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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1995
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 Identification No.)
incorporation or organization)
1055 WEST SEVENTH STREET, SUITE 100 90017
LOS ANGELES, CALIFORNIA (Zip Code)
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (213) 688-8417
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -----------------------
Common Stock, $.01 par value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
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.
/X/ Yes / / No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. / /
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the closing sale price of its Common Stock on
September 15, 1995, on the New York Stock Exchange was $2,099,297.
At September 15, 1995, 27,201,993 shares of the registrant's Common Stock,
$.01 par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement to be filed with the
Securities and Exchange Commission in connection with the Annual Meeting of
Stockholders to be held November 15, 1995 are incorporated by reference in
Part III hereof.
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PART I
ITEM 1.BUSINESS
GENERAL
UnionFed Financial Corporation ("UnionFed" or the "Company") was
incorporated in Delaware in 1986 and is a financial services holding company
engaged in the savings and loan business through its wholly-owned subsidiary,
Union Federal Bank, a federal savings bank (the "Bank"). The Bank is a
federally-chartered stock savings bank which began operations in 1927. The
Company became the holding company for the Bank on June 25, 1987. Unless
otherwise indicated, references to "the Company" include the Bank and other
subsidiaries of the Bank.
The Bank has experienced significant losses since 1990 as a result of its
real estate development activities and its commercial and land development
lending activities, which have required significant charge-offs and provisions
for loan and real estate losses. The Bank's loan and real estate portfolios
have been negatively impacted by the deterioration of real estate markets,
particularly for commercial and land development projects, in Southern
California and in the other regions of the United States where the Bank
previously conducted loan and real estate development activities. In mid-1990,
the Company ceased undertaking any new real estate investment and development
projects.
In order to comply with a prompt corrective action directive (the
"Directive") of the Office of Thrift Supervision ("OTS") requiring a sale,
merger or recapitalization transaction, the Bank in June 1995 completed two
significant transactions. First, the Bank sold approximately $136 million of
its classified commercial, industrial and multi-family loan and real estate
portfolio (the "Asset Sales"), principally to "bulk sale" institutional buyers,
for cash proceeds of $101 million, including a $3.6 million holdback of funds in
escrow accounts for potential representation and warranty breaches. Second, the
Bank sold 13 of its 14 retail banking offices and approximately $820 million of
related deposit liabilities to Glendale Federal Bank, Federal Savings Bank
("Glendale Federal"). At closing, the Bank transferred cash and other assets,
principally single family and non-classified commercial and multi-family real
estate loans valued at Union Federal's book value, to Glendale Federal in an
amount necessary to offset the deposit and other liabilities assumed by Glendale
Federal. The Bank received a $6.9 million purchase price for the transfer, plus
a right to receive a contingent payment based upon the actual performance of
certain multi-family, commercial and industrial real estate loans transferred to
Glendale Federal to the extent that such loans are repaid or otherwise resolved
by June 30, 1998. See "Contingent Payment" below. In anticipation of the
Glendale Federal transaction, the Bank liquidated $209 million of its investment
securities portfolio in May 1995 at a slight gain to raise cash.
Following the Asset Sales and the Glendale Federal transaction, the Bank
has continued its business through its downtown Los Angeles retail banking
office. Under its agreement with Glendale Federal, the Bank is prohibited until
June 23, 1998 from opening additional branches using the Union Federal or
UnionFed name without Glendale Federal's consent. At June 30, 1995, the Company
had total assets of $37.2 million, down significantly from $904 million at
June 30, 1994. The Company's principal assets include approximately $27.2
million in book value of classified loan and real estate assets, including two
commercial real estate owned (REO) properties in Key West, Florida and Los
Angeles, California, and cash, including funds escrowed in the Asset Sales. The
Company ceased residential mortgage banking activities early in 1995 to reduce
overhead costs and has reduced its staffing levels to approximately eight
employees, who conduct the ongoing retail banking and administrative operations
at the downtown Los Angeles banking office. At June 30, 1995, the Bank had
deposits of $34.2 million and a net worth of $2.0 million. At June 30, 1995,
the Bank had core capital of 5.02%, Tier 1 risk-based capital of 6.19% and total
risk-based capital of 7.52%. Since the Bank's total risk-based capital was
under the 8% level required for the Bank to be "adequately capitalized," the
Bank was considered to be an "undercapitalized" savings institution at June 30,
1995. The Bank expects an operating loss in the quarter ending September 30,
1995, which will reduce the Bank's capital further. See "Regulation and
Supervision - FDICIA Prompt Corrective Action Requirements."
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The potential sources for generating a future return for the Company's
stockholders primarily consist of the gain, if any, realized upon the
disposition of the classified assets retained by the Bank, the contingent
consideration, if any, to be received from Glendale Federal in 1998 and any
consideration received from the sale of the Company's business operations. The
Company is waiting on the final review of the refund claim and tax examination,
which may result in a refund from the Internal Revenue Service in an amount of
approximately $1.0 million. The Company has been advised that the refund has
been approved at the field examination level and is being reviewed by the Joint
Committee on Taxation. The Company expects that this refund, if any, would be
paid in the fourth quarter of calendar 1995 or first quarter of calendar 1996.
There can be no assurance that this refund will be approved and paid or that
the Company will be able to provide any future return to stockholders.
The Company's ability to continue as a going concern will depend in
significant part on factors outside of its control. Since approximately two-
thirds of the Bank's assets are non-earning real estate assets, the Bank's
interest income will not be sufficient to cover its interest expense for
deposits and general and administrative expenses. The Company's financial
condition in fiscal 1996 and thereafter will be principally dependent upon the
performance of the Company's remaining assets, principally its REO and
classified loans. The Company has no significant resources other than the Bank.
At present, the Bank does not have any other significant income generation
capabilities other than income from its relatively small loan portfolio and
realization of its real estate assets. Given the structure of its balance
sheet, the Bank has limited flexibility in dealing with asset liability
management and limited ability to improve its earning power.
The OTS is requiring the Bank to report monthly regarding its financial
condition, financial projections and the current status of its remaining assets.
To date, the OTS has not required the filing of a capital restoration plan by
the Bank despite its "undercapitalized" status. See "Regulation and Supervision
- - FDICIA Prompt Corrective Action Requirements."
If the Bank continues to fail to meet its required capital levels, the
operations and future prospects of the Bank will depend principally on
regulatory attitudes and actions at the time, including those of the OTS and
Federal Deposit Insurance Corporation ("FDIC"), within applicable legal
constraints. Such failure could result in the issuance of a cease and desist
order or capital directive to the Bank, the imposition of such operating
restrictions as the OTS deems appropriate at the time, such other actions by the
OTS as it may be authorized or required to take under applicable statutes and
regulations and/or the appointment of a conservator or receiver for the Bank.
In the event that the Bank were to become "critically undercapitalized," it must
be placed in receivership or conservatorship not later than 90 days thereafter
unless the OTS and FDIC determine that taking other action would better serve
the purposes of prompt corrective action. Such determinations are required to
be reviewed at 90-day intervals, and if the Bank remains critically
undercapitalized for more than 270 days, the decision not to appoint a receiver
would require certain affirmative findings by the OTS and FDIC regarding the
viability of the institution. An institution is 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%. At June 30, 1995, the Bank's "tangible equity" ratio was 5.02%. In light
of the financial condition of the Company at June 30, 1995, the Company's
independent auditors have disclaimed an opinion on the Company's 1995 fiscal
year-end financial statements and indicated that the Company's situation raises
substantial doubt about the Company's ability to continue as a going concern.
The executive offices of the Company are located at 1055 West Seventh
Street, Suite 100, Los Angeles, California 90017 and its telephone number is
(213) 688-8417.
LENDING ACTIVITIES
In the past, the Company's lending activities have emphasized origination
of first mortgage loans secured by residential property. The Company
discontinued its lending operations in March 1995 to reduce costs and
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presently does not plan to engage in any significant lending activity in the
near future except where necessary to facilitate the sale of REO or accomplish
loan restructurings.
LOAN AND MORTGAGE-BACKED SECURITIES PORTFOLIO COMPOSITION
Following the Asset Sales, the Company's net loan portfolio totaled
approximately $2.2 million at June 30, 1995, representing 5.9% of the Company's
assets at that date. As a federally-chartered savings institution, the Bank has
authority to make loans secured by real estate located throughout the United
States. The following table sets forth the composition of the Bank's loan and
mortgage-backed securities portfolio by type of loan at the dates indicated.
<TABLE>
<CAPTION>
AT JUNE 30,
----------------------------------------------------------------------
1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Real estate loans:
One-to-four units. . . . . . . . . . . . . $ -- $198,046 $370,187 $ 394,946 $ 541,191
Five or more units . . . . . . . . . . . . -- 166,779 199,638 221,329 235,269
Construction . . . . . . . . . . . . . . . -- 6,924 15,922 71,515 204,628
Commercial and land. . . . . . . . . . . . -- 202,017 278,731 324,572 312,940
Acquisition, development
and construction . . . . . . . . . . . . -- -- 1,330 4,749 11,585
Equity trust deed. . . . . . . . . . . . . 2,744(1) 6,279 7,480 11,504 19,576
-------- -------- -------- ---------- ----------
Total real estate
loans. . . . . . . . . . . . . . . . . 2,744 580,045 873,288 1,028,615 1,325,189
Other loans(2) . . . . . . . . . . . . . . . -- 14,090 17,270 23,341 38,797
-------- -------- -------- ---------- ----------
Total loans
receivable . . . . . . . . . . . . . . 2,744 594,135 890,558 1,051,956 1,363,986
Less:
Unearned fees, premiums
and discounts. . . . . . . . . . . . . . -- 2,051 2,479 4,148 6,931
Loans in process . . . . . . . . . . . . . -- 166 3,324 8,998 35,418
Allowance for estimated
losses . . . . . . . . . . . . . . . . . 500 24,963 20,573 17,824 31,064
-------- -------- -------- ---------- ----------
Net loans receivable . . . . . . . . . 2,244 566,955 864,182 1,020,986 1,290,573
Mortgage-backed securities . . . . . . . . . -- 158,305 88,039 62,473 394,985
Less unearned (discounts)
premiums . . . . . . . . . . . . . . . . -- (522) 2,669 (764) 542
-------- -------- -------- ---------- ----------
Total net loans
receivable and
mortgage-backed
securities . . . . . . . . . . . . . . $ 2,244 $724,738 $954,890 $1,082,695 $1,686,100
-------- -------- -------- ---------- ----------
-------- -------- -------- ---------- ----------
</TABLE>
____________
(1) At June 30, 1995 the Bank's remaining loan asset was a second trust deed on
a 155 unit multifamily building in Los Angeles, California, with a net book
value of $2.2 million. The asset is currently performing and is an
adjustable rate loan based on the five year treasury rate plus 300 basis
points, adjusting annually. The current rate on the loan is 10.81%.
(2) Includes passbook loans, mobile home loans, overdraft loans and other
unsecured loans.
In September 1995, the Bank repurchased a loan from one of the
institutional purchasers in the Asset Sales. The loan has an unpaid principal
balance of $2.7 million and was repurchased at a price of $2.3 million.
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The loan is secured by a 179-unit motel in Phoenix, Arizona, matures in December
1996 and has a current interest rate of 10.50%.
The table below sets forth the origination, purchase and sale activity
relating to loans and mortgage-backed securities of the Bank during the periods
indicated. The significant sale activity in 1995 principally related to the
Asset Sales and the Glendale Federal transaction.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Real estate loans originated:
One-to-four units. . . . . . . . . . . . $ 108,563 $ 201,648 $ 233,208 $ 188,652 $ 213,620
Five or more units . . . . . . . . . . . 6,002 10,905 2,814 7,819 14,208
Construction . . . . . . . . . . . . . . -- --- 750 -- 6,824
Commercial and land. . . . . . . . . . . 1,828 22,041 17,024 12,176 37,070
Equity trust deed. . . . . . . . . . . . -- 102 660 1,627 5,093
Other loans originated (1) . . . . . . . . . (2,516) (2,270) (2,625) (3,736) 2,523
--------- --------- --------- --------- ---------
Total loans originated . . . . . . 113,877 232,426 251,831 206,538 279,338
Real estate loans purchased. . . . . . . . . -- -- 44,872 13,231 15,053
--------- --------- --------- --------- ---------
Total loans originated
and purchased . . . . . . . . . 113,877 232,426 296,703 219,769 294,391
Total loans sold . . . . . . . . . . . . . . (618,403) (227,638) (84,104) (121,194) (63,375)
Loans exchanged for
mortgage-backed securities. . . . . . . . (9,505) (133,253) (159,555) (134,850) (239,684)
Total loan repayments. . . . . . . . . . . . (54,701) (112,556) (176,015) (232,099) (263,552)
Other net changes(2) . . . . . . . . . . . . 4,021 (56,206) (33,833) (1,213) (9,645)
-------- --------- --------- --------- ---------
Net increase (decrease) in
loans receivable. . . . . . . . . . . . . (564,711) (297,227) (156,804) (269,587) (281,865)
Mortgage-backed securities:
Received in exchange
for loans. . . . . . . . . . . . . . 9,505 133,253 159,555 134,850 239,684
Purchased. . . . . . . . . . . . . . . . 38,432 188,157 169,082 7,502 16,433
Sold . . . . . . . . . . . . . . . . . . (195,047) (233,232) (283,871) (402,520) (161,807)
Repayments . . . . . . . . . . . . . . . (10,294) (21,106) (16,215) (73,634) (83,113)
Other net changes(2) . . . . . . . . . . (379) 3 448 (16) 67
--------- --------- --------- --------- ---------
Net (decrease) increase
in mortgage-backed
securities. . . . . . . . . . . . . . (157,783) 67,075 28,999 (333,818) 11,264
--------- --------- --------- --------- ---------
Net (decrease) increase
in loans and mortgage-
backed securities . . . . . . . . . . $(722,494) $(230,152) $(127,805) $(603,405) $(270,601)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
____________
(1) Amount represents the net change in passbook loans, mobile home loans,
overdraft loans and other unsecured loans.
(2) Includes in-substance foreclosures, changes in loans in process, deferred
income and/or other changes.
CONTINGENT PAYMENT
The Bank has a right to receive a contingent payment based upon the actual
performance of certain multi-family, commercial and industrial real estate loans
("Contingent Portfolio") transferred to Glendale Federal to the
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extent that such loans are repaid or otherwise finally resolved by June 30, 1998
("Resolved Loans"). The amount of such contingent payment, if any, will equal
50% of the amount by which the aggregate net proceeds collected by Glendale
Federal on Resolved Loans exceed the agreed upon aggregate base amount assigned
to such loans as of the closing date after taking into account interim costs or
recoveries as provided in the Purchase Agreement. At June 23, 1995, the closing
date of the Glendale Federal transaction, loans in the Contingent Portfolio had
an aggregate unpaid principal balance of $184 million and a net book value of
$182 million. The Contingent Portfolio has an agreed upon aggregate base amount
of $172 million as of June 23, 1995. Under the Purchase Agreement, Glendale
Federal is entitled to treat the Contingent Portfolio as its sole property and
is free to determine whether to hold, sell, foreclose upon or otherwise deal
with loans in the Contingent Portfolio without regard to the impact, if any, of
such action on the contingent payment. The Bank will not be entitled to any
contingent payment based upon Contingent Portfolio loans paid or otherwise
finally resolved after June 30, 1998. There are no assurances as to whether the
Bank will receive any contingent payment, or if it does, the amount of such
contingent payment.
MULTIFAMILY AND COMMERCIAL REAL ESTATE LENDING
In the past, the Bank has originated permanent loans secured by multifamily
properties and commercial and industrial properties, including office buildings,
retail centers, hotels/motels, land and other properties with income producing
capabilities ("commercial real estate loans"). In the past, commercial real
estate loans were originated by the Bank for its portfolio and, to a limited
extent, for sale to others. During the fiscal years ended June 30, 1995 and
1994, the Bank originated commercial real estate loans only for the purpose of
restructuring existing loans and to facilitate the sale of real estate owned by
the Bank or by its real estate subsidiary, Uni-Cal Financial Corporation ("Uni-
Cal"). Originations of loans secured by multifamily properties totaled
$6.0 million in fiscal 1995 compared to $10.9 million in fiscal 1994.
Originations of commercial real estate loans totaled $1.8 million in fiscal 1995
compared to $22.0 million in fiscal 1994.
Multifamily and commercial real estate loans generally entail significant
additional risks as compared to single family residential mortgage lending.
Each loan, including loans to restructure existing loans and to facilitate the
sale of real estate owned, is subject to the Bank's underwriting standards,
which generally include an evaluation of the creditworthiness and reputation of
the borrower, the amount of the borrower's equity in the project as determined
on the basis of appraisal, sales and leasing information on the property and
cash flow projections. Effective June 30, 1995, all originations,
modifications, renewals or other extensions of credit of multifamily and
commercial real estate loans in excess of $500,000 are required to be approved
by the Board of Directors.
CONSTRUCTION LENDING
The Bank has in the past provided construction loan financing for
residential (both single family and multifamily) and commercial real estate
projects. The Bank sold its remaining construction loan in the Asset Sales.
LOANS-TO-ONE-BORROWER LIMITATIONS
With certain limited exceptions, the maximum amount that a savings
institution may lend to one borrower (including certain related entities of such
borrower) is an amount equal to 15% of the savings institution's unimpaired
capital and unimpaired surplus, plus an additional 10% of such capital and
surplus for loans fully secured by readily marketable collateral. Real estate
is not included within the definition of "readily marketable collateral." At
June 30, 1995, the maximum amount which the Bank could have loaned to any one
borrower (and related entities) was $374 thousand, compared to $7.1 million at
June 30, 1994.
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REAL ESTATE OWNED
Following the Asset Sales and the Glendale Federal transaction, the Bank
retained approximately $24.6 million of commercial real estate owned (REO)
properties acquired upon default of the borrowers. The Bank's three REO
properties as of June 30, 1995 were:
TRUMAN ANNEX: In 1991, the Bank acquired title to several land parcels in
Key West, Florida totaling seven acres, together with an unimproved marina and a
26.4 acre island located 500 yards offshore. The property is within a master
planned development known as Truman Annex, a historical site once owned by the
Navy. While no improvements existed on the property at the time it was acquired
by the Bank, it was approved for specific entitlements under a development
agreement and other related agreements with the City of Key West and the State
of Florida.
On December 31, 1993, the Bank entered into a purchase and sale agreement
with a third party purchaser providing the purchaser with an option to purchase
the Truman Annex property for an aggregate purchase price of $19.5 million plus
a $2.0 million reimbursement for infrastructure developments funded by the Bank.
The agreement provides for the purchase of the property in phases over the
course of three years, with financing to be made available with each parcel. As
of June 30, 1995, the purchaser had purchased approximately 60% of the property
for a purchase price of approximately $11.3 million.
At June 30, 1995, the 22-slip marina and 83 residential lots on the island
remained to be sold. Under the purchase agreement, the purchaser has the option
to purchase the remaining residential lots by March 31, 1996 for an aggregate
purchase price of $9.7 million, including the infrastructure payment. Under the
agreement, the purchaser also may acquire the marina for $1.5 million on or
before March 31, 1996 and has a right of first refusal on such marina until
March 1998. Under the purchase agreement, the Bank is required to provide loans
aggregating approximately $6.3 million, with scheduled payment reductions in
March 1997 and March 1998 and the balance maturing in March 1999.
BROADWAY TRADE CENTER: This asset is a commercial property in downtown Los
Angeles, California known as the Broadway Trade Center. The structure has six
full stories and three partial stories above the sixth floor. Since its prior
status as a department store, the property has been used for ground floor retail
uses, garment manufacturing, office and storage. At June 30, 1995, the property
was 70% occupied based on the space available for rent. The Bank filed a
declaratory relief action in July 1994 to confirm its exclusive right to three
land leasehold interests representing approximately 28% of the underlying land
interests. In addition to its leasehold interests, the Bank and its subsidiary
own approximately 82% of the property in fee simple absolute. The Bank also
currently is attempting to resolve outstanding delinquent property taxes with
the County of Los Angeles and to successfully conclude outstanding
litigation. See "Item 3. -- Legal Proceedings."
During fiscal 1995, the Bank's principal efforts on this property related
to seeking a conditional use permit (CUP) allowing for 360,000 square feet of
garment manufacturing on floors three through nine. The CUP was granted in June
1995 and a subsequent appeal was denied in September 1995. There is an
additional period to appeal this denial; however, the Bank expects the CUP issue
to be resolved by the end of calendar 1995. Upon favorable resolution of the
CUP appeal, the building will be marketed for lease up and thereafter will be
marketed for sale. It is anticipated that any such sale would not happen until
at least the Company's 1997 fiscal year. At June 30, 1995, the book value of
the Broadway Trade Center was $13.9 million.
RENAISSANCE II: Renaissance II is a Delaware limited liability company of
which the Bank and its subsidiary are the only members. Renaissance II is
currently in the process of converting a 115-unit apartment complex in Pacoima,
California to condominium ownership. To date, 34 units have been sold to
individual homeowners at prices ranging from $80,000 to $120,000. The property
is subject to a first trust deed held by an institutional investor with an
unpaid principal balance as of September 1, 1995 equal to approximately
$5,450,000.
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CLASSIFICATION OF ASSETS
To comply with regulatory requirements, the Bank uses a seven grade system
to classify its assets. The current grades are Pass-1, Pass-2, Pass-3, Special
Mention, Substandard, Doubtful and Loss. The OTS has stated that classified
assets (comprised of Substandard, Doubtful and Loss assets) will be the standard
measure used in expressing the quality of a financial institution's loan
portfolio and other assets. A brief description of these classifications
follows:
The three Pass classifications represent various levels of credit quality,
all of which are considered of sufficient quality not to warrant a Special
Mention or more adverse classification. A Pass asset is well supported by the
paying capacity of the borrower and the value of the collateral.
Special Mention assets are those assets having a potential weakness that
deserve management's close attention. If left uncorrected, these potential
weaknesses may result in deterioration of the repayment prospects for the asset
or in the institution's credit position at some future date.
A Substandard asset is inadequately protected by the current net worth and
paying capacity of the obligor or of the collateral pledged, if any.
Substandard assets have a well defined weakness or weaknesses. They are
characterized by the distinct possibility that the Bank will sustain some loss
if the deficiencies are not corrected.
An asset classified Doubtful has all the weaknesses inherent in those
classified Substandard with the added characteristic that the weaknesses make
collection or liquidation in full, on the basis of currently existing facts,
conditions and values, highly questionable and improbable. The Bank considers
Doubtful to be a temporary classification and will only classify an asset, or
portion of an asset, Doubtful when information is not available to more clearly
define the potential for loss.
That portion of an asset classified Loss is considered uncollectible and of
such little value that its continuance as an asset, without establishment of a
specific valuation allowance, is not warranted. A Loss classification does not
mean that an asset has absolutely no recovery or salvage value, but rather it is
not practical or desirable to defer writing-off a basically worthless asset or
portion of an asset even though partial recovery may be effected in the future.
For a loan in which proceeds for repayment can be expected to come only from the
operation and sale of the collateral (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" is classified as
Loss, and the remainder generally is 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.
At June 30, 1995, the Bank had total classified assets of $27.2 million,
consisting of one loan and three REO properties. The loan is also considered a
"troubled, collateral-dependent loan."
ASSET SALES HOLDBACKS
In connection with the Asset Sales, the Bank deposited approximately $3.6
million in escrow for potential representation and warranty breaches. Under the
purchase agreements, the Bank is required either to compensate the purchaser for
such breaches or to repurchase the loan that is the subject of the breach. In
September 1995, the Bank repurchased a loan from one of the institutional
purchasers in the Asset Sales. The loan has an unpaid principal balance of $2.7
million and was repurchased at a price of $2.3 million. The loan is secured by
a 179-unit motel in Phoenix, Arizona, matures in December 1996 and has a current
interest rate of 10.50%.
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As of September 26, 1995, a total of approximately $967 thousand remained
in escrow. Of this amount, $345 thousand remained in one escrow subject to a
claim by the bulk purchaser that a representation and warranty was breached with
respect to one loan. The Bank has taken the position that the purchaser waived
any breach by foreclosing on the asset. Recovery of the remaining funds may
require negotiation or litigation. A second escrow which currently holds $622
thousand expires in mid-December 1995 and to date has had claims made totaling
approximately $155 thousand. At June 30, 1995, the Bank had established a
reserve of $400 thousand to cover potential claims for breaches of
representations and warranties.
INVESTMENT ACTIVITIES
Federal regulations require the Bank to maintain a specified minimum amount
of liquid assets which may be invested in certain short-term securities. The
Bank is also permitted to make certain other securities investments. Investment
decisions are made by authorized officers of the Bank within guidelines
established by the Bank's Board of Directors. Such investments are managed in
an effort to produce the highest yield consistent with maintaining safety of
principal and compliance with regulations governing savings institutions.
At June 30, 1995, the Bank's investment securities portfolio totaled
$2.5 million and consisted entirely of government and government agency
securities and FHLB stock, all of which had maturities or were redeemable by the
Bank within ten years or less.
The following table sets forth the composition of the Bank's investment
securities portfolio at the dates indicated.
<TABLE>
<CAPTION>
JUNE 30,
-------------------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Overnight funds. . . . . . . . . . . . . . . $1,000 $3,000 $ 3,000 $ 10,000 $ 7,000
Certificates of deposit, bankers'
acceptances and corporate
obligations . . . . . . . . . . . . . . . -- -- -- -- 11,554
United States government and
government agency securities . . . . . . 2,499 62,119 62,736 318,841 106,880
FHLMC and FHLB stock . . . . . . . . . . . . 100 5,420 6,643 27,983 26,650
------ ------- ------- -------- --------
Total . . . . . . . . . . . . . . . . $3,599 $70,539 $72,379 $356,824 $152,084
------ ------- ------- -------- --------
------ ------- ------- -------- --------
</TABLE>
As of June 30, 1995, all of the Bank's investment securities matured in one
year or less and the weighted average yields of those securities were as
follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
AMOUNT YIELD
-----------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Overnight funds . . . . . . . . . . . $1,000 5.5%
U.S. Government and
government agency securities . . $2,499 5.0%
FHLB stock (1). . . . . . . . . . . . $ 100 4.5%
</TABLE>
____________
(1) The weighted average yield on FHLB stock has been estimated based upon
recent dividends received.
9
<PAGE>
SOURCES OF FUNDS
DEPOSITS
The Bank prefers to use deposits as the principal source of funds for
supporting its investment activities, since the cost of these funds generally is
less than that of borrowings or other funding sources with comparable
maturities. Deposits totaled $34.2 million, $848.0 million and $1.0 billion at
June 30, 1995, 1994 and 1993, respectively. The significant deposit decrease in
fiscal 1995 is attributable to the Glendale Federal transaction, which involved
the sale of 13 retail banking offices. The Bank continues to operate one retail
banking office in downtown Los Angeles.
Deposit flows are affected by general economic conditions. Funds may flow
from depository institutions such as savings banks into direct vehicles such as
government and corporate securities or other financial intermediaries. The
ability of the Bank to attract and keep deposits will continue to be affected by
money market conditions, prevailing interest rates and other factors. In
addition, the Bank is restricted until June 23, 1998 from operating other branch
locations using the Union Federal or UnionFed name without the consent of
Glendale Federal.
The Bank's savings deposits traditionally have been obtained primarily from
the areas in Southern California surrounding its branch offices. However, in
the past, the Bank also obtained deposits from outside its primary market area
through the use of national securities firms ("brokered deposits"). Such
deposits acquired by the Bank generally had longer maturities, but with higher
rates, than were typically available through retail branches. An institution
that fails to meet its minimum capital requirements, such as the Bank, is
prohibited from accepting or renewing brokered deposits. Total brokered
deposits were $4.7 million at June 30, 1995, or 13.7% of total deposits, and
carried a weighted average interest rate of 11.8%. At June 30, 1994, such
amount was $5.1 million, or 0.6% of total deposits, and at June 30, 1993, such
amount was $23.0 million, or 2.3% of total deposits. The Bank intends to
continue to phase out its brokered deposits at the respective scheduled maturity
date.
The following table sets forth the amounts of savings deposits in various
types of savings programs at the dates indicated.
