UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended December 31, 1993
OR
TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 1-9594
UnionFed Financial Corporation
(Exact name of registrant as specified in its charter)
Delaware 95-4074126
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
330 East Lambert Road
Brea, California 92621
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (714) 255-8100
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 February 14, 1994, 27,201,993 shares of the Registrant's $.01
par value common stock were outstanding.
UnionFed Financial Corporation
Index
Part I. Financial Information Page
Item 1. Financial Statements
Consolidated Statements of Financial 3
Condition (unaudited) as of December 31,
1993 and June 30, 1993
Consolidated Statements of Operations 4
(unaudited) for the three months and six
months ended December 31, 1993 and 1992
Consolidated Statements of Cash Flows 5
(unaudited) for the six months ended
December 31, 1993 and 1992
Notes to Consolidated Financial 7
Statements (unaudited)
Item 2. Management's Discussion and Analysis of 8
Financial Condition and Results of
Operations
Part II. Other Information (omitted items are inapplicable) 24
Signatures 25
UnionFed Financial Corporation and Subsidiaries
Consolidated Statements of Financial Condition - Unaudited
(In thousands except share and per share amounts)
December 31, June 30,
1993 1993
Assets
Cash and cash equivalents $33,154 $35,798
Investment securities and mortgage-backed
securities held for sale, at market value at
12/93 (amortized cost of $139,033 at 12/93); and
amortized cost at 06/93 (estimated market value
of $128,019 at 06/93) 138,873 127,084
Investment securities,net 6,768 8,184
Mortgage-backed securities, net 16,495 18,176
Loans held for sale (estimated market value
$68,320 at 12/93 and $173,626 at 06/93) 68,132 173,305
Loans receivable, net of allowance for losses of
$27,742 at 12/93 and $20,573 at 06/93 603,516 690,877
Interest receivable 5,826 6,889
Real estate, net 35,078 56,887
Investment in Federal Home Loan Bank stock, at cost 6,785 6,643
Premises and equipment, net 18,693 21,542
Other assets 8,864 16,560
$942,184 $1,161,945
Liabilities and Stockholders' Equity
Liabilities
Savings deposits $837,769 $845,882
Savings deposits at retail banking offices held
for sale - 176,164
FHLB advances and other borrowings 43,777 104,823
Accounts payable and accrued liabilities 8,070 15,276
Deferred income taxes 2,752 2,758
Total liabilities 892,368 1,144,903
Commitments and contingencies - -
Stockholders' equity
Preferred stock-par value $.01 per share;
authorized, 1,000,000 shares, issued and
outstanding, none - -
Common stock-par value $.01 per share; authorized
60,000,000 shares, issued and outstanding,
27,201,993 shares at 12/93 and 755,950 at 06/93 51 51
Additional paid-in capital 108,164 65,490
Accumulated deficit (58,399) (47,073)
Less:
Treasury stock--at cost, 11,100 shares at 06/93 - (1,426)
Total stockholders' equity 49,816 17,042
$942,184 $1,161,945
UnionFed Financial Corporation and Subsidiaries
Consolidated Statements of Operations - Unaudited
(In thousands except per share amounts)
Three Months Ended Six Months Ended
December 31, December 31,
1993 1992 1993 1992
Interest on loans $13,665 $19,499 $29,415 $40,757
Interest on mortgage-backed
securities 1,786 1,308 3,209 2,478
Interest and dividends on
investments 1,056 2,781 2,428 6,772
Total interest income 16,507 23,588 35,052 50,007
Interest on savings deposits 8,082 12,788 17,494 28,172
Interest on borrowings 1,211 4,191 2,936 10,130
Total interest expense 9,293 16,979 20,430 38,302
Net interest income before
provision for estimated loan
losses 7,214 6,609 14,622 11,705
Provision for estimated loan
losses 4,825 4,567 9,864 7,960
Net interest income after
provision for estimated loan
losses 2,389 2,042 4,758 3,745
Non-interest income:
Gain on sale of loans and
loan servicing 353 1,198 2,107 2,224
Realized gain on sale of
mortgage-backed securities
and investment securities 453 1,610 1,329 1,965
Unrealized loss on sale of
mortgage-backed securities
and investment securities (160) - (160) -
Loan servicing fees, net of
amortization 280 (298) 696 (148)
Loan service charges 223 228 484 475
Gain on sale of branches - - 1,496 -
Other, net 561 525 1,445 2,482
Total non-interest income 1,710 3,263 7,397 6,998
Non-interest expense:
Compensation and related
expenses 3,065 3,311 6,015 6,564
Premises and occupancy 1,000 1,344 2,132 2,751
SAIF insurance premium 805 695 1,609 1,425
Other general and
administrative 2,346 2,244 4,883 4,581
Total general and
administrative expense 7,216 7,594 14,639 15,321
Real estate operations, net 3,956 9,273 8,505 12,672
Core deposit intangible
amortization 165 204 336 467
Total non-interest expense
expense 11,337 17,071 23,480 28,460
Loss before income taxes (7,238) (11,766) (11,325) (17,717)
Income tax expense (benefit) 1 (5,999) 1 (5,999)
NET LOSS ($7,239) ($5,767) ($11,326) ($11,718)
Net loss per common share ($0.28) ($7.74) ($0.79) ($15.73)
UnionFed Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows - Unaudited
(Dollars in Thousands)
Six Months Ended
December 31,December 31,
