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 September 30, 1994
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 November 14, 1994, 27,209,993 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 September 30,
1994 and June 30, 1994
Consolidated Statements of Operations 4
(unaudited) for the three months ended
September 30, 1994 and 1993
Consolidated Statements of Cash Flows 5
(unaudited) for the three months ended
September 30, 1994 and 1993
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) 23
Signatures 24
UnionFed Financial Corporation and Subsidiaries
Consolidated Statements of Financial Condition - Unaudited
(In thousands except share and per share amounts)
September 30, June 30,
1994 1994
Assets
Cash and cash equivalents $24,753 $38,091
Investment securities,net 61,151 62,119
Mortgage-backed securities, net 185,177 157,783
Loans held for sale (estimated market value of $53,591
at 09/94 and $45,320 at 06/94) 53,507 45,320
Loans receivable, net of allowance for losses of
$25,968 at 09/94 and $24,963 at 06/94 515,496 521,635
Interest receivable 6,294 6,524
Real estate, net 34,740 39,947
Investment in Federal Home Loan Bank stock, at cost 5,494 5,419
Premises and equipment, net 17,612 18,051
Other assets 7,819 9,087
$912,043 $903,976
Liabilities and Stockholders' Equity
Liabilities
Savings deposits $848,289 $847,957
FHLB advances and other borrowings 26,814 15,464
Accounts payable and accrued liabilities 3,240 3,180
Deferred income taxes 2,691 2,690
Total liabilities 881,034 869,291
Commitments and contingencies - -
Stockholders' equity
Preferred stock-par value $.01 per share; authorized,
1,000,000 shares, issued and outstanding, none - -
Common stock-par value $.01 per share; authorized
60,000,000 shares, issued and outstanding,
27,201,993 shares (1994) 272 272
Additional paid-in capital 107,943 107,943
Accumulated deficit (77,206) (73,530)
Total stockholders' equity 31,009 34,685
$912,043 $903,976
UnionFed Financial Corporation and Subsidiaries
Consolidated Statements of Operations - Unaudited
(In thousands except per share amounts)
Three Months Ended
September 30,
1994 1993
Interest on loans $10,708 $15,750
Interest on mortgage-backed securities 2,900 1,423
Interest and dividends on investments 1,342 1,372
Total interest income 14,950 18,545
Interest on savings deposits 8,051 9,412
Interest on borrowings 293 1,725
Total interest expense 8,344 11,137
Net interest income before provision
for estimated loan losses 6,606 7,408
Provision for estimated loan losses 3,859 5,039
Net interest income after provision
for estimated loan losses 2,747 2,369
Non-interest income:
(Loss)/gain on sale of loans and loan servicing 135 1,755
(Loss)/gain on sale and write-down
of mortgage-backed securities and
investment securities 8 875
Loan servicing fees, net 239 416
Loan fees 106 261
Gain on sale of branches - 1,496
Other, net 544 884
Total non-interest income (loss) 1,032 5,687
Non-interest expense:
Compensation and related expenses 2,858 2,950
Premises and occupancy 1,111 1,132
SAIF insurance premium 627 804
Other general and administrative 2,199 2,537
Total general and administrative
expense 6,795 7,423
Real estate operations, net 438 4,549
Core deposit intangible amortization 222 171
Total non-interest expense 7,455 12,143
Loss before income taxes (3,676) (4,087)
Income tax expense (benefit) - -
NET LOSS ($3,676) ($4,087)
Net loss per common share ($0.14) ($3.10)
UnionFed Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows - Unaudited
(Dollars in Thousands)
Three Months Ended
September 30,September 30,
1994 1993
Cash Flows From Operating Activities:
Net loss ($3,676) ($4,087)
Adjustments to reconcile net loss to cash provided by
operating activities:
Net decrease in loan fees and discounts (244) (490)
Depreciation and amortization 656 677
Provisions for loan and real estate losses 3,994 8,556
Gain on sale of investment securities and
mortgage-backed securities, net (8) (875)
Gain on sales of loans and loan servicing (135) (1,755)
Loss on sale of real estate 8 369
Gain on sales of branches - (1,496)
Federal Home Loan Bank stock dividends (75) (79)
Loans originated and purchased, held
for sale (42,870) (71,585)
Proceeds from sales of loans, held for sale 25,856 56,697
Proceeds from sale of loan servicing - 3,863
Decrease in interest and dividends receivable 230 881
Decrease/(increase) in prepaid expenses and
other assets 1,045 (1,869)
Increase in interest payable 44 382
Increase in accounts payable and accrued liabilities 17 3,003
Net cash used in operating activities (15,158) (7,808)
Cash Flows From Investing Activities:
Proceeds from maturities of investment securities 968 61
Principal reductions on mortgage-backed securities 3,132 4,237
Principal reductions on loans 9,438 30,003