<TABLE>
<CAPTION>
AT JUNE 30,
---------------------------------------------------------------------
1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Passbook. . . . . . . . . . . . . . . . $ 4,146 $ 58,303 $ 61,224 $ 69,051 $ 60,761
Money market passbook . . . . . . . . . 636 92,183 144,782 213,095 167,630
Market access checking. . . . . . . . . 261 74,135 86,480 98,169 93,776
Premium market access checking. . . . . 722 12,648 14,330 15,844 20,918
Jumbo certificates(1) . . . . . . . . . 7,284 20,913 58,659 79,840 151,052
2-8 month certificates. . . . . . . . . 3,049 80,696 118,136 231,471 324,266
9-12 month certificates . . . . . . . . 7,800 123,883 162,712 210,865 303,517
13-29 month certificates. . . . . . . . 5,936 301,017 298,640 269,474 372,790
30-120 month certificates . . . . . . . 4,336 82,591 73,911 108,219 68,493
All other fixed rate certificates . . . -- 1,588 3,172 2,339 2,108
------- -------- ---------- ---------- ----------
Total deposits. . . . . . . . . . . . . $34,170 $847,957 $1,022,046 $1,298,367 $1,565,311
------- -------- ---------- ---------- ----------
------- -------- ---------- ---------- ----------
</TABLE>
(1) At June 30, 1995, jumbo certificates (deposit certificates of $100,000 or
more) ranged in maturity from 30 days to 5 years.
10
<PAGE>
BORROWINGS
The Bank traditionally utilized borrowings from the FHLB of San Francisco
as a significant source of funds, but has reduced those borrowings during the
past two fiscal years. The Bank from time to time has employed reverse
repurchase agreements as a source of additional funds. There were no reverse
repurchase agreements outstanding at June 30, 1995.
The following table sets forth information concerning the Bank's FHLB
advances and other borrowings at the dates indicated. At June 30, 1995, no such
borrowings were outstanding.
<TABLE>
<CAPTION>
JUNE 30,
-------------------------------------------------------
1994 1993 1992 1991
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
FHLB advances . . . . . . . . . . . . . . . $13,000 $100,000 $250,000 $350,000
Medium-term notes . . . . . . . . . . . . . -- -- 7,000 7,000
Other borrowings:
Reverse repurchase agreements -- -- -- 85,461
Mortgage-backed bonds . . . . . . . . . 1,933 3,538 5,104 6,254
Real estate loans . . . . . . . . . . . 4 741 6,435 16,648
Other . . . . . . . . . . . . . . . . . 527 544 1,654 1,000
------- -------- -------- --------
Total borrowings. . . . . . . . . . . . . . $15,464 $104,823 $270,193 $466,363
------- -------- -------- --------
------- -------- -------- --------
Weighted average rate on borrowings
during the period . . . . . . . . . . . . 5.94% 8.20% 8.56% 8.46%
Total borrowings as a percentage of
total deposits. . . . . . . . . . . . . . 1.82% 10.26% 20.81% 29.79%
Total borrowings as a percentage of
total assets. . . . . . . . . . . . . . . 1.71% 9.02% 16.45% 21.66%
</TABLE>
The following table sets forth certain information with respect to the
Bank's short-term borrowings.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------------
1995 1994 1993
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
FHLB advances with original maturities less than one year:
Average balance outstanding during the period. . . . . . . . . . . $ 6,470 $29,583 $ 19,643
Maximum amount outstanding at any month-end during the period. . . 13,000 50,000 100,000
Weighted average interest rate on maximum amount
outstanding at any month-end during the period. . . . . . . . . 3.95% 3.71% 3.71%
Securities sold under agreements to repurchase:
Average balance outstanding during the period. . . . . . . . . . . $ 4,774 $ 6,989 $ 1,848
Maximum amount outstanding at any month-end during the period. . . 12,258 59,095 --
Weighted average interest rate on maximum amount outstanding at
any month-end during the period . . . . . . . . . . . . . . . . 5.75% 3.29% N/A
Total other short-term borrowings:
Average balance outstanding during the period. . . . . . . . . . . $ 44 $ 101 $ 4,023
Maximum amount outstanding at any month-end during period. . . . . 525 406 6,653
Weighted average interest rate on maximum amount outstanding
during the period . . . . . . . . . . . . . . . . . . . . . . . 8.0% 11.00% 7.35%
</TABLE>
SUBSIDIARY ACTIVITIES
Federal savings institutions may make limited investments in the capital
stock, obligations or other securities of certain types of subsidiaries
(referred to as "service corporations") and may make loans (subject to
limitations) to such corporations and joint ventures in which they participate.
At June 30, 1995, the Bank's
11
<PAGE>
aggregate investment in service corporations was $252 thousand. As of June 30,
1995, three of the Bank's subsidiaries held real property assets, but otherwise
all subsidiaries were inactive.
COMPETITION
The Bank faces strong competition both in attracting deposits and in making
real estate and other loans. Its most direct competition for deposits has
historically come from other savings institutions such as Home Savings of
America and from commercial banks such as Bank of America located in its
principal market area, including many large financial institutions based in
other parts of the country or their subsidiaries. In addition, the Bank faces
additional significant competition for investors' funds from alternative
investments such as mutual funds and other corporate and government securities.
The ability of the Bank to attract and retain savings deposits depends on its
ability generally to provide a rate of return, liquidity and risk comparable to
that offered by competing investment opportunities.
EMPLOYEES
At June 30, 1995, the Company had 8 full-time employees, down from 254
employees at June 30, 1994. The Company provides its employees with basic and
major medical insurance, life insurance, accident insurance, sick leave and an
employee funded 401(k) plan.
TAXATION
FEDERAL. Under applicable provisions of the Internal Revenue Code of 1986,
as amended (the "Code"), a savings institution that meets certain definitional
tests relating to the composition of its assets and the sources of its income (a
"qualifying savings institution") is permitted to establish reserves for bad
debts. A qualifying savings institution may make annual additions to such
reserves based upon the institution's actual loss experience (the "experience
method"). Alternatively, a qualifying savings institution may elect, on an
annual basis, to use the percentage of taxable income method to compute its
allowable addition to its bad debt reserve on qualifying real property loans
(generally, loans secured by an interest in improved real estate).
The availability of the bad debt reserve deduction computed under the
percentage of taxable income method (the "percentage bad debt deduction") has
permitted qualifying savings institutions to be taxed at a lower effective
federal income tax rate than that applicable to corporations generally. The
percentage of taxable income that may be deducted under the percentage of
taxable income method is currently 8% and the maximum corporate tax rate is 35%.
Accordingly, a qualifying savings institution that is able to use the percentage
bad debt deduction with respect to 100% of its taxable income (assuming
$10 million in taxable income) would be subject to a maximum effective federal
income tax rate of approximately 32.2%.
Qualifying savings institutions that file federal income tax returns as
part of a consolidated group, are required by applicable Treasury regulations,
in effect, to reduce proportionately their bad debt reserve deduction (if
computed under the percentage of taxable income method) for tax losses
attributable to the activities of the non-savings institution members of the
consolidated group that are functionally related to the activities of the
savings institution member. Under applicable law, the bad debt reserves of a
qualifying savings institution also may not exceed certain specified limits
based upon the amount of outstanding qualifying real property loans and the
relative size of the institution's withdrawable deposit accounts.
Under applicable provisions of the Code, a savings institution organized in
stock form whose accumulated reserve for losses on qualifying real property
loans exceeds the reserve as calculated under the experience method may be
subject to recapture taxes on such reserve if it makes certain types of
distributions to its stockholders. Dividends may be paid out of retained
earnings without the imposition of any recapture tax on the savings institution
to the extent that the amounts paid as dividends do not exceed the savings
institution's current or post-1951 accumulated earnings and
12
<PAGE>
profits as calculated for federal income tax purposes. Stock redemptions,
dividends paid in excess of the savings institution's current or post-1951
accumulated earnings and profits as calculated for tax purposes, and other
distributions made with respect to the savings institution's stock (and the
taxes deemed to be attributable thereto), however, are deemed under applicable
sections of the Code to be made from the savings institution's tax bad debt
reserves to the extent that such reserves exceed the amount that could have been
accumulated under the experience method. Thus, certain distributions to
stockholders that are treated as having been paid from the reserve for losses on
qualifying real property loans could result in a federal recapture tax.
A savings institution with assets in excess of $500,000,000 (a "large
savings institution") that fails to satisfy the applicable definitional tests
for treatment as a qualifying savings institution is not permitted to use a
reserve method in accounting for bad debts and is instead required to use the
specific charge-off method in reporting deductions for bad debts. Furthermore,
a large savings institution that ceases to be a qualifying savings institution
is required to recapture (i.e., report as income) an amount equal to its reserve
for bad debts existing at the close of the tax year preceding the year in which
the savings institution ceased to be a qualifying savings institution. Under
special provisions of the Code, however, such an institution generally will be
eligible to carryback net operating losses attributable to the specific charge-
off of bad debts during taxable years beginning after December 31, 1986 and
before January 1, 1994 to the 10 years preceding the loss. Until the tax year
ended September 30, 1992, the Bank qualified as a qualifying savings
institution. For the tax year ended September 30, 1992, the Bank constituted a
large savings institution that did not qualify as a qualifying savings
institution. As a result, the tax loss incurred in 1992 was carried back 10
years. The tax bad debt reserve of $8.6 million is being recognized as taxable
income over the six-year period beginning October 1, 1992. However, for the tax
year ended September 30, 1993, the Company requalified as a qualifying savings
institution and is therefore eligible to use the reserve method of accounting
for claiming bad debt deductions.
In addition to the regular corporate income tax, corporations, including
savings institutions, are subject to an alternative minimum tax. This 20% tax
is computed with respect to the Company's regular taxable income (with certain
adjustments), as increased by tax preference items ("alternative minimum taxable
income"), and will apply if it exceeds the Company's regular tax liability. One
tax preference item common to savings institutions such as the Bank is the
excess, if any, of its annual tax bad debt deduction over the deduction that
would have been available under the experience method. In addition, in
computing the Company's alternative minimum taxable income, the Company's
regular taxable income is required to be increased by 75% of the excess of the
Company's current earnings and profits (subject to certain adjustments) over the
Company's alternative minimum taxable income determined prior to this adjustment
and without regard to the alternative tax net operating loss deduction.
The Company uses a tax year ending September 30. The Company's tax returns
have been examined by the Internal Revenue Service ("IRS") through September 30,
1993. The Company is waiting on the final review of the refund claim and tax
examination, which may result in a refund from the Internal Revenue Service in
an amount of approximately $1.0 million. The Company has been advised that the
refund has been approved at the field examination level and is being reviewed by
the Joint Committee on Taxation. The Company expects that this refund, if any,
would be paid in the fourth quarter of calendar 1995 or first quarter of
calendar 1996. There can be no assurance that this refund will be approved.
STATE. For taxable years ending before December 31, 1995, the Company is
subject to a variable rate California franchise tax, computed under a formula
which results in a rate higher than the rate applicable to nonfinancial
corporations because it reflects an amount "in lieu" of local personal property
and business license taxes paid by such corporations (but not generally paid by
banks or financial corporations such as the Company). The variable tax rate for
the taxable year 1994 was 11.47% and for taxable years ending in 1995 (but
before December 31, 1995) is approximately 11.48%. For taxable years ending on
or after December 31, 1995, the California franchise tax on financial
corporations, such as the Company, will be equal to the franchise tax rate on
non-financial corporations plus 2%. The Company and its subsidiaries file
California franchise tax returns on a combined reporting basis.
13
<PAGE>
The Company's tax returns have been audited by the California Franchise Tax
Board through September 30, 1988. For the tax years September 30, 1983 and
September 30, 1985 through September 30, 1988, the Franchise Tax Board has
raised issues which are being protested by the Company. The Company does not
expect any additional liability resulting from these issues.
REGULATION AND SUPERVISION
GENERAL
The Company is a savings and loan holding company subject to regulation by
the OTS. The Bank is a federally-chartered savings bank, a member of the
Federal Home Loan Bank of San Francisco, and is subject to regulation by the OTS
and the FDIC. The Bank's deposits are insured by the FDIC through the Savings
Association Insurance Fund ("SAIF"). As described in more detail below,
statutes and regulations applicable to the Company govern such matters as
changes of control of the Company and transactions between the Bank and the
Company. Statutes and regulations applicable to the Bank govern such matters as
the amount of capital the Bank must hold, dividends payable by the Bank, mergers
and changes of control, establishment and closing of branch offices, and the
investments and activities in which the Bank can engage.
The Company and the Bank are subject to the examination, supervision and
reporting requirements of the OTS, their primary federal regulator. The
Director of the OTS imposes assessments on the Bank to fund OTS operations,
including the cost of examinations. The FDIC may also examine the Bank
separately from the OTS, and the FDIC has "back-up" authority to take
enforcement action against the Bank if the OTS fails to take such action after a
recommendation by the FDIC. The FDIC may impose assessments on the Bank to
cover the cost of FDIC examinations, but currently covers such costs using other
resources. The Bank must undergo at least one full scope, on-site examination
by the OTS or FDIC every twelve months. Beginning in 1996, the FDIC will no
longer be able to conduct separate examinations of the Bank except in exigent
circumstances. In addition to being subject to supervision by the OTS and the
FDIC, the Bank is subject to regulation by the Board of Governors of the Federal
Reserve System ("FRB") with respect to certain aspects of its business.
FIRREA CAPITAL REQUIREMENTS
The OTS's capital regulations, as required by FIRREA, include three
separate minimum capital requirements -- a "tangible capital requirement," a
"leverage limit" (core capital) and a "risk-based capital requirement." These
capital standards must be no less stringent than the capital standards
applicable to national banks. The OTS also has the authority, after giving the
affected institution notice and an opportunity to respond, to establish
individual minimum capital requirements ("IMCR") for a savings institution which
are higher than the industry minimum requirements, upon a determination that an
IMCR is necessary or appropriate in light of the institution's particular
circumstances.
The industry minimum capital requirements are as follows:
TANGIBLE CAPITAL OF AT LEAST 1.5% OF ADJUSTED TOTAL ASSETS. Tangible
capital is composed of (1) an institution's common stock, perpetual non-
cumulative preferred stock, and related earnings or surplus (including
unrealized gains and losses on securities classified as available-for-sale), and
(2) the amount, if any, of equity investment by others in the institution's
subsidiaries, after deducting (a) the institution's investments in and
extensions of credit to subsidiaries engaged as principal in activities not
permissible for national banks, net of any reserves established against such
investments, and subject to a phase-out rather than a deduction for the amount
of investments made or committed to be made prior to April 12, 1989, (b)
intangible assets other than purchased mortgage servicing rights, and (c) any
purchased mortgage servicing rights that exceed 50% of the institution's core
capital. Deferred tax assets whose realization depends on the institution's
future taxable income or on the institution's tax planning strategies must also
be deducted from tangible capital to the extent that such assets exceed the
lesser of (1) 10% of core capital, or (2) the amount of such assets that can be
realized within one year, unless such assets were reportable as of December 31,
1992, in which case no deduction is required.
14
<PAGE>
In general, adjusted total assets equal the institution's consolidated
total assets, minus any assets that are deducted in calculating the amount of
capital.
CORE CAPITAL OF AT LEAST 3% OF ADJUSTED TOTAL ASSETS. Core capital
consists of tangible capital plus (1) purchased credit card relationships, as
long as they do not exceed 25% of core capital and, when aggregated with
purchased mortgage servicing rights, do not exceed 50% of core capital; and (2)
any core deposit premium in existence on March 4, 1994 whose inclusion in core
capital is grandfathered by the OTS. At June 30, 1995, the Bank had no core
deposit premium on its balance sheet.
TOTAL CAPITAL OF AT LEAST 8% OF RISK-WEIGHTED ASSETS. Total capital
includes both core capital and "supplementary" capital items deemed less
permanent than core capital, such as subordinated debt and general loan loss
allowances (subject to certain limits). However, equity investments (with the
exception of investments in subsidiaries and investments permissible for
national banks) and portions of certain high-risk land loans and nonresidential
construction loans must be deducted from total capital. At least half of total
capital must consist of core capital.
Risk-weighted assets are determined by multiplying each category of an
institution's assets, including off balance sheet asset equivalents, by an
assigned risk weight based on the credit risk associated with those assets, and
adding the resulting sums. The four risk weight categories range from zero
percent for cash and government securities to 100% for assets (including past-
due loans and Real Estate Owned) that do not qualify for preferential risk-
weighting.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") required the OTS and the federal bank regulatory agencies to revise
their risk-based capital standards to ensure that those standards take adequate
account of interest-rate risk, concentration of credit risk, and risks of
nontraditional activities. The OTS has implemented a final regulation that
requires a deduction from total capital by any savings institution that is
projected to experience a two percent decline in net portfolio value in the
event interest rates were to increase or decrease immediately by two percentage
points. Net portfolio value is defined as the net present value of the expected
cash flows from the institution's assets, liabilities and off balance sheet
contracts. The amount of the deduction from the total capital would be one-half
of the amount by which the decline in net portfolio value exceeds two percent of
the present value of the institution's assets.
As of August 23, 1995, an institution whose prompt corrective action
category is reduced by the application of the OTS' interest rate risk component
may request an adjustment to its capital requirement if it is able to
demonstrate that the accuracy of the OTS' estimate of interest rate risk
exposure can be materially improved through the use of more refined data or more
appropriate assumptions tailored to the specific institution. Additionally,
well-capitalized institutions may request to use their own internal interest
rate risk model in place of the OTS model in calculating its interest rate risk
capital requirements. The internal model must meet certain OTS standards,
including reasonable assumptions about future interest rates, prepayment rates
for assets and attrition rates for liabilities.
As of August 31, 1995, the amount of risk-based capital that may be
required to be maintained by the institution for recourse assets cannot be
greater than the total of the recourse liability. Thus, whenever the above
method of calculating risk-based assets including assets sold with recourse
would result in a capital charge greater than the institution's maximum recourse
liability, the institution's risk-based capital requirement will be increased by
the institution's maximum recourse liability. Moreover, qualified savings
associations may include in their risk-weighted assets, for the purpose of
capital standards and other capital measures, only the amount of retained
recourse of small business obligation transfers multiplied by the appropriate
risk weight percentage. The regulation sets reserve requirements and aggregate
limits for recourse held under the modified treatment. Only well-capitalized
institutions and adequately capitalized institutions with OTS permission may use
this reduced capital treatment.
15
<PAGE>
At June 30, 1995, the Bank had a tangible capital ratio of 5.02%, a
leverage (core) capital ratio of 5.02%, and a risk-based capital ratio of 7.52%.
Accordingly, the Bank did not meet the industry minimum capital requirements,
which require a risk-based capital ratio of 8%. As a result, the Bank is
subject to a number of sanctions similar to but less restrictive than the
sanctions under the Prompt Corrective Action system, described below, and to a
requirement that the OTS be notified of any changes in the Bank's directors or
senior executive officers.
FDICIA PROMPT CORRECTIVE ACTION REQUIREMENTS
FDICIA required 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
established 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 5.0%, and it is not
subject to any order or directive by the 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. Under the OTS
regulations, 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%.
An institution's capital category is based on its capital levels as of the
most recent of the following dates: (1) the date the institution's most recent
quarterly Thrift Financial Report ("TFR") was required to be filed with the OTS;
(2) the date the institution received from the OTS its most recent final report
of examination; or (3) the date the institution received written notice from the
OTS of the institution's capital category. If subsequent to the most recent TFR
or report of examination a material event has occurred that would cause the
institution to be placed in a lower capital category, the institution must
provide written notice to the OTS within 15 days of such event, and the OTS
shall determine whether to change the association's capital category. As a
result of the Bank's TFR for the quarter ended June 30, 1995, which was required
to be filed on August 1, 1995, the Bank is considered to be undercapitalized as
of August 1, 1995, 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. In
addition, the OTS may approve a capital restoration plan only if the
institution's performance under the plan is guaranteed by every company that
controls the institution, up to the lesser of (a) 5% of the institution's total
assets at the time the institution became undercapitalized, or (b) the amount
necessary to bring the institution into compliance with all capital standards as
of the time the institution fails to comply with its capital restoration
16
<PAGE>
plan. Such guarantee must remain in effect until the institution has been
adequately capitalized for four consecutive quarters, and the controlling
company must provide the OTS with appropriate assurances of its ability to
perform the guarantee.
The OTS is requiring the Bank to report monthly regarding its financial
condition, financial projections and the current status of its remaining assets.
To date, the OTS has not required the filing of a capital restoration plan by
the Bank despite its "undercapitalized" status.
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
any 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 OTS after consultation with the FDIC.
Undercapitalized institutions also may not pay management fees to any company or
person that controls the institution.
BROKERED DEPOSITS AND BENEFIT PLAN DEPOSITS. An undercapitalized savings
institution cannot accept, renew, or rollover deposits obtained through a
deposit broker, and may not solicit deposits by offering interest rates that are
more than 75 basis points higher than market rates. Savings institutions that
are adequately capitalized but not well capitalized must obtain a waiver from
the FDIC in order to accept, renew, or rollover brokered deposits, and even if a
waiver is granted may not solicit deposits, through a broker or otherwise, by
offering interest rates that exceed market rates by more than 75 basis points.
Institutions that are ineligible to accept brokered deposits can only offer
FDIC insurance coverage for employee benefit plan deposits up to $100,000 per
plan, rather than $100,000 per plan participant, unless, at the time such
deposits are accepted, the institution meets all applicable capital standards
and certifies to the benefit plan depositor that its deposits are eligible for
coverage on a per-participant basis.
RESTRICTIONS ON SIGNIFICANTLY AND CRITICALLY UNDERCAPITALIZED INSTITUTIONS.
In addition to the above mandatory restrictions which apply to all
undercapitalized savings institutions, institutions that are significantly
undercapitalized may not without the OTS's prior approval (a) pay a bonus to any
senior executive officer, or (b) increase any senior executive officer's
compensation over the average rate of compensation (excluding bonuses, options
and profit-sharing) during the 12 months preceding the month in which the
institution became undercapitalized. The same restriction applies to
undercapitalized institutions that fail to submit or implement an acceptable
capital restoration plan.
If a savings institution is critically undercapitalized, the institution is
also prohibited from making payments of principal or interest on subordinated
debt beginning sixty days after the institution becomes critically
undercapitalized, unless the FDIC permits such payments or the subordinated debt
was outstanding on July 15, 1991 and has not subsequently been extended or
renegotiated. In addition, the institution cannot without prior FDIC approval
(a) enter into any material transaction outside the ordinary course of business,
(b) extend credit for any highly leveraged transaction, (c) amend its charter or
bylaws, (d) make any material change in accounting methods, (e) make any loan to
an affiliate, purchase the assets of an affiliate, or issue a guarantee or
letter of credit for the benefit of an affiliate, (f) pay excessive compensation
or bonuses, or (g) pay interest on its liabilities (including deposits) at a
rate that would increase the institution's average cost of funds to a rate
significantly exceeding the prevailing rates of interest.
Critically undercapitalized savings institutions must be placed in
receivership or conservatorship within 90 days of becoming critically
undercapitalized unless the OTS, with the concurrence of the FDIC, determines
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that some other action would better resolve the problems of the institution at
the least possible long-term loss to the insurance fund, and documents the
reasons for its determination. A determination by the OTS not to place a
critically undercapitalized institution in conservatorship or receivership must
be reviewed every 90 days and the OTS must either make a new determination or
appoint a conservator or receiver. If the institution remains critically
undercapitalized on average during the calendar quarter beginning 270 days after
it became critically undercapitalized, the OTS must appoint a receiver unless
(a) the OTS determines, with the concurrence of the FDIC, that the institution
(i) has positive net worth, (ii) has been in substantial compliance with an
approved capital restoration plan requiring consistent improvement in the
institution's capital, (iii) the institution is profitable or has an upward
trend in earnings which the OTS determines is sustainable, and (iv) the
institution is reducing its ratio of nonperforming loans to total loans, and (b)
the Director of the OTS and the Chairperson of the FDIC both certify that the
institution is viable and not expected to fail.
DISCRETIONARY SANCTIONS TIED TO PROMPT CORRECTIVE ACTION CAPITAL
CATEGORIES. OPERATING RESTRICTIONS. With respect to an undercapitalized
institution, the OTS, if it deems such actions necessary to resolve the
institution's problems at the least possible loss to the insurance fund, has the
explicit authority to:
(a) order the institution to recapitalize by selling shares of capital
stock or other securities,
(b) order the institution to agree to be acquired by another depository
institution holding company or combine with another depository institution,
(c) restrict transactions with affiliates,
(d) restrict the interest rates paid by the institution on new deposits to
the prevailing rates of interest in the region where the institution is located,
(e) require reduction of the institution's assets,
(f) restrict any activities that the OTS determines pose excessive risk to
the institution,
(g) order a new election of directors,
(h) order the institution to dismiss any director or senior executive
officer who held office for more than 180 days before the institution became
undercapitalized, subject to the director's or officer's right to obtain
administrative review of the dismissal,
(i) order the institution to employ qualified senior executive officers
subject to the OTS's approval,
(j) prohibit the acceptance of deposits from correspondent depository
institutions,
(k) require the institution to divest any subsidiary or the institution's
holding company to divest the institution or any other subsidiary, or
(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 also
may 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.
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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,
described above, 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.
EXPANDED REGULATORY AUTHORITY UNDER FDICIA
In addition to the prompt corrective action provisions discussed above
based on an institution's regulatory capital ratios, FDICIA contains several
measures intended to promote early identification of management problems at
depository institutions and to ensure that regulators intervene promptly to
require corrective action by institutions with inadequate operational and
managerial standards.
MINIMUM ACCEPTABLE STANDARDS. FDICIA required the OTS to prescribe minimum
acceptable operational and managerial standards, and standards for asset
quality, earnings, and valuation of publicly-traded shares, for depository
institutions. Such standards were to be effective no later than December 1,
1993, but were finalized only as of July 10, 1995. The standards were
implemented as Guidelines Establishing Standards for Safety and Soundness,
rather than as regulations. The Safety and Soundness Guidelines cover internal
controls, loan documentation, credit underwriting, interest rate exposure, asset
growth, and employee compensation.
Any institution that fails to meet any regulations promulgated under the
FDICIA requirement must submit a plan for corrective action within 30 days. Any
institution that fails to meet any of the Guidelines may be required to submit
such a plan of compliance. If a savings institution fails to submit or
implement an acceptable plan as required or requested, the OTS must order it to
correct the safety and soundness deficiency, and may restrict its rate of asset
growth, prohibit asset growth entirely, require the institution to increase its
ratio of tangible equity to assets, restrict the interest rate paid on deposits
to the prevailing rates of interest on deposits comparable amounts and
maturities, or require the institution to take any other action that the OTS
determines will better carry out the purpose of prompt corrective action.
Imposition of these sanctions is within the discretion of the OTS in most cases
but is mandatory if the savings institution commenced operations or experienced
a change in control during the 24 months preceding the institution's failure to
meet the safety and soundness standards, or underwent extraordinary growth
during the preceding 18 months.
The Guidelines require institutions to closely monitor regulatory
compliance and establish procedures to ensure effective risk assessment and
asset management. These internal controls and information systems must be
reviewed by independent, qualified and objective persons and institutions must
document the audits and actions taken to correct deficiencies. Also, the
auditors must, themselves, be reviewed by the institution's board of directors
or audit committee. The proposal also requires that loan documentation and
credit underwriting procedures enable the institution to make informed decisions
on risk, monitor loans, borrowers and the source of payments, and ensure the
legality of loans as well as the enforceability of claims against a borrower.
They must also take account of credit and interest rate risk and engage only in
transactions appropriate to the size of the institution and the nature and scope
of its activities. Asset growth must reflect consideration of the source of
funds that support growth as well as the effect of the growth on credit risk,
interest rate risk and the institution's capital. The proposed regulation also
requires that institutions make no payments of compensation, fees or benefits
that are excessive or could lead to material financial loss.
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The Company requested a waiver for fiscal 1995 from the FDIC and the OTS
regarding the filing of the annual report under Part 363 of FDICIA due to the
drastic reduction in the Company's asset base causing the Company to fall below
the regulatory guideline requirements. The Company received notification from
the FDIC that both the FDIC and the OTS saw no compelling safety and soundness
reason for recommending action against Union Federal Bank if it does not file
the annual report required under Part 363 of FDICIA.
ACTIVITIES RESTRICTIONS NOT RELATED TO CAPITAL COMPLIANCE
QUALIFIED THRIFT LENDER TEST. The qualified thrift lender ("QTL") test
requires that, in at least nine out of every twelve months, at least 65% of a
savings bank's "portfolio assets" must be invested in a limited list of
qualified thrift investments, primarily investments related to housing loans.