1993 1992
Cash Flows From Operating Activities:
Net loss ($11,326) ($11,718)
Adjustments to reconcile net loss to cash provided by
operating activities:
Accretion of fees and discounts (725) (1,516)
Depreciation and amortization 1,151 2,378
Provisions for loan and real estate losses 16,858 17,856
Realized gain on sale of investment securities
and mortgage-backed securities, net (1,329) (1,965)
Unrealized loss on investment securities and
mortgage-backed securities, net 160 -
Gain on sales of loans (1,322) (621)
Gain on sales of loan servicing (785) (1,603)
Loss on sale of real estate 802 -
Gain on sales of branches (1,496) (652)
Federal Home Loan Bank stock dividends (141) (191)
Mortgage-backed securities purchased, held
for sale (53,026) (19,267)
Loans originated and purchased, held
for sale (142,589) (107,376)
Proceeds from sales of mortgage-backed
securities, held for sale 40,972 98,217
Proceeds from sales of loans, held for sale 82,053 10,093
Proceeds from sale of loan servicing 4,216 2,459
Decrease in interest and dividends receivable 1,063 2,724
Decrease in income tax refund receivable - 15,726
(Increase) decrease in prepaid expenses and other
assets 4,107 (489)
Decrease in interest payable (417) (2,333)
Decrease in accounts payable and accrued liabilities (6,197) (4,518)
Increase (decrease) in deferred income taxes (6) 3,085
Net cash provided by (used in)
operating activities (67,977) 289
Cash Flows From Investing Activities:
Proceeds from maturities of investment securities 1,422 194,994
Proceeds from sale of investment securities held
for investment 12,009 115,566
Purchases of investment securities held - (53,499)
for investment
Principal reductions on mortgage-backed securities 11,093 8,563
Principal reductions on loans 65,892 97,523
Loans originated, held for investment (11,097) (23,365)
Net change in undisbursed loan funds (1,567) (2,528)
Acquisitions of real estate (2,778) (1,641)
Proceeds from disposition of real estate 25,202 32,463
Redemption of Federal Home Loan Bank stock - 17,816
Sale of branches, net (122) (76,569)
Other, net 689 3,384
Net cash provided by investing
activities 100,743 312,707
UnionFed Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows - Unaudited (continued)
(Dollars in Thousands)
Six Months Ended
December 31,December 31,
1993 1992
Cash Flows From Financing Activities:
Net decrease in deposits ($18,059) ($84,313)
Proceeds from short-term borrowings 14,525 -
Repayment of long-term borrowings (976) (3,497)
Additional FHLB advances 420,000 -
Repayments of FHLB advances (495,000) (100,000)
Proceeds from issuance of common stock 44,100 -
Net cash used in financing activities (35,410) (187,810)
Net increase in cash and cash equivalents (2,644) 125,186
Cash and cash equivalents at beginning of period 35,798 44,881
Cash and cash equivalents at end of period $33,154 $170,067
Sale of Branches, net:
Loans and mortgage-backed securities $163,719 $183
Premises and equipment 1,471 839
Excess of cost over net assets acquired 38 676
Other assets (36) 60
Deposits (166,218) (78,566)
Other liabilities (592) (413)
Gain on sale 1,496 652
Net cash used by sale of branches,
net ($122) ($76,569)
Supplemental disclosures of cash flow information:
Cash paid for:
Interest (net of amount capitalized) $21,079 $40,881
Delaware franchise tax 40 37
Non-cash Investing and Financing activities:
Additions to real estate acquired in
settlement of loans 8,313 14,541
Loans exchanged for mortgage-backed
securities 96,932 93,350
Loans to facilitate the sale of real estate 8,196 -
UnionFed Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
1- In the opinion of the Company, the accompanying consolidated financial
statements contain all adjustments (consisting of only normal recurring
accruals) that are necessary to present fairly the financial position as
of December 31, 1993, the results of operations for the three and six
month periods ended December 31, 1993 and 1992, and the cash flows for
the six month periods ended December 31, 1993 and 1992. The results of
operations for the three and six month periods ended December 31, 1993,
are not necessarily indicative of operations to be expected for the
enitre year.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and,
therefore,do not include all information and footnotes necessary for a
fair presentation of financial position, results of operations and
statements of cash flows in conformity with generally accepted accounting
principles. Item 2, "Management's Discussion and Analysis of Financial
Condition and Results of Operations", is written with the presumption that
the users of the interim financial statements have read or have access to
the most recent 10-K report that contains the latest audited financial
statements and notes thereto, together with the Management's Discussion
and Analysis of Financial Condition and Results of Operations as of June
30, 1993, and for the year then ended.
2- Securities to be held for indefinite periods of time and not necessarily
intended to be held to maturity or on a long-term basis are classified as
held for sale and carried at the lower of amortized cost or market value.