Purchases of mortgage-backed securities (30,519) -
Purchases of mortgage-backed securities,
available for sale (2,000) -
Proceeds from sales of mortgage-backed
securities, available for sale 6,733 -
Loans originated, held for investment (6,810) (2,219)
Net change in undisbursed loan funds (139) (424)
Acquisitions of real estate (713) (729)
Proceeds from disposition of real estate 10,042 10,142
Branch (sales) - (122)
Other, net 6 398
Net cash (used in) provided by
investing activities (9,862) 41,347
UnionFed Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows - Unaudited (continued)
(Dollars in Thousands)
Three Months Ended
September 30,September 30,
1994 1993
Cash Flows From Financing Activities:
Net increase/(decrease) in deposits $332 ($4,900)
Proceeds from short-term borrowings 74,806 -
Repayment of short-term borrowings (63,456) -
Repayment of long-term borrowings - (600)
Additional FHLB advances - 370,000
Repayments of FHLB advances - (420,000)
Proceeds from issuance of common stock - 42,800
Net cash provided by (used in)
financing activities 11,682 (12,700)
Net increase in cash and cash equivalents (13,338) 20,839
Cash and cash equivalents at beginning of period 38,091 35,798
Cash and cash equivalents at end of period $24,753 $56,637
Sale of Branches:
Loans and mortgage-backed securities $ $163,719
Premises and equipment - 1,471
Excess of cost over net assets acquired - 38
Other assets - (36)
Deposits - (166,218)
Other liabilities - (592)
Gain on sale - 1,496
Net cash used by sale of branches,
net $ ($122)
Supplemental disclosures of cash flow information:
Cash paid for:
Interest (net of amount capitalized) $8,333 $10,871
Delaware franchise tax - 20
Non-cash Investing and Financing activities:
Additions to real estate acquired in
settlement of loans 4,265 6,168
Loans exchanged for mortgage-backed
securities 4,732 56,873
Loans to facilitate the sale of real
estate - 6,107
UNIONFED Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
1- In the opinion of the Company, the accompanying consolidated financial
statements contain all adjustments necessary to present fairly the
financial condition as of September 30, 1994 and June 30, 1994, the
results of operations for the three month periods ended September 30,
1994 and 1993, and the cash flows for the three months periods ended
September 30, 1994 and 1993. The results of operations for the three
month period ended September 30, 1994, are not necessarily indicative of
operations to be expected for the entire year.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and, therefore
do not include all information and footnotes necessary for a fair
presentation of financial condition, results of operations and statement
of cash flows in conformity with generally accepted accounting
principles. Item 2, "Management's Discussion and Analysis of Financial
Condition and Results of Operations", is written with the presumption
that the users of the interim financial statements have read or have
access to the most recent 10-K report that contains the latest audited
financial statements and notes thereto, together with Management's
Discussion and Analysis of Financial Condition and Results of Operations
as of June 30, 1994, and for the year then ended.
2- The Company has adopted FASB Statement of Financial Standards N0. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS
115") effective for the fiscal year ending June 30, 1995. Accordingly,
securities classified as "held to maturity" are carried at amortized
cost. Mortgage-backed securities originated or purchased with the
purpose of holding for possible sale are classified "available for sale"
and carried at fair value. The adoption of SFAS 115, applied
prospectively as of July 1, 1994, has not had a material effect on the
Company's financial statements.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
UNIONFED Financial Corporation, (the "Company") parent of Union Federal Bank, a
federal savings bank (the "Bank") reported a net loss of $3.7 million or $0.14
per share for the first quarter ended September 30, 1994. This compares to a
loss of $4.1 million or $3.10 per share in the corresponding quarter during
fiscal year 1994.
As a result of operating losses, the Bank since June 30, 1994 has not met two
of three regulatory capital requirements. The leverage ( core) capital ratio of
the Bank at September 30, 1994 was 3.37%, which was less than the 4% ratio
required of federally chartered thrift institutions. However, the Bank's tier-
one risk based capital at September 30, 1994 of 5.21% exceeded the 4% minimum
requirement. The total risk-based capital at September 30, 1994 was 6.47%,
which was below the minimum 8% required. At September 30, 1994 the Bank's total
risk based capital was $9 million below the "adequately capitalized" level.