If the Bank fails to satisfy the QTL test and does not requalify as a QTL within
one year, the Company must register and be regulated as a bank holding company,
and the Bank must either convert to a commercial bank charter or become subject
to restrictions on branching, business activities and dividends as if it were a
national bank. At June 30, 1995, the Bank had no such qualifying assets as a
result of the Asset Sales and the Glendale Federal transaction. The Bank
expects to be out of compliance with the QTL test as of September 30, 1995.
Portfolio assets consist of tangible assets minus (a) assets used to
satisfy liquidity requirements, and (b) property used by the institution to
conduct its business. Assets that may be counted as qualified thrift
investments without limit include residential mortgage and construction loans;
home improvement and repair loans; mortgage-backed securities; home equity
loans; Federal Savings and Loan Insurance Corporation ("FSLIC") Resolution
Funding Corporation, FDIC and RTC obligations; and Federal Home Loan Bank
("FHLB") stock.
Assets includible subject to an aggregate maximum of 20% of portfolio
assets include FNMA and FHLMC stock; investments in residential housing-oriented
subsidiaries; consumer and education loans up to a maximum of 10% of portfolio
assets; 200% of loans for development of low-income housing; 200% of certain
community development loans; loans to construct, purchase or maintain churches,
schools, nursing homes and hospitals; and 50% of any residential mortgage loans
originated by the institution and sold during the month for which the QTL
calculation is made, if such loans were sold within 90 days of origination.
INVESTMENTS AND LOANS. In general, federal savings associations such as
the Bank may not invest directly in equity securities, debt securities that are
not rated investment grade, or real estate, other than real estate used for the
institution's offices and related facilities. Indirect equity investment in
real estate through a subsidiary is permissible, but subject to limitations
based on the amount of the institution's assets, and the institution's
investment in such a subsidiary must be deducted from regulatory capital in full
or (for certain subsidiaries owned by the institution prior to April 12, 1989)
phased out of capital by no later than July 1, 1996. Loans to a single borrower
are generally limited to 15% of the institution's "unimpaired capital and
surplus," which is similar, but not identical to total capital. Aggregate loans
secured by nonresidential real property are generally limited to 400% of the
institution's total capital.
ACTIVITIES OF SUBSIDIARIES. A savings institution seeking to establish a
new subsidiary, acquire control of an existing company or conduct a new activity
through an existing subsidiary must provide 30 days prior notice to the FDIC and
OTS. A subsidiary of the Bank can engage in activities that are not permissible
for the Bank directly, if the OTS determines that such activities are reasonably
related to the Bank's business, but the Bank may be required to deduct its
investment in such a subsidiary from capital. The OTS has the power to require
a savings institution to divest any subsidiary or terminate any activity
conducted by a subsidiary that the OTS determines to be a serious threat to the
financial safety, soundness or stability of such savings institution or to be
otherwise inconsistent with sound banking practices.
REAL ESTATE LENDING STANDARDS. The OTS and the other federal banking
agencies have adopted regulations which require institutions to adopt and at
least annually review written real estate lending policies. The lending
policies must include diversification standards, underwriting standards
(including loan-to-value limits), loan administration procedures, and procedures
for monitoring compliance with the policies. The policies
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must reflect consideration of guidelines adopted by the banking agencies. Among
the guidelines adopted by the agencies are maximum loan-to-value ratios for land
loans (65%); development loans (75%); construction loans (80%-85%); loans on
owner-occupied 1-4 family property, including home equity loans (no limit, but
loans at or above 90% require private mortgage insurance); and loans on other
improved property (85%).
The guidelines permit institutions to make loans in excess of the
supervisory loan-to-value limits if such loans are supported by other credit
factors, but the aggregate of such nonconforming loans should not exceed the
institution's total capital, and the aggregate of nonconforming loans secured by
real estate other than 1-4 family property should not exceed 30% of total
capital.
DEPOSIT INSURANCE
GENERAL. The Bank's deposits are insured by the FDIC to a maximum of
$100,000 for each insured depositor. Under the Financial Institutions Reform,
Recovery and Enforcement Act of 1989 ("FIRREA"), the FDIC administers two
separate deposit insurance funds: The Bank Insurance Fund (the "BIF") which
insures the deposits of institutions that were insured by the FDIC prior to
FIRREA, and the SAIF which maintains a fund to insure the deposits of
institutions, such as the Bank, that were insured by the FSLIC prior to FIRREA.
INSURANCE PREMIUM ASSESSMENTS. FDICIA requires the FDIC to implement a
risk-based assessment system, under which an institution's assessment will be
based on the probability that the deposit insurance fund will incur a loss with
respect to the institution, the likely amount of any such loss, and the revenue
needs of the deposit insurance fund. The average assessment rate under the
risk-based system may not be less than 0.18% of deposits until January 1, 1997.
The FDIC may impose higher assessments as it deems appropriate based on the
reserves of the SAIF. The FDIC has adopted a regulation that implements the
risk-based assessment system that became effective January 1, 1993.
Under the risk-based assessment system, a SAIF-insured savings institution
will be categorized into one of three capital categories (well capitalized,
adequately capitalized, and undercapitalized) and one of three categories based
on supervisory evaluations by the OTS (financially sound with only a few minor
weaknesses (Group A), demonstrates weaknesses that could result in significant
deterioration (Group B), and poses a substantial probability of loss to the SAIF
(Group C)). The capital ratios used by the FDIC to define well-capitalized,
adequately capitalized, and undercapitalized are the same as in the prompt
corrective action regulation. Assessments are set at the following percentages
of deposits:
Group A Group B Group C
------- ------- -------
Well
Capitalized 23 26 29
Adequately
Capitalized 26 29 30
Undercapitalized 29 30 31
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The same schedule also applied to BIF member institutions until the BIF
reached its designated reserve ratio of 1.25% on May 31, 1995. Once the BIF
reached its designated reserve ratio, a second BIF assessment rate schedule
became applicable. The new schedule became effective on June 1, 1995. The
assessment rate for BIF deposits is set at the following percentages of
deposits:
Group A Group B Group C
------- ------- -------
Well
Capitalized 4 7 21
Adequately
Capitalized 7 14 28
Undercapitalized 14 28 31
Under current law, the SAIF has three major obligations: to fund losses
associated with the failure of institutions with SAIF-insured deposits; to
increase its reserves to 1.25% of insured deposits over a reasonable period of
time; and to make interest payments on debt incurred to provide funds to the
former FSLIC ("FICO debt").
The SAIF has not yet reached its designated reserve ratio of 1.25% and it
is not anticipated that the SAIF will be fully recapitalized without assistance
before 2002. One reason that the BIF was able to be recapitalized well before
the SAIF is that the BIF does not have an obligation to pay interest on the FICO
debt.
As a result of the reduction of the BIF deposit assessment rate, savings
associations will be subject to significantly higher assessment rates for an
extended period of time, which may adversely affect their ability to compete
with BIF insured institutions. However, legislative measures that would address
the assessment rate disparity are currently being considered by the United
States Congress. Among such measures being considered is a one time charge on
savings associations to recapitalize the SAIF. Such an assessment could have an
adverse affect on a savings association's earnings and capital in the year such
an assessment is paid. Another measure under consideration would eliminate the
savings association charter entirely and convert all federal savings
associations, such as the Bank, to national banks.
TERMINATION OF DEPOSIT INSURANCE. The FDIC may initiate a proceeding to
terminate an institution's deposit insurance if, among other things, the
institution is in an unsafe or unsound condition to continue operations. It is
the policy of the FDIC to deem an insured institution to be in an unsafe or
unsound condition if its ratio of Tier 1 capital to total assets is less than
2%. Tier 1 capital is similar to core capital but includes certain investments
in and extensions of credit to subsidiaries engaged in activities not permitted
for national banks.
ENFORCEMENT
FIRREA's enforcement provisions are applicable to all depository
institutions, not just savings institutions. FIRREA introduces the new term
"institution-affiliated party" to encompass those who are subject to agency
enforcement authority. The term includes: (i) directors, officers, employees,
agents, and controlling stockholders; (ii) persons required to file a change-in-
control notice; (iii) any person who participates in the affairs of the savings
institution (including shareholders, consultants, and joint venture partners);
and (iv) independent contractors (including attorneys, appraisers, and
accountants) who knowingly or recklessly cause or participate in a violation,
breach of duty or unsafe practice likely to cause a loss to the institution.
FIRREA authorized significantly increased penalties for violations of
regulations or cease-and-desist orders. The requirements for the issuance of
such orders are eased, and the agencies are specifically authorized to
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order institution-affiliated parties to take affirmative action such as
restitution to remedy losses experienced by a depository institution as a result
of the parties' participation in violations of law, breaches of duty or unsafe
or unsound practices.
A new three-tier system of penalties against institutions and their
institution-affiliated parties applies to violations of laws, regulations,
orders and written agreements with regulators. Simple violations may result in
a maximum daily penalty of $5,000, while violations, breaches of duty, or
reckless practices that are part of a pattern or are likely to cause more than
minimal loss (or result in gain to the wrongdoer) are subject to a $25,000 daily
penalty. Knowing violations, practices or breaches that cause a substantial
loss to the institution or substantial gain to the wrongdoer are subject to a
$1,000,000 daily penalty for an institution-affiliated party or the lesser of
$1,000,000 or 1% of total assets per day for an institution.
Subsequent to the enactment of FIRREA, the Crime Control Act of 1990
supplemented the agencies' power to seek civil money penalties or cease-and-
desist orders requiring restitution by giving the agencies the ability to seek
prejudgment attachment of the assets of institution-affiliated parties. The
Crime Control Act also expanded agency investigative powers and created the
crime of "corruptly obstructing" an examination.
Even when a savings institution is in full compliance with capital and
other requirements, the OTS has adopted a policy of intervening with regulatory
enforcement actions to correct deficiencies perceived by the OTS before they
result in significant problems or threaten the viability or safety and soundness
of the institution. Among the enforcement actions which the OTS is prepared to
take in such situations are supervisory agreements, cease and desist orders and
capital directives.
SAVINGS AND LOAN HOLDING COMPANY REGULATION
AFFILIATE AND INSIDER TRANSACTIONS. The ability of the Company and its
non-depository subsidiaries to deal with the Bank is limited by the affiliate
transaction rules, including Sections 23A and 23B of the Federal Reserve Act
which also govern BIF-insured banks. With very limited exceptions, these rules
require that all transactions between the Bank and an affiliate (which term
generally does not include the Bank's subsidiaries) be on arms' length terms.
Under Section 23A specific restrictions apply to transactions in which the
Bank provides funding to its affiliates: the Bank may not purchase the
securities of an affiliate, make a loan to any affiliate that is engaged in
activities not permissible for a bank holding company, or acquire from an
affiliate any asset that has been classified, is in nonaccrual status, has been
restructured, or is more than 30 days past due. As to affiliates engaged in
bank holding company-permissible activities, the aggregate of (a) loans,
guarantees, and letters of credit provided by the savings bank for the benefit
of any one affiliate, and (b) purchases of assets by the savings bank from the
affiliate, may not exceed 10% of the savings bank's capital (20% for the
aggregate of permissible transactions with all affiliates). All loans to
affiliates must be secured by collateral equal to at least 100% of the amount of
the loan (130% if the collateral consists of equity securities, leases or real
property).
On July 25, 1991, the OTS published a final regulation on affiliate
transactions that, among other things, requires savings institutions to retain
records of their affiliate transactions that reflect such transactions in
reasonable detail. In addition, if a savings institution has been the subject
of a change of control application or notice within the preceding two-year
period, does not meet its minimum capital requirements, has entered into a
supervisory agreement, is subject to a formal enforcement proceeding, or is
determined by the OTS to be the subject of supervisory concern, the institution
may be required to provide the OTS with 30 days prior notice of any affiliate
transaction.
Loans by the Bank to directors, executive officers, and individual 10%
shareholders of the Bank, the Company, or the Company's subsidiaries
(collectively, "insiders"), are subject to separate limits on loans to insiders
and their related interests. A related interest includes a corporation or
partnership that is at least 10% owned by an insider. All loans to insiders and
their related interests must be underwritten and made on non-
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preferential terms, loans in excess of $500,000 must be approved in advance by
the Bank's Board of Directors, and the Bank's total of such loans may not exceed
100% of the Bank's capital. Loans by the Bank to its executive officers are
subject to even more stringent limits.
PAYMENT OF DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS. The payment of
dividends, stock repurchases, and other capital distributions by the Bank to the
Company is subject to regulation by the OTS. Currently, 30 days prior notice to
the OTS of any capital distribution is required. The OTS has promulgated a
regulation that measures a savings institution's ability to make a capital
distribution according to the institution's capital position.
The rule establishes "safe-harbor" amounts of capital distributions that
institutions can make after providing notice to the OTS, but without needing
prior approval. Institutions can distribute amounts in excess of the safe
harbor only with the prior approval of the OTS. Savings institutions that are
undercapitalized, such as the Bank, have no "safe harbor" and may not make any
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 OTS after consultation with the FDIC. Undercapitalized institutions also
may not pay management fees to any company or person that controls the
institution.
ENFORCEMENT. Whenever the OTS has reasonable cause to believe that the
continuation by a savings and loan holding company of any activity or of
ownership or control of any non FDIC-insured subsidiary constitutes a serious
risk to the financial safety, soundness, or stability of a savings and loan
holding company's subsidiary savings association and is inconsistent with the
sound operation of the savings association, the OTS may order the holding
company, after notice and opportunity for a hearing, to terminate such
activities or to divest such noninsured subsidiary. FIRREA also empowers the
OTS, in such a situation, to issue a directive without any notice or opportunity
for a hearing, which directive may (i) limit the payment of dividends by the
savings association, (ii) limit transactions between the savings association and
its holding company or its affiliates, and (iii) limit any activity of the
association that creates a serious risk that the liabilities of the holding
company and its affiliates may be imposed on the savings association.
In addition, FIRREA includes savings and loan holding companies within the
category of person designated as "institution-affiliated parties." An
institution-affiliated party may be subject to significant penalties and/or loss
of voting rights in the event such party took any action for or toward causing,
bringing about, participating in, counseling, or aiding and abetting a violation
of law or unsafe or unsound practice by a savings association.
LIMITS ON CHANGE OF CONTROL. Subject to certain limited exceptions,
control of the Bank or the Company may only be obtained with the approval (or in
the case of an acquisition of control by an individual, the nondisapproval) of
the OTS, after a public comment and application review process. Under OTS
regulations defining "control," a rebuttable presumption of control arises if an
acquiring party acquires more than 10% of any class of voting stock of the Bank
or the Company (or more than 25% of any class of stock, whether voting or non-
voting) and is subject to any "control factors" as defined in the regulation.
Control is conclusively deemed to exist if an acquirer holds more than 25% of
any class of voting stock of the Bank or the Company, or has the power to
control in any manner the election of a majority of directors.
Any company acquiring control of the Bank or the Company becomes a savings
and loan holding company, must register and file periodic reports with the OTS,
and is subject to OTS examination. With limited exceptions, a savings and loan
holding company such as the Company may not directly or indirectly acquire more
than 5% of the voting stock of another savings and loan holding company or
savings institution unless it acquires control of such company or institution,
after obtaining prior OTS approval.
NOTIFICATION OF NEW OFFICERS AND DIRECTORS. A savings and loan holding
company that has undergone a change in control in the preceding two years, is
subject to a supervisory agreement with the OTS, or is deemed to be in "troubled
condition" by the OTS, must give the OTS 30 days' notice of any change to its
Board of Directors
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or its senior executive officers. The OTS must disapprove such change if the
competence, experience or integrity of the affected individual indicates that it
would not be in the best interests of the public to permit his appointment.
CLASSIFICATION OF ASSETS
Savings institutions are required to classify their assets on a regular
basis, to establish appropriate allowances for losses and report the results of
such classification quarterly to the OTS. A savings institution is also
required to set aside adequate valuation allowances to the extent that an
affiliate possesses assets posing a risk to the institution, and to establish
liabilities for off-balance sheet items, such as letters of credit, when loss
becomes probable and estimable. The OTS has the authority to review the
institution's classification of its assets and to determine whether and to what
extent (a) additional assets must be classified, and (b) the institution's
valuation allowances must be increased.
Troubled assets are classified into one of three categories as follows:
SUBSTANDARD ASSETS. Prudent general valuation allowances ("GVAs") are
required to be established for such assets.
DOUBTFUL ASSETS. Prudent GVAs are required to be established for such
assets.
LOSS ASSETS. 100% of the amount classified as loss must be charged
off, or a specific allowance of 100% of the amount classified as loss must be
established. The OTS has proposed a regulation that would require the use of
charge-offs rather than specific allowances for all amounts classified loss, but
has postponed action on its proposal.
In addition to classified assets, the Bank monitors Special Mention assets
which have been identified to include potential weaknesses that deserve
management's close attention. According to OTS guidelines, Special Mention
assets are those assets having a potential weakness or financial risk that, if
not corrected, could weaken the assets and increase the risk of financial loss
in the future.
The OTS in recent years issued Regulatory Bulletins 31 and 32 (RB31 and
RB32) which set criteria for determining, valuing and classifying troubled
collateral-dependent loans. RB31 defines a troubled collateral-dependent loan
as a loan in which proceeds for repayment can be expected to come only from the
operation and sale of the collateral.
RB32 then requires all troubled collateral-dependent loans to be carried at
the fair value of the collateral.
GVAs for loan and lease losses are included within regulatory capital for
certain purposes and up to certain limits, while specific allowances and GVAs
held against assets other than loans and leases are not included at all.
The OTS and the other federal banking agencies have adopted a statement of
policy regarding the appropriate levels of GVAs for loan and lease losses that
institutions should maintain. Under the policy statement, examiners will
generally accept management's evaluation of the adequacy of GVAs if the
institution has maintained effective systems and controls for identifying and
addressing asset quality problems, analyzed in a reasonable manner all
significant factors that affect the collectibility of the portfolio, and
established an acceptable process for evaluating the adequacy of GVAs. However,
the policy statement also provides that OTS examiners will review management's
analysis more closely if GVAs for loan and lease losses do not equal at least
the sum of (a) 15% of assets classified as substandard, (b) 50% of asset
classified as doubtful, and (c) for the portfolio of unclassified loans and
leases, an estimate of credit losses over the following twelve months based on
the institution's average rate of net charge-offs over the previous two or three
years on similar loans, adjusted for
25
<PAGE>
current trends and conditions. The Company does not anticipate that the GVA
policy statement will have a material impact on the Bank's results of operations
or financial condition.
COMMUNITY REINVESTMENT ACT
The Community Reinvestment Act ("CRA") requires each savings institution,
as well as other lenders, to identify the communities served by the
institution's offices and to identify the types of credit the institution is
prepared to extend within such communities. The CRA also requires the OTS to
assess the performance of the institution in meeting the credit needs of its
community and to take such assessment into consideration in reviewing
applications for mergers, acquisitions, and other transactions. An
unsatisfactory CRA rating may be the basis for denying such an application.
In connection with its assessment of CRA performance, the OTS assigns a
rating of "outstanding," "satisfactory," "needs to improve," or "substantial
noncompliance." Based on an examination conducted during March 1995, the Bank
was rated satisfactory.
The OTS and the other federal banking agencies adopted substantive
amendments to their CRA regulations on May 4, 1995, effective July 1, 1995.
Evaluation under the amended regulations becomes mandatory on July 1, 1997,
while related data collection and reporting requirements are effective on
January 1, 1996 and January 1, 1997, respectively. The regulations replace the
current assessment system, which is based on the adequacy of the processes that
an institution has established to comply with the CRA, with a new system based
on the institution's performance in making loans and investments and maintaining
branches in low- and moderate-income areas within the communities that it
serves.
Further changes to the CRA rules are contemplated in the "Financial
Institutions and Regulatory Relief Act of 1995," which has not yet been passed
into law. The Regulatory Relief Act would increase consumer input into CRA
exams, make CRA an element of safety and soundness evaluation, provide CRA
exemptions and relaxed procedures for smaller institutions, reduce the data
collection requirements contained in the recently amended CRA regulations, and
provide a "safe-harbor" in the applications process for merger, acquisitions and
other transactions for institutions with a "satisfactory" CRA rating on their
most recent examination.
FEDERAL HOME LOAN BANK SYSTEM
The Federal Home Loan Banks provide a credit facility for member
institutions. As a member of the FHLB of San Francisco, the Bank is required to
own capital stock in the FHLB of San Francisco in an amount at least equal to
the greater of 1% of the aggregate principal amount of its unpaid home loans,
home purchase contracts and similar obligations at the end of each calendar
year, assuming for such purposes that at least 30% of its assets were home
mortgage loans, or 5% of its advances from the FHLB of San Francisco. At
June 30, 1995 the Bank was in compliance with this requirement with an
investment in the stock of the FHLB of San Francisco of $100 thousand. Long-
term FHLB advances may be obtained only for the purpose of providing funds for
residential housing finance and all FHLB advances must be secured by specific
types of collateral.
REQUIRED LIQUIDITY
OTS regulations require savings institutions to maintain, for each calendar
month, an average daily balance of liquid assets (including cash, certain time
deposits, bankers' acceptances and specified United States government, state and
federal agency obligations) equal to at least 5% of the average daily balance of
its net withdrawable accounts plus short-term borrowings during the preceding
calendar month. The OTS may change this liquidity requirement from time to time
to an amount within a range of 4% to 10% of such accounts and borrowings
depending upon economic conditions and the deposit flows of member institutions,
and may exclude from the definition of liquid assets any item other than cash
and the balances maintained in satisfaction of FRB reserve requirements,
described below.
26
<PAGE>
OTS regulations also require each member institution to maintain, for each
calendar month, an average daily balance of short-term liquid assets (generally
those having maturities of 12 months or less) equal to at least 1% of the
average daily balance of its net withdrawal accounts plus short-term borrowings
during the preceding calendar month. Monetary penalties may be imposed for
failure to meet liquidity ratio requirements. The liquidity ratio of the Bank
at June 30, 1995 was 13.17%, which exceeded the applicable requirement.
FEDERAL RESERVE SYSTEM
The FRB requires savings institutions to maintain reserves against certain
of their transaction accounts (primarily deposit accounts that may be accessed
by writing unlimited checks) and non-personal time deposits. These reserves do
not earn interest. For the calculation period including June 30, 1995, the Bank
was in compliance with this requirement. The balances maintained to meet the
reserve requirements imposed by the FRB may be used to satisfy the Bank's
liquidity requirements discussed above.
As a creditor and a financial institution, the Bank is subject to certain
regulations promulgated by the FRB, including, without limitation, Regulation B
(Equal Credit Opportunity Act), Regulation D (Reserves), Regulation E
(Electronic Funds Transfers Act), Regulation F (limits on exposure to any one
correspondent depository institution), Regulation Z (Truth in Lending Act),
Regulation CC (Expedited Funds Availability Act), and Regulation DD (Truth in
Savings Act). As creditors of loans secured by real property and as owners of
real property, financial institutions, including the Bank, may be subject to
potential liability under various statutes and regulations applicable to
property owners, generally including statutes and regulations relating to the
environmental condition of the property.
ITEM 2. PROPERTIES.
The Company leases the land and improvements for its one retail banking
office, which also serves as the Company's executive office. For additional
information regarding the Company's office and equipment and minimum future
lease payments, see Notes 7 and 15 of Notes to Consolidated Financial Statements
in Item 8 hereof. The net book value of the leased branch office totaled $242
thousand at June 30, 1995. The net book value of the Bank's furniture and
fixtures was $101 thousand at June 30, 1995.
ITEM 3. LEGAL PROCEEDINGS.
The Company is a defendant in various legal actions arising in the ordinary
course of business which are not material to the Company. At June 30, 1995, the
Company was involved in the following additional legal proceedings:
In DOYLE V. HILL AND UNION FEDERAL BANK, the plaintiff alleges the Bank and
a former loan officer conspired with the general partner of a limited
partnership of which the plaintiff was a limited partner to defraud the
plaintiff by misappropriating construction loan proceeds advanced to the
partnership by the Bank. The court recently granted summary judgment in favor
of the Bank and awarded the Bank over $500,000 in attorneys' fees payable by the
plaintiff. The plaintiff has informed counsel for the Bank that plaintiff
intends to appeal the judgment against him.
In HARBOUR PLACE CONDOMINIUMS ASSOC. V. HARBOUR PLACE DEVELOPMENT
CORPORATION, ET AL., the plaintiff condominium association alleges a series of
purported construction defects in the Harbour Place condominium project in Key
West, Florida. The project was initially developed and sold by a limited
partnership in which a subsidiary of the Bank was a limited partner and was
later completed and the remaining units sold by a subsidiary of the Bank after a
transfer of the property to such subsidiary in lieu of foreclosure. The Bank
has denied the plaintiff's claims. The Bank has tendered the plaintiff's claims
to its liability carriers, one of which has accepted the Bank's tender and is
providing defense counsel subject to a reservation of rights under the Bank's
liability policies.
27
<PAGE>
In UNION FEDERAL BANK V. BROADWAY TRADE CENTER, the Bank seeks a
declaratory judgment regarding its possessory right to two ground leases and one
ground sublease affecting the Broadway Trade Center. In addition to its
leasehold interests, the Bank and its subsidiary hold title to approximately 82%
of the property in fee simple absolute. In the litigation, the Bank seeks a
judgment that its leases are in full force and effect following the Bank's
foreclosure on such leases as security for a Bank loan made to a former owner.
The lessor of such leases alleges that such leases are in default for various
reasons, all of which the Bank contends are without merit. In addition, the
Bank is seeking a judgment that the Bank is entitled to retain as liquidated
damages the sum of $400,000 deposited with the Bank by a former owner of the
property pursuant to the terms of an agreement with such owner which the Bank
contends such owner breached. In a companion case entitled, SECURITY TRUST
COMPANY V. UNION FEDERAL BANK, the plaintiff, representing the lessor of the
three leases at issue in the BROADWAY TRADE CENTER litigation, has filed for
unlawful detainer and damages with respect to such leases based on various
alleged defaults, all of which the Bank contends are without merit. The
plantiffs have demanded unpaid rent in the amount of $2.0 million plus an
escalation factor based on the terms of the lease. There can be no assurance
that the Bank will prevail in these matters.
In UNION FEDERAL BANK V. LANDMARK INSURANCE CO., the Bank seeks to recover
insurance proceeds from the defendant with respect to fire damage to the
Broadway Trade Center property. The Bank claims that the defendant improperly
distributed approximately $4 million in insurance proceeds directly to the
Bank's borrower as owner of the property without notice to the Bank,
notwithstanding that the Bank was named as an additional loss payee on the
insurance policy. The defendant has moved for summary judgment contending that
the statute of limitations is an absolute bar to the Bank's action.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No items were submitted to a vote of security holders during the fiscal
quarter ended June 30, 1995.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth the names, ages and positions of the
executive officers of the Company. Executive officers are elected annually and
serve at the pleasure of the Board of Directors.
David S. Engelman 58 Chairman of the Board, President and Chief
Executive Officer of UnionFed and the Bank
Ronald M. Griffith 49 Senior Vice President, General Counsel and
Corporate Secretary of UnionFed and the Bank
Michelle X. Dean 33 Chief Financial Officer of UnionFed and the Bank
David S. Engelman has been the Chairman of the Board, President and Chief
Executive Officer of the Company and the Bank since April 1991. From October
1989 to March 1991, Mr. Engelman was a consultant to Portland General
Corporation, a diversified holding company, which includes ownership of Portland
General Electric Co. He was formerly a director and Chairman of the Executive
Committee of Commercial Federal Bank in Omaha, Nebraska.
Ronald M. Griffith has been the Senior Vice President, General Counsel and
Corporate Secretary of the Company and the Bank since February 1987. He was a
partner in the law firm of McKenna, Conner & Cuneo from 1983 until he joined the
Company.
Michelle X. Dean has been the Chief Financial Officer of the Company and
the Bank since August 1995. She joined the Bank in May 1990 and served in
various capacities in accounting, asset quality and loan service administration.
Prior to joining the Bank, she was a manager with KPMG Peat Marwick.
28
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's common stock has been traded on the New York Stock
Exchange ("NYSE") under the trading symbol UFF. On or before October 17,
1995, the Company's common stock will be suspended from trading on the NYSE
because the Company falls below the NYSE's continued listing criteria.
Following such suspension, the Company expects its common stock to trade over
the counter through one or more market makers. There can be no assurance
that a public trading market will continue for the Company's common stock.