Securities held for indefinite periods of time include securities that
management intends to use as part of its asset/liability management
strategy and that may be sold in response to changes in interest rates
and resultant prepayment risk, capital maintenance requirements and other
factors. Certain loans and mortgage-backed securities purchased or
originated with the purpose of holding for possible sale are also
classified as held for sale, and carried at the lower of amortized cost
or market value.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
UnionFed Financial Corporation (the "Company"), whose principal subsidiary is
Union Federal Bank, a federal savings bank (the "Bank"), reported a net loss of
$7.2 million and $11.3 million for the three and six month periods ended
December 31, 1993, or $0.28 and $0.79 per share, compared to a net loss of $5.8
million and $11.7 million, or $7.74 and $15.73 per share, for the same periods
in fiscal 1993.
In May 1993, as a result of its failure to meet minimum capital levels at March
31, 1993, the Bank was required by the Office of Thrift Supervision ("OTS") to
file a Capital Restoration Plan under the Prompt Corrective Action Provisions
of the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"). In July 1993, the OTS approved the Capital Restoration Plan,
imposed a Prompt Corrective Action Directive (the "Directive") and lifted the
Cease and Desist Order imposed on the Bank since April, 1991.
On September 28, 1993, the Company successfully completed a recapitalization
through the sale of common stock to investors, management and stockholders (the
"Offerings") and received net proceeds of $44.1 million (less a subscription
receivable of $1.3 million). Contribution of this capital by the Company to
the Bank enabled the Bank to achieve capital levels in excess of the 4%
leverage (core), 4% tier one risk-based and 8% total risk-based capital ratios
required by the OTS. The OTS subsequently terminated the Bank's Prompt
Corrective Action Directive in light of the improvement in the Bank's capital
ratios, which now exceed the levels required of an "adequately capitalized"
savings bank.
As a result of the recapitalization, the Company has approximately 27.2 million
shares outstanding and has issued warrants entitling certain investors to
purchase an additional 6.9 million shares at $2.33 per share up to five years
after the closing.
At December 31, 1993, the Company has unused net operating losses for federal
income tax and California franchise tax purposes of approximately $44 million
and $28 million, respectively. Stockholders and prospective investors should
be aware that if any person (including any existing stockholder) acquires stock
that would cause such person to own 5% or more of the Company's common stock,
the Company's ability to use its net operating losses likely will be
significantly limited. Such limitation could result in increased tax
liabilities for the Company with a corresponding decrease in the Company's net
income and stockholders' equity. Stockholders and prospective investors
requiring further information on the Company's ability to use its net operating
losses should contact the Company.
Financial High(Dollars in thousands except per share)
For the three months ended December 31, 1993 1992
Net interest income $7,214 $6,609
Provision for losses on loans 4,825 4,567
Non-interest income 1,710 3,263
Non-interest expense 11,337 17,071
Loss before income taxes (7,238) (11,766)
Income tax expense (benefit) 1 (5,999)
Net Loss (7,239) (5,767)
Loss per share (0.28) (7.74)
Loans originated and purchased 79,882 79,568
Mortgage-backed securites purchased 53,026 17,136
Loans sold 25,270 1,227
Mortgage-backed securities sold 41,096 54,964
Interest rate spread during period 3.42% 2.45%
For the six months ended December 31, 1993 1992
Net interest income $14,622 $11,705
Provision for losses on loans 9,864 7,960
Non-interest income 7,397 6,998
Non-interest expense 23,480 28,460
Loss before income taxes (11,325) (17,717)
Income tax expense (benefit) 1 (5,999)
Net Loss (11,326) (11,718)
Loss per share (0.79) (15.73)
Loans originated and purchased 153,686 130,741
Mortgage-backed securites purchased 53,026 19,267
Loans sold 167,509 9,656
Mortgage-backed securities sold 117,161 97,907
Interest rate spread during period 3.38% 2.20%
Other information 12/31/93 06/30/93
Total Assets $942,184 $1,161,945
Loan and morgage-backed security
portfolio 784,063 954,890
Deposits 837,769 1,022,046
Loans serviced for others 143,514 545,787
Stockholders' equity 49,816 17,042
Nonperforming assets, net 48,095 73,941
Nonperforming assets, net
to total assets 5.10% 6.36%
Nonperforming assets and
restructured loans, net 181,074 236,473
Nonperforming assets and restructured
loans, net to total assets 19.22% 20.35%
Classified assets to total assets 24.68% 22.21%
End of period interest spread 3.68% 3.55%
Financial Condition
The Company's consolidated assets totaled $942 million at December 31, 1993, a
reduction of $219.8 million or 18.9% compared to June 30, 1993. This decrease
is primarily due to the sale of four branches during the quarter ended
September 30, 1993 and is consistent with the Company's strategy of reducing
total assets of the Bank to comply with OTS capital requirements. See
"Regulatory Capital Compliance." Stockholders' equity totaled $49.8 million at
December 31, 1993, compared to $17.0 million at June 30, 1993. The increase is
attributable to the net proceeds of $44.1 million raised from the Company's
Offerings. It is partially offset by the net loss of $11.3 million for the six
months ended December 31, 1993.