Since its leverage ( core) and total risk-based capital ratios have dropped
below regulatory requirements, the Bank is deemed "undercapitalized" under the
"prompt corrective action" provisions of the Federal Deposit Insurance
Corporation Improvement act of 1991 and implementing regulations. In September,
1994 the Bank submitted to the Office of Thrift Supervision a capital
restoration plan outlining proposed measures to resolve the Bank's capital
deficiency through the recapitalization or possible sale or merger of the Bank.
The plan is expected to be approved in November, 1994 and to involve the
issuance of a Prompt Corrective Action Directive requiring that the Bank
recapitalize by March 31, 1995 either through a sale or merger of the Bank or
through an infusion of sufficient capital to permit the Bank to become
"adequately capitalized."
Financial Highlights (Dollars in thousands except per share)
For the three months ended September 30, 1994 1993
Net interest income $6,606 $7,408
Provision for losses on loans 3,859 5,039
Non-interest income 1,032 5,687
Non-interest expense 7,455 12,143
Loss before income taxes (3,676) (4,087)
Income tax expense (benefit) - -
Net Loss (3,676) (4,087)
Loss per share (0.14) (3.10)
Loans originated and purchased 49,680 73,804
Mortgage-backed securites purchased 32,519 -
Loans sold 25,720 218,304
Mortgage-backed securities sold 6,725 -
Interest rate spread during period 3.46% 3.38%
Other information 09/30/94 06/30/94
Total Assets $912,043 $903,976
Loan and morgage-backed security portfolio 754,180 724,738
Deposits 848,289 847,957
Loans serviced for others 118,180 164,994
Stockholders' equity 31,009 34,685
Nonperforming assets, net 52,174 61,359
Nonperforming assets, net
to total assets 5.72% 6.79%
Nonperforming assets and
restructured loans, net 159,336 175,035
Nonperforming assets and restructured
loans, net to total assets 17.47% 19.36%
Classified assets to total assets 19.87% 23.56%
End of period interest spread 3.14% 3.50%
Financial Condition
The Company's consolidated assets totaled $912 million at September 30, 1994
compared to $904 million at June 30, 1994. Stockholders' equity totaled $31
million at September 30, 1994, a reduction of $3.7 million from $34.7 at June
30, 1994. The decrease in stockholders' equity is directly attributable to the
net loss for the quarter.
Capital Resources and Liquidity
The Bank's sources of funds include deposits, advances from the FHLB and other
borrowings, proceeds from the sale of real estate, sales of loans and MBS,
sales of loan servicing and repayments of loans and MBS. Prepayments on loans
and MBS and deposit inflows and outflows are affected significantly by interest
rates, real estate sales activity and general economic conditions.
Proceeds from the sale of loans and MBS held for sale, proceeds from the
disposition of real estate and principal repayments on loans and MBS provided
the principal sources of funds for the three month period ended September 30,
1994. The sale of loans and MBS held for sale provided $32.6 million in funds.
Real estates sales, and principal repayments on loans and MBS provided $10.1
million and $12.6 million respectively.
The principal measure of liquidity in the savings and loan industry is the
regulatory ratio of cash and eligible investments to the sum of withdrawable
savings and borrowings due within one year. The minimum set by federal
regulators is 5%. At September 30, 1994 the Bank's ratio was 8.15% compared to
11.47% at June 30, 1994. The decrease in liquidity reflects an increase in
short term borrowings due to loan originations in excess of loan sales during
the quarter.
The primary source of cash for the Company is dividends from the Bank. As long
as the Bank remains "undercapitalized" for regulatory purposes, the OTS cannot
approve any capital distributions (including dividends) except in connection
with a capital-raising transaction by the Bank.
Regulatory Capital Compliance
FDICIA established three capital standards for savings institutions: a
"leverage (core) limit," a "tier 1 risk-based limit" and a "total risk-based
capital requirement. Certain assets or portions thereof are required to be
deducted immediately from capital, while the inclusion of others in capital
under one or all of the capital standards is subject to various transitional
rules or other limitations. As of September 30, 1994 the Bank did not meet two
of the components of the regulatory capital requirements.