At September 15, 1995, the Company had approximately 658 stockholders of
record (not including the number of persons or entities holding stock in
nominee or street name through various brokerage firms) and 27,201,993
outstanding shares of common stock. The following table sets forth for the
fiscal quarters indicated the range of high and low sale prices per share of
the common stock of UnionFed as reported on the New York Stock Exchange
Composite Tape.
<TABLE>
<CAPTION>
FISCAL 1995 FISCAL 1994
---------------------------------------- ----------------------------------------
4th 3rd 2nd 1st 4th 3rd 2nd 1st
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
-------- -------- -------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High* . . . . $0.375 $0.625 $0.625 $0.875 $1.75 $2.63 $2.25 $3.75
Low* . . . . $0.031 $0.125 $0.375 $0.250 $0.75 $1.50 $1.63 $1.50
</TABLE>
_____________
* Price per share is adjusted to give effect to the one-for-ten reverse
stock split effected on August 18, 1993.
UnionFed may pay dividends out of funds legally available therefor at
such times as the Board of Directors determines that dividend payments are
appropriate, after considering UnionFed's net income, capital requirements,
financial condition, alternate investment options, prevailing economic
conditions, industry practices and other factors deemed to be relevant at
the time. UnionFed's principal source of income currently consists of
dividends, if any, from the Bank.
UnionFed's ability to pay dividends is limited by certain
restrictions generally imposed on Delaware corporations. In general,
dividends may be paid only out of a Delaware corporation's surplus, as
defined in the Delaware General Corporation Law, or net profits for the
fiscal in which the dividend is declare and/or the preceding fiscal year.
"Surplus" is defined for this purpose as the amount by which a
corporation's net assets (total assets minus total liabilities) exceed
the amount designated by the Board of Directors of the corporation in
accordance with Delaware law as the corporation's capital. The Board of
Directors of UnionFed has designated as UnionFed's capital the amount equal
to the aggregate par value of its outstanding shares of common stock.
29
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
UNIONFED FINANCIAL CORPORATION AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL AND OPERATION DATA
<TABLE>
<CAPTION>
AT OR FOR
YEAR ENDED JUNE 30,
----------------------------------------------------------------
1995 1994 1993 1992 1991
-------- --------- ---------- ---------- ----------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
FINANCIAL CONDITION AT END OF
YEAR:
Total assets . . . . . . . . . . . . $ 37,156 $903,976 $1,161,945 $1,642,784 $2,152,756
Loans (excluding mortgage-backed
securities)(1) . . . . . . . . . . 2,244 581,384 882,133 1,036,571 1,311,342
Mortgage-backed
securities(1). . . . . . . . . . . -- 157,783 90,708 61,709 395,527
General valuation allowance
for loan losses . . . . . . . . . . -- 14,429 17,951 15,585 20,769
Investments and cash (2) . . . . . . 8,301 65,119 63,736 328,841 125,434
Total nonperforming
loans (3) . . . . . . . . . . . . . -- 22,125 18,978 53,375 66,479
REO (4). . . . . . . . . . . . . . . 24,623 39,234 54,962 85,599 89,449
Total nonperforming
assets (5). . . . . . . . . . . . . 24,623 61,359 73,940 138,974 155,928
Total restructured loans (6) . . . . -- 113,676 162,532 82,032 23,174
Total classified assets (7). . . . . 27,226 213,010 266,092 301,343 460,114
Total loans delinquent 30-89 days. . -- 15,772 13,554 43,052 85,344
Core deposit intangible. . . . . . . -- 2,533 3,233 4,892 6,072
Capitalized loan servicing
assets (8). . . . . . . . . . . . . -- 118 3,402 5,137 18,292
Deposits . . . . . . . . . . . . . . 34,170 847,957 1,022,046 1,298,367 1,565,311
Borrowed funds . . . . . . . . . . . -- 15,464 104,823 270,193 466,363
Stockholders' equity . . . . . . . . 2,001 34,685 17,042 49,126 71,254
SUMMARY OF OPERATIONS:
Total interest income. . . . . . . . 56,869 64,134 $ 91,772 $ 143,263 $ 206,677
Less: interest expense . . . . . . . 36,210 36,297 65,973 113,940 170,783
------- -------- ---------- ---------- ----------
Net interest income. . . . . . . . . 20,659 27,837 25,799 29,323 35,894
Less: provision for estimated
loan losses . . . . . . . . . . . . 14,382 14,350 18,603 6,666 25,127
------- -------- ---------- ---------- ----------
Net interest income after
provision for estimated losses. . . 6,277 13,487 7,196 22,657 10,767
------- -------- ---------- ---------- ----------
Non-interest income:
Loan servicing fees, net of
amortization. . . . . . . . . . . 737 893 230 1,012 3,892
Loan fees . . . . . . . . . . . . 320 832 1,375 1,918 1,872
(Loss)/gain on sale of loans,
mortgage-backed securities,
investments and loan
servicing. . . . . . . . . . . (16,551) (239) 7,655 11,165 2,465
Gain on sale of branches. . . . . 4,668 1,496 1,315 -- --
Other, net. . . . . . . . . . . . 2,527 2,488 3,181 4,421 1,720
------- -------- ---------- ---------- ----------
Total non-interest income. . . . . . (8,299) 5,470 13,756 18,516 9,949
------- -------- ---------- ---------- ----------
Non-interest expense:
General and administrative
expense. . . . . . . . . . . . 25,689 29,006 30,910 36,328 42,053
Real estate operations,
net(9). . . . . . . . . . . . . 6,480 15,743 27,277 33,770 66,839
Amortization of core
deposit intangible. . . . . . . 790 662 845 1,181 1,046
------- -------- ---------- ---------- ----------
Total non-interest expense . . . . . 32,959 45,411 59,032 71,279 109,938
------- -------- ---------- ---------- ----------
Loss before income taxes . . . . . . (34,981) (26,454) (38,080) (30,106) (89,222)
Income tax provision (benefit) . . . (2,297) 3 (5,996) (7,978) (24,566)
------- -------- ---------- ---------- ----------
Loss . . . . . . . . . . . . . . . . $ (32,684) $(26,457) $ (32,084) $ (22,128) $ (64,656)
------- -------- ---------- ---------- ----------
------- -------- ---------- ---------- ----------
</TABLE>
30
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
(CONTINUED)
<TABLE>
<CAPTION>
AT OR FOR
YEAR ENDED JUNE 30,
---------------------------------------------------------------
1995 1994 1993 1992 1991
-------- ---------- ---------- --------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
PER COMMON SHARE:(10)
Net income (loss) - primary............ $ (1.20) $ (1.28) $ (43.07) $ (29.70) $ (86.80)
Net income (loss) - fully
diluted ............................ (1.20) (1.28) (43.07) (29.70) (86.80)
Book value - primary................... 0.08 1.28 22.88 66.00 95.70
Book value - fully diluted............. 0.08 1.28 22.88 66.00 95.70
Average number of shares
outstanding (In thousands)........... 27,202 20,674 745 745 745
Ratios:
Return on average assets............... (3.72%) (2.65%) (2.27)% (1.18)% (2.69)%
Return on average stockholders'
equity............................... (123.96%) (65.48%) (88.82)% (38.23)% (52.25)%
Interest rate spread during period..... 2.78% 3.39% 2.51% 2.32% 2.18%
Net yield on interest-earning
assets during period................. 7.09% 3.17% 2.09% 1.82% 1.54%
Expense Ratios:
Gross(11)............................ 5.22% 4.16% 3.29% 2.90% 4.16%
Adjusted(12)......................... 4.50% 2.98% 1.36% 1.11% 1.38%
Efficiency Ratios:
Gross(13)............................ 428.00% 142.75% 154.37% 154.97% 239.81%
Adjusted(14)......................... 344.00% 93.26% 83.04% 81.55% 94.01%
Stockholders' equity to totalassets.... 5.39% 3.84% 1.47% 2.99% 3.31%
Tangible capital ratio................. 5.02% 3.53% 1.09% 2.60% 2.70%
Leverage capital ratio................. 5.02% 3.80% 1.36% 2.90% 3.00%
Risk-based capital ratio............... 7.52% 6.99% 3.08% 5.20% 5.40%
General valuation allowance for
loan losses to loans and
mortgage-backed securities........... -- 1.95% 1.85% 1.42% 1.22%
General valuation allowance for
loan losses to loans,
excluding mortgage-backed
securities............ -- 2.48% 2.03% 1.50% 1.58%
General valuation allowance for
loan losses to nonperforming
loans................................ -- 65.22% 94.59% 29.20% 31.24%
Nonperforming assets to total
loans, mortgage-backed
securities and REO................... 91.79% 7.88% 7.19% 11.74% 8.68%
Nonperforming assets to total
assets............................... 66.27% 6.79% 6.36% 8.46% 7.24%
Restructured loans and
nonperforming assets to total
assets............................... 66.27% 19.36% 20.35% 13.45% 8.32%
Classified assets to total assets...... 66.27% 23.56% 22.90% 18.34% 21.37%
Net loan chargeoffs to average
total loans.......................... 7.31% 1.45% 1.72% 1.71% 0.52%
</TABLE>
31
<PAGE>
NOTES TO SELECTED HISTORICAL FINANCIAL DATA:
(1) Includes both held for investment and held for sale and net of
unamortized premiums, unearned income, deferred fees and specific loan
loss allowance.
(2) Investment securities does not include the stock held by the Bank as a
member of the Federal Home Loan Bank of San Francisco. Cash includes
restricted cash of $3.2 million at June 30, 1995 and $11.3 million at June
30, 1994.
(3) Nonperforming loans are those loans placed on non-accrual status and
other loans delinquent for 90 days or more.
(4) REO includes real estate acquired in settlement of loans, in-substance
foreclosures, net of general and specific real estate valuation allowances
and excludes real estate held for investment.
(5) Non-performing assets include nonperforming loans and REO (net of
specific and general reserves).
(6) Restructured loans are loans that have been modified resulting in
concessions from original terms with respect to interest payments,
maturity, or partial forgiveness of principal or interest.
(7) Classified assets include loans classified Substandard or Doubtful, REO
(before general valuation allowance), and the Bank's investment in Uni-Cal
Financial Corporation.
(8) Capitalized loan servicing assets include purchased mortgage servicing
rights and capitalized excess servicing on loans originated by the Bank.
Capitalized excess servicing for a loan is the discounted present value of
any difference between (i) the interest rate received by the Bank from the
borrower and (ii) the interest rate passed through to the purchaser of the
loan, less a "normal servicing fee." See "MD&A -- Interest Rate Risk" for
a discussion of assumptions regarding prepayment rates.
(9) Real estate operations, net includes net revenues and expenses, of REO
and real estate held for investment, development, or sale.
(10) Per share data is adjusted to give effect to the one-for-ten reverse
stock split effected on August 18, 1993.
(11) The gross expense ratio is the ratio of net non-interest expense to
average total assets. Net non-interest expense is total non-interest
expense minus fee income, gains and losses from sales of loans, MBS,
investments and loan servicing, and other income, net (except for
exclusion in 1992 of the $1.84 million gain on curtailment of pension
plan).
(12) The adjusted expense ratio is equal to net non-interest expense, less
real estate operations, net to average total assets.
(13) The gross efficiency ratio is the ratio of non-interest expense to total
revenue. Total revenue is net interest income plus fee income, gains from
sales of loans, MBS, investments and loan servicing, and other, net
(except for exclusion in 1992 of the $1.84 million gain on curtailment
of pension plan).
(14) The adjusted efficiency ratio is equal to the non-interest expense, less
real estate operations, net to total revenue.
32
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company reported a net loss of $32.7 million, or $1.20 per share,
for the fiscal year ended June 30, 1995 compared to a loss in the prior
fiscal year of $26.5 million, or $1.28 per share. For the fiscal year ended
June 30, 1993, the loss was $32.1 million or $43.07 per share. Book value
decreased to $.08 per share at June 30, 1995 compared to $1.28 per share at
June 30, 1994. All per share amounts are calculated after giving effect to 1
for 10 stock split in August 1993.
In order to comply with a prompt corrective action directive (the
"Directive") of the Office of Thrift Supervision ("OTS") requiring a sale,
merger or recapitalization transaction, the Bank in June 1995 completed two
significant transactions. First, the Bank sold approximately $136 million of
its classified commercial, industrial and multi-family loan and real estate
portfolio (the "Asset Sales"), principally to "bulk sale" institutional
buyers, for cash proceeds of $101 million, including a $3.6 million holdback
of funds held in escrow accounts for potential representation and warranty
breaches. Second, the Bank sold 13 of its 14 retail banking offices and
approximately $820 million of related deposit liabilities to Glendale Federal
Bank, a federal savings bank ("Glendale Federal"). At closing, the Bank
transferred cash and other assets, principally single family and
non-classified commercial and multi-family real estate loans valued at Union
Federal's book value, to Glendale Federal in an amount necessary to offset
the deposit and other liabilities assumed by Glendale Federal. The Bank
received a $6.9 million purchase price for the transfer, plus a right to
receive a contingent payment based upon the actual performance of certain
multi-family, commercial and industrial real estate loans transferred to
Glendale Federal to the extent that such loans are repaid or otherwise
resolved by June 30, 1998. See "Contingent Payment," below. In anticipation
of the Glendale Federal transaction, the Bank liquidated its $209 million
investment securities in May 1995 at a slight gain to raise cash.
Following the Asset Sales and the Glendale Federal transaction, the Bank
has continued its business through its downtown Los Angeles retail banking
office. Under its agreement with Glendale Federal, the Bank is prohibited
until June 23, 1998 from opening additional branches using the Union Federal
or UnionFed name without Glendale Federal's consent. At June 30, 1995, the
Company had total assets of $37.2 million, down significantly from $904
million at June 30, 1994. The Company's principal assets include
approximately $27 million in book value of classified loan and real estate
assets, including two commercial REO properties in Key West, Florida and Los
Angeles, California, and cash, including funds escrowed in the Asset Sales.
The Company ceased residential mortgage banking activities early in 1995 to
reduce overhead costs and has reduced its staffing levels to approximately
seven employees, who conduct the ongoing retail banking and administrative
operations at the downtown Los Angeles banking office. At June 30, 1995, the
Bank had deposits of $34.2 million and a net worth of $2.0 million. At June
30, 1995, the Bank had core capital of 5.26%, Tier 1 risk-based capital of
6.49% and total risk-based capital of 7.81%. Since the Bank's total
risk-based capital was under the 8% level required for the Bank to be
"adequately capitalized," the Bank was considered to be an "undercapitalized"
savings institution at June 30, 1995. The Bank expects an operating loss in
the quarter ending September 30, 1995, which will reduce the Bank's capital
further.
The potential sources for generating a future return for the Company's
stockholders primarily consist of the gain, if any, realized upon the
disposition of the classified assets retained by the Bank, the contingent
consideration, if any, to be received from Glendale Federal in 1998 and any
consideration received from the sale of the Company's business operations.
The Company is waiting on the final review of the refund claim and tax
examination, which may result in a refund from the Internal Revenue Service
in the amount of $1.0 million. The Company has been advised that the refund
has been approved at the field examination level and is being reviewed by
senior Internal Revenue Service personnel. The Company expects that this
refund, if any, would be paid in the fourth quarter of calendar 1995 or first
quarter of calendar 1996. There can be no assurance that this refund will be
approved and paid or that the Company will be able to provide any future
return to stockholders. The
33
<PAGE>
Company's financial condition in fiscal 1996 and thereafter will be
principally dependent upon the performance of the Company's remaining assets,
principally its real estate owned and loans. The Company has no significant
resources other than the Bank. At present, the Bank does not have any other
significant income generation capabilities other than income from its
relatively small loan portfolio and realization of its real estate assets.
Given the structure of its balance sheet, the Bank has limited flexibility in
dealing with asset liability management or to improve its earning power.
The Company's ability to continue as a going concern will depend in
significant part on factors outside of its control. Since approximately
two-thirds of the Bank's assets are non-earning real estate assets, the
Bank's interest income will not be sufficient to cover its interest expense
for deposits and general and administrative expenses.
The OTS is requiring the Bank to report monthly regarding its financial
condition, financial projections and the current status of its remaining
assets. To date, the OTS has not required the filing of a capital
restoration plan by the Bank despite its "undercapitalized" status. See
"Regulation and Supervision - FDICIA Prompt Corrective Action Requirements."
If the Bank continues to fail to meet its required capital levels, the
operations and future prospects of the Bank will depend principally on
regulatory attitudes and actions at the time, including those of the OTS and
FDIC, within applicable legal constraints. Such failure could result in the
issuance of a cease and desist order or capital directive to the Bank, the
imposition of such operating restrictions as the OTS deems appropriate at the
time, such other actions by the OTS as it may be authorized or required to
take under applicable statutes and regulations and/or the appointment of a
conservator or receiver for the Bank. In the event that the Bank were to
become "critically undercapitalized," it must be placed in receivership or
conservatorship not later than 90 days thereafter unless the OTS and FDIC
determine that taking other action would better serve the purposes of prompt
corrective action. Such determinations are required to be reviewed at 90-day
intervals, and if the Bank remains critically undercapitalized for more than
270 days, the decision not to appoint a receiver would require certain
affirmative findings by the OTS and FDIC regarding the viability of the
institution. An institution is 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%. At
June 30, 1995, the Bank's "tangible equity" ratio was 5.02%.
FINANCIAL CONDITION
At June 30, 1995 the Company's consolidated assets totaled $37.2
million, which consisted largely of real estate owned. The Company also had
short term investments consisting of overnight deposits and U.S. Treasury
bills. Stockholders' equity totaled $2.0 million at June 30, 1995, compared
to $34.7 million at June 30, 1994. The reduction is due to the continued
operating losses incurred during fiscal 1995 from loan and real estate
operations and the losses incurred in the Asset Sales, offset by the gain of
$4.7 million for the 13 banking offices sold to Glendale Federal.
The Company's financial condition in fiscal 1996 and thereafter will be
principally dependent upon the performance of the Company's remaining assets,
principally its REO and classified loan. The Company has no significant
resources other than the Bank. At present, the Bank does not have any other
significant income generation capabilities other than income from its
relatively small loan portfolio and realization of its real estate assets.
Given the structure of its balance sheet, the Bank has limited flexibility in
dealing with asset liability management and limited ability to improve its
earning power.
CAPITAL RESOURCES AND LIQUIDITY
The Bank's sources of funds in fiscal 1995 and prior years included
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. The source of funds for the Bank after the Asset
Sales and the Glendale Federal
34
<PAGE>
transaction are expected to be limited largely to the raising of deposits in
the remaining Los Angeles retail banking office. Under its agreement with
Glendale Federal, the Bank is prohibited from opening additional offices
using the Union Federal or UnionFed name for three years. Some funds are
expected to be generated in the future with the sale of the Bank's remaining
REO properties.
The Bank's deposit base in its remaining office consists largely of time
certificates of deposit. The Bank continues to have a customer deposit base
that has allowed it to maintain its deposit levels after the Glendale Federal
transaction. The Bank has been able to raise deposits since June 30, 1995 at
its office, but its ability to maintain deposits and raise additional funds
as necessary will be a matter of competition and interest rates.
The Bank repaid $13.0 million of FHLB advances prior to the sale of the
banking offices to Glendale Federal in fiscal 1995, compared to a net
repayment of $87 million in 1994. The Bank repaid $400 thousand of maturing
brokered deposits in 1995 compared to $17.9 million in 1994. The Bank has one
remaining brokered deposit for $4.7 million, which matures in November 1996.
With the sale of 13 offices to Glendale Federal in June 1995, the Bank
sold $820 million in deposits. In fiscal 1994, the Bank sold four branches
and consolidated one branch. In 1994 the four branches sold represented
$166.2 million in deposits.
Investment securities sales in fiscal 1995 totaled $260.6 million,
including $38.0 million transferred to Glendale Federal as part of the assets
used to fund the sale of the 13 banking offices. The Bank continued its
practice of securitizing and selling the majority of its single family loan
production in fiscal year 1995. The production of single family loans was
discontinued in March 1995 in an effort to reduce overhead costs.
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 June 30, 1995, the Bank's ratio was 13.17% as
compared to 11.47% at June 30, 1994. The Bank's cash and eligible
investments at June 30, 1995 included $3.6 million of cash held in trust,
less a $400 thousand reserve for potential breaches of representations and
warranties related to the Asset Sales. The Bank's high liquidity ratio in
each of the periods was due to the reduction of its deposit and borrowing
base in each of the respective periods. The Bank does not anticipate
maintaining liquidity in the future significantly in excess of required
levels. The Bank's sources of cash in the future are primarily limited to
deposits.
The primary source of cash for the Company is dividends for the Bank,
which would require the prior written approval of the OTS Regional Director.
As long as the Bank remains "undercapitalized" for regulatory purposes, the
OTS Regional Director cannot approve any capital distributions 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. See "FDICIA Prompt Corrective Action Requirements."
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 June 30, 1995, the Bank did not meet the total risk-based
capital component of the regulatory capital requirements.
35
<PAGE>
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 June 30, 1995:
<TABLE>
<CAPTION>
LEVERAGE TIER 1 TOTAL
(CORE) % RISK BASED % RISK-BASED %
----------- ------ ------------- ----- ------------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
GAAP Equity. . . . . . . . . $ 1,925 $ 1,925 $ 1,925
Non-allowable assets:
Investment in Uni-Cal
Financial. . . . . . . . (63) (63) (63)
General loss reserves(1) . -- -- 400
----------- ------------- ------------
Bank Regulatory Capital. . . 1,863 5.0% 1,863 6.2% 2,263 7.5%
Minimum capital requirement. 1,484 4.0% 1,203 4.0% 2,407 8.0%
----------- ------ ------------- ----- ------------ -----
Capital excess (deficiency). $ 379 1.0% $ 659 2.2% $ (144) (.5%)
----------- ------ ------------- ----- ------------ -----
----------- ------ ------------- ----- ------------ -----
</TABLE>
______________
(1) Represents a general valuation allowance against the holdbacks for
breaches of warranties related to the bulk loan and asset sales.
ASSET/LIABILITY MANAGEMENT
NET INTEREST INCOME
The Bank's net interest income is determined by the difference (the
"spread") between the yields earned by the Bank on its loans, mortgage-backed
securities and investment securities ("interest-earning assets") and the
interest rates paid by the Bank on its deposits and borrowings
("interest-bearing liabilities"), as well as the relative amounts of the
Bank's interest-earning assets and interest-bearing liabilities. Savings
institutions, including the Bank, are subject to interest rate risks to the
degree that their interest-bearing liabilities, consisting principally of
customer deposits, FHLB advances and other borrowings, mature or reprice more
rapidly, or on a different basis, than their interest-earning assets, which
consist predominantly of intermediate or long-term real estate loans. While
having liabilities that mature or reprice more frequently on average than
assets may be beneficial in times of declining interest rates, such an
asset/liability structure may result in declining net earnings during periods
of rising interest rates, unless offset by non-interest income.
Net interest income before provision for estimated loan losses decreased
25.8% in fiscal 1995 to $20.7 million compared to $27.8 million in fiscal
1994. The decrease is largely attributable to the reduction in asset base
during fiscal 1995, due to the discontinuance of single family loan
originations in March 1995 and the bulk sale of classified loans in the
beginning of June 1995. The decrease is also attributable to a decreased
spread during the rising rate environment in fiscal 1995, which caused
deposits to reprice at a more rapid pace than the loan and investment
portfolios. The during period spread decreased to 2.78% at June 30, 1995,
compared to a 3.39% in fiscal 1994 due largely to an increase in the cost of
deposits during the period and the sale of higher yielding investment
securities in the fourth quarter.
36
<PAGE>
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 and the resultant costs, expressed both in dollars and rates. The
table also sets forth the net average earning balance for the periods
indicated. Average balances are computed using a daily average balance
during the period.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1995 YEAR ENDED JUNE 30, 1994 YEAR ENDED JUNE 30, 1993
--------------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
------- -------- ------ ------- -------- ------ ------- -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans . . . . . . . . . . . . . . . . . . $ 530,914 $ 39,567 7.45% $ 686,688 $ 52,859 7.70% $ 922,538 $75,391 8.17%
Mortgage-backed securities . . . . . . . 160,253 10,831 6.76% 103,321 6,338 6.13 82,257 6,070 7.38
---------- -------- --------- -------- ---- --------- ------- -----
Total loans and mortgage-
backed securities (1) . . . . . . . 691,167 50,398 7.29% 790,009 59,197 7.49 1,004,795 81,461 8.11
Investments . . . . . . . . . . . . . . . 105,664 6,197 5.86 87,115 4,692 5.39 230,911 10,151 4.40
---------- -------- ---- --------- -------- ---- --------- ------- -----
Total interest-earning assets . . . . 796,831 56,595 7.10 877,124 63,889 7.28 1,235,706 91,612 7.42
---- -----
Investments in FHLB stock. . . . . . . . . 5,576 274 4.91 6,286 245 3.90 15,165 160 1.06
-------- ---- -------- ---- ------ -----
Non-interest-earnings assets . . . . . . . 75,060 113,279 165,194
--------- --------- -------- ----------
Total assets. . . . . . . . . . . . . 877,467 56,869 996,689 64,134 $1,416,065 $91,772
--------- -------- --------- -------- ---------- -------
--------- --------- ----------
Interest-bearing liabilities:
Savings deposits:
Savings(2). . . . . . . . . . . . . . . 748,059 34,586 4.62 791,076 31,681 4.00 1,040,351 47,568 4.57
Checking. . . . . . . . . . . . . . . . 79,734 844 1.06 78,538 905 1.15 107,811 2,310 2.14
--------- -------- ---- --------- ------- ---- --------- ------- -----
Total deposits. . . . . . . . . . . . 827,793 35,430 4.28 869,614 32,586 3.75 1,148,162 49,878 4.34
Borrowings:
Reverse repurchase. . . . . . . . . . . 4,774 243 5.09 11,585 327 2.82 -- -- --
FHLB advances . . . . . . . . . . . . . 6,470 259 4.00 46,799 2,654 5.67 181,449 14,426 7.95
Medium-term notes . . . . . . . . . . . -- -- -- -- -- -- 4,864 220 4.52
Other . . . . . . . . . . . . . . . . . 1,669 278 16.66 4,127 730 17.69 9,911 1,449 14.62
--------- -------- ---------- ------- ---- -------- ------ -----
Total borrowings . . . . . . . . . 12,913 780 62,511 3,711 5.94 196,224 16,095 8.20
--------- -------- ----- ---------- ------- ---- -------- ------ -----
Total interest-bearing
liabilities . . . . . . . . . . . 840,706 36,210 4.31 932,125 36,297 3.89 1,344,386 65,973 4.91
Non-interest bearing liabilities . . . . . 10,395 24,162 35,555
Stockholders' equity . . . . . . . . . . . 26,366 40,402 36,124
--------- --------- ---------
Total liabilities and
stockholder's equity . . . . . . . 877,467 36,210 996,689 36,297 $1,416,065 $65,973
--------- -------- --------- ------- --------- -------
--------- -------- --------- ------- --------- -------
Net interest income/interest rate
spread. . . . . . . . . . . . . . . . . . 20,659 2.78% 27,837 3.39% $25,799 2.51%
-------- ---- ------- ---- ------- ----
-------- ---- ------- ---- ------- ----
Net average earning balance(3)/
net yield on interest earning assets(4) . $ (38,299) 2.57% $(55,001) 3.17% $ (108,680) 2.09%
---------- ---- -------- ---- ---------- ----
---------- ---- -------- ---- ---------- ----
</TABLE>
- ---------------------------
(1) Nonaccrual loans are included in the average balance column; however, only
collected interest is included in the interest column.
(2) Brokered deposits represented 6.13%, 0.61% and 2.25% of the Bank's average
deposits at June 30, 1995, 1994 and 1993, respectively.
(3) The "net average earning balance" equals the difference between the average
balance of interest-earning assets and the average balance of interest-
bearing liabilities.
(4) The net yield in interest earning assets during the periods equals net
interest income divided by average interest-earning assets for the period.