Capital Resources and Liquidity
The Bank's sources of funds include deposits, advances from the FHLB and other
borrowings, proceeds from sales of mortgage-backed securities ("MBS") held for
sale, repayments of MBS, sales of loans held for sale and loan servicing,
repayments of loans and sales of real estate. Prepayments on MBS and loans and
deposit inflows and outflows are affected significantly by interest rates, real
estate sales activity and general economic conditions.
With the approval of the OTS, the Bank further reduced its current branch
system. Four branches were sold in the quarter ended September 30, 1993,
representing $166 million in deposits. The sale was funded by sales of a like
amount of loans and MBS, previously classified as held for sale.
Sales of MBS and loans held for sale and loan repayments represented the
principal sources of funds during the three and six month periods ended
December 31, 1993. Sales of MBS held for sale totalled $41.1 million and
$117.2 million, respectively, compared to $55.0 million and $97.9 million in
the comparable 1992 periods. Sales of loans held for sale amounted to $25.3
million and $167.5 million in the three month and six month periods ended
December 31, 1993, compared to $1.2 million and $9.6 million in the comparable
1992 periods. Loan repayments totaled approximately $34.8 million and $74.8
million during the three and six month periods ended December 31, 1993,
compared to $37.5 million and $102.5 million during the comparable 1992
periods.
During the quarter ended December 31, 1993, $50 million of long term FHLB
advances matured and were extended as short term borrowings. Subsequently, $25
million of these advances were paid off largely by the excess funds received
from loan sales and loan repayments.
At December 31, 1993, cash, investments and cash equivalents totaled $82.9
million. The principal measure of liquidity in the savings and loan industry
is the regulatory ratio of cash and eligible investments to the sum of
withdrawable savings and borrowings due within one year. The minimum set by
federal regulators is 5%. At December 31, 1993, the Company's ratio was 8.5%
compared to 6.5% at June 30, 1993.
The primary source of cash for the Company historically has been dividends from
the Bank. The Bank does not expect to distribute dividends in the foreseeable
future.
Regulatory Capital Compliance
FDICIA established new capital standards for savings institutions, including
three capital requirements: a "leverage (core) limit," a "tier 1 risk-based
limit" and a "total risk-based capital" requirement. Certain assets or
portions thereof are required to be deducted immediately from capital, while
the inclusion of others in capital under one or all of the capital standards
are subject to various transitional rules or other limitations.
In late September, 1993 the Company completed its Offerings and contributed net
proceeds of $44.1 million to the Bank. Following is a reconciliation of the
Bank's stockholder's equity to federal regulatory capital, and a comparison of
such regulatory capital to the industry minimum requirements of the OTS, as of
December 31, 1993 (in thousands):
Leverage Tier 1 Total
(Core) % Risk Based % Risk Based %
GAAP Equity $49,508 $49,508 $49,508
Non-allowable assets:
Investment in Uni-Cal Financial (296) (296) (296)
Additional capital items:
Assets required to be deducted - - (66)
General loan loss reserves - - 8,936
Bank Regulatory Capital 49,212 5.2% 49,212 7.0% 58,082 8.2%
Minimum capital requirement 37,674 4.0% 28,213 4.0% 56,426 8.0%
Capital excess (deficiency) $11,538 1.2% $20,999 3.0% $1,656 0.2%
A primary objective of the Bank is to remain in compliance with fully phased-in
capital requirements. Key components of the Bank's strategic plan are to (i)
continue to reduce nonperforming assets and real estate investments and (ii)
increase profitability of the core bank by reducing general and administrative
expenses and increasing mortgage banking revenues and fee income.
Asset Liability Management
Savings institutions are subject to interest rate risks to the degree that
interest bearing liabilities reprice or mature more rapidly or on a different
basis than interest earning assets. A principal objective of the Company is to
manage the effects of adverse changes in interest rates on the Company's net
interest income, while maintaining asset quality. At December 31, 1993, the
Company's one-year gap was negative 8% compared to positive 1% at June 30,
1993. The change in the one-year gap was principally due to the reduction in
assets repricing in less than one year exceeding the reduction in liabilities
repricing in one year. This is attributable to the sale of adjustable rate
mortgage loans, lengthened maturities of certain investment securities and the
use of reverse repurchase agreements.
As part of a strategy to enhance the spread, the Bank purchased approximately
$50 million of GNMA and FNMA mortgage-backed securities held for sale during
the quarter ended December 31, 1993. These securities initially were funded by
a like amount of reverse repurchase agreements. The net spread earned from the
transactions has been approximately 2.5%. As of December 31, 1993, a portion
of the short-term borrowings used to purchase these securities was repaid
through application of the Bank's excess overnight funds.
The Bank continually monitors the composition and amount of its loan
origination activity to determine the amount of loans originated for sale. In
recent years, the Bank's originations of fixed-rate and adjustable rate
("ARMS") one-to-four unit residential mortgage loans have been held for sale.
The Company's strategic plan calls for the reinvestment of proceeds from MBS
and one-to-four unit residential mortgage loan repayments and liquidation of
real estate investments into ARMs and adjustable rate MBS. In the event
one-to-four unit residential loan originations are insufficient, and it is
economical to do so, the Bank may purchase ARM loans.