The 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 September 30, 1994:
Leverage Tier 1 Total
(Core) % Risk Base % Risk Base %
GAAP Equity $30,800 $30,800 $30,800
Non-allowable assets:
Investment in Uni-Cal Financial (72) (72) (72)
Additional capital items:
General loan loss reserves 0 0 7,442
Bank Regulatory Capital 30,728 3.37% 30,728 5.21% 38,170 6.47%
Minimum capital requirement 36,476 4.00% 23,588 4.00% 47,177 8.00%
Capital excess (deficiency) ($5,748)-0.63% $7,140 1.21% ($9,007)-1.53%
FDICIA PROMPT CORRECTIVE ACTION REQUIREMENTS
FDICIA requires the OTS to implement a system requiring regulatory sanctions
against institutions that are not adequately capitalized, with the sanctions
growing more severe the lower the institution's capital. The OTS must establish
specific capital ratios for five separate capital categories: "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized," and "critically undercapitalized."
Under the OTS regulations implementing FDICIA, an institution is treated as
well capitalized if its risk-based capital ratio is at least 10.0%, its ratio
of core capital to risk - weighted assets (the "Tier 1 risk-based capital
ratio") is at least 6.0%, its leverage (core) capital ratio is at least 5.O%,
and it is not subject to any order or directive by OTS to meet a specific
capital level. An institution will be adequately capitalized if its risk-based
capital ratio is at least 8.0%, its tier 1 risk-based capital ratio is at least
4.0%, and its leverage (core) capital ratio is at least 4.0% (3.0% if the
institution receives the highest rating on the CAMEL financial institutions
rating system). An institution whose capital does not meet the amounts
required in order to be adequately capitalized will be treated as
undercapitalized. Additionally, an institution will be treated as significantly
undercapitalized if the above capital ratios are less than 6.0%, 3.0%, or 3.0%
respectively. An institution will be treated as critically undercapitalized if
its ratio of "tangible equity" (core capital plus cumulative preferred stock
minus intangible assets other than supervisory goodwill and purchased mortgage
servicing rights) to total assets is equal to or less than 2.0%.
As a result of the Bank's Thrift Financial Report for the quarter ended June
30, 1994, which was filed with the OTS on August 1, 1994, and which reported
the Bank's leverage (core) capital ratio at 3.80% and its risk-based capital
ratio at 6.99%, the Bank is considered to be undercapitalized, and is subject
to the sanctions applicable to undercapitalized institutions (described below).
Mandatory Sanctions Tied to Prompt Corrective Action Capital Categories:
Capital Restoration Plan. An institution that is undercapitalized must submit
a capital restoration plan to the OTS within 45 days after becoming
undercapitalized. The capital restoration plan must specify the steps the
institution will take to become adequately capitalized, the levels of capital
the institution will attain while the plan is in effect, the types and levels
of activities the institution will conduct, and such other information as the
OTS may require. The OTS must act on the capital restoration plan
expeditiously, and generally not later than 60 days after the plan is
submitted. The OTS may approve a capital restoration plan only if the OTS
determines that the plan is likely to succeed in restoring the institution's
capital and will not appreciably increase the risks to which the institution is
exposed.
Limits on Expansion. An institution that is undercapitalized, even if its
capital restoration plan has been approved, may not acquire an interest in any
company, open a new branch office, or engage in a new line of business unless
the OTS determines that such action would further the implementation of the
institution's capital plan or the FDIC approves the action. An
undercapitalized institution also may not increase its average total assets
during any quarter except in accordance with an approved capital restoration
plan.
Capital Distributions. An undercapitalized savings institution may not pay
dividends or other capital distributions, with the exception of repurchases or
redemptions of the institution's shares that are made in connection with the
issuance of additional shares to improve the institution's financial condition
and that are approved by the FDIC. Undercapitalized institutions also may not
pay management fees to any company or person that controls the institution.
Brokered Deposits and Benefit Plan Deposits. An undercapitalized savings
institution cannot accept, renew, or rollover deposits obtained through a
deposit broker, and may not solicit deposits by offering interest rates that
are more than 75 basis points higher than market rates. Savings institutions
that are adequately capitalized but not well capitalized must obtain a waiver
from the FDIC in order to accept, renew, or rollover brokered deposits, and
even if a waiver is granted may not solicit deposits, through a broker or
otherwise, by offering interest rates that exceed market rates by more than 75
basis points.