37
<PAGE>
Changes in the Bank's net interest income are a function of both changes in
rates and changes in volumes of interest-earning assets and interest-bearing
liabilities. The following table sets forth information regarding changes in
interest income and expense for the Bank for the periods indicated. For each
category of interest-earning asset and interest-bearing liability, information
is provided on changes attributable to: (i) changes in rate (changes in rate
multiplied by old volume) and (ii) changes in volume (changes in volume
multiplied by old rate). The net change attributable to changes in both volume
and rate, which cannot be segregated, has been allocated proportionately to the
change due to volume and the change due to rate. Interest-earning asset and
interest-bearing liability balances in the calculations are computed using daily
average balances.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------------------------------------------------
1995 VS. 1994 1994 VS. 1993
------------------------------------ ------------------------------------------
INCREASE INCREASE
(DECREASE) (DECREASE)
ATTRIBUTED TO ATTRIBUTED TO
------------------------- ----------------------------
VOLUME RATE NET VOLUME RATE NET
------------ ------------ ---------- ------------- ------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest income on loans and mortgage-
backed securities . . . . . . . . . . . . $ (7,405) $(1,394) $ (8,799) $(17,414) $(4,850) $(22,264)
Interest income on investments . . . . . . . 1,006 499 1,505 (6,321) 862 (5,459)
-------- ------- -------- -------- ------- --------
Total interest income on interest-
earning assets. . . . . . . . . . (6,399) (895) (7,294) (23,735) (3,988) (27,723)
-------- ------- -------- -------- ------- --------
Investments required by law. . . . . . . . . (32) 61 29 (94) 179 85
-------- ------- -------- -------- ------- --------
Interest expense on deposits . . . . . . . . (1,568) 4,412 2,844 (12,101) (5,191) (17,292)
Interest expense on borrowings . . . . . . . (2,946) 15 (2,931) (10,968) (1,416) (12,384)
-------- ------- -------- -------- ------- ---------
Total interest expense on
interest-bearing liabilities. . . (4,514) 4,427 (87) (23,069) (6,607) (29,676)
-------- ------- -------- -------- ------- ---------
Increase (decrease) in net interest
income. . . . . . . . . . . . . . . . . . $ (1,917) $(5,261) $ (7,178) $ (760) $ 2,798 $ 2,038
-------- ------- -------- -------- -------- ---------
-------- ------- -------- -------- -------- ---------
</TABLE>
The following table sets forth the components of the Bank's net interest
rate spread at the dates indicated:
<TABLE>
<CAPTION>
JUNE 30,
---------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Weighted average yield on:
Loans and mortgage-backed securities . . 10.81%(1) 7.28% 7.91%
Investments. . . . . . . . . . . . . . . 5.25 6.20 5.71
----- ---- ----
Combined loans and investments . . . . . . . 7.40 7.19 7.77
----- ---- ----
Weighted average cost of:
Deposits . . . . . . . . . . . . . . . . 5.80 3.65 3.96
Borrowings . . . . . . . . . . . . . . . -- 5.93 6.72
----- ---- ----
Combined deposits and borrowings . . . . . . 5.80 3.69 4.22
----- ---- ----
Interest spread at end of period . . . . . . 1.60%(2) 3.50% 3.55%
----- ---- ----
----- ---- ----
</TABLE>
____________________
(1) Represents one $2.7 million loan.
(2) Since the Bank's interest bearing deposits are dramatically larger than the
Bank's interest earning assets, this spread is not a meaningful measure of
earnings capacity.
38
<PAGE>
INTEREST RATE RISK
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. However, the Bank's current balance sheet
structure does not allow for meaningful management of interest rate risk.
With 66.36% of total assets consisting of nonperforming assets, interest
expense will exceed interest income and deposit maturities are managed to
support the workout of real estate assets rather than to manage interest rate
risk.
NONPERFORMING ASSETS
Nonperforming assets consist of real estate acquired in settlement of
loans and in-substance foreclosures (collectively, "REO") and nonaccrual
loans. While the Bank experienced a decrease in nonperforming assets during
fiscal 1995 and 1994, total nonperforming assets remain high as a percentage
of assets relative to industry peer averages. The decrease in fiscal years
1995 and 1994 was primarily attributable to the sale of and additional
write-downs on REO and loans.
The following table sets forth the amounts of nonperforming assets of
the Bank at the dates indicated:
<TABLE>
<CAPTION>
AT JUNE 30,
------------------------------------------
1995 1994 1993
----------- ---------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Nonperforming loans (1). . . . . . . . . . . . . . $ -- $ 22,125 $ 18,978
Real estate acquired in settlement of loans (2). . 24,623 23,557 43,621
In-substance foreclosures, net of undisbursed
funds (2). . . . . . . . . . . . . . . . . . . -- 15,677 11,341
------- -------- ----------
Total nonperforming assets . . . . . . . $24,623 $ 61,359 $ 73,940
------- -------- ----------
------- -------- ----------
Total assets . . . . . . . . . . . . . . . . . . . $37,156 $903,976 $1,161,945
------- -------- ----------
------- -------- ----------
Nonperforming assets, net as a percentage of
total assets . . . . . . . . . . . . . . . . . 66.27% 6.79% 6.36%
------- -------- ----------
------- -------- ----------
</TABLE>
____________
(1) Net of specific valuation allowances.
(2) Net of specific valuation allowances and pro-rata allocated REO general
valuation allowance.
39
<PAGE>
The following table presents the activity of nonperforming loans and REO
(net of specific valuation allowances and the REO general valuation
allowance) for the periods presented (1):
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
JUNE 30, 1995 JUNE 30, 1994
---------------------------- -------------------------------
NONPERFORMING NONPERFORMING
LOANS REO LOANS REO
-------------- ------------- -------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Beginning Balance. . . . . . . . . . $ 22,125 $ 39,234 $ 18,978 $ 54,962
Additions . . . . . . . . . . . . . 21,323 14,262 47,025 49,872
Payoff, cures and sales . . . . . . (23,909) (26,279) -- (53,748)
Restructurings. . . . . . . . . . . -- -- (1,475) --
Assets foreclosed upon or
designated as REO . . . . . . . . (11,518) -- (35,912) --
Charge-offs and specific
valuation allowance
provisions. . . . . . . . . . . . (8,021) (2,594) (6,491) (11,852)
------------- ------------- -------------- ---------------
Ending Balance. . . . . . . . . . . $ -- $ 24,623 $ 22,125 $ 39,234
------------- ------------- -------------- ---------------
------------- ------------- -------------- ---------------
</TABLE>
____________
(1) Single family and consumer loans are reflected in additions or
designated as REO on a net change basis.
(2) Includes Asset Sales and Glendale Federal transaction.
NONACCRUAL LOANS
Nonaccrual loans generally represent loans for which interest accruals
have been suspended. The Bank had no non-accrual loans at June 30, 1995.
At June 30, 1994, nonaccrual loans of $22.1 million had increased by $3.1
million, or 17%, from $19.0 million at June 30, 1993.
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. Nonaccrual loans at June 30, 1994 included $1.4 million of cash
flow loans. The Bank recognizes the interest on the cash flow loans on a
cash basis. In some cases, the Bank may continue to accrue interest on
certain loans that are adequately secured and in the process of collection
even though such loans have been past due as to interest or principal
payments for 90 days or more. In addition, if a loan is in the process of
being restructured and the final terms have been agreed upon by both parties,
the loan will be accounted for as a restructured loan and interest due since
the last payment will be written off or accrued as dictated by the terms of
the restructuring.
Nonaccrual loans at June 30, 1994 were primarily commercial loans (51%)
and single family loans (39%). At June 30, 1993, nonaccrual loans
consisted largely of single family loans (68%) and multifamily loans
(25%). The change in mix in nonaccrual loans is primarily attributable
to two factors: the decrease in multifamily loans was due to the
restructure and foreclosure of several loans during the year while the
increase in nonaccrual commercial real estate loans was attributable to the
default of several major properties in late fiscal 1994.
40
<PAGE>
The following table summarizes the distribution of the Bank's nonaccrual
loans by collateral type for the years indicated (1):
<TABLE>
<CAPTION>
AT JUNE 30,
---------------------
1994 1993
---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
1-4 unit residential and mortgage-
backed securities. . . . . . . . . . . . . . . . . . $ 8,650 $ 12,875
Multifamily. . . . . . . . . . . . . . . . . . . . . . 689 4,332
Commercial:
Retail. . . . . . . . . . . . . . . . . . . . . . . . 2,449 --
Hotel/motel . . . . . . . . . . . . . . . . . . . . . 5,592 1,154
Other . . . . . . . . . . . . . . . . . . . . . . . . 3,163 328
---------- ---------
Total commercial. . . . . . . . . . . . . . . . . . 11,204 1,482
---------- ---------
Total real estate loans. . . . . . . . . . . . . . . . 20,543 18,689
Consumer loans (2) . . . . . . . . . . . . . . . . . . 1,582 289
---------- ---------
Total nonaccrual loans . . . . . . . . . . . . . . . . $ 22,125 $ 18,978
---------- ---------
---------- ---------
</TABLE>
____________
(1) Balances are net of contra, 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 an indication that
a borrower will not make all the required payments on a loan; the borrower no
longer has equity in the property collateralizing a loan; it appears doubtful
that equity will be rebuilt in the foreseeable future; or the borrower has
(effectively or actually) abandoned control of the collateral, the property
is considered repossessed in-substance (in-substance foreclosure). Real
estate acquired in settlement of loans is recorded at the 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 real
estate acquired in settlement of loans.
As part of the Bank's internal asset review procedure, loans are tested
for potential in-substance foreclosure status through discounted cash flow
analyses, and evaluation of the borrower's capacity and willingness to
continue to service the debt and control the property. If the Bank expects
that, based on the current terms of the debt and the expected future cash
flows of the property, the borrower will be unable to rebuild equity in the
future, the loan will be evaluated as a candidate for troubled debt
restructuring. The Bank will continue to classify this asset as a loan during
the restructure process and will only transfer it to in-substance foreclosure
when it is determined that a restructure is not feasible. These loans will
be carried at the lower of cost or fair value.
REO decreased to $24.6 million at June 30, 1995 from $39.2 million at June
30, 1994, and from $55.0 million at June 30, 1993. The decrease in fiscal
1995 is due largely to the sales of real estate of $26.3 million which
includes $5.2 million from the Asset Sales. The decrease in fiscal 1994 is
attributable to sales of real estate totaling $53.7 million and charge-offs
or write-downs of $11.9 million, partially offset by additions of $49.9
million. During fiscal year 1994, the Bank acquired title to $45.4 million in
assets previously classified as in-substance foreclosures.
41
<PAGE>
The Bank's REO portfolio at June 30, 1995 consisted principally of two
properties, $10.6 million of land and marina in a planned development project
in Key West, Florida and $13.9 million of a mixed use retail/garment
manufacturing building in Los Angeles, California:
TRUMAN ANNEX: In 1991, the Bank acquired title to several land parcels in
Key West, Florida totaling seven acres, together with an unimproved marina
and a 26.4 acre island located 500 yards offshore. The property is within a
master planned development known as Truman Annex, a historical site once
owned by the Navy. While no improvements existed on the property at the time
it was acquired by the Bank, it was approved for specific entitlements under
a development agreement and other related agreements with the City of Key
West and the State of Florida.
On December 31, 1993, the Bank entered into a purchase and sale agreement
with a third party purchaser providing the purchaser with an option to
purchase the Truman Annex property for an aggregate purchase price of $19.5
million plus a $2.0 million reimbursement for infrastructure developments
funded by the Bank. The agreement provides for the purchase of the property
in phases over the course of three years, with financing to be made available
with each parcel. As of June 30, 1995, the purchaser had purchased
approximately 60% of the property for a purchase price of approximately $11.3
million.
At June 30, 1995, the 22-slip marina and 83 residential lots on the island
remained to be sold. Under the purchase agreement, the purchaser has the
option to purchase the remaining residential lots by March 31, 1996 for an
aggregate purchase price of $9.7 million, including the infrastructure
payment. Under the agreement, the purchaser also may acquire the marina for
$1.5 million on or before March 31, 1996 and has a right of first refusal on
such marina until March 1998. Under the purchase agreement, the Bank is
required to provide additional loans aggregating approximately $6.3 million,
with scheduled payment reductions in March 1997 and March 1998 and the
balance maturing in March 1999.
BROADWAY TRADE CENTER: This asset is a commercial property in downtown Los
Angeles, California known as the Broadway Trade Center. The structure has six
full stories and three partial stories above the sixth floor. Since its prior
status as a department store, the property has been used for ground floor
retail uses, garment manufacturing, office and storage. At June 30, 1995, the
property was 70% occupied based on space available for rent. The Bank filed a
declaratory relief action in July 1994 to confirm its exclusive right to
three land leasehold interests representing approximately 28% of the
underlying land interests. The Bank also currently is attempting to resolve
outstanding delinquent property taxes with the County of Los Angeles.
During fiscal 1995, the Bank's principal efforts on this property related
to seeking a conditional use permit (CUP) allowing for 360,000 square feet of
garment manufacturing on floors three through nine. The CUP was granted in
June 1995 and an appeal was denied. There is an additional period to appeal
this denial; however, the Bank expects the CUP issue to be resolved by the
end of calendar 1995. Upon favorable resolution of the CUP appeal, the
building will be marketed for lease up and thereafter will be marketed for
sale. It is anticipated that any such sale would not happen until at least
the Company's 1997 fiscal year. At June 30, 1995, the book value of the
Broadway Trade Center was $13.9 million.
In connection with the sale of 13 banking offices to Glendale Federal, the
Bank transferred all of its single family loan REOs to Glendale Federal at
their then carrying value. Single family REO decreased to $1.3 million at
June 30, 1994 from $3.4 million at June 30, 1993. The Bank sold $14.6 million
of single family REOs in fiscal 1994 and $6.3 million in fiscal 1993.
42
<PAGE>
The following table summarizes the distribution of the Bank's REO by
collateral type (1):
<TABLE>
<CAPTION>
AT JUNE 30,
----------------------------------------------------
1995 1994 1993
---------------- ---------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
1-4 unit residential. . . . . . . . . . . $ -- $ 1,334 $ 3,433
Multifamily . . . . . . . . . . . . . . . 126 6,889 5,451
Commercial:
Retail . . . . . . . . . . . . . . . . . 13,931 14,725 2,445
Land . . . . . . . . . . . . . . . . . . 10,566 10,333 22,654
Mobile home parks. . . . . . . . . . . . -- 82 --
Manufacturing/Warehouse -- -- 1,377
Office . . . . . . . . . . . . . . . . . -- 5,137 9,384
Other. . . . . . . . . . . . . . . . . . -- -- 1,239
---------------- ---------------- ---------------
Total commercial . . . . . . . . . . . 24,497 30,277 37,099
Construction:
Residential. . . . . . . . . . . . . . . -- -- 8,979
Commercial . . . . . . . . . . . . . . . -- 681 --
---------------- ---------------- ---------------
Total construction . . . . . . . . . . -- 681 8,979
---------------- ---------------- ---------------
Total real estate . . . . . . . . . . . . 24,623 39,181 54,962
Consumer (2) . . . . . . . . . . . . . . -- 53 --
---------------- ---------------- ---------------
Total real estate acquired in settlement
of loans . . . . . . . . . . . . . . . . $ 24,623 $ 39,234 $ 54,962
---------------- ---------------- ---------------
---------------- ---------------- ---------------
</TABLE>
____________
(1) Balances are net of contra, loans in process, and specific valuation
allowances and the real estate general and specific valuation allowances.
(2) Consumer loans include mobile home loans.
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. A 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."
The Bank had no restructured loans at June 30, 1995, as all restructured
loans were either sold in the Asset Sales or transferred to Glendale Federal.
Restructured loans which were performing in accordance with their new terms
and, therefore, were not included in nonaccrual loans, amounted to $113.7
million at June 30, 1994. Of the total restructured loans at June 30, 1994,
87% originated from performing loans or loans less than 90 days delinquent at
the time of restructure. For restructured loans that were previously
performing, the Bank
43
<PAGE>
accrues interest based on the terms of restructure. For nonperforming loans
that have been restructured, interest accruals are on a cash basis until such
time as a sustained stream of payments, in accordance with the restructured
terms, has been received. Thereafter, interest accrual resumes based on the
terms of the restructure.
Restructured loans decreased to $113.7 million at June 30, 1994 from
$162.5 million at June 30, 1993. During fiscal 1993, the Bank restructured
$72.8 million of multifamily loans, of which $29.1 million were loans to one
borrower. The restructures generally involved modifications to payments and
interest rate reductions, with a small amount of principal forgiveness. As
of June 30, 1993, one restructured loan was paid off upon the sale of the
property. A loan whose terms have been restructured is no longer disclosed
as a restructured loan if, subsequent to restructuring, its effective
interest rate is equal to or greater than the rate that the Bank is willing
to accept for a new loan with comparable risk and if principal payments,
suspended in connection with the restructure, resume.
The following table summarizes the distribution of the Bank's
restructured loans by collateral type (1):
<TABLE>
<CAPTION>
AT JUNE 30,
--------------------------------
1994 1993
---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Multifamily. . . . . . . . . . . . . . . $ 92,057 $ 90,627
Commercial:
Retail. . . . . . . . . . . . . . . . . 4,733 44,630
Land. . . . . . . . . . . . . . . . . . -- 3,325
Hotel/motel. . . . . . . . . . . . . . 2,783 8,930
Storage facilities . . . . . . . . . . -- 6,733
Office . . . . . . . . . . . . . . . . 5,541 6,587
Other . . . . . . . . . . . . . . . . 2,270 1,700
-------- --------
Total commercial . . . . . . . . . . 15,327 71,905
-------- --------
Construction:
Residential construction. . . . . . . . 6,292 --
-------- --------
Total restructured loans. . . . . . . . $113,676 $162,532
-------- --------
-------- --------
</TABLE>
___________________
(1) Balances are net of contra, loans in process and specific valuation
allowances.
TROUBLED, COLLATERAL-DEPENDENT LOANS
In 1993 and 1994, the OTS issued Regulatory Bulletins 31 and 32,
respectively, which address troubled, collateral-dependent loans. A
troubled, collateral-dependent loan is defined as a loan in which proceeds
for repayment can be expected to come only 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 the fair value
of the collateral.
The Bank has revised its Policies and Procedures consistent with
Regulatory Bulletin 31 and has addressed troubled collateral-dependent loans.
In addition, the Bank uses various tests to assess whether an asset is a
troubled, collateral-dependent loan. 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 June 30, 1995, the
Bank's one troubled, collateral-dependent loan totaled $2.2 million and was
performing.
44
<PAGE>
POTENTIAL PROBLEM LOANS
CLASSIFIED LOANS
During fiscal 1995, the Bank's Internal Asset Review Department
conducted 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 OTS regulatory classification requirements. At June 30,
1995, the Bank's equity loan on a multi-family property was classified as
substandard.
The table below presents the Bank's total classified loan portfolio at
the dates indicated (1):
<TABLE>
<CAPTION>
JUNE 30,
------------------------------------------------
1995 1994 1993
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Substandard
Residential 1-4. . . . . . . . . . . . . . . . $ -- $ 8,650 $ 14,268
Multifamily. . . . . . . . . . . . . . . . . . 2,244 109,289 119,468
Commercial . . . . . . . . . . . . . . . . . . -- 33,030 56,947
Construction . . . . . . . . . . . . . . . . . -- 5,817 8,074
Consumer . . . . . . . . . . . . . . . . . . . -- 2,082 954
-------- -------- --------
2,244 158,868 199,711
-------- -------- --------
Doubtful
Multifamily. . . . . . . . . . . . . . . . . . -- 261 3,428
Commercial . . . . . . . . . . . . . . . . . . -- -- 1,272
Consumer . . . . . . . . . . . . . . . . . . . -- -- 598
-------- -------- --------
-- . . . . . . . . . . . . . . . . . . . . -- 261 5,298
-------- -------- --------
. . . . . . . . . . . . . . . . . . . . . . . $ 2,244 $159,129 $205,009
-------- -------- --------
-------- -------- --------
Total classified loans as a percentage of
total loans. . . . . . . . . . . . . . . . . . 100% 28.07% 23.17%
-------- -------- --------
-------- -------- --------
Total Bank general valuation allowance for loan
losses as a % of total classified loans. . . . 0% 9.07% 8.76%
-------- -------- --------
-------- -------- --------
- ----------------
(1) Loss assets provided for through specific valuation allowance were $500
thousand, $10.5 million and $2.6 million at June 30, 1995, June 30, 1994
and June 30, 1993, respectively.
</TABLE>
45
<PAGE>
The following table reflects the classified loans by loan collateral
type to the respective gross loan portfolio, net of loan in process, for the
periods presented. A table for June 30, 1995 is not included as there was only
one loan in the portfolio.
<TABLE>
<CAPTION>
JUNE 30, 1994
------------------------------------------
TYPE CLASSIFIED GROSS LOAN %
LOANS PORTFOLIO CLASSIFIED
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Residential 1-4. . . . . . . . . . . . . . $ 8,650 $ 198,046 4.37%
Multifamily. . . . . . . . . . . . . . . . 105,770 166,779 63.42%
Commercial . . . . . . . . . . . . . . . . 33,030 202,017 16.35%
Construction . . . . . . . . . . . . . . . 5,817 6,924 84.01%
Equity . . . . . . . . . . . . . . . . . . 3,780 6,279 60.20%
Consumer . . . . . . . . . . . . . . . . . 2,082 14,090 14.78%
---------- ---------- ------
Total. . . . . . . . . . . . . . . . . . $ 159,129 $ 594,135 26.78%
---------- ---------- ------
---------- ---------- ------
<CAPTION>
JUNE 30, 1994
------------------------------------------
TYPE CLASSIFIED GROSS LOAN %
LOANS PORTFOLIO CLASSIFIED
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Residential 1-4. . . . . . . . . . . . . . $ 14,268 $ 370,187 3.85%
Multifamily. . . . . . . . . . . . . . . . 119,085 200,637 59.35%
Commercial . . . . . . . . . . . . . . . . 58,219 278,731 20.89%
Construction . . . . . . . . . . . . . . . 8,074 16,253 49.67%
Equity . . . . . . . . . . . . . . . . . . 3,811 7,480 50.94%
Consumer . . . . . . . . . . . . . . . . . 1,552 17,270 8.99%
---------- ---------- ------
Total. . . . . . . . . . . . . . . . . . $ 205,009 $ 890,558 23.02%
---------- ---------- ------
---------- ---------- ------
</TABLE>
DELINQUENT LOANS
When a borrower fails to make required payments on a loan and does not
cure the delinquency within 90 days or within 10 days if other than a one-to-
four unit loan, the Bank normally records a notice of default, subject to any
required prior notice to the borrower, and commences foreclosure proceedings.
If either the loan is not reinstated within the time permitted by law for
reinstatement, which is normally five business days prior to the date set for
the non-judicial trustee's sale, or the property is not redeemed prior to such
sale, the property may then be sold at the non-judicial trustee's sale. If the
Bank has elected to pursue a non-judicial foreclosure, the Bank is not permitted
under applicable California law to obtain a deficiency judgment against the
borrower, even if the security property is insufficient to cover the balance
owed. In trustee sales, the Bank normally acquires title to the property. The
following table indicates the amounts of the Bank's past due loans as of the
dates indicated. The Bank did not have any delinquent loans at June 30, 1995,
therefore a delinquent loan table is not included for such date.
46
<PAGE>
<TABLE>
<CAPTION>
JUNE 30, 1994 JUNE 30, 1993
------------------------------------- -------------------------------------
30-59 60-89 90+ 30-59 60-89 90+
DAYS DAYS DAYS TOTAL DAYS DAYS DAYS TOTAL
----- ----- ----- ----- ----- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One to four units. . . . . . . . . . . . . $ 4,935 $ 2,346 $ 8,650 $15,931 $ 3,064 $ 1,321 $12,875 $17,260
Multifamily, commercial
and construction . . . . . . . . . . . . 8,342 85 12,261 20,688 1,112 7,771 3,840 12,723
------- ------- ------- ------- ------- ------- ------- -------
Total real estate. . . . . . . . . . . 13,277 2,431 20,911 36,619 4,176 9,0921 6,715 29,983
Consumer Loans . . . . . . . . . . . . . . . 38 26 1,582 1,646 94 192 289 575
------- ------- ------- ------- ------- ------- ------- -------
$13,315 $ 2,457 $22,493 $38,265 $ 4,270 $ 9,284 $17,004 $30,558
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
Percent of loans and
mortgage-backed securities
portfolio. . . . . . . . . . . . . . . . . 1.84% 0.34% 3.10% 5.28% 0.45% 0.97% 1.78% 3.20%
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
</TABLE>
Delinquent loans increased to $38.3 million at June 30, 1994 from
$30.6 million at June 30, 1993. At June 30, 1994, one loan with a principal
balance of $368 thousand was contractually past due over 90 days and continued
to accrue interest. At June 30, 1993, no loans over 90 days delinquent
continued to accrue interest.
The state of the economy, the high unemployment levels and the
depressed real estate market have all led to a continued increase in delinquent
single family loans in prior years. The high delinquency levels on residential
one-to-four family loans over the past three years have contributed to an
increase in single family foreclosures and short payoffs. The Bank made every
effort to counsel the borrowers and work out payment plans to return the loan to
a current status, without modifying the rates or terms of the loan.
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 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 risks 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.
47
<PAGE>
The following table sets forth the Bank's general and specific
valuaton allowances for loan and real estate losses at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
--------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loan general valuation
allowance (1) . . . . . $ -- $ 14,429 $ 17,951 $ 15,585 $ 20,769
Loan specific valuation
allowances . . . . . . 500 10,534 2,622 2,239 10,295
-------- -------- -------- -------- --------
Total loan valuation
allowance . . . . . . . $ 500 $ 24,963 $ 20,573 $ 17,824 $ 31,064
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Real estate general
valuation allowance(1) $ -- $ 2,221 $ 2,774 $ 4,453 $ 34,182
Real estate specific
valuation allowances . . 11,515 17,811 22,604 25,803 34,625
-------- -------- -------- -------- --------
Total real estate
valuation allowance . . $ 11,515 $ 20,032 $ 25,378 $ 30,256 $ 68,807
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Total valuation
allowances . . . . . . $ 12,015 $ 44,995 $ 45,951 $ 48,080 $ 99,871
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
- ------------------
(1) Since specific valuation allowances have been provided for each loan
and real estate asset, no general valuation allowance was recorded at
June 30, 1995.
The loan general valuation allowance as a percentage of the net loans
receivable and MBS balance increased to 1.99% at June 30, 1994 from 1.88% at
June 30, 1993. The Bank used the various asset classifications and asset type
as a means of measuring risk for determining the general valuation allowances at
a point in time. In determining the General Valuation Allowance risk factors
the Bank analyzed various factors including economic trends, portfolio mix,
trends in non-performing assets, classified assets and restructured assets, fair
value exposure and historic loss trends. To analyze historic losses, the Bank
utilized a loss migration model which tracked losses over ten quarters. These
losses were compared historically to total loans, and loss factors were
determined based on the Bank's historic loss experience. During fiscal year
1994, as a result of this analysis, the General Valuation Allowance loss factors
were adjusted to reflect these historic losses. As a result of these
adjustments, reduction in the loan portfolio, and improvement in the mix of
classified assets the loan General Valuation Allowance decreased at June 30,
1994 from June 30, 1993.
Based on the risk factors inherent in the Bank's loan portfolio and
the results of the analyses performed in conjunction with the Bank's internal
asset review system, the following table represents the allocation of the
general valuation allowance for loan losses at the dates indicated:
<TABLE>
<CAPTION>
June 30, 1994 June 30, 1993
--------------------------------------------- ----------------------------------------------
Loan Portfolio Loan Portfolio
Principal Allowance as a Principal Allowance as a
Balance(1) Allowance(2) % of Portfolio Balance(1) Allowance(2) % of Portfolio
-------------- ------------ -------------- -------------- ------------ --------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Residential 1-4. . . . . $ 198,046 $ 574 0.29% $ 370,187 $ 952 0.26%
Multifamily. . . . . . . 166,779 7,723 4.63% 200,637 8,306 4.14%
Commercial . . . . . . . 202,017 5,438 2.69% 278,731 7,325 2.63%
Construction . . . . . . 6,924 213 3.08% 16,253 642 3.95%
Equity trust deed. . . . 6,279 247 3.93% 7,480 218 2.91%
Consumer and other . . . 14,090 219 1.55% 17,270 453 2.62%
MBS - with recourse. . . 45,682 15 0.03% 62,765 55 .09%
------------ ---------- --------- ------------ ---------- ---------
$ 639,817 $ 14,429 2.25% $ 953,323 $ 17,951 1.88%
------------ ---------- --------- ------------ ---------- ---------
------------ ---------- --------- ------------ ---------- ---------
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
June 30, 1992 June 30, 1991
------------------------------------------------ ---------------------------------------------
Loan Portfolio Loan Portfolio
Principal Allowance as a Principal Allowance as a
Balance(1) Allowance(2) % of Portfolio Balance(1) Allowance(2) % of Portfolio
-------------- ------------- --------------- ------------- ------------ ---------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Residential 1-4. . . . . . . . $ 394,946 $ 832 0.21% $ 541,191 $ 882 0.16%
Multifamily. . . . . . . . . . 224,878 5,901 2.62% 235,269 9,088 3.86%
Commercial . . . . . . . . . . 324,572 8,553 2.64% 312,940 12,088 3.86%
Construction . . . . . . . . . 72,715 1,907 2.62% 216,213 8,352 3.86%
Equity trust deed. . . . . . . 11,504 151 1.31% 19,576 73 0.37%
Consumer and other . . . . . . 23,341 475 2.04% 38,797 371 0.96%
MBS - with recourse. . . . . . 40,980 6 0.01% 209,607 210 0.10%
---------- ---------- ---------- ---------- ---------- ----------
$1,092,936 $ 17,825 1.63% $1,573,593 $ 31,064 1.97%
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
- ------------
(1) Gross of deferred fees, loans in process, discounts/premiums and specific
valuation allowances.