During the three and six month periods ended December 31, 1993, the Company
originated loans totalling $76.1 million and $149.9 million, an increase of
3.3% and 20.1% over the comparable periods in the prior year. Overall loan
origination volume has increased as compared to a year ago as part of the
Company's strategy to increase mortgage banking revenues. Substantially all of
the Company's fixed rate loan originations and purchases are expected to be
sold into the secondary markets on a servicing released basis. The Bank sold
approximately $41 million and $465 million of servicing rights, resulting in a
gains of $267 thousand and $784 thousand, respectively, in the three and six
month periods ended December 31, 1993.
At December 31, 1993, loans and MBS with adjustable rates represented 67.7% of
the Bank's loan and mortgage-backed securities portfolio. Adjustable rate
loans comprised 23.0% and 21.5% of loan originations and purchases for the
three and six month periods ended December 31, 1993, an increase from 22.2%
and 16.3% for the similar periods one year ago.
Net Interest Income
Net interest income, before provisions for loan losses, increased to $7.2
million and $14.6 million for the three and six month periods ended December
31, 1993, from $6.6 million and $11.7 million for the same periods ended
December 31, 1992. The increase is primarily attributable to the improved
interest rate spreads and a substantial reduction in non-performing assets.
The during period spread rose in the three and six month periods ended December
31, 1993, to 3.42% and 3.38% compared to 2.45% and 2.20% in the same periods
ended December 31, 1992. The increase is largely due to significant decreases
in the Bank's cost of funds in excess of decline in yields on loans and
investments. The difference between average interest-earning assets and
interest-bearing liabilities ("net average earning balance") improved by $54.0
million and $52.1 million, respectively, between three and six month periods
ended December 31, 1993 and the same periods a year ago, principally due to
dispositions of non-earning assets.
Notwithstanding a declining interest rate environment, the weighted average
yield on interest-earning assets remained at approximately 7.5% in the past
year. This is primarily due to a change in mix of the Bank's earning assets to
a lesser percentage of investment securities. The weighted average cost of
interest bearing liabilities declined to 4.04% and 4.11%, respectively, in the
three and six month periods ended December 31, 1993 compared to 5.00% and 5.28%
in the same periods ended December 31, 1992. The Bank was able to lower its
rates paid on certificates of deposit due to significant decreases in market
interest rates. The payoff of high rate long term FHLB advances, commercial
deposits and brokered deposits that matured in the quarter ended September 30,
1993, and a lower rate on FHLB advances extended during quarter ended December
31, 1993 also contributed to the decline.
The end of period spread increased to 3.68% at December 31, 1993 from 3.55% at
June 30, 1993 and 2.85% at December 31, 1992. The increase in spread was due
primarily to changes in mix of earning assets and reduced borrowing costs.
Nonperforming Assets
Nonperforming assets consist of nonaccrual loans and real estate acquired in
settlement of loans and in substance foreclosures (collectively, "REO").
The following table sets forth the amounts of nonperforming assets held by the
Bank at the dates indicated (in thousands):
At At At
December 31, June 30, December 31,
1993 1993 1992
Nonaccrual loans (1) $15,067 $18,979 $23,534
Real estate owned (2) 28,485 43,621 52,897
In-substance foreclosures,
net of undisbursed funds (2) 4,543 11,341 7,764
Total nonperforming assets $48,095 $73,941 $84,195
Total assets $942,184 $1,161,945 $1,360,510
Nonperforming assets, net as
a percentage of total assets 5.10% 6.36% 6.19%
(1) Net of specific reserves.
(2) Net of specific reserves and pro-rata allocated REO general
reserves.
Nonaccrual Loans
Nonaccrual loans generally represent loans for which accruals have been
suspended. The Bank's nonaccrual policy provides that interest accruals
generally cease once a loan is past due as to interest or principal for a
period of 90 days or more. Loans may also be placed on nonaccrual status even
though they are less then 90 days past due if management concludes that there
is little likelihood that the borrower will be able to comply with the
repayment terms of the loan. At December 31, 1993, nonaccrual loans of $15.1
million had declined by $3.9 million from $19.0 million at June 30, 1993.
Nonaccrual loans at December 31, 1993 were primarily single-family loans (50%),
multi-family loans (37%) and commercial loans (10%). At June 30, 1993,
nonaccrual loans consisted largely of single-family loans (68%), multi-family
loans (25%) and commercial loans (7%). The change in mix is primarily
attributable to the decrease of single-family nonaccrual loans from $12.9
million at June 30, 1993 to $7.5 million at December 31, 1993.
The following table summarizes the distribution of the Bank's nonaccrual
loans by collateral type (in thousands) (1):
December 31, June 30, December 31,
1993 1993 1992
1-4 Unit residential and
mortgage-backed securities $7,545 $12,875 $12,024
Multifamily 5,580 4,332 31,500
Commercial:
Land - - 3,325
Hotel/Motel 1,155 1,154 2,118
Storage facilities - - 1,446
Other 328 328 600
Total commercial 1,483 1,482 7,489
Total real estate loans 14,608 18,689 23,013
Consumer loans (2) 459 289 521
Total nonaccrual loans $15,067 $18,978 $23,534
(1) Balances are net of contra deductions, loans in process and specific
valuation allowances.