Institutions that are ineligible to accept brokered deposits can only offer
FDIC insurance coverage for employee benefit plan deposits up to $100,000 per
plan, rather than $100,000 per plan participant, unless, at the time such
deposits are accepted, the institution meets all applicable capital standards
and certifies to the benefit plan depositor that its deposits are eligible for
coverage on a per-participant basis.
Discretionary Sanctions Tied to Prompt Corrective Action Capital Categories:.
Operating Restrictions. With respect to an undercapitalized institution, the
OTS will, if it deems such actions necessary to resolve the institution's
problems at the least possible loss to the insurance fund, have the explicit
authority to:
(a) order the institution to recapitalize by selling shares of capital
stock or other securities,
(b) order the institution to agree to be acquired by another depository
institution holding company or combine with another depository
institution,
(c) restrict transactions with affiliates,
(d) restrict the interest rates paid by the institution on new deposits
the prevailing rates of interest in the region where the institution is
located,
(e) require reduction of the institution's assets,
(f) restrict any activities that the OTS determines pose excessive risk
to the institution,
(g) order a new election of directors,
(h) order the institution to dismiss any director or senior executive
officer who held office for more than 180 days before the institution
became undercapitalized, subject to the director's or officer's right
to obtain administrative review of the dismissal,
(i) order the institution to employ qualified senior executive officers
subject to the OTS's approval,
(j) prohibit the acceptance of deposits from correspondent depository
institutions,
(k) require the institution to divest any subsidiary or the institution's
holding company to divest the institution or any other subsidiary, or
(l) take any other action that the OTS determines will better resolve the
institution's problems at the least possible loss to the deposit
insurance fund.
If an institution is significantly undercapitalized, or if it is
undercapitalized and its capital restoration plan is not approved or
implemented within the required time periods, the OTS shall take one or more of
the above actions, and must take the actions described in clauses (a) or (b),
(c) and (d) above unless it finds that such actions would not resolve the
institution's problems at the least possible loss to the deposit insurance
fund. The OTS may also prohibit the institution from making payments on any
outstanding subordinated debt or entering into material transactions outside
the ordinary course of business without the OTS's prior approval.
The OTS's determination to order one or more of the above discretionary actions
will be evidenced by a written directive to the institution, and the OTS will
generally issue a directive only after giving the institution prior notice and
an opportunity to respond. The period for response shall be at least 14 days
unless the OTS determines that a shorter period is appropriate based on the
circumstances. The OTS, however, may issue a directive without providing any
prior notice if the OTS determines that such action is necessary to resolve the
institution's problems at the least possible loss to the deposit insurance
fund. In such a case, the directive will be effective immediately, but the
institution may appeal the directive to the OTS within 14 days.
Receivership or Conservatorship. In addition to the mandatory appointment of a
conservator or receiver for critically undercapitalized institutions, the OTS
or FDIC may appoint a receiver or conservator for an institution if the
institution is undercapitalized and (i) has no reasonable prospect of becoming
adequately capitalized, (ii) fails to submit a capital restoration plan within
the required time period, or (iii) materially fails to implement its capital
restoration plan.
Assets Liability Management
Savings institutions are subject to interest rate risk to the degree that
interest-bearing liabilities reprice or mature more rapidly or on a different
basis than interest-earning assets. A principal objective of the Bank is to
manage the effects of adverse changes in interest rates on the Bank's interest
income, while maintaining asset quality. The Bank monitors asset and liability
maturities on a regular basis, and performs various simulations and other
analysis as a means of quantifying and controlling interest rate risk.
The Bank's one-year gap, a measure of exposure to interest rate risk, was
12.47% at September 30, 1994 compared to 4.27% at June 30, 1994. The Bank's
policy is to maintain its balance sheet gaps for annual periods close to a
tolerance range of zero. The change in the one year gap between June 30, 1994
and September 30, 1994 is attributable to the increase in current maturities
and repricing of loans, investment securities and MBS and a the lengthening of
terms for certificates of deposits to terms of 2 years or more.
To improve rate sensitivity and maturity balance of its interest-earning assets
and its liabilities, the Bank has over the past few years emphasized
originations of loans with adjustable rates or relatively short maturities.
Loans with adjustable rates have the beneficial effect of allowing the yield on
the Bank's assets to increase during periods of rising interest rates, although
such loans have contractual limitations on the frequency and extent of interest
rate adjustments. Since fiscal year 1993, the Bank has sold virtually all of
its current production of one-to-four unit residential loans, including ARM
loans.
