224 26,011
September 30, 1994 14,750 18,191 32,941
------- -------- --------
9 Mos.Ended 3/31/95 $22,160 $ 57,495 $ 79,655
</TABLE>
The Company believes that the higher market interest rates in the
current three and nine months in relation to the prior year's market
rates have severely lessened the demand for the fixed rate loans which
UFC originates, sells and services. Unless UFC can increase its market
share of what is a very competitive market, or unless overall demand
increases, loan origination fees are likely to remain at levels
insufficient to produce operating profits at UFC. (See also "Condensed
Consolidating Income Statements".)
(c) The Company restructured its held to maturity investment portfolio in
the quarter ending December 31, 1994, by selling its entire portfolio of
agency multi-step callable bonds. With the increases in market interest
rates which occurred after the initial purchase of the bonds, a loss of
$533,000 was incurred on the sale. Additionally, the Company recorded a
loss of $768,000 on the sale of available for sale mortgage-backed
securities for which the Company determined no longer to be SMMEA
eligible. (No longer eligible as a 20% risk based capital qualifying
item.)
OTHER EXPENSES
- --------------
Other expenses decreased by $299,000 in the three months ended March 31, 1995
from the comparable period in 1994. A decrease in salaries and benefits expense
of $111,000 was the largest component of the decrease. The decrease in salaries
and benefits expense at UFC for the quarter was $145,000, accounting for more
than 100% of the decrease. The decrease at UFC relates to its decreased volume
of business activity. (See "Other Income", and "Condensed Consolidated Income
Statement".)
Other expenses increased by $2,230,000 for the nine months ended March 31, 1995,
when compared to the comparable 1994 period. The primary components of this
increase were increases in warranty losses on sold loans ($2,338,000) and
professional fees ($714,000) offset by decreased salaries and benefits expense
of $722,000. The December 31, 1994, quarter's provision of $2,190,000 for
warranty losses on sold loans and approximately $700,000 in professional fees
relating to the proposed merger with CNB were the primary components of these
increases. (See Notes 7 and 3 of "Notes to Consolidated Financial Statements".)
Effective June 1, 1993, the Bank sold complete ownership of its then wholly
owned subsidiary, Union Security Mortgage, Inc. ("USM"), to the Knight
Corporation ("Knight"). While the Bank owned USM, USM originated, sold and
services conventional single family residential loans through its offices in
Santa Ana and Woodland Hills, California. USM customarily sold all of the loans
that it originated to buyers in the secondary market on a non-recourse basis,
either as individual whole loans or as a packaged pool of loans. However,
subsequent to the sale of the loans it originated USM remained potentially
liable for losses incurred by a purchaser, including unpaid principal and
interest, under certain representations and warranties made to the purchaser at
the time of sale. In certain circumstances (for example, when the debtor made
fraudulent misrepresentations to USM in the origination process), USM was liable
for a purchaser's losses on a defaulted loan, regardless of whether the loan was
recourse or non-recourse, if there had been a breach of the representations and
warranties made to the purchaser by USM. Such fraud might occur with respect to
tax returns, employment verifications, and deposits and appraisals provided at
the time of origination. In connection with the sale of USM on June 1, 1993,
the Bank contractually assumed liability for losses
-15-
<PAGE>
to the Knight Corporation and repurchase demands resulting from breaches of the
representations and warranties. Moreover, in certain cases the Bank separately
guaranteed USM's obligations to loan purchasers pursuant to guarantees signed by
the Bank prior to the sale of USM. Although USM dissolved in 1994, and the Bank
is less likely to be asked to indemnify the Knight Corporation for claims
against USM for any breach of the representations and warranties, the Bank does
remain obligated under certain of the separate guarantees to loan purchasers for
losses relating to USM's prior operations.
When fraud claims relating to loans originated by USM began to surface in fiscal
1993, they were thought to be aberrational. However, additional repurchase
claims arose in 1994, and the Company discovered that these claims, some of
which were based on fraud, were arising in California because of the prior sharp
increases in the value of single family homes. During 1990 and 1991, borrowers
not capable of meeting mortgage payments obtained loans based on fraud with the
apparent expectation that they could profit from the resale of the homes in the
rising home market. However, the California economy deteriorated and housing
values dropped sharply. As a result, borrowers were unable to sell their homes
at a profit and pay off the mortgage loans. As borrowers defaulted, the fraud
was discovered and the repurchase and warranty loss claims occurred. By fiscal
1994, lenders and the public were generally aware of the fraud schemes in
California and the California housing market had stabilized.