(2) Consumer loans include mobile home loans.
REO
REO consists of real estate acquired in settlement of loans and loans accounted
for as in-substance foreclosures. When there is indication that a borrower
will not make all the required payments on a loan; the borrower no longer has
equity in the property collateralizing a loan; it appears doubtful that equity
will be rebuilt in the foreseeable future; or the borrower has (effectively or
actually) abandoned control of the collateral, the property is considered
repossessed in-substance (in-substance foreclosure). Real estate acquired in
settlement of loans is recorded at the lower of the unpaid balance of the loan
at the settlement date or fair value of the collateral, less estimated selling
cost. Subsequently, valuation allowances for estimated losses are charged to
real estate operations expense if the carrying value of real estate exceeds
estimated fair value. The Bank does not accrue interest income on loans
classified as in-substance foreclosures and reported as REO. However, if a
borrower continues to pay interest on an in-substance foreclosed loan, it is
recognized when received as income from real estate operations.
Real estate acquired in settlement of loans decreased to $28.5 million at
December 31, 1993, from $43.6 million at June 30, 1993. In-substance
foreclosures decreased to $4.5 million at December 31, 1993 from $11.3 million
at June 30, 1993. The decrease is attributable primarily to the sales of real
estate properties totalling $26.0 million and charge-offs or write-downs of
$7.0 million, partially offset by additional foreclosures of approximately
$10.1 million during the six months ended December 31, 1993.
The following table summarizes the distribution of the Bank's REO by
collateral type (1):
December 31, June 30, December 31,
1993 1993 1992
1-4 Residential $3,945 $3,433 $3,506
Multifamily 2,304 5,451 7,753
Commercial: - -
Retail 564 2,445 3,802
Land 18,497 22,654 32,852
Hotel/Motel - - -
Manufacturing/
Warehouse - 1,377 -
Office 6,897 9,384 4,495
Other - 1,239 992
Total
Commercial 25,958 37,099 42,141
Construction:
Residential - 8,979 4,834
Commercial 693 - 951
Total
construction 693 8,979 5,785
Total real estate 32,900 54,962 59,185
Consumer (2) 128 - 1,476
Total REO $33,028 $54,962 $60,661
(1) Balances are net of contra deductions, loans in process, and real
estate general and specific valuation allowances.
(2) Consumer REO's include moblie home REO's.
Restructred Loans
The Bank has restructured certain loans in instances where a determination was
made that greater economic value will be realized under new terms than through
foreclosure, liquidation or other disposition. Candidates for restructure are
reviewed based on the quality of the borrower and the borrower's ability to
enhance the value of the property, the collateral and the economic value of the
restructured loan relative to foreclosure and other options. Restructure
allows the borrower more time to regain equity in the property. Generally the
Bank obtains an appraisal at the time of restructure and updates the valuation
quarterly through internally prepared discounted cash flow analyses. The terms
of the restructure generally involve some or all of the following
characteristics: a reduction in the interest rate to reflect a positive debt
coverage ratio, modifying the payments for a period of time to interest only,
an extension of the loan maturity date to allow time for stabilization of the
property income, and partial forgiveness of principal and interest. In certain
circumstances, the Bank also obtains the right to share in future benefits
arising from the upside potential of the collateral. In addition to the
modifications to terms, the Bank generally requires the borrower to invest new
cash equity in the property through principal reduction or correction of
deferred maintenance as part of the restructure agreement. Once a restructure
takes place, the loan is subject to the accounting and disclosure rules
prescribed in the SFAS No. 15, "Accounting by Debtors and Creditors for
Troubled Debt Restructurings".
Restructured loans which are performing in accordance with their new terms and,
therefore, are not included in nonaccrual loans, amounted to $133.0 million at
December 31, 1993. This is an decrease from $162.5 million at June 30, 1993
and $162.3 million at September 30, 1992. The reduction is principally due to
approximately $29 million of restructured loans no longer designated as
restructured loans due to the resumption of principal payments and the loan
reaching an effective market rate of interest.
The following table summarizes the distribution of the Bank's
restructed loans by collateral type (1):
December 31, June 30, December 31,
1993 1993 1992
(In thousands)
Multifamily $89,443 $90,627 $86,247
Commercial:
Retail 21,045 44,630 32,648
Land - 3,325 -
Hotel/motel 7,966 8,930 15,048
Storage facilities - 6,733 6,733
Office 5,564 6,587 7,997
Other 8,961 1,700 8,954
Total commercial 43,536 71,905 71,380
Construction - residential - - 4,692
Total restructured loans $132,979 $162,532 $162,319
(1) Balances are net of contra, loans in process and
specific valuation allowances.