At September 30, 1994, loans and MBS with adjustable interest rates represented
67.2% of the Bank's loan and MBS portfolio, compared to 63% at June 30, 1994.
The Bank's largely adjustable rate loan and Mortgage-backed securities
portfolio is funded principally by short term deposits and borrowings with
original maturities of less than three years. Adjustable rate loans comprised
84% of loan originations in the quarter ended September 30, 1994.
Net Interest Income
Net interest income, before provisions for loan losses, was $6.6 million for
the three month period ended September 30, 1994 compared to $7.4 million for
the same period in 1993. The decrease is primarily attributable to a decrease
in earning assets and interest bearing liabilities associated with the sale of
four branches in the period ended September 30, 1993.
The during period spread rose in the three month period ended September 30,
1994 to 3.46% compared to 3.38% for the same period in 1993. The increase is
due to a higher interest rate economic environment and a decrease in borrowed
funds made possible by the recapitalization of the Company in September of
1993. The difference between average interest-earning assets and interest-
bearing liabilities ("net average earning balance") improved by $32.5 million
for the three month period ended September 30, 1994 compared to the same period
in 1993.
Nonperforming Assets
Nonperforming assets consist of real estate acquired in settlement of loans and
in-substance foreclosures (collectively, "REO") and nonaccrual loans.
The following table sets forth the amounts of non-performing assets of the bank
at the dates indicated:
At At At
September 30, June 30, September 30,
1994 1994 1993
Nonaccrual loans (1) $18,521 $22,125 $13,479
Real estate owned (2) 33,653 23,557 41,767
In-substance foreclosures,
net of undisbursed funds - 15,677 5,647
Total nonperforming assets $52,174 $61,359 $60,893
Total assets $912,043 $903,976 $981,732
Nonperforming assets, net as
a percentage of total ass 5.72% 6.79% 6.20%
(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 interest accruals have
been suspended. At September 30, 1994, nonaccrual loans were $18.5 million, a
decrease from the $22.1 million at June 30, 1994.
The Bank's nonaccrual policy provides that interest accruals generally cease
once a loan is past due as to interest or principal for a period of 90 days or
more. Loans may also be placed on nonaccrual status even though they are less
than 90 days past due if management concludes that there is little likelihood
that the borrower will be able to comply with the repayment terms of the loan.
The following table summarizes the distribution of the Bank's nonaccrual
loans by collateral type (in thousands) (1):
September 30, June 30, September 30,
1994 1994 1993
1-4 Unit residential and
mortgage-backed secuities $9,096 $8,650 $7,889
Multifamily 372 689 3,722
Commercial:
Land - - -
Hotel/Motel 6,205 5,592 1,154
Retail - 2,449 -
Other 2,805 3,163 328
Total commercial 9,010 11,204 1,482
Total real estate loans 18,478 20,543 13,093
Consumer loans (2) 43 1,582 386
Total nonaccrual loans $18,521 $22,125 $13,479
(1) Balances are net of contra deductions, loans in process and
specific valuation allowances.
(2) Consumer loans include mobile home loans.
Real Estate Owned (REO)
REO consists of real estate acquired in settlement of loans and loans accounted
for as in-substance foreclosures. When there is an indication that a borrower
will not make all the required payments on a loan; the borrower no longer has
equity in the property collaterizing 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 expenses if the carrying value of real estate exceeds
estimated fair value. The bank does not accrue interest income on loans
classified as in-substance foreclosure and reported as real estate acquired in
settlement of loans.
REO decreased to $33.7 at September 30, 1994, from $39.2 million at June 30,
1994 and $47.4 million at September 30, 1994. The decrease from June 30, 1994
is primarily attributable to the disposition of REO properties totaling $8.7
million, partially offset by additional foreclosures of approximately $5.0
million.
The following table summarizes the distribution of the Bank's REO by collateral
type:
September 30, June 30, September 30,
1994 1994 1993
1-4 Residential $1,810 $1,334 $4,745
Multifamily 1,278 6,889 1,474
Commercial:
Retail - 14,725 2,052
Land 10,945 10,333 20,784
Manufacturing/Ware 14,731 - 1,374
Office 3,818 5,137 7,763
Other 1,031 82 -
Total Commerc 30,525 30,277 31,973
Construction:
Residential - - 9,222
Commercial - 681 -
Total constru - 681 9,222
Total real estate 33,613 39,181 47,414
Consumer (2) 40 53 -
Total REO $33,653 $39,234 $47,414
(1) Balances are net of contra deductions, loans in process, and real
estate general and specific valuation allowances.