(2) Includes the general valuation allowance for off-balance sheet items such
as letters of credit and loans sold with recourse that are not included in
the portfolio balances.
The following table is a summary of activity in the Bank's valuation
allowance for loan losses:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period . . . . . . . $ 24,963 $ 20,573 $ 17,824 $ 31,064 $ 14,077
Provision. . . . . . . . . . . . . . . . . . 14,382 14,350 18,603 6,666 25,127
Charge-offs, net . . . . . . . . . . . . . . (38,845) (9,960) (15,854) (20,206) (8,140)
Transfer of specific allowances to
real estate . . . . . . . . . . . . . . . -- -- -- 300 --
-------- -------- -------- -------- --------
Balance at end of period . . . . . . . . . . $ 500 $ 24,963 $ 20,573 $ 17,824 $ 31,064
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
The total loan valuation allowance decreased to $500 thousand from
$20.6 million during fiscal 1995. The decrease was due to the sale of all but
one loan in the Asset Sales and Glendale Federal transaction during fiscal 1995.
The following table is a summary of activity in the Bank's valuation
allowance for real estate losses:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------------------------------------
1995 1994 1993 1992 1991
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period . . . . . . . $20,032 $25,378 $30,256 $68,807 $ 9,782
Provision. . . . . . . . . . . . . . . . . . 3,395 12,757 22,089 25,291 65,567
Charge-offs, net . . . . . . . . . . . . . . (11,912) (18,103) (26,967) (63,542) (6,542)
Other. . . . . . . . . . . . . . . . . . . . -- -- -- (300) --
------- ------- ------- ------- -------
Balance at end of period . . . . . . . . . . $11,515 $20,032 $25,378 $30,256 $68,807
------- ------- ------- ------- -------
------- ------- ------- ------- -------
</TABLE>
The allowance for real estate losses decreased from $25.4 million at
June 30, 1993 to $20.0 million at June 30, 1994 and 11.5 million at June 30,
1995, due to charge-offs which occurred at the time of sale for real estate
owned and upon acquisition of title for in-substance foreclosures, including
$4.0 million related to the Asset Sales. The provisions for real estate losses
totaled $3.4 million for June 30, 1995 compared to $12.8 million for the year
ended June 30, 1994 and $22.1 million for the year ended June 30, 1993. The
provisions in fiscal 1995, 1994 and 1993 were largely due to the writedown of
REO to reflect current fair values based on sales offers and/or recent
appraisals.
49
<PAGE>
Combined charge-offs of loans and real estate, net of recoveries and
realized gains and losses on the sales of real estate by type of collateral
are as follows:
<TABLE>
<CAPTION>
JUNE 30,
----------------------------------------------------------
1995 1994 1993 1992 1991
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
One-to-four unit residential . . . $ 2,112 $ 3,040 $12,916 $ 64 $ 157
Multifamily . . . . . . . . . . . . 15,406 9,343 6,891 4,486 1,400
Commercial . . . . . . . . . . . . 25,587 14,440 12,657 43,585 10,366
Construction . . . . . . . . . . . 6,709 36 9,604 35,638 1,262
Equity trust deed . . . . . . . . . 290 247 (5) -- 9
Consumer and other non-mortgage . . 724 833 1,154 236 617
------- ------- ------- ------- -------
$50,828 $27,939 $43,217 $84,009 $13,811
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Net realized losses and charge-offs
as a % of net loans and mortgage-
backed securities (1) . . . . . 2,234% 3.86% 4.53% 7.76% 0.82%
------- ------- ------- ------- -------
------- ------- ------- ------- -------
</TABLE>
____________
(1) Recoveries on consumer and other loans have not been segregated in the
accounts of the Bank due to their immateriality. Commercial loan
recoveries totaled $2.8 million for 1994, $137 thousand for 1993 and $2.4
million for 1992. Construction loan recoveries totaled $350 thousand in
1992. Recoveries on one-to-four unit residential loans were $42 thousand,
$10 thousand, $182 thousand, $65 thousand, and $106 thousand in fiscal
years 1994 through 1990, respectively.
In addition to losses charged against the allowance for loan losses, the
Bank has recorded losses on real estate acquired in settlement of loans by
direct write-off to real estate operations as loss on sale.
As the Bank continues to reduce nonperforming assets either through sale
or restructure, additional provisions for loan and real estate losses may be
incurred. The prices at which properties can be disposed are dependent on the
state of the California and national real estate economies, as well as the
availability of credit and financially viable buyers. Under current
conditions in the real estate markets, such efforts could result in
additional real estate losses which could deplete the existing capital of the
Company and the Bank.
REAL ESTATE HELD FOR INVESTMENT, DEVELOPMENT OR SALE
Real estate held for investment, development or sale at June 30, 1995
and 1994 is comprised of the real estate remaining from the Bank's branches
that have been sold and Uni-Cal's wholly-owned investments. At June 30, 1995,
real estate held for investment, development or sale totaled $359 thousand as
compared to $713 thousand at June 30, 1994. The decrease in fiscal year 1995
is due to the sale of one of the former banking offices and the sale of a
Uni-Cal wholly owned investment.
NON-INTEREST INCOME
Non-interest income consists of loan servicing fees, net of amortization
of capitalized loan servicing assets, loan fees, gains on sales of loans and
mortgage-backed securities, gain on sale of loan servicing, gain on sales of
investment securities held for sale, and other income.
Loan servicing fees, net of amortization of servicing assets, were $737
thousand in fiscal 1995 as compared to $893 thousand in fiscal 1994 and $230
thousand in fiscal 1993.
Gains (losses) on sales of loans and loan servicing were $(16.9) million
in fiscal 1995 compared to $919 thousand and $4.1 million in 1994 and 1993,
respectively. The significant loss of sale of loans and loan
50
<PAGE>
servicing assets in fiscal 1995 was attributable to the loss recognized in
connection with the Asset Sales of $18.6 million offset by gains in sales of
loan servicing of $623 thousand and gains on sales of loans of $1.1 million
during the year.
For the year ended June 30, 1995, the gain on sale of investment
securities and mortgage-backed securities held for sale totaled $308 thousand
compared to a loss during fiscal 1994 of $1.2 million and gains of $3.5
million in fiscal 1993. In the March 1994 quarter, the Bank incurred a
realized loss of $2.1 million from the sale of securities in the "held for
sale" portfolio. This loss, together with a $400 thousand write-down of
additional investment securities to their fair value at March 31, 1995,
followed the change in the direction of interest rates as the Federal Reserve
Bank acted to tighten credit. In fiscal 1995, the Bank sold the majority of
its investment portfolio prior to the Glendale Federal transaction as a means
of providing cash to fund the transfer of the deposit liability. These sales
resulted in gains totaling $386 thousand, which were offset by $78 thousand
in losses recognized earlier in the year.
Non-interest expense consists of general and administrative expense,
real estate operations, net, and core deposit intangible amortization.
General and administrative expenses, which consist of compensation and
related expenses, premises and occupancy, SAIF insurance premiums, other
operating expense, and other general and administrative expense, decreased to
$25.7 million for the fiscal year ended June 30, 1995, from $29.0 million and
$30.9 million for the fiscal years ended June 30, 1994 and June 30, 1993,
respectively.
The ratio of general and administrative expenses to average assets was
2.93% in fiscal 1995 compared to 2.91% and 2.18% for fiscal year 1994 and
1993, respectively. The ratio increases between periods reflect the lower
level of average total assets.
Real estate operations, net, consist of revenues and expenses of REO,
together with real estate held for investment, development or sale. In 1990,
the Company ceased undertaking any new real estate investment and development
projects. Since 1991, the Company has been winding down and disposing of its
real estate investment and development properties, and has incurred
substantial real estate losses. For the fiscal year ended June 30, 1995,
real estate operations, net, resulted in a loss of $6.5 million, compared to
$15.7 million and $27.3 million for fiscal years 1994 and 1993, respectively.
These losses were due to the provisions for real estate losses and net
expenses of the Bank's REO and in-substance foreclosed properties described
above.
INCOME TAX BENEFITS
The Company has utilized net operating losses for income tax purposes
for all periods through September 30, 1992. In December, 1992 the Company
recorded a tax benefit of approximately $6 million upon receipt of refunds of
taxes paid in prior years. No further income tax benefits can be recognized
until operations of the Company result in additional taxable income. The
effective tax rates for tax benefits reflected in the Company's financial
statements give effect to the timing of realization of tax refunds. For the
fiscal years 1995, 1994, and 1993, the respective effective tax rates were
(6.6)%, 0.01%, and (15.7)%.
At June 30, 1995, the Company had unused net operating losses ("NOL")
for federal income tax and California franchise tax purposes of $102 million
and $105 million, respectively. On August 5, 1994, the Company incurred an
"ownership change" within the meaning of Section 382 of the Internal Revenue
Code ("Section 382"). Section 382 generally provides that if a corporation
undergoes an ownership change, the amount of taxable income that the
corporation may offset after the date of the ownership change (the "change
date") with net operating loss carryforwards and certain built-in losses
existing on the change date will be subject to an annual limitation. In
general, the annual limitation equals the product of (i) the fair market
value of the corporation's equity on the change date (with certain
adjustments) and (ii) a long-term tax exempt bond rate of return published by
the Internal Revenue Service.
The Section 382 limitation will not have a material impact on the
financial statements of the Company as the Company has not utilized any net
operating losses to offset the reversal of taxable temporary differences.
51
<PAGE>
Although the Section 382 limitation will affect the Company's ability to
utilize its net operating loss carryovers and certain recognized built-in
losses, any income tax benefits attributable to those net operating loss
carryovers and recognized built-in losses will not be available until
operations of the Company result in additional taxable income. The annual
amount of the Section 382 limitation potentially available to the Company has
been estimated to approximate $563 thousand per year for a period of 15
years, for a potential NOL utilization of $8.44 million.
52
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report. . . . . . . . . . . . . . . . . . . . 54
Consolidated Statements of Financial Condition as of
June 30, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . 55
Consolidated Statements of Operations for the three years
ended June 30, 1995. . . . . . . . . . . . . . . . . . . . . . . 56
Consolidated Statements of Changes in Stockholders' Equity
for the three years ended June 30, 1995. . . . . . . . . . . . . 57
Consolidated Statements of Cash Flows for the three years
ended June 30, 1995. . . . . . . . . . . . . . . . . . . . . . . 58
Notes to Consolidated Financial Statements. . . . . . . . . . . . . 60
53
<PAGE>
The Board of Directors and Stockholders
UnionFed Financial Corporation:
We have audited the accompanying consolidated balance sheets of UnionFed
Financial Corporation and subsidiaries (the "Company") as of June 30, 1995 and
1994, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for each of the years in the three-year
period ended June 30, 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to report on
these consolidated financial statements based on the results of our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our audits to
obtain reasonable assurance about whether the consolidated 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 provide a
reasonable basis for our report.
In our opinion, the 1994 and 1993 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
UnionFed Financial Corporation and subsidiaries as of June 30, 1994, and the
results of their operations and their cash flows for each of the years in the
two-year period ended June 30, 1994, in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 13 to
the consolidated financial statements, the prompt corrective action provisions
of the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
place restrictions on any insured depository institution that does not meet
certain requirements, including minimum capital ratios. These restrictions are
based on an institution's FDICIA defined capital category and become
increasingly more severe as an institution's capital category declines. Union
Federal Bank, a federal savings bank (the "Bank"), and wholly owned subsidiary
of the Company, was deemed "undercapitalized" based upon the Bank's capital
position at June 30, 1995. The Bank anticipates continuing operating losses in
fiscal 1996 which will result in further deterioration of its regulatory capital
position. Further declines in its capital ratios such that it becomes
"critically undercapitalized" expose the Bank to regulatory take-over.
This situation raises substantial doubt about the Company's ability to continue
as a going concern. The ability of the Company to continue as a going concern
is dependent upon many factors, including management achieving its plan to
maintain a tangible equity capital ratio in excess of 2% and regulatory action.
Management's plans in regard to these matters are described in Note 13 to the
consolidated financial statements. The accompanying consolidated financial
statements do not include any adjustments that might result from the outcome of
these uncertainties.
As discussed in Note 15 to the consolidated financial statements, the Bank is a
defendant in a lawsuit alleging a claim for unpaid rent under certain lease and
sublease agreements to which the Bank is a party. Preliminary hearings and
discovery proceedings on this action are in progress. The ultimate outcome of
the litigation cannot presently be determined. Accordingly, no provision for
any liability that may result upon adjudication has been recognized in the
accompanying consolidated financial statements.
Because of the significance of the uncertainties discussed in the two preceding
paragraphs, we are unable to express, and we do not express, an opinion on the
accompanying 1995 consolidated financial statements.
As discussed in Note 1 to the consolidated financial statements, the Company
adopted the provisions of the Financial Accounting Standards Board's Statement
of Financial Accounting Standards No. 115 "Accounting for Certain Debt and
Equity Securities" in 1995 and No. 109 "Accounting for Income Taxes" in 1994.
KPMG PEAT MARWICK LLP
Orange County, California
October 11, 1995
54
<PAGE>
UNIONFED FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
AT JUNE 30,
------------------------------------------
1995 1994
-------------------- -----------------
(DOLLARS IN THOUSANDS EXCEPT SHARE
AND PER SHARE AMOUNTS)
<S> <C> <C>
ASSETS
Cash........................................................................ $ 1,588 $ 23,791
Restricted Cash............................................................. 3,214 11,300
Overnight funds sold........................................................ 1,000 3,000
U.S. Government and agency obligations and other securities available
for sale (1995) and held to maturity (1994) at amortized cost
(estimated market value of $2,499 (1995) and $61,407 (1994))........... 2,499 62,119
Mortgage-backed securities, net, held to maturity (estimated market
value of $153,733 (1994)).............................................. -- 157,783
Loans receivable, net of allowance for losses of $500 (1995)
and $24,963 (1994)..................................................... 2,244 521,635
Loans available for sale at market.......................................... -- 45,320
Interest receivable......................................................... 91 6,524
Real estate, net............................................................ 24,982 39,947
Investment in Federal Home Loan Bank stock, at cost......................... 100 5,419
Premises and equipment, net................................................. 343 18,051
Other assets................................................................ 1,095 9,087
---------- ----------
$ 37,156 $ 903,976
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Savings deposits....................................................... $ 34,170 $ 847,957
FHLB advances and other borrowings..................................... -- 15,464
Accounts payable and accrued liabilities............................... 594 3,180
Deferred income taxes.................................................. 391 2,690
---------- ----------
Total liabilities............................................... 35,155 869,291
---------- ----------
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 (1995 and
1994).............................................................. 272 272
Additional paid-in capital............................................. 107,943 107,943
Accumulated deficit.................................................... (106,214) (73,530)
---------- ----------
Total stockholders' equity...................................... 2,001 34,685
---------- ----------
$ 37,156 $ 903,976
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
55
<PAGE>
UNIONFED FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------------------
1995 1994 1993
---------- ---------- -----------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Interest on loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 39,567 $ 53,104 $ 75,126
Interest on mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . 10,831 6,093 6,335
Interest and dividends on investments. . . . . . . . . . . . . . . . . . . . . . 6,471 4,937 10,311
---------- ---------- ----------
Total interest income . . . . . . . . . . . . . . . . . . . . . . 56,869 64,134 91,772
---------- ---------- ----------
Interest on savings deposits . . . . . . . . . . . . . . . . . . . . . . . . . . 35,430 32,586 49,878
Interest on borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 780 3,711 16,095
---------- ---------- ----------
Total interest expense. . . . . . . . . . . . . . . . . . . . . . 36,210 36,297 65,973
---------- ---------- ----------
Net interest income before provision for estimated
loan losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,659 27,837 25,799
Provision for estimated loan losses. . . . . . . . . . . . . . . . . . . . . . . 14,382 14,350 18,603
---------- ---------- ----------
Net interest income after provision for estimated
loan losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,277 13,487 7,196
---------- ---------- ----------
Non-interest income:
Loan servicing fee, net of amortization. . . . . . . . . . . . . . . . . . 737 893 230
Loan fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 320 832 1,375
(Loss)/gain on sale of loans related to
Bulk Asset Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . (18,562) -- --
Other, (loss)/gain on sale of loans. . . . . . . . . . . . . . . . . . . . 1,080 (9) 2,019
Gain on sales of loan servicing. . . . . . . . . . . . . . . . . . . . . . 623 928 2,100
(Loss)/gain on sale and mark-to-market of
investment securities and mortgage-backed
securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 308 (1,158) 3,536
Gain on sale of branches . . . . . . . . . . . . . . . . . . . . . . . . . 4,668 1,496 1,315
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,527 2,488 3,181
---------- ---------- ----------
Total non-interest income . . . . . . . . . . . . . . . . . . . . (8,299) 5,470 13,756
---------- ---------- ----------
Non-interest expense:
General and administrative expense:
Compensation and related expenses . . . . . . . . . . . . . . . . . . 10,361 12,160 13,363
Premises and occupancy. . . . . . . . . . . . . . . . . . . . . . . . 4,225 4,251 5,191
SAIF insurance premium. . . . . . . . . . . . . . . . . . . . . . . . 2,501 2,918 2,793
Office operating expense. . . . . . . . . . . . . . . . . . . . . . . 5,868 6,651 6,534
Other general and administrative. . . . . . . . . . . . . . . . . . . 2,734 3,026 3,029
---------- ---------- ----------
Total general and administrative expense. . . . . . . . . . . . . 25,689 29,006 30,910
Real estate operations, net. . . . . . . . . . . . . . . . . . . . . . . . 6,480 15,743 27,277
Core deposit intangible amortization . . . . . . . . . . . . . . . . . . . 790 662 845
---------- ---------- ----------
Total non-interest expense. . . . . . . . . . . . . . . . . . . . 32,959 45,411 59,032
---------- ---------- ----------
Loss before income tax expense/(benefit). . . . . . . . . . . . . (34,981) (26,454) (38,080)
Income tax expense/(benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . (2,297) 3 (5,996)
---------- ---------- ----------
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (32,684) $ (26,457) $ (32,084)
---------- ---------- ----------
---------- ---------- ----------
Net loss per common share. . . . . . . . . . . . . . . . . . . . . . . . . . . . $(1.20) $(1.28) $(43.07)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
56
<PAGE>
UNIONFED FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
THREE YEARS ENDED JUNE 30, 1995
----------------------------------------------------------------
ADDITIONAL
COMMON PAID-IN ACCUMULATED TREASURY
STOCK CAPITAL DEFICIT STOCK TOTAL
------ ---------- ----------- -------- -----
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
BALANCE AT JUNE 30, 1992 . . . . . . . . $ 51 $ 65,490 $ (14,989) $ (1,426) $ 49,126
Net loss . . . . . . . . . . . . . . . . -- -- (32,084) -- (32,084)
--- ------- --------- ------- -------
BALANCE AT JUNE 30, 1993 . . . . . . . . 51 65,490 (47,073) (1,426) 17,042
Issuance of 26,457,143 shares of
Common Stock . . . . . . . . . . . . 221 43,879 -- -- 44,100
Treasury Stock Retired . . . . . . . . . -- (1,426) -- 1,426 --
Net Loss . . . . . . . . . . . . . . . . -- -- (26,457) -- (26,457)
--- ------- --------- ------- -------
BALANCE AT JUNE 30, 1994 . . . . . . . . 272 107,943 (73,530) -- 34,685
Net Loss . . . . . . . . . . . . . . . . -- -- (32,684) -- (32,684)
--- ------- --------- ------- -------
BALANCE AT JUNE 30, 1995 . . . . . . . . $272 $107,943 $(106,214) $ -- $ 2,001
--- ------- --------- ------- -------
--- ------- --------- ------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
57
<PAGE>
UNIONFED FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------------
1995 1994 1993
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES (DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (32,684) $ (26,457) $ (32,084)
Adjustments to reconcile net loss to cash
provided by (used in) operating activities:
Net decrease in loan fees and discounts. . . . . . . . . . . . . . (2,051) (428) (2,018)
Depreciation and amortization. . . . . . . . . . . . . . . . . . . 1,745 2,519 2,972
Provisions for loan and real estate losses . . . . . . . . . . . . 17,777 27,107 40,692
(Gain)/Loss on sale and write-down of investment
securities and mortgage-securities, net. . . . . . . . . . . . . (308) 1,158 (3,536)
Loss/(Gain) on sales and write-down of Loans . . . . . . . . . . . 17,482 9 (2,019)
Gain on sales of loan servicing. . . . . . . . . . . . . . . . . . (623) (928) (2,100)
Gain on sales of real estate . . . . . . . . . . . . . . . . . . . 12 32,986 (285)
Gain on sales of branches. . . . . . . . . . . . . . . . . . . . . (4,668) (1,496) (1,315)
Federal Home Loan Bank stock dividends . . . . . . . . . . . . . . (232) (267) (273)
Proceeds from sale of loan servicing . . . . . . . . . . . . . . . 794 44,211 5,441
Purchases of mortgage servicing rights . . . . . . . . . . . . . . -- -- (1,605)
Proceeds from sales of loans held for sale . . . . . . . . . . . . 120,032 142,447 30,523
Decrease in interest and dividends receivable. . . . . . . . . . . . 3,723 365 3,413
Decrease in income tax refund receivable . . . . . . . . . . . . . . -- -- 15,726
Decrease in prepaid expenses and other assets. . . . . . . . . . . . 3,566 3,526 1,097
Decrease in interest payable . . . . . . . . . . . . . . . . . . . . (265) (354) (2,390)
Increase (decrease) in accounts payable and accrued liabilities . . 5,322 (11,150) (7,017)
Increase (decrease) in deferred income taxes . . . . . . . . . . . . (2,299) (68) 2,758
---------- ---------- ----------
Net cash provided by (used in) operating activities. . . . . . . . 127,434 143,180 47,980
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES . . . . . . . . . . . . . . . .
Proceeds from maturities and sales of investment securities. . . . . 76,852 16,961 207,019
Proceeds from sales of investment securities held
for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 24,284 170,053
Purchases of investment securities held for sale . . . . . . . . . . -- -- (118,855)
Purchases of mortgage-backed securities held for sale. . . . . . . . -- (82,313) (154,427)
Loans originated and purchased, held for sale. . . . . . . . . . . . (95,304) (206,058) (280,496)
Proceeds from sales of mortgage-backed securities, held
for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156,210 285,642
Proceeds from sale of mortgage-backed
securities, available for sale . . . . . . . . . . . . . . . . . . 18,080 -- --
Purchases of investment securities held to maturity. . . . . . . . . (30,519) (40,829) --
Purchase of mortgage-backed securities,
available for sale . . . . . . . . . . . . . . . . . . . . . . . . (38,432) -- --
Principal reductions on mortgage-backed securities . . . . . . . . . 10,294 21,106 16,215
Principal reduction on loans . . . . . . . . . . . . . . . . . . . . 54,701 112,556 166,957
Purchases of mortgage-backed securities,
held for investment. . . . . . . . . . . . . . . . . . . . . . . . -- (105,844) (14,654)
Loans originated, held to maturity . . . . . . . . . . . . . . . . . (18,573) (26,368) (18,832)
Net change in undisbursed loan funds . . . . . . . . . . . . . . . . (166) (3,158) (5,251)
Proceeds from sale of mortgage-backed securities,
held to maturity . . . . . . . . . . . . . . . . . . . . . . . . . 153,167 -- --
Acquisitions of real estate. . . . . . . . . . . . . . . . . . . . . (6,340) (4,450) (9,809)
Proceeds from disposition of real estate . . . . . . . . . . . . . . 15,409 49,671 54,279
Redemption of FHLB loan stock. . . . . . . . . . . . . . . . . . . . 5,551 1,491 21,613
Proceeds from bulk asset sale. . . . . . . . . . . . . . . . . . . . 82,477 -- --
Branch (sales) . . . . . . . . . . . . . . . . . . . . . . . . . . . (354,981) (122) (84,339)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (17,025) (894) 6,565
---------- ---------- ----------
Net cash provided by (used in) investing activities. . . . . . (144,809) (87,757) 241,680
---------- ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
58
<PAGE>
UNIONFED FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------------
1995 1994 1993
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (981) $ (7,871) $(133,373)
Proceeds from short term borrowings. . . . . . . . . . . . . . . . . . . . . . -- 14,525 --
Repayment in-short-term borrowings . . . . . . . . . . . . . . . . . . . . . . (933) (14,858) (5,653)
Repayment of medium-term notes . . . . . . . . . . . . . . . . . . . . . . . . -- -- (7,000)
Repayment of long-term borrowings. . . . . . . . . . . . . . . . . . . . . . . -- (2,026) (2,717)
Additional FHLB advances . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 545,000 50,000
Proceeds from issuance of common stock . . . . . . . . . . . . . . . . . . . . -- 44,100 --
Repayments of FHLB advances. . . . . . . . . . . . . . . . . . . . . . . . . . (13,000) (632,000) (200,000)
--------- --------- ---------
Net cash used in financing activities. . . . . . . . . . . . . . . . . . . (14,914) (53,130) (298,743)
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents . . . . . . . . . . . . . (32,289) 2,293 (9,083)
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . 38,091 35,798 44,881
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD . . . . . . . . . . . . . . . . . . $ 5,802 $ 38,091 $ 35,798
--------- --------- ---------
--------- --------- ---------
SALES OF BRANCHES:
Loans and securities and accrued interest. . . . . . . . . . . . . . . . . . $ 438,896 $ 163,719 $ 55,253
Premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,963 1,471 1,353
Excess of cost over net assets acquired. . . . . . . . . . . . . . . . . . . -- 38 986
Other assets and real estate owned . . . . . . . . . . . . . . . . . . . . . 7,472 (36) 117
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (812,806) (166,218) (142,948)
Other liabilities and borrowings . . . . . . . . . . . . . . . . . . . . . . (9,174) (592) (415)
Gain on sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,668 1,496 1,315
--------- --------- ---------
Net cash used by sales of branches, net. . . . . . . . . . . . . . . . . $(354,981) $ (122) $ (84,339)
--------- --------- ---------
--------- --------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest (net of amount capitalized) . . . . . . . . . . . . . . . . . . . . $ 36,474 $ 36,651 $ 68,868
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 40 36
Non cash investing and financing activities:
Additions to real estate acquired in settlement of loans . . . . . . . . . . 14,701 45,422 33,833
Loans exchanged for mortgage-backed securities . . . . . . . . . . . . . . . 9,522 133,253 159,555
Loans to facilitate the sale of real estate. . . . . . . . . . . . . . . . . 1,781 8,196 10,616
</TABLE>
See accompanying notes to consolidated financial statements.
59
<PAGE>
UNIONFED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995, 1994 AND 1993
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of UnionFed
Financial Corporation and its subsidiaries, (the "Company"), which is a holding
company primarily engaged in the financial services business through Union
Federal Bank, a federal savings bank (the "Bank"). The Company is also engaged
in trustee services and, previously, insurance agency operations and real estate
development, through subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation. Certain prior year amounts
have been restated to conform to the current year presentation.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements have been prepared in conformity
with generally accepted accounting principles. In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the date of the
balance sheets and operations for the periods. Actual results could differ
significantly from those estimates.
Material estimates that are particularly susceptible to significant
change in the near-term relate to the determination of the allowance for loan
losses and the valuation of real estate. Management believes that the
allowances established for losses on loans and real estate are adequate. While
management uses available information to recognize losses on loans and real
estate, future additions to the allowances may be necessary based on changes in
economic conditions. In addition, various regulatory agencies, as an integral
part of their examination process, periodically review the Company's allowances
for losses on loans and real estate. Such agencies may require the Company to
recognize additions to the allowances based on their judgments about information
available to them at the time of their examination.