In June, 1994, the Company identified eight loans with an aggregate outstanding
loan balance of $1,048,000, which had been sold to the Federal Home Loan
Mortgage Corporation and a loan sold to Federal National Mortgage Corporation
("FNMA") with a loan balance of $141,700, which appeared to have involved broker
fraud. No claims had been made at March 31, 1995 with respect to these loans.
In connection with its merger negotiations in November and December, 1994, the
Company and CNB Bancshares, Inc. undertook an extensive investigation and
analysis of pending and potential warranty claims relating to USM's operations.
The Company contacted each entity which had outstanding loans purchased from USM
to determine the number of loans outstanding, the balance outstanding for such
loans, the delinquency status for such loans, and the number of loans involving
fraud (regardless of their delinquency status). During the quarter ended March
31, 1995, the Bank received warranty loss claims for two loans, one of which
was determined to lack validity. The other claim received during the quarter
ended March 31, 1995 was for $39,000 on a $154,000 loan.
During the nine months ended March 31, 1995, the Bank incurred approximately
$541,000 in losses relating to warranty claims on five (5) loans, and entered
into an $800,000 settlement in November, 1994, with one of the largest
purchasers of USM's loans to cover all pending and future losses with respect to
that purchaser. At March 31, 1995, the Company had 3 warranty loss claims
pending and the estimated potential loss from these known claims and a claim
expected to be made as a result of a recent foreclosure on the FNMA loan
referred to above, totaled $275,000. The Company's allowance for warranty
losses was $2,537,000 at March 31, 1995, which management considers adequate.
The decreases in salaries and benefits expense relate primarily to the
decreased volume of business activity of UFC's mortgage banking operations.
(See "Other Income", and "Condensed Consolidating Income Statements".)
INCOME TAXES
- ------------
Included in income tax expense for the nine months ended March 31, 1995, is the
provision for $2,775,000 relating to previously untaxed bad debt reserves. (See
Note 5 of "Notes to Consolidated Financial Statements" and "Overview", Item
"a".) Offsetting the major portion of the $2,775,000 provision are credits at
regular tax rates for the losses before income taxes for the nine months ended
March 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Bank's principal sources of funds are deposits, advances from the FHLB of
Indianapolis, amortization and prepayment of loan principal (including mortgage-
backed securities) and, to a lesser
-16-
<PAGE>
extent, maturities of investment securities, mortgage-backed securities, and
short-term investments and operations. While scheduled loan repayments and
maturing investments are relatively predictable, deposit flows and early loan
repayments are influenced to a great degree by interest rates, general economic
conditions, and competition.
Federal regulations historically have required the Bank to maintain minimum
levels of liquid assets. The required percentage has varied from time to time
based upon economic conditions and savings flows and is currently 5% of net
withdrawable savings deposits and borrowings payable on demand or in one year or
less during the preceding calendar month. Liquid assets for purposes of this
ratio include cash, certain time deposits, U. S. Government and corporate
securities and other obligations generally having remaining maturities of less
than five years. The Bank has historically maintained its liquidity ratio at
levels in excess of those required. For March 1995, the Bank's liquidity ratio
was 7.7%.
Liquidity management is both a daily and long-term responsibility of management.
The Company adjusts its investments in liquid assets based upon management's
assessment of (i) expected loan demand, (ii) the projected amount of loans to be
originated by the mortgage banking subsidiary and held for re-sale, (iii)
expected deposit flows, (iv) yields available on interest-bearing deposits, and
(v) the objective of its asset/liability management program. Excess liquidity is
invested generally in interest-bearing overnight deposits and other short-term
government and agency obligations. If the Company requires funds beyond its
ability to generate them internally, the Bank has additional borrowing capacity
with the FHLB and collateral eligible for reverse repurchase agreements.
The Company anticipates that it will have sufficient funds available to meet
current loan commitments. At March 31, 1995, the Bank, excluding UFC, had
outstanding commitments to extend credit which amounted to $9.3 million. UFC had
commitments to fund loans of $38.1 million at March 31, 1995.