(2) Consumer REO's include mobile home REO's.
Restructured 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 $107.2 million at
September 30, 1994. This is a decrease from $113.7 million at June 30, 1994
and $140.2 million at September 30, 1993.
The following table summarizes the distribution of the Bank's restructured
loans by collateral type (1):
September 30, June 30, September 30,
1994 1994 1993
(In thousands)
Multifamily $89,268 $92,057 $89,407
Commercial:
Retail 2,059 4,733 28,279
Land - - 3,325
Hotel/motel 2,776 2,783 8,083
Storage facilities - - 3,533
Office 5,530 5,541 5,900
Other 2,098 2,270 1,700
Total commercial 12,463 15,327 50,820
Construction:
Residential - 6,292 -
Multifamily 5,431 - -
Total restructured loans $107,162 $113,676 $140,227
(1) Balances are net of contra, loans in process and specific valuation
allowances.
Troubled, Collateral-dependent Loans
Effective September 30, 1993, the OTS issued Regulatory Bulletin 31, which
addresses troubled, collateral-dependent loans. A troubled, collateral-
dependent loan is defined as a loan in which proceeds for repayment can be
expected to come from the operation and sale of the collateral.
For a troubled collateral-dependent loan where, based on current information
and events, it is probable that the lender will be unable to collect all
amounts due (both principal and interest), any excess of the recorded
investment in the loan over its "value" should be classified as Loss, and the
remainder should generally be classified as Substandard.
For a troubled collateral-dependent loan, the "value" is one of the following:
1) the present value of the expected future cash flows, discounted at the
loan's effective interest rate, based on original contractual terms ("loan-rate
present value"); 2) the loan's observable market price; or 3) the fair value of
the collateral. All loans over $500,000 which are not secured by single family
residences are reviewed for the possibility that they may be troubled
collateral-dependent loans.
At September 30, 1994, troubled, collateral-dependent loans totalled $49.3
million. Of these loans which are considered troubled, collateral-dependent
loans, $40.3 million are performing loans and $9.0 million are non-performing
loans.
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, including
classified restructured loans described on page 17, at the dates indicated:
September 30, June 30, September 30,
Substandard 1994 1994 1993
Residential 1-4 $9,096 $8,650 $8,720
Multifamily 89,101 109,289 114,457
Commercial 42,832 33,030 52,075
Construction 5,609 5,817 7,702
Consumer 603 2,082 1,086
147,241 158,868 184,040
Doubtful
Multifamily - 261 -
Consumer - - 598
- 261 598
TOTAL $147,241 $159,129 $184,638
The table below summarizes the Bank's classified loans by performance
status at September 30, 1994:
Performance Status Classified Loans
Nonaccrual (page 15) $18,521
Restructured - performing (classified portion) 88,098
Other classified loans currently performing 40,622
Total classified loans $147,241
Real Estate Held for Investment, Development or Sale
Real estate held for investment, development or sale at September 30, 1994 is
comprised of the real estate remaining from the Bank's branches that have been
sold, a land lease, and Uni-Cal's wholly owned investments. At September 30,
1994, real estate held for investment, development or sale totaled $1.1
million compared to $.7 million at June 30, 1994. The increase is directly
attributable to the purchase of a land lease in conjunction with the
foreclosure of a REO property.
Allowance for Loan and Real Estate Losses
It is the Company's policy to provide an allowance for estimated losses on
loans and real estate when it is probable that the value of the asset has been
impaired and the loss can be reasonably estimated. Loans are generally required
to be carried at the lower of amortized cost or net realizable value. Net
realizable value is the present value of the future cash flows, including the
costs of holding, refurbishment and selling, discounted at the combined cost of
debt and equity for the Bank. REO is carried at the lower of cost or fair
value, less selling costs. To comply with this policy the Company has
established a monitoring system that requires at least an annual review of all
loans in excess of $500 thousand, and a quarterly review of all loans
considered adversely classified or criticized. The monitoring system requires a
review of operating statements, evaluation of the properties' current and past
performance, and evaluation of the borrower's ability to repay. When
deterioration is anticipated or certain other risk are identified, the
completion of a discounted cash flow analysis is also required. Based on the
results of the review, a new appraisal may be required.