Potential Problem Loans
The Bank has established a monitoring system for its loan and real estate
portfolios to identify potential problem assets and to assess the adequacy of
allowances for losses in a timely manner. The loan portfolio consists mainly
of the following categories: 1-4 unit residential and mortgage-backed
securities, construction loans, multifamily loans, and commercial real estate
loans secured by land or income producing property. The Bank's 1-4 unit
residential loans are considered a homogeneous population. These loans are
reviewed by analyzing the portfolio's performance and composition of the
underlying collateral as a whole. Specifically, the Bank analyzes delinquency
trends, foreclosure losses, borrower's ability to repay and geographic
composition of the portfolio. Multifamily, commercial real estate and
construction loans are evaluated on an individual basis by the Bank's Internal
Asset Review Department ("IARD"). The IARD conducts independent reviews of the
risk and quality of all credit exposures of the Bank in excess of $500 thousand
in an effort to identify and monitor problem loans and comply with the OTS
regulatory classification requirements.
The table below presents the Bank's total classified loan portfolio
at the dates indicated:
December 31, June 30, December 31,
Substandard 1993 1993 1992
Residential 1-4 $8,334 $14,268 $12,024
Multifamily 123,985 119,468 100,762
Commercial 53,709 56,947 62,700
Construction 6,656 8,074 8,561
Consumer 2,541 954 2,101
195,225 199,711 186,148
Doubtful
Multifamily - 3,428 -
Commercial - 1,272 1,000
Consumer 701 598 675
701 5,298 1,675
TOTAL $195,926 $205,009 $187,823
The table below summarizes the Bank's classified loans by performance
status at December 31, 1993:
Performance Status
Nonaccrual $15,067
Restructured - performing 129,577
Other classified loans currently performing 51,282
Total classified loans $195,926
Real Estate Held for Investment, Development or Sale
Real estate held for investment, development or sale at December 31, 1993 is
comprised of the real estate remaining from the Bank's branches that have been
sold and Uni-Cal's wholly owned investments and net equity in joint ventures.
At December 31, 1993, real estate held for investment, development or sale
totaled $2.1 million compared to $1.9 million at June 30, 1993. The slight
increase during the six months is due to the reclassification of real estate
facilities remaining from one of four branches sold during the quarter ended
September 30, 1993.
Allowance for Loan and Real Estate Losses
Valuation allowance for estimated losses on loans and real estate are
established on a specific and general basis. Specific reserves are determined
based on a difference between the carrying value of the asset and the fair
value or cost, as appropriate. General valuation allowances are determined
based on historical loss experience, current and anticipated levels and trends
of delinquent and nonperforming loans and the mix of Classified assets, which
is used to measure the risk in the loan portfolio.
The provision for estimated losses on loans totalled $4.8 million and $9.9
million for the three and six months ended December 31, 1993 compared to $4.6
million and $8.0 million in the three and six months ended December 31, 1992.
The provisions to the allowance for loan losses in the three and six month
periods ended December 31, 1993 reflects further market deterioration of
certain multi-family real estate loans, together with a $1.3 million additional
provision to the loan general reserve at December 31, 1993.
The provision for estimated losses on real estate for the three month and six
month periods ended December 31, 1993 totaled $3.5 million and $7.0 million
compared to $7.9 and $9.9 million in the year earlier comparable periods. The
provisions were largely due to the write down of REO to reflect current fair
values based on sales offers and/or recent appraisals.
The following table sets forth the Bank's general and specific valuation
allowances for loan and real estate losses at the dates indicated:
At At At
December 31, June 30, December 31,
1993 1993 1992
Loan general $18,516 $17,951 $15,640
Loan specific 9,226 2,622 5,207
Total loan allowance $27,742 $20,573 $20,847
Real estate general $1,653 $2,774 $3,742
Real estate specific 21,434 22,604 21,774
Total real estate allowance $23,087 $25,378 $25,516
Total valuation allowances $50,829 $45,951 $46,363
Non-interest Income and Expense
For the three month and six month periods ended December 31, 1993, non-interest
income totaled $1.7 million and $7.4 million, respectively, compared to $3.3
million and $7.0 million for the comparable periods of the prior year.
Realized gains on sale of investment securities and MBS available for sale were
$453 thousand and $1.3 million for the three month and six month periods ended
December 31, 1993 compared to $1.6 million and $2.0 million for the
corresponding periods of the prior year. $160 thousand of unrealized loss on
investment securities and MBS held for sale portfolio was recognized in the
quarter ended December 31, 1993 to adjust the portfolio's amortized book value
to the lower aggregate market value at December 31, 1993. Sales of loans, MBS
and investment securities are part of the Bank's overall strategy of reducing
asset size in order to achieve capital compliance and to comply with regulatory
operating restrictions.
Gains on sales of loans available for sale and loan servicing were $353
thousand and $2.1 million, respectively, for the three month and six month
periods ended December 31, 1993 compared to $1.2 million and $2.2 million for
the corresponding periods of the prior year. Loan servicing sales consisted of
retained loan servicing, generated primarily from loan production. Such sales
permit the Company to realize the full economic value for loan origination
activity at the time of sale rather than over the life of the servicing assets.
The Company sold four branches in the quarter ended September 30, 1993,
resulting in a gain of $1.5 million. The branch sale was contemplated in the
Company's strategic plan and the Capital Restoration Plan.
Loan servicing fees, net of amortization of servicing assets, totalled $280
thousand and $696 thousand for the three month and six month periods ended
December 31, 1993. This compares to a net loss of $298 thousand and $148
thousand for the corresponding periods of the prior year. The increase from
the prior year periods is principally attributable to a lower level of
prepayments.