Savings institutions insured by the Federal Deposit Insurance Corporation are
required by FIRREA to meet three regulatory capital requirements. If a
requirement is not met, regulatory authorities may take legal or administrative
actions, including restrictions on growth or operations, or, in extreme cases,
seizure. Institutions not in compliance may apply for an exemption from the
requirements and submit a recapitalization plan.
During the quarter ending December 31, 1994, the Company made a capital
contribution of $5 million to its principal subsidiary, Union Federal Savings
Bank. The purpose of the contribution was to maintain Union Federal's
classification of "well capitalized" under FDIC and FEDICIA guidelines.
Under these capital requirements, at March 31, 1995, the Bank had:
<TABLE>
<CAPTION>
($ 000's) Tangible Capital Core Capital Risk Based Capital
------------------ --------------------- -------------------
Amount Percent Amount Percent Amount Percent
------------------ --------------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Actual $37,825 6.81% $37,825 6.81% $39,148 18.65%
Required 8,331 1.50% 16,662 3.00% 16,796 8.00%
------------------ --------------------- ------------------
Excess $29,494 5.31% $21,163 3.81% $22,352 10.65%
================== ===================== ===================
</TABLE>
-17-
<PAGE>
GENERAL ACCOUNTING ISSUES
- -------------------------
Accounting for Debt and Equity Securities. In 1993, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities ("SFAS No. 115"). SFAS No. 115 addresses the
accounting and reporting for investments in equity securities that have readily
determinable fair values and for all investments in debt securities. Those
investments are classified and accounted for as follows:
Debt securities that the holder has the positive intent and ability to hold
until maturity are classified as held for investment and reported at amortized
cost. Securities that can be held for indefinite periods of time, including
those that may be used in an asset/liability management strategy, are not
classified as held for investment. This means that securities that could be
sold in response to changing interest rates, changes in prepayment risks,
increased loan demand, general liquidity needs, or other similar factors are not
classified as held for investment. However, securities that are held for
investment could be sold before they mature if the issuer's creditworthiness
deteriorates significantly. Debt and equity securities classified as available
for sale are reported at fair value, or marked to market. Unrealized gains and
losses are not included in income and are reported as a separate component of
equity. Debt and equity securities classified as held for current resale are
classified as trading securities and reported at fair value with unrealized
gains and losses included in income. Transfers between categories should be
accounted for at fair value. For any sales or transfers of securities
classified as held for investment, the cost basis, the realized gain or loss,
and the circumstances leading to the decision to sell are disclosed. SFAS No.
115 was adopted by the Company on July 1, 1994. (See Note 2 of "Notes to
Consolidated Financial Statements".)
At the time of purchase of new securities, management of the Company makes a
determination as to the appropriate classification of securities as available
for sale or held to maturity. Debt and mortgage-backed securities purchased
with the positive intent and ability to hold to maturity are classified as held
to maturity. Securities may be transferred to held to maturity from available
for sale. Other debt and mortgage-backed securities that will be held for
indefinite periods of time, such as securities that may be sold in response to
interest rate change or anticipated liquidity needs, are classified as available
for sale.
Accounting for Impairment of Loans. In 1993, FASB issued SFAS No. 114,
Accounting by Creditors for Impairment of a Loan ("SFAS No. 114"). The purpose
of SFAS No. 114 is to eliminate inconsistencies in the accounting among
different types of creditors for loans with similar collection problems by
requiring a single method for measuring impaired loans. A loan is considered
impaired when, based on current information and events it is probable that
creditor will be unable to collect all amounts due according to the contractual
terms of the loan agreement. A bank will measure certain impaired loans
pursuant to SFAS No. 114 at a discounted amount on the balance sheet based on
the present value amount of the expected future cash flows using the loan's
effective interest rate. A valuation reserve should be recorded if the present
value of the expected cash flows is less than the recorded amount of the loan.
Formally restructured loans and loans evaluated as groups or pools of
homogeneous loans (e.g. single family residence) are excluded from SFAS No. 114.