CASH
The Company is required by the Federal Reserve System to maintain non-
interest earning cash reserves against certain of its transaction and term
deposit accounts. At June 30, 1995, the required reserves totaled $35 thousand.
RESTRICTED CASH
Restricted cash at June 30, 1995 represented cash held in escrow in
relation to asset sales for potential breaches of representations and
warranties. Restricted cash at June 30, 1994 related to cash accounts
associated with private placement mortgage pass-through certificates.
U.S. GOVERNMENT AND AGENCY OBLIGATIONS AND OTHER SECURITIES
In May 1993, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities" ("SFAS 115"). SFAS 115 requires that investments
be classified as "held to maturity," "available for sale" or "trading
securities." The statement defines investments in securities as "held to
maturity" based upon a positive intent and ability to
60
<PAGE>
hold those securities to maturity. Investments held to maturity are to be
reported at amortized cost. Debt and equity securities that are bought and held
principally for the purpose of selling them in the near term are classified as
"trading securities" and are to be reported at fair value, with unrealized gains
and losses included in operations. Equity and debt securities not classified as
"held to maturity" or "trading securities" are classified as "available for
sale" and are recorded at fair value, with unrealized gains and losses excluded
from operations and reported as a separate component of stockholders' equity,
net of the tax effect.
SFAS 115 was adopted by the Company as of July 1, 1994.
The designation of securities is made by management at the time of
acquisition.
PREMISES AND EQUIPMENT
Premises and equipment are amortized on a straight-line basis over the
estimated useful lives of the assets. Leasehold improvements are amortized over
the lives of the respective leases or the useful lives of the improvements,
whichever is shorter.
LOANS RECEIVABLE AND MORTGAGE-BACKED SECURITIES HELD FOR SALE
The Company has identified those loans receivable and mortgage-backed
securities ("MBS") which may be sold prior to maturity. These assets have been
classified as held for sale on the accompanying consolidated statement of
financial condition and are recorded at the lower of amortized cost or market
value on an aggregate basis by type of asset. Net unrealized losses are
recognized in a valuation allowance by charges to income. For loans, market
value is calculated on an aggregate basis as determined by outstanding
commitments from investors, or, in the absence of such commitments, the current
market investor yield requirement. Market values for MBS are determined by
financial market quotations which are generally available.
Gain or loss on sale of loans receivable and mortgage-backed
securities is based on the specific identification method.
LOANS RECEIVABLE AND MORTGAGE-BACKED SECURITIES
Loans receivable and mortgage-backed securities are stated at
principal balances net of unearned discounts and premiums, which are accreted or
amortized to interest income using the interest method over the estimated
remaining lives of the loans and securities.
The Company provides an allowance for accrued interest on loans when
the collection of the interest appears doubtful. The allowance is netted
against accrued interest receivable and interest income for financial statement
purposes. It is the Company's general policy to cease the accrual of interest
on any loan when the payment of interest is 90 or more days delinquent or
earlier if the collection of interest appears doubtful. Interest is
subsequently accrued when such loans are brought current and the Company
believes the interest and principal for the loan is collectible.
A loan is classified as a restructured loan when certain
modifications, such as the reduction of interest rates to below market or
forgiveness or deferral of principal payments, are made to contractual terms due
to a borrower's financial condition. Certain restructured loan agreements call
for additional interest or principal to be paid on a deferred or contingent
basis.
The Company has originated acquisition, development, and construction
loans ("AD&C loans") with the following characteristics: (1) the borrower has
title to the property but little or no equity in the underlying security and
(2) the Company participates in the profit on the ultimate sale of the project
(the percentage or term of profit participation varies). The Company recognizes
profit on sales when the project is sold to unrelated third
61
<PAGE>
parties, adequate down payment has been received and the collectibility of the
sales price is reasonably assured and the Company is not obligated to perform
significant activities after the sale. During the construction period of
projects securing AD&C loans, interest in excess of the Company's cost of funds
and fees collected on the loans are deferred and are not recognized in income
until sales occur.
ALLOWANCE FOR LOAN LOSSES
It is the Company's policy to provide an allowance for estimated
losses on loans when it is probable that the value of the asset has been
impaired and the loss can be reasonably estimated. Various factors will affect
the level of allowances, including economic conditions, trends and previous loss
experience. While management uses currently available information to provide
for losses on loans, future additions to the allowance may be necessary based on
future economic conditions. In addition, the regulatory agencies periodically
review the allowance for loan losses and such agencies may require the Company
to recognize additions to the allowance based on information and factors not
available to management. Additions to the allowance are made by a charge
against operations. Charge-offs are made when loans are considered
uncollectible or are transferred to real estate owned. Recoveries are credited
to the allowance when received.
LOAN ORIGINATION FEES AND RELATED COSTS
The Company defers loan origination fees and related incremental
direct loan origination costs and recognizes the net fee or cost in income using
the interest method over the contractual life of the loans, adjusted for
estimated prepayments based on historical prepayment experience. The
amortization of deferred fees and costs is discontinued on loans that are
contractually 90 days delinquent.
REAL ESTATE
Real estate consists of real estate held for investment or sale, real
estate acquired in settlement of loans and loans accounted for as in-substance
foreclosures. Real estate held for sale or investment is carried at the lower
of cost or fair value. Real estate acquired in settlement of loans or through
deed-in-lieu of foreclosure is recorded at fair value less estimated selling
costs, as supported by independent appraisals, list prices or broker's opinions
of value. Costs, including interest, of holding real estate in the process of
development or improvement are capitalized, whereas costs relating to holding
other property are expensed. The Company utilizes the equity method of
accounting for investments in non-controlled joint ventures. The Company defers
interest income and loan fees from loans to joint ventures equivalent to its
percentage interest in those joint ventures. The recognition of gains on sale
of real estate is dependent upon various factors relating to the nature of the
property sold, the terms of the sale and the future involvement of the Company.
When there is indication that a borrower no longer has equity in
property collateralizing a loan and it is doubtful that equity will be rebuilt
in the foreseeable future, the property is considered repossessed in-substance
("in-substance foreclosure"). Both in-substance foreclosure and real estate
acquired in settlement of loans are recorded at fair value of the collateral at
the time of foreclosure. Subsequently, valuation allowances for estimated
losses are provided against real estate operations income if the carrying value
of real estate exceeds estimated fair value less estimated selling costs. Legal
fees, direct costs, including estimated foreclosure and other related costs, are
expensed as incurred. While management uses currently available information to
provide for losses on real estate, future additions to the allowance may be
necessary based on future economic conditions. In addition, the regulatory
agencies periodically review the allowance for real estate losses and such
agencies may require the Company to recognize additions to the allowance based
on information and factors not available to management.
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<PAGE>
COSTS IN EXCESS OF THE FAIR VALUE OF NET ASSETS ACQUIRED
Costs in excess of the fair value of net assets acquired less
liabilities assumed in connection with the purchase of branch facilities are
generally being charged to operations over a ten-year period using the straight-
line method. Branch purchase premiums included in other assets amounted to $0
(1995) and $2.53 million (1994).
GAINS ON SALE OF LOANS AND MORTGAGE-BACKED SECURITIES AND AMORTIZATION
OF LOAN SERVICING ASSETS
The Company sells loans and participations in loans for cash proceeds
equal to the market value of the loans and participations sold with yield rates
to the investors based upon current market rates. Gain or loss on loans sold is
recognized in an amount equal to the difference between the book value of the
loans sold and the sum of the cash proceeds from the sale (net of discounts,
commitment fees paid, and other loan sale costs), plus any capitalized excess
servicing on the loans sold. Capitalized excess servicing is the present value
of any difference between the interest rate charged to the borrower and the
interest rate paid to the purchaser after deducting a normal servicing fee.
Capitalized excess servicing is amortized against loan servicing income using
the interest method over the estimated life of such loans. Adjustments for
unanticipated prepayments and changes in estimated future prepayments are made
if the estimated future net servicing income, computed on a discounted basis, is
less than the balance of capitalized excess servicing. Capitalized excess
servicing included in other assets amounted to $0 (1995) and $118 thousand
(1994).
INCOME TAXES
On February 10, 1992, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 109. "Accounting for
Income Taxes" (SFAS 109), which changes the method of accounting for income
taxes from the deferred method under Accounting Principles Board Opinion No. 11
(APB 11) to the asset and liability method. Under APB 11, amounts accrued for
Federal and California state income taxes are based on income reported in the
consolidated financial statements at current tax rates. Such amounts generally
include deferred taxes resulting from timing differences in the recognition of
income and expenses. Under SFAS 109, deferred tax liabilities are recognized on
all taxable temporary differences (reversing differences where tax deductions
initially exceed financial statement expense, or income is reported for
financial statement purposes prior to being reported for tax purposes). In
addition, deferred tax assets are recognized on all deductible temporary
differences (reversing differences where financial statement expense initially
exceeds tax deductions, or income is reported for tax purposes prior to being
reported for financial statement purposes) and operating loss and tax credit
carryforwards. Valuation allowances are established to reduced deferred tax
assets if it is determined to be "more likely than not" that all or some portion
of the potential deferred tax assets will not be realized. Other significant
changes made by SFAS 109 include: (i) a deferred tax asset may be recognized
for the financial statement general valuation allowance for loans and REO, while
a deferred tax liability must be recognized for that portion of the tax bad debt
reserve exceeding the "base year" reserves, and (ii) current tax benefits based
upon the future implementation of tax planning strategies should be net of any
expenses or losses, and the underlying strategy must be prudent and feasible.
At July 1, 1993, the Company adopted SFAS 109. The cumulative effect of the
adoption of SFAS 109 was not considered material to the financial statements.
NET LOSS PER SHARE
Net loss per share is based on net loss divided by the weighted
average number of common shares outstanding, including the dilutive effect of
outstanding stock options. After giving effect to the one-for-ten reverse stock
split effective in August, 1993, and the issuance of 26,457,143 shares in
conjunction with the Company's recapitalization in 1993, the number of shares
used in computing net loss per share was 27,201,993 for 1995, 20,674,000 for
1994 and 744,950 for 1993.
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<PAGE>
CURRENT ACCOUNTING PRONOUNCEMENTS
In May 1993, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 114, "Accounting by Creditors
for Impairment of a Loan" ("SFAS 114") and in October 1994, the FASB issued
Statement of Financial Accounting Standards No. 118, "Accounting by Creditors
for Impairment of a Loan-Income Recognition and Disclosures" ("SFAS 118").
Under the provisions of SFAS 114, a loan is considered impaired when, based on
current information and events, it is probable that a creditor will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. SFAS 114 requires creditors to measure impairment of a loan based on
the present value of expected future cash flows discounted at the loan's
effective interest rate. If the measure of the impaired loan is less than the
recorded investment in the loan, a creditor shall recognize the impairment by
recording a valuation allowance with a corresponding charge to provision for
estimated losses on loans. This statement also applies to restructured loans
and eliminates the requirement to classify loans that are in-substance
foreclosures as foreclosed assets except for loans where the creditor has
physical possession of the underlying collateral but not legal title. SFAS 114
applies to financial statements for fiscal years beginning after December 15,
1994. The Company expects to adopt the statement on July 1, 1995 and does not
expect that the adoption of the statement will have a material impact on the
Company's results of operations or financial position.
SFAS 118 amends SFAS 114 to allow a creditor to use existing methods
for recognizing interest income on impaired loans. In addition, SFAS 118 amends
certain disclosure requirements of SFAS 114.
In October 1994, the FASB issued Statement of Financial Accounting
Standards No. 119, "Disclosure About Derivative Financial Instruments and Fair
Value of Financial Instruments" ("SFAS 119"). This statement amends Statement
of Financial Accounting Standards No. 105, "Disclosure of Information About
Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments with
Concentrations of Credit Risk" and Statement of Financial Accounting Standards
No. 107, "Disclosures About Fair Value of Financial Instruments," and provides
specific disclosure requirements for derivative financial instruments. SFAS 119
is effective for financial statements issued for fiscal years ending after
December 15, 1994. The disclosures required by SFAS 119 with respect to the
fair value of financial instruments are included herein. The Company does not
utilize derivative financial instruments.
In March 1995, the FASB issued Statement of Financial Accounting
Standards No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of." SFAS 121 requires that
long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or circumstances indicate that the carrying amount of
an asset may not be recoverable. However, SFAS 121 does not apply to financial
instruments, mortgage and other servicing rights or deferred tax assets. SFAS
121 is effective for fiscal years beginning after December 15, 1995. The
adoption of SFAS 121 will have no material impact on the Company's financial
statements.
In May 1995, the FASB issued Statement of Financial Accounting
Standards No. 122 ("SFAS 122"), "Accounting for Mortgage Servicing Rights, an
amendment to Statement of Financial Accounting Standards No. 65." SFAS 122
requires an institution that purchases or originates mortgage loans and sells or
securitizes those loans with servicing rights retained to allocate the total
cost of the mortgage loans to the mortgage servicing rights and the loans
(without the mortgage servicing rights) based on their relative fair values. In
addition, institutions are required to assess impairment of the capitalized
mortgage servicing portfolio based on the fair value of those rights on a
stratum-by-stratum basis with any impairment recognized through a valuation
allowance for each impaired stratum. Capitalized mortgage servicing rights
should be stratified based upon one or more of the predominate risk
characteristics of the underlying loans such as loan type, size, note rate, date
of origination, term and/or geographic location. SFAS 122 is effective for
fiscal years beginning after December 15, 1995. The adoption of SFAS 122 will
have no material impact on the Company's financial statements.
64
<PAGE>
NOTE 2 - SIGNIFICANT TRANSACTIONS
During fiscal year 1995 the Company completed two significant
transactions in order to comply with a prompt corrective action directive
(the "Directive") of the Office of Thrift Supervision requiring a sale, merger
or recapitalization transaction. First, the Company sold $136 million of its
classified commercial, industrial and multi-family loans and real estate
portfolio, principally to "bulk sale" institutional buyers. This bulk sale of
assets resulted in a loss on sales of $18,562, net of any allowances for
estimated losses established for these assets. The sale generated proceeds of
$101 million, including $3.6 million in funds "held-back" in an escrow account
for potential representation and warranty breaches. At June 30, 1995, the Bank
had established a reserve of $400 thousand to cover potential claims for
breaches of representations and warranties. Second, the Company sold 13 of its
14 retail banking offices and $822 million of related deposit liabilities to
Glendale Federal Bank, a federal savings bank ("Glendale Federal"). At closing
the Company transferred cash and other assets, principally single family and
non-classified commercial and multi-family real estate loans, at net book
value, to Glendale Federal to offset the deposit and other liabilities assumed
by Glendale Federal. As a result of the Glendale Federal transaction the Bank
recorded a gain of $4.7 million. In connection with the Glendale Federal
transaction, the Bank liquidated $209 million of its investment securities
portfolio in May 1995 for a gain of $386 thousand. The assets that were sold
in each of the above transactions had previously been classified as Held to
Maturity. Compliance with the Directive caused the Bank to sell assets from
the Held to Maturity category.
NOTE 3 - U.S. GOVERNMENT AND AGENCY OBLIGATIONS AND OTHER SECURITIES
The amortized cost and estimated market value of U.S. Government and
agency obligations and other securities held to maturity at June 30 are
summarized as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ----------- ---------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
1995
Available for Sale:
U.S. Government and agency obligations. . . . . . . . . $ 2,499 $ -- $ -- $ 2,499
----------- ----------- ---------- ---------
----------- ----------- ---------- ---------
1994
Held to Maturity:
U.S. Government and agency obligations. . . . . . . . . $ 62,119 $ -- $ (712) $ 61,407
----------- ----------- ---------- ---------
----------- ----------- ---------- ---------
</TABLE>
The contractual maturity of U.S. Government and agency obligations and
other investment securities at June 30, 1995, by amortized cost and estimated
market value, are shown below.
<TABLE>
<CAPTION>
WITHIN
1 YEAR
----------------------
AMORTIZED COST (DOLLARS IN THOUSANDS)
<S> <C>
Available for Sale:
U.S. Government and agency obligations. . . . . . . $ 2,499
---------
---------
ESTIMATED MARKET VALUE
Available for Sale:
U.S. Government and agency obligations. . . . . . . $ 2,499
---------
---------
</TABLE>
65
<PAGE>
Accrued interest receivable for investments amounted to $42 thousand
(1995) and $1.5 million (1994). Gross realized gains from sales, and gross
realized losses from sales and mark-to-market write-downs of investment
securities were $884 thousand and $527 thousand, respectively in 1995, $76
thousand and $277 thousand, respectively in 1994, and $2.1 million and $1
thousand, respectively in 1993.
NOTE 4 - MORTGAGE-BACKED SECURITIES
The amortized cost and estimated market value of mortgage-backed securities
held to maturity at June 30, 1994(1) are summarized as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---------- ----------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Held for Investment:
GNMA Certificates. . . . . . . . . . . . . . . . . . . . $ 106,772 $ -- $ (2,269) $ 104,503
FNMA Certificates. . . . . . . . . . . . . . . . . . . . 32,783 -- (874) 31,909
FHLMC Certificates . . . . . . . . . . . . . . . . . . . 3,205 -- (94) 3,111
Collateralized mortgage obligations. . . . . . . . . . . 14,993 4 (787) 14,210
Mortgage pass-through securities issued by
the Bank . . . . . . . . . . . . . . . . . . . . . . 30 -- (30) --
--------- -------- ---------- ---------
Total. . . . . . . . . . . . . . . . . . . . . . $ 157,783 $ 4 $ (4,054) $ 153,733
--------- -------- ---------- ---------
--------- -------- ---------- ---------
</TABLE>
__________________
(1) The balance of this asset was zero at June 30, 1995 and the information is
not applicable
The weighted average interest rate at June 30, 1994 on mortgage-backed
securities giving effect to amortization of discounts and premiums was 6.61%.
Eighty-nine percent (89%) of the Company's mortgage-backed securities included
in the held for investment portfolio, at June 30, 1994 had contractual
maturities in excess of ten years.
Gross realized gains from sales, and gross realized losses
from sales and mark-to-market write-downs of mortgage-backed securities held to
maturity were $23 thousand and $157 thousand, respectively in fiscal 1995,
$1.9 million and $2.9 million, respectively, in fiscal 1994, and $2.5 million
and $689 thousand, respectively, in fiscal 1993.
Accrued interest receivable on mortgage-backed securities amounted to
$818 thousand (1994).
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<PAGE>
NOTE 5 - LOANS RECEIVABLE
Loans receivable and loans held for sale at June 30 are summarized as
follows:
<TABLE>
<CAPTION>
1995 1994
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Held for Investment:
Real estate loans
First trust deed residential loans
One-to-four units. . . . . . . . . . . . . . . . . . . . . . . $ -- $ 152,726
Five or more units . . . . . . . . . . . . . . . . . . . . . . -- 166,779
Other real estate loans
Construction . . . . . . . . . . . . . . . . . . . . . . . . . -- 6,924
Commercial and land. . . . . . . . . . . . . . . . . . . . . . -- 202,017
Acquisition, development and construction. . . . . . . . . . . -- --
Equity trust deed. . . . . . . . . . . . . . . . . . . . . . . 2,744 6,279
---------- ------------
534,725
Consumer and other. . . . . . . . . . . . . . . . . . . . . . . . . . -- 14,090
---------- ------------
2,744 548,815
Less
Deferred fees, premiums and discounts. . . . . . . . . . . . . -- 2,051
Loans in process . . . . . . . . . . . . . . . . . . . . . . . -- 166
Allowance for estimated losses . . . . . . . . . . . . . . . . 500 24,963
---------- ------------
Total loans receivable held for investment:. . . . . . . . . . . . . . . $ 2,244 $ 521,635
---------- ------------
---------- ------------
Held for sale:
First trust deed residential loans . . . . . . . . . . . . . . . . $ -- $ 45,320
---------- ------------
Total loans held for sale. . . . . . . . . . . . . . . . . . . . . . . . $ -- $ 45,320
---------- ------------
---------- ------------
Weighted average interest rate at June 30 giving effect to
yield adjustments . . . . . . . . . . . . . . . . . . . . . . . 10.81% 7.28%
---------- ------------
---------- ------------
</TABLE>
The Company serviced loans for others totaling $0 (1995),
$131.6 million (1994), and $545.8 million (1993).
The following table summarizes the Company's real estate loan and
mortgage-backed securities portfolios by property type, geographic location and
risk concentration at June 30 are summarized as follows (1):
<TABLE>
<CAPTION>
CALIFORNIA FLORIDA MAINE ARIZONA ALL OTHER TOTAL
---------- ------- ------- ------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Multifamily . . . . . . . . . . $ 2,744 -- -- -- -- $ 2,744
---------- ------- ------- ------- ------- ----------
---------- ------- ------- ------- ------- ----------
Totals June 30, 1995 . . . . . $ 2,744 $ -- $ -- $ -- $ -- $ 2,744
---------- ------- ------- ------- ------- ----------
---------- ------- ------- ------- ------- ----------
% of real estate loans . . . . 100.00% --% --% --% --% 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%
---------- ------- ------- ------- ------- ----------
---------- ------- ------- ------- ------- ----------
</TABLE>
- ----------------
(1) Principal balances before deduction of loans-in-process, deferred income,
discounts, premiums and allowance for losses.
67
<PAGE>
Activity in the allowance for estimated losses on loans for the years
ended June 30, 1995, 1994 and 1993 is as follows:
<TABLE>
<CAPTION>
REAL ESTATE CONSUMER TOTAL
LOANS LOANS LOANS
--------------- --------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at June 30, 1992 . . . . . . . . . . . . . . . . $ 17,638 $ 186 $ 17,824
Provision for losses . . . . . . . . . . . . . . . . . . 17,559 1,044 18,603
Charge-offs. . . . . . . . . . . . . . . . . . . . . . . (15,224) (777) (16,001)
Recoveries . . . . . . . . . . . . . . . . . . . . . . . 147 -- 147
----------- -------- -----------
Balance at June 30, 1993 . . . . . . . . . . . . . . . . 20,120 453 20,573
Provision for losses . . . . . . . . . . . . . . . . . . 14,167 183 14,350
Charge-offs. . . . . . . . . . . . . . . . . . . . . . . (11,975) (424) (12,399)
Recoveries . . . . . . . . . . . . . . . . . . . . . . . 2,439 -- 2,439
----------- -------- -----------
Balance at June 30, 1994 . . . . . . . . . . . . . . . . 24,751 212 24,963
Provision for losses . . . . . . . . . . . . . . . . . . 14,382 -- 14,382
Charge-offs. . . . . . . . . . . . . . . . . . . . . . . (38,933) (212) (39,145)
Recoveries . . . . . . . . . . . . . . . . . . . . . . . 300 -- 300
----------- -------- -----------
Balance at June 30, 1995 . . . . . . . . . . . . . . . . $ 500 $ -- $ 500
----------- -------- -----------
----------- -------- -----------
</TABLE>
The aggregate amount of nonaccrual loans receivable that are
contractually past due 90 days or more as to principal or interest and loans
that have been restructured are as follows:
<TABLE>
<CAPTION>
JUNE 30
---------------------------------
1995 1994
-------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Nonaccrual . . . . . . . . . $ -- $ 22,125
-------- --------
-------- --------
Restructured . . . . . . . . $ -- $113,676
-------- --------
-------- --------
</TABLE>
At the end of the year, interest on nonaccrual loans excluded from
interest income was $0 (1995), $1.2 million (1994), and $2.4 million (1993).
Interest on nonaccrual loans at the end of the year included in interest income
was $467 thousand (1994) and $1.1 million (1993).
Under the original terms of the restructured loans at June 30, 1995,
interest earned would have totaled $0 (1995), $11.1 million (1994), and $12.1
million (1993). Under the restructured terms of the loans, interest income
recorded amounted to $0 (1995), $9.9 million (1994), and $10.0 million (1993).
The Company charged off $675 thousand (1994) and $26.8 million (1993) in
connection with restructured loans.
Accrued interest receivable at June 30 amounted to $49 thousand (1995)
and $4.2 million (1994).
There were no loans receivable from officers and directors at June 30,
1995.
68
<PAGE>
NOTE 6 - REAL ESTATE, NET
Real estate, net at June 30 includes the following:
<TABLE>
<CAPTION>
1995 1994
-------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Real estate held for sale, development or investment, less
accumulated depreciation of $0 (1995) and $172 (1994). . . . . . . . $ 888 $ 2,630
Real estate acquired in settlement of loans. . . . . . . . . . . . . . 35,609 40,783
In-substance foreclosures. . . . . . . . . . . . . . . . . . . . . . . -- 16,566
--------- ---------
36,497 59,979
Less allowance for estimated losses. . . . . . . . . . . . . . . . . . 11,515 20,032
--------- ---------
$ 24,982 $ 39,947
--------- ---------
--------- ---------
</TABLE>
Income/(loss) from real estate operations for the years ended June 30
is summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------------- -------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Operating loss from unconsolidated joint ventures. . . . . . $ -- $ (86) $ (217)
Net loss on sales of real estate and other income. . . . . . (3,085) (2,900) (4,971)
Provision for estimated losses . . . . . . . . . . . . . . . (3,395) (12,757) (22,089)
----------- ----------- -----------
$ (6,480) $ (15,743) $ (27,277)
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
Activity in the allowance for estimated losses on real estate for the years
ended June 30 are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------------- -------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of period . . . . . . . . . . . . . . . $ 20,032 $ 25,378 $ 30,256
Provision for estimated losses . . . . . . . . . . . . . . . 3,395 12,757 22,089
Loss on real estate charged against the allowance. . . . . . (11,912) (18,500) (26,967)
Recoveries . . . . . . . . . . . . . . . . . . . . . . . . . -- 397 --
----------- ----------- -----------
Balance at end of period. . . . . . . . . . . . . . . . $ 11,515 $ 20,032 $ 25,378
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
NOTE 7 - PREMISES AND EQUIPMENT, NET
Premises and equipment, net, consist of the following at June 30:
<TABLE>
<CAPTION>
1995 1994
------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
At cost:
Land. . . . . . . . . . . . . . . . . . . . $ -- $ 4,130
Office buildings. . . . . . . . . . . . . . -- 14,090
Leasehold rights and improvements . . . . . 561 6,184
Furniture and equipment . . . . . . . . . . 237 9,858
-------- ---------
798 34,262
Less accumulated depreciation and
amortization. . . . . . . . . . . . . 455 16,211
-------- ---------
$ 343 $ 18,051
-------- ---------
-------- ---------
</TABLE>
69
<PAGE>
NOTE 8 - DEPOSITS
A summary of savings deposits by type at June 30 follows:
<TABLE>
<CAPTION>
1995 1994
----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Money market accounts (weighted average rates of 1.42% (1995) and
1.75% (1994)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,619 $ 178,966
Passbook accounts (weighted average rates of 1.68% (1995) and
2.00% (1994)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,146 58,303
Certificates of deposit less than $100,000 (weighted average rates of
5.67% (1995) and 4.33% (1994)) . . . . . . . . . . . . . . . . . . . . 21,121 589,775
Certificates of deposit, $100,000 and greater (weighted average rates of
9.49% (1995) and 5.33% (1994)) . . . . . . . . . . . . . . . . . . . . 7,284 20,913
----------- ------------
$ 34,170 $ 847,957
----------- ------------
----------- ------------
</TABLE>
Brokered deposits included in certificates of deposit above totaled
$4.7 million (1995) and $5.1 million (1994). Since the Bank does not meet
all of its regulatory capital requirements, it is not permitted to renew
brokered deposits without regulatory approval.
The weighted average interest rate at June 30 on savings deposits
giving effect to amortization of fees paid to national securities dealers was
5.80% (1995) and 3.66% (1994).
Certificates of deposit are scheduled to mature as follows:
<TABLE>
<CAPTION> WEIGHTED
AVERAGE
INTEREST RATE AMOUNT
--------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Year ending June 30
1996 . . . . . . . . . . . . . . . . . 5.38% $18,241
1997 . . . . . . . . . . . . . . . . . 9.04% 9,803
1998 . . . . . . . . . . . . . . . . . 5.98% 170
1999 . . . . . . . . . . . . . . . . . 6.67% 170
2000 . . . . . . . . . . . . . . . . . 6.10% 21
----- -------
6.65% $28,405
----- -------
----- -------
</TABLE>
Deposits of $0 (1995) and $185 thousand (1994) are obtained
from government agencies within California.