The provision for estimated losses on loans totalled $3.9 million for the
three months ended September 30, 1994 compared to $5.0 million for the three
ended September 30, 1993. The provision for estimated losses on real estate for
the three month period ended September 30, 1994 totaled $.1 million compared to
$3.5 in the year earlier comparable period. The loan loss provisions for the
period ending September 30, 1994 were primarily related to two real estate
loans collaterized by income properties, which were written down to fair value
based on current 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
September 30, June 30, September 30,
1994 1994 1993
Loan general $13,101 $14,429 $17,490
Loan specific 12,867 10,534 4,333
Total loan allowance $25,968 $24,963 $21,823
Real estate general $1,891 $2,221 $2,703
Real estate specific 10,166 17,811 23,281
Total real estate allowance $12,057 $20,032 $25,984
Total valuation allowances $38,025 $44,995 $47,807
Non-interest Income and Expense
Non-interest income for the quarter ended September 30, 1994 was $1.0 million
compared to $5.7 million for the same period in 1993. The decrease reflects
non-recurring gains taken in 1993, as part of the Bank's overall strategy at
the time to reduce asset size in order to achieve capital compliance. The prior
year gains consisted primarily of a gain on the sale of four branches of $1.5
million and the gain on sale of loans and servicing to fund the branch sale of
approximately $2.5 million.
General and administrative expenses decreased to $6.8 million for the quarter
ended September 30, 1994 from $7.4 million for the same period in 1993. This
decrease reflects the Company's successful ongoing cost cutting efforts and the
effect of selling four branches in September of 1993. 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.
Income Taxes
At June 30, 1994, the Company had unused net operating losses for federal
income tax and California franchise tax purposes of $50 million and $49
million, respectively. On August 5, 1994, the Company incurred an "ownership
change" within the meaning of Section 382 of the Internal Revenue Code
("Section 382"). Section 382 generally provides that if a corporation
undergoes an ownership change, the amount of taxable income that the
corporation may offset after the date of the ownership change (the "change
date") with net operating loss carryforwards and certain built-in losses
existing on the change date will be subject to an annual limitation. In
general, the annual limitation equals the product of (i) the fair market value
of the corporation's equity on the change date (with certain adjustments) and
(ii) a long term tax exempt bond rate of return published by the Internal
Revenue Service.
The Section 382 limitation will not have a material impact on the financial
statements of the Company as the Company has not utilized any net operating
losses to offset the reversal of taxable temporary differences. Although the
Section 382 limitation will affect the Company's ability to utilize its net
operating loss carryovers and certain recognized built-in losses, any income
tax benefits attributable to those net operating loss carryovers and recognized
built-in losses will not be available until operations of the Company result in
additional taxable income. The amount of Section 382 limitation for the Company
has not yet been determined.
The following table summarizes the Company's real estate loan portfolio by
property type, geographic location and risk concentration at September 30,
1994(1).
California Florida Maine Arizona All Other Total
(In thousands)
1-4 unit residential
and mortgage-backed
securities $387,477 - - $4,356 $1,761 $393,594
Multifamily 170,971 - - - - 170,971
Commercial:
Retail 74,776 - 16,276 - - 91,052
Land 10,169 9,088 - - 3 19,260
Hotel/motel 19,950 3,850 3,060 2,276 6,256 35,392
Mobile home parks - - - - 8,406 8,406
Storage facilities 30,856 - - - - 30,856
Office 12,942 - - - - 12,942
Med/hosp 1,504 - - - - 1,504
Total commercial 150,197 12,938 19,336 2,276 14,665 199,412
Construction:
Residential 6,084 - - - - 6,084
Commercial - - - - - -
Residential lots - - - - - -
Total
construction 6,084 - - - - 6,084
Totals June 30, 1994 $714,729 $12,938 $19,336 $6,632 $16,426 $770,061
% of real estate loans 92.82% 1.68% 2.51% 0.86% 2.13% 100.00%
Totals June 30, 1994 $686,844 $19,365 $10,547 $6,657 $14,937 $738,350
% of real estate loans 93.02% 2.63% 1.43% 0.90% 2.02% 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. None
Item 5. None
Item 6. Exhibits and Reports on Form 8-K
There were no reports on Form 8-K filed for the three
month period ended September 30, 1994.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNIONFED FINANCIAL CORPORATION
Date November 14, 1994 By /S/ Ronald M. Griffith
Ronald M. Griffith
Senior Vice President
General Counsel, Secretary
Date November 14, 1994 By /S/ Stephen J. Austin
Stephen J. Austin
Senior Vice President
Chief Financial Officer