General and administrative expenses decreased to $7.4 million and $15.0 million
for the three month and six month periods ended December 31, 1993 from $7.8
million and $15.8 million for the corresponding periods of the prior year, a
reduction of approximately 5%. This decrease reflects the Company's successful
ongoing cost cutting efforts. However, the annualized ratio of general,
administrative and other expenses to average assets increased to 2.80% in the
six month period ended December 31, 1993 from 2.06% in the corresponding six
month period one year ago, reflecting the lower level of average total assets.
Management continues to search for methods of reducing general and
administrative expenses. However, operating expenses continue to be burdened
by the cost of resolution of problem assets as well as regulatory procedural
compliance.
Real estate operations resulted in a loss of $4.0 million and $8.5 million for
the three month and six month periods ended December 31, 1993, compared to $9.3
million and $12.7 million for the three month and six month periods ended
December 31, 1992, due largely to the loss provisions discussed above. Real
estate operations include the operations of Uni-Cal and the results of
operations of the Bank's REO. The Company is continuing to experience real
estate losses as a result of disposition of properties in the current
distressed market for residential and commercial real estate and the high costs
of management of foreclosed properties pending sale.
Income Taxes
At December 31, 1993, the company had unused net operating losses for federal
income tax and California franchise tax purposes of approximately $44 million
and $28 million, respectively. As previously mentioned, the Company raised an
additional capital of $44.1 million through the sale of common stock. Based on
current ownership information available to the Company, the Company believes
that the sale of common stock in September, 1993 did not cause an ownership
change under Section 382 of the Internal Revenue Code.
Section 382 generally provides that if a corporation undergoes an "ownership
change", the amount of taxable income that the corporation may offset after the
date of the ownership change (the "Change Date") with net operating loss
carryforwards and certain built-in losses existing on the Change Date will be
subject to an annual limitation. The Company does not anticipate the
recognition of significant taxable income in the current fiscal year ending
June 30, 1994. The ability to offset taxable income in future years against
net operating loss carry forwards at December 31, 1993 will depend in part on
whether an ownership change should occur up to three years following the
September, 1993 recapitalization.
Stockholders and prospective investors should be aware that the Company likely
will undergo an ownership change if any person (including any existing
stockholder) acquires stock that would cause such person to own 5% or more of
the Company's common stock. Because of the limitations on the Company's
ability to use its net operating losses to offset taxable income after such an
ownership change, such acquisitions of stock could result in increased tax
liabilities for the Company with a corresponding decrease in the Company's net
income and stockholders' equity. Stockholders and prospective investors
requiring further information on the Company's ability to use its net operating
losses should contact the Company.
The following table summarizes the Company's real estate loan portfolio by
property type, geographic location and risk concentration at December 31,
1993 (1).
California Florida Maine Arizona All Other Total
(In thousands)
1-4 unit residential and
mortgage-backed
securities $329,334 $0 $0 $0 $1,174 $330,508
Multifamily 204,622 0 0 0 0 204,622
Commercial:
Retail 103,674 711 16,363 0 0 120,748
Land 10,260 1,222 0 0 31 11,513
Hotel/motel 27,612 10,542 3,060 2,286 6,318 49,818
Mobile home parks 807 0 0 990 18,294 20,091
Storage facilities 32,591 0 0 0 0 32,591
Office 12,904 0 0 0 0 12,904
Med/hosp 1,564 0 0 0 0 1,564
Total commercial 189,412 12,475 19,423 3,276 24,643 249,229
Construction:
Residential 12,259 0 0 0 0 12,259
Commercial 0 0 0 0 0 0
Residential lots 0 0 0 0 0 0
Total
construction 12,259 0 0 0 0 12,259
Totals December 31, 1993 $735,627 $12,475 $19,423 $3,276 $25,817 $796,618
% of real estate loans 92.34% 1.57% 2.44% 0.41% 3.24% 100.00%
Totals June 30, 1993 $884,596 $12,521 $19,460 $5,631 $39,119 $961,327
% of real estate loans 92.02% 1.30% 2.02% 0.59% 4.07% 100.00%
(1) Principal balances before deduction of loan-in-process, deferred
income, discounts, premiums and allowance for losses.
UNIONFED FINANCIAL CORPORATION
Part II Other Information
Item 1. None
Item 2. None
Item 3. None
Item 4. Submission of Matters to a Vote of Security Holders
At the 1993 Annual Meeting held on October 27, 1993, the
following was approved:
- the election of David S. Engelman, Dale A. Welke and
John R. Wise to the Board of Directors for terms of three
years each.
Item 5. None
Item 6. Exhibits and Reports on Form 8-K
There were no reports on Form 8-K filed for the three month period ended
December 31, 1993.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNIONFED FINANCIAL CORPORATION
Date February 14, 1994 By /S/ DAVID S. ENGELMAN
David S. Engelman
Chief Executive Officer
Date February 14, 1994 By /S/ STEPHEN J. AUSTIN
Stephen J. Austin
Senior Vice President
Chief Financial Officer