In October, 1994, the FASB issued SFAS No. 118 ("SFAS No. 118"), entitled
Accounting by Creditors of Impairment of Loan - Income Recognition and
Disclosures. SFAS No. 118 amends the disclosure requirements in SFAS No. 114 to
require information about the recorded investment in certain impaired loans and
about how a creditor recognizes interest income related to those impaired loans.
The effective date of SFAS No. 114 and 118 is for fiscal years beginning after
December 31, 1994. The Company will adopt SFAS No. 114 and 118 July 1, 1995 and
management does not anticipate a material impact on earnings or financial
condition as a result of adoption.
Derivative Financial Statements and Fair Value Disclosures. In October, 1994,
FASB issued SFAS No. 119, Disclosure about Derivative Financial Instruments and
Fair Value of Financial Instruments ("SFAS No. 119"). SFAS No. 119 requires
disclosures about derivative financial instruments--futures, forward, swap and
option contracts, and other financial instruments with similar characteristics
(e.g., interest rate caps or floors and loan commitments). The definition of
derivatives excludes all on-balance-sheet receivables and payables, including
those that "derive" their values or cash flows from the price of another
security or index, such as mortgage-backed securities, and interest-only and
principal-only obligations.
-18-
<PAGE>
This Statement requires disclosures about amounts, nature and terms of
derivatives that are not subject to SFAS No. 105 because they do not result in
off-balance-sheet risk of accounting loss. It requires that distinction between
and differing disclosure be made for financial instruments held or issued for
trading purposes and financial instruments held or issued for purposes other
than for trading. The required disclosures, either in the body of the financial
statements or in the footnote, include the face or contract amount (or notional
principal amount) and the nature and terms, including, at a minimum, a
discussion of (1) the credit and market risk of those instruments, (2) the cash
requirements of those instruments, and (3) the related accounting policy.
This Statement amends SFAS No. 105 and 107 to require disaggregation of
information about financial instruments with off-balance-sheet risk of
accounting loss and to require that fair value information be presented without
combining, aggregating, or netting the fair values of derivatives with the fair
value of nonderivatives and be presented together with the related carrying
amounts in the body of the financial statements, a single footnote, or a summary
table in a form that makes it clear whether the amounts represent assets or
liabilities. The Company will adopt SFAS No. 119 effective June 30, 1995. The
Company believes that SFAS No. 119 will not have a material impact on financial
position or results of operations.
-19-
<PAGE>
UF BANCORP, INC.
FORM 10-Q/A
PART II. OTHER INFORMATION
- ---------------------------
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
NONE
Item 5. Other Information
-----------------
NONE
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
Exhibit 11, Statement regarding computation of per share earnings is
submitted herewith. No other exhibits are required to be filed.
________________________________________________________________________________
No other information is required to be filed under Part II of the form.
-20-
<PAGE>
UF BANCORP, INC.
FORM 10-Q/A
SIGNATURES
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.
UF Bancorp, Inc.
____________________________
(Registrant)
Date: June 13, 1995 /s/ Donald A. Rausch
by: ____________________________
Donald A. Rausch
Chairman of the Board &
President
Date: June 13, 1995 /s/ Ennis R. Griffith
by: ____________________________
Ennis R. Griffith, Senior
Vice President, Chief
Financial Officer
(Principal Accounting
Officer)
-21-
<PAGE>
UF Bancorp, Inc.
Form 10-Q/A
Exhibit 11 - Computation of Per Share Earnings
(Treasury Stock Method)
(Unaudited)
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Three Months ended Nine Months ended
March 31, March 31,
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1995 1994 1995 1994
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<S> <C> <C> <C> <C>
Average Shares:
Outstanding 1,607,693 1,593,693 1,599,526 1,632,368
Effect of stock options 116,887 93,300 110,606 95,384
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Average common and common
equivalent shares outstanding 1,724,580 1,686,993 1,710,132 1,727,752
========== ========== =========== ==========
Net income (loss) before cumulative effect of
change in accounting method $894,000 $1,025,000 $(3,358,000) $3,844,000
Cumulative effect of change in accounting method 300,000
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Net income (loss) $894,000 $1,025,000 $(3,358,000) $4,144,000
========== ========== =========== ==========
PER SHARE:
Net income (loss) before cumulative effect of
change in accounting method $0.52 $0.61 $(1.96) $2.23
Net income (loss) $0.52 $0.61 $(1.96) $2.40
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