A summary of interest expense by deposit type at June 30, follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------------- -------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Money market accounts . . . . . . . . . . . . . . . . . $ 844 $ 1,189 $ 2,864
Passbook accounts . . . . . . . . . . . . . . . . . . . 2,834 3,761 7,385
Certificates of deposit . . . . . . . . . . . . . . . . 30,814 26,997 37,211
Certificates of deposit, $100,000 and greater . . . . . 938 639 2,418
--------- --------- ---------
$ 35,430 $ 32,586 $ 49,878
--------- --------- ---------
--------- --------- ---------
</TABLE>
70
<PAGE>
Accrued interest on deposits, which is included in accounts payable
and accrued liabilities, was $142 thousand (1995) and $383 thousand (1994).
NOTE 9 - FHLB ADVANCES AND OTHER BORROWINGS
There were no FHLB advances and other borrowings at June 30, 1995.
<TABLE>
<CAPTION>
1994
---------------
(DOLLARS IN
THOUSANDS)
<S> <C>
FHLB Advances and other borrowings
at June 30, 1994 are summarized as follows:
FHLB Advances, with weighted average interest rates of
3.95%, secured by real estate loans with an
aggregated unpaid balance of $55.9 million,
due on various dates through 1995 . . . . . . . . . . . . . . $ 13,000
Mortgage-backed bonds, net of discounts of $311 with
weighted average interest rates of 10.38%, secured
by real estate loans with an aggregate unpaid balance of
$3,290, due on various dates through 2012. . . . . . . . . . . 1,933
Various borrowings due to banks and others, with weighted
average interest rates of 8.00% principally secured
by real estate, due on various dates through 2019 . . . . . . 531
-----------
Total FHLB advances and other borrowings . . . . . . . . $ 15,464
-----------
-----------
</TABLE>
The weighted average interest rate on FHLB advances and other
borrowings giving effect to amortization of discounts and issue costs was 5.22%
(1994).
Interest expense on short term borrowings totaled $259 thousand
(1995), 1.17 million (1994) and $1.38 million (1993).
NOTE 10 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
There were no securities sold under agreements to repurchase at June
30, 1995 and 1994.
During 1995 and 1994, securities sold under agreements to repurchase
had an average balance outstanding of $4.8 million and $11.6 million,
respectively. The maximum outstanding at any month-end during 1995 and 1994 was
$2.3 million and $59.1 million, respectively. Interest expense on these
borrowings totaled $243 thousand (1995), $327 thousand (1994), and $60 thousand
(1993). The securities that collateralize the agreements were under the
Company's control.
71
<PAGE>
NOTE 11 - RETIREMENT PLAN
The Company had a defined benefit pension plan (the "Plan") covering
certain employees which was terminated in September 1995. The benefits were
based on years of service and the employee's compensation during the last five
years of employment. The Plan was amended to cease benefit accruals as of
December 31, 1991. In 1993 Plan assets other than a nominal amount for shares
of common stock of the Company were transferred to an investment fund
administered by an insurance company.
The following table sets forth the Plans' funded status and amounts
recognized in the Company's consolidated financial statements as of the dates
indicated:
<TABLE>
<CAPTION>
JUNE 30,
--------------------------------
1995 1994
-------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested accumulated benefits to retirees . . . . . . . . . . . . . . $ 3,365 $ 3,689
Vested accumulated benefits to terminated employees . . . . . . . . 565 39
---------- ----------
Total accumulated benefits . . . . . . . . . . . . . . . . . . $ 3,930 $ 3,728
---------- ----------
---------- ----------
Projected benefit obligation for service rendered to date. . . . . . . . $ 3,930 $ 3,728
Less: Plan assets at fair value -- 1995, general accounts
of an insurance company . . . . . . . . . . . . . . . . . . . . . . 3,770 4,330
---------- ----------
Plan assets less than (greater than) projected benefit obligation. . . . $ 160 $ (602)
---------- ----------
---------- ----------
Items not yet recognized in earnings:
Unrecognized net (gain) loss. . . . . . . . . . . . . . . . . . . . $ 160 $ 548
---------- ----------
---------- ----------
</TABLE>
The Company incurred a net loss of $1.12 million from the Plan in 1995
and net gains of $84 thousand in 1994 and $93 thousand in 1993. The 1995 loss
was incurred due to the valuation at June 30, 1995 of projected benefit
obligations on a termination basis, and the accelerated amortization of the
previously deferred pension amount of $1.172 million.
Net pension cost included the following components for the years ended
June 30:
<TABLE>
<CAPTION>
1995 1994
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Interest cost on projected benefit obligation. . . . . . . . $ 300 $ 281
Actual return on assets. . . . . . . . . . . . . . . . . . . (300) (329)
Net amortization . . . . . . . . . . . . . . . . . . . . . . 1,172 (36)
-------- --------
Net periodic pension cost. . . . . . . . . . . . . . . . . . $ 1,172 $ (84)
-------- --------
-------- --------
</TABLE>
Weighted-average discount rate of 8% was used in determining actuarial
present value of the projected benefit obligation in both years and rates of
increase in future compensation levels of 7% were used in 1994. On June 23,
1995, the Bank terminated the nonqualified plan for directors upon their
retirement which called for a lifetime of directors' fees after a certain period
of service. The expected long-term rate of return on assets was 8%.
72
<PAGE>
Effective February 1, 1989, the Bank established a non-leveraged ESOP
and qualified 401(k) plan, covering substantially all employees. Effective
June 23, 1995, this plan was terminated. Employee contributions are voluntary,
as the employee elects to defer from two to sixteen percent of base (qualifying)
compensation. Prior to December 31, 1991, deferrals of up to two percent of
qualifying compensation were matched by corresponding Company contributions.
Effective January 1, 1992 the maximum matching percentage is three percent plus
one half of one percent contributed to all participants to encourage
participation in the plan. The expense for the plan was $491 thousand (1995),
$209 thousand (1994) and $235 thousand (1993).
General and administrative expenses included amounts attributable to
employee compensation, retirement and other benefits during the year, net of
reimbursements, which in 1995 included $700 thousand in reimbursements from a
former officer for employee compensation and retirement benefits paid during a
prior year.
NOTE 12 - INCOME TAXES
Income tax expense (benefit) for the year ended June 30, 1995, 1994
and 1993 is comprised of the following:
<TABLE>
<CAPTION>
FEDERAL STATE TOTAL
------------- ------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Year ended June 30, 1995
Current . . . . . . . . . $ -- $ -- $ --
Deferred . . . . . . . . (2,297) -- (2,297)
--------- --------- ---------
$ (2,297) $ -- $ (2,297)
--------- --------- ---------
--------- --------- ---------
Year ended June 30, 1994
Current . . . . . . . . . $ -- $ 3 $ 3
Deferred . . . . . . . . -- -- --
--------- --------- ---------
$ -- $ 3 $ 3
--------- --------- ---------
--------- --------- ---------
Year ended June 30, 1993
Current . . . . . . . . . $ (6,000) $ 4 $ (5,996)
Deferred . . . . . . . . -- $ -- --
--------- --------- ---------
$ (6,000) $ 4 $ (5,996)
--------- --------- ---------
--------- --------- ---------
</TABLE>
A reconciliation from expected federal income taxes to consolidated
income taxes using the statutory Federal rate for the periods indicated follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Expected federal income tax benefit . . . . . $ (11,861) $ (7,740) $(12,947)
Increases (decreases in computed tax
benefit resulting from:
Unused net operating loss . . . . . -- -- 6,951
Change in valuation allowance . . . 9,564 7,736 --
Other, net -- 7 --
---------- ---------- --------
$ (2,297) $ 3 $ (5,996)
---------- ---------- --------
---------- ---------- --------
</TABLE>
73
<PAGE>
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at June 30 are
presented below:
<TABLE>
<CAPTION>
1995 1994
---------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Deferred tax assets (tax effected):
Loan valuation allowances . . . . . . . . . . . $ 170 $ 14,133
Net Operating loss. . . . . . . . . . . . . . . 43,969 22,113
Other . . . . . . . . . . . . . . . . . . . . . -- 1,476
-------- ----------
Total gross deferred tax assets. . . . . . 44,139 37,722
Less valuation allowance. . . . . . . . . . . . 44,139 34,577
-------- ----------
Net deferred tax assets. . . . . . . . . . -- 3,145
-------- ----------
Deferred tax liabilities (tax effected):
Loan fees . . . . . . . . . . . . . . . . . . . -- 2,891
FHLB Stock. . . . . . . . . . . . . . . . . . . -- 1,660
Core deposit intangible . . . . . . . . . . . . -- 714
Other . . . . . . . . . . . . . . . . . . . . . 391 570
-------- ----------
Total gross deferred tax liabilities . . . 391 5,835
-------- ----------
Net deferred tax liability . . . . . . . . $ (391) $ (2,690)
-------- ----------
-------- ----------
</TABLE>
Under SFAS 109, deferred tax assets are initially recognized for
differences between the financial statement carrying amount and the tax bases of
assets and liabilities which will result in future deductible amounts and
operating loss and tax credit carryforwards. A valuation allowance is then
established to reduce that deferred tax asset to the level at which it is "more
likely than not" that the tax benefits will be realized. Realization of tax
benefits of deductible temporary differences and operating loss or tax credit
carryforwards depends on having sufficient taxable income of an appropriate
character within the carryback and carryforward periods. Sources of taxable
income that may allow for the realization of tax benefits include (1) taxable
income in the current year or prior years that is available through carryback,
(2) future taxable income that will result from the reversal of existing taxable
temporary differences and (3) future taxable income generated by future
operations. As of June 30, 1995 the valuation allowance against deferred tax
assets amounted to $44.1 million. Deferred tax assets as of June 30, 1995 have
been recognized to the extent of the expected reversal of taxable temporary
differences.
Prior to July 1, 1993 the Company accounted for income taxes under
APB 11, accordingly deferred income taxes result from timing differences in the
recognition of income and expense for tax and financial statement purposes.
Savings banks that meet certain definitional tests and other
conditions prescribed by the Internal Revenue Code are allowed to deduct, within
limitations, a bad debt deduction computed as a percentage of taxable income
(percentage method) before such deduction. The deduction percentage is 8% for
the years ended June 30, 1994, 1993 and 1992. Alternately, a qualified savings
bank may compute its bad debt deduction based upon actual loan loss experience
(the "Experience Method").
For the tax year ended September 30, 1992, the Company qualified as a
commercial bank for tax purposes. Under certain circumstances and subject to
certain limitations, commercial banks are allowed to carryback net operating
losses over a 10 year period, whereas institutions qualifying as thrift
institutions for tax purposes generally may carryback net operating losses over
a 3 year period. As a result of qualifying as a
74
<PAGE>
commercial bank, the Company was able to carryback its September 30, 1992
federal net operating loss over a 10 year period and is recapturing its tax bad
debt reserve over six years beginning with the year ended September 30, 1992.
For the tax year ended September 30, 1993, the Company requalified as a thrift
and is therefore eligible to use the reserve method of accounting for claiming
bad debt deductions.
At June 30, 1995, the Company had unused net operating losses for
federal income tax and California franchise tax purposes of $102 million and
$105 million, respectively. On August 5, 1994, the Company incurred an
"ownership change" within the meaning of Section 382 of the Internal Revenue
Code ("Section 382"). Section 382 generally provides that if a corporation
undergoes an ownership change, the amount of taxable income that the corporation
may offset after the date of the ownership change (the "change date") with net
operating loss carryforwards and certain built-in losses existing on the change
date will be subject to an annual limitation. In general, the annual limitation
equals the product of (i) the fair market value of the corporation's equity on
the change date (with certain adjustments) and (ii) a long-term tax exempt bond
rate of return published by the Internal Revenue Service.
As of June 30, 1995, the Company has certain deferred tax benefits
(generally, expenses or losses recorded in the financial statements which have
not yet reduced the Company's income tax liability) totaling approximately $44.1
million, of which approximately $43.9 million are attributable to net operating
loss carryforwards and alternative minimum tax credits and approximately $170
thousand are attributable to future deductions. The tax attributes associated
with all of the deferred tax benefits may be reviewed and potentially disallowed
by the Internal Revenue Service (the "Service"). In addition, the ability of
the Company to utilize a substantial portion of these tax attributes to reduce
the future tax liability of the Company following the Section 382 ownership
change will be subject to significant limitations under Section 382.
The Section 382 limitation did 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-losses, any
income tax benefits attributable to those net operating loss carryovers and
recognized built-losses will not be available until operations of the Company
result in additional taxable income. The amount of the Section 382 limitation
for the Company has not yet been determined.
NOTE 13-STOCKHOLDERS' EQUITY AND REGULATORY MATTERS
Since 1990 the Bank has been the subject of significant regulatory
oversight and review by the Office of Thrift Supervision ("OTS") and the Federal
Deposit Insurance Corporation ("FDIC"). The Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA") and implementing regulations for
"prompt corrective action" provisions effective in 1992 have resulted in
significant changes to the legal and regulatory environment for insured
depository institutions, including reductions in insurance coverage for certain
kinds of deposits, increased supervision by the federal regulatory agencies,
increased reporting requirements for insured institutions, and new regulations
concerning internal controls, accounting and operations.
The prompt corrective action regulations define specific capital
categories based on an institution's capital ratios. The capital categories, in
declining order, are "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," and "critically
undercapitalized." An institution categorized as "undercapitalized" or worse is
subject to certain restrictions, including the requirement to file a capital
plan with its primary federal regulator, prohibitions on the payment of
dividends and management fees, restrictions on executive compensation, and
increased supervisory monitoring, among other things. Other restrictions may be
imposed on the institution either by its primary federal regulator or by the
FDIC, including requirements to raise
75
<PAGE>
additional capital, sell assets, or sell the entire institution. Once an
institution becomes "critically undercapitalized" it is generally placed in
receivership or conservatorship within 90 days.
To be considered "adequately capitalized," an institution must
generally have a leverage ratio of at least 4%, a Tier 1 risk-based capital
ratio of at least 4%, and a total risk-based capital ratio of at least 8%. An
institution is deemed to be "critically undercapitalized" if it has a tangible
equity ratio of 2% or less.
In July 1993, the Bank, which was then "critically undercapitalized,"
became subject to a Prompt Corrective Action Directive (the "Directive") which
required achieving 4% leverage (core), 4% Tier 1 risk-based, and 8% total risk-
based capital ratios by September 23, 1993, and which was subsequently extended
by the OTS to September 30, 1993. The Company completed a recapitalization
equity offering to investors as of September 30, 1993, and received net proceeds
of approximately $44.1 million. As a result of recapitalization, the Company
contributed additional capital to the Bank, resulting in the Bank being
classified as an "adequately capitalized" institution, and the OTS Directive was
subsequently terminated.
As a result of the net loss for the year ended June 30, 1995, which
included the sale of certain assets in bulk sales and the sale of 13 of the
Bank's 14 branches to Glendale Federal, the Bank's total risk-based capital
ratio was again below regulatory requirements, and the Bank was categorized as
"undercapitalized" at June 30, 1995. At June 30, 1995, the regulatory capital
ratios and levels were leverage (core) ratio of 5.02%, Tier 1 risk-based ratio
of 6.19%, risk-based ratio of 7.52% and tangible equity ratio of 5.02%, based on
leverage capital of $1.9 million, Tier 1 capital of $1.9 million, total risk-
based capital of $2.3 million, and tangible capital of $1.9 million, as defined.
The Bank anticipates continuing operating losses in fiscal 1996 which
will result in further deterioration of its regulatory capital. This situation
raises substantial doubt about the Company's ability to continue as a going
concern. The ability of the Company to continue as a going concern is dependent
upon may factors, including management achieving its plan to maintain a tangible
equity capital ratio in excess of 2% and regulatory action. The accompanying
consolidated financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
The Bank has not filed, nor has it been required to file, a capital
restoration plan with the OTS addressing its plans for attaining the required
levels of regulatory capital. However, the OTS is requiring the Bank to report
monthly to it regarding the Bank's financial condition, financial projections
and the current status of its remaining assets. The Bank's plans to maintain a
tangible equity capital ratio in excess of 2% and avoid regulatory takeover
under the prompt corrective action provisions of FDICIA are dependent upon a
number of factors including the reduction of the Bank's asset base through the
sale of certain assets and the receipt of proceeds from a refund claim with the
Internal Revenue Service. The Bank anticipates that failure to receive these
proceeds and/or sell the assets in the intended time frame would result in the
Bank becoming "critically undercapitalized."
In the event that the Bank were to become "critically
undercapitalized," it must be placed in receivership or conservatorship no later
than 90 days thereafter unless the OTS and the FDIC determine that taking other
action would better serve the purposes of prompt corrective action. Such
determinations are required to be reviewed at 90 day intervals, and if the Bank
remains critically undercapitalized for more than 270 days, the decision not to
appoint a receiver would require certain affirmative findings by the OTS and
FDIC regarding the viability of the institution. An institution is 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%. At June 30, 1995, the Bank's "tangible equity" ratio was 5.02%.
The Bank is also required to satisfy a regulation imposed by the OTS,
known as the Qualified Thrift Lender ("QTL") test. The QTL test requires that,
in at least nine out of every twelve months, at least 65% of a
76
<PAGE>
savings bank's "portfolio assets" must be invested in a limited list of
qualified thrift investments, primarily investments related to housing loans.
If the Bank fails to satisfy the QTL test and does not requalify as a QTL within
one year, the Company must register and be regulated as a bank holding company,
and the Bank must either convert to a commercial bank charter or become subject
to restrictions on branching, business activities and dividends as if it were a
national bank. At June 30, 1995, the Bank had no portfolio assets which
constituted qualified thrift investments and did not satisfy the QTL test.
However, the Bank maintained portfolio assets which constituted qualified thrift
investments for at least nine out of the twelve months in the fiscal year ended
June 30, 1995. The Bank expects to be out of compliance with the QTL test as of
September 30, 1995.
NOTE 14-STOCK OPTION PLAN
In September 1992, the Company established the 1992 Stock Incentive
Plan (the "Incentive Plan"), which has a term of ten years. A total of
1,322,957 shares have been reserved for issuance under the Option Plan. Under
the Option Plan, the Stock Option Committee of the Board of Directors may grant
incentive stock options to persons who provide valuable service to the Company.
All incentive stock options must have an exercise price at least equal to the
fair market value of the Company's common stock at the date of the grant and are
limited to a maximum term of five years. Exercise of options may be subject to
certain conditions as provided in the Option Plan.
A summary of changes in stock options granted under the Incentive Plan
follows:
<TABLE>
<CAPTION>
INCENTIVE STOCK OPTIONS
-------------------------------
OPTIONS OUTSTANDING SHARES PER SHARE
- ------------------- ------------ ------------------
<S> <C> <C>
June 30, 1993. . . . . . . . . . . . . . . . -- $ --
Granted. . . . . . . . . . . . . . . . . . . 1,296,000 1.75 - 1.88
Canceled . . . . . . . . . . . . . . . . . . -- --
June 30, 1994. . . . . . . . . . . . . . . . 1,296,000 $ 1.75 - 1.88
Granted. . . . . . . . . . . . . . . . . . . -- --
Canceled . . . . . . . . . . . . . . . . . . 1,296,000 $ 1.75 - 1.88
June 30, 1995. . . . . . . . . . . . . . . . -- --
--------- -----------------
--------- -----------------
</TABLE>
Prior to September 30, 1993 the Company had in place the 1984 Stock
Option Plan. This plan was terminated in conjunction with the recapitalization
of the Company in September 1993.
NOTE 15-COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company and its subsidiaries are involved in certain litigation
concerning various transactions entered into during the normal course of
business which management believes are not material to the Company. At June 30,
1995, the Company was involved in the following additional legal proceedings:
In DOYLE V. HILL AND UNION FEDERAL BANK, the plaintiff alleges the
Bank and a former loan officer conspired with the general partner of a limited
partnership of which the plaintiff was a limited partner to defraud the
plaintiff by misappropriating construction loan proceeds advanced to the
partnership by the Bank. The court recently granted summary judgment in favor
of the Bank and awarded the Bank over $500,000 in attorneys' fees payable by the
plaintiff. The plaintiff has informed counsel for the Bank that plaintiff
intends to appeal the judgment against him.
77
<PAGE>
In HARBOUR PLACE CONDOMINIUMS ASSOC. V. HARBOUR PLACE DEVELOPMENT
CORPORATION, ET AL., the plaintiff condominium association alleges a series of
purported construction defects in the Harbour Place condominium project in Key
West, Florida. The project was initially developed and sold by a limited
partnership in which a subsidiary of the Bank was a limited partner and was
later completed and the remaining units sold by a subsidiary of the Bank after a
transfer of the property to such subsidiary in lieu of foreclosure. The Bank
has denied the plaintiff's claims. The Bank has tendered the plaintiff's claims
to its liability carriers, one of which has accepted the Bank's tender and is
providing defense counsel subject to a reservation of rights under the Bank's
liability policies.
In UNION FEDERAL BANK V. BROADWAY TRADE CENTER, the Bank seeks a
declaratory judgment regarding its possessory right to two ground leases and one
ground sublease affecting the Broadway Trade Center. In addition to its
leasehold interests, the Bank and its subsidiary hold title to approximately 82%
of the property in fee simple absolute. In the litigation, the Bank seeks a
judgment that its leases are in full force and effect following the Bank's
foreclosure on such leases as security for a Bank loan made to a former owner.
The lessor of such leases alleges that such leases are in default for various
reasons, all of which the Bank contends are without merit. In addition, the
Bank is seeking a judgment that the Bank is entitled to retain as liquidated
damages the sum of $400,000 deposited with the Bank by a former owner of the
property pursuant to the terms of an agreement with such owner which the Bank
contends such owner breached. In a companion case entitled, SECURITY TRUST
COMPANY V. UNION FEDERAL BANK, the plaintiff, representing the lessor of the
three leases at issue in the BROADWAY TRADE CENTER litigation, has filed for
unlawful detainer and damages with respect to such leases based on various
alleged defaults, all of which the Bank contends are without merit. The
plaintiffs have demanded unpaid rent in the amount of $2.0 million plus an
escalation factor based on the terms of the lease. There can be no assurance
that the Bank will prevail in these matters.
In UNION FEDERAL BANK V. LANDMARK INSURANCE CO., the Bank seeks to
recover insurance proceeds from the defendant with respect to fire damage to the
Broadway Trade Center property. The Bank claims that the defendant improperly
distributed approximately $4 million in insurance proceeds directly to the
Bank's borrower as owner of the property without notice to the Bank,
notwithstanding that the Bank was named as an additional loss payee on the
insurance policy. The defendant has moved for summary judgment contending that
the statute of limitations is an absolute bar to the Bank's action.
LEASE COMMITMENTS
The Company has agreements to lease its office facilities until
July 1, 1999 with options to renew at negotiable amounts. The lease provides
for cost of living increases as well as payment of property taxes, insurance and
other items. Minimum rental commitments under noncancelable leases are as
follows:
<TABLE>
<CAPTION>
AMOUNT
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Year ending June 30
1996 . . . . . . . . . . . . . . . . . . $ 289
1997 . . . . . . . . . . . . . . . . . . 289
1998 . . . . . . . . . . . . . . . . . . 289
1999 . . . . . . . . . . . . . . . . . . 289
2000 . . . . . . . . . . . . . . . . . . 24
-------
$ 1,180
-------
-------
</TABLE>
Net rental payments for office facilities aggregate $911 thousand
(1995), $664 thousand (1994), and $1.1 million (1993).
78
<PAGE>
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company has been party to financial instruments with off-balance
sheet risk in the past in the normal course of business to meet the financing
needs of its customers and to reduce its own exposure to fluctuations in
interest rates. These financial instruments include commitments to extend
credit in the form of loans or through letters of credit, interest rate caps,
and forward commitments. Those instruments involve to varying degrees, elements
of credit and interest rate risk in excess of the amount recognized in the
statement of financial condition. The contract or notional amounts of those
instruments reflect the extent of involvement the Company has in particular
classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance
by the other party to the financial instrument for commitments to extend credit
is represented by the contractual notional amount of those instruments. The
Company uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments. For interest rate caps
transactions and forward commitments, the contract or notional amounts do not
represent exposure to credit loss. The Company controls the credit risk of its
interest rate swap agreements and forward commitments through credit approvals,
limits, and monitoring procedures.
Unless noted otherwise, the Company does not require collateral or
other security to support financial instruments with credit risk. At June 30,
1995, the Company had no financial instruments with off-balance sheet risk.
<TABLE>
<CAPTION>
CONTRACT OR
NOTIONAL AMOUNT
---------------
JUNE 30, 1994
---------------
(DOLLARS IN
THOUSANDS)
<S> <C>
Financial Instruments whose contract amounts represent credit risk:
Real estate loan commitments. . . . . . . . . . . . . . . . . . . . . . . . . . $14,020
Construction loans in process . . . . . . . . . . . . . . . . . . . . . . . . . 166
Consumer credit instruments . . . . . . . . . . . . . . . . . . . . . . . . . . 1,798
Letters of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,400
Loans sold with recourse. . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,682
Financial Instruments whose credit risk is less than the notional or contract
amounts:
Forward commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,306
Commitments to buy loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . --
</TABLE>
Commitments to extend credit are agreements to lend to a customer
provided there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since certain of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Company evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained if deemed necessary by the Company upon extension of credit is based on
management's credit evaluation of the borrower.
The Company receives collateral to support commitments for which
collateral is deemed necessary. The most significant categories of collateral
include real estate properties underlying mortgage loans, liens on personal
property and cash on deposit with the Company.
Letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public bond financing under municipal
79
<PAGE>
loans to lender programs. The guarantees extend for more than five years and
expire through the year 2000. The credit risk involved in issuing letters of
credit is essentially the same as that involved in making real estate loans to
customers.
Forward commitments to sell mortgage-backed securities and loans are
contracts which the Company enters into in order to reduce the market risk
associated with originating loans for sale. In order to fulfill a forward
commitment, the Company typically delivers loans or exchanges its current
production of loans for mortgage-backed securities which are then delivered to
purchasers (counterparties), national securities firms, at a future date at
prices or yields as specified by the contracts. Risks may arise from the
possible inability of counterparties to meet the terms of their contracts. In
addition, fluctuations in interest rates may affect the ability of the Company
to acquire loans to fulfill the contracts, in which case the Company would
normally purchase securities in the open market to deliver against the contract.
The Company is normally protected from increases in interest rates to the extent
production is available to fulfill the contract. The Company considers the risk
of incurring adverse market price adjustments on open market purchases to
fulfill forward commitments to be immaterial, due to the relatively small
principal amounts and short duration of such contracts.
NOTE 16-FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures
about Fair Value of Financial Instruments" ("SFAS No. 107"), requires the
Company to disclose estimated values for its financial instruments. Fair value
estimates are made at a specific point in time based upon relevant market
information and other information about the financial instrument. The estimates
do not necessarily reflect the price the Company might receive if it were to
sell at one time its entire holding of a particular financial instrument.
Because no active market exists for a significant portion of the Company's
financial instruments, fair value estimates are based upon the following methods
and assumptions, some of which are subjective in nature. Changes in assumptions
could significantly affect the estimates.
CASH, OVERNIGHT FUNDS SOLD, SECURITIES PURCHASED UNDER RESALE
AGREEMENTS, AND INTEREST RECEIVABLE AND INTEREST PAYABLE
The carrying amounts reported in the balance sheet for these items
approximate fair value.
INVESTMENT SECURITIES INCLUDING MORTGAGE-BACKED SECURITIES
Fair values are based upon bid prices published in financial
newspapers or bid quotations received from securities dealers.
LOANS RECEIVABLE
The loan receivable fair value was based on a written offer to
purchase the note receivable.
DEPOSITS
The fair value of deposits with no stated maturity such as regular
passbook accounts, money market accounts, and NOW accounts, is defined by SFAS
No. 107 as the carrying amounts reported in the balance sheet. The fair value
of deposits with a stated maturity such as certificates of deposit is based on
the price offered for the deposits as part of the sale of branches to Glendale
Federal Bank.
80
<PAGE>
Based on the above methods and assumptions, the following table
presents the estimated fair value of the Company's financial instruments at June
30, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
------------------------ ------------------------
Carrying Estimated Carrying Estimated
ASSETS: Amounts Fair Value Amounts Fair Value
------- ---------- ------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Cash . . . . . . . . . . . . . . . . . . . . . $ 4,802 $ 4,802 $ 35,091 $ 35,091
Overnight funds sold . . . . . . . . . . . . . 1,000 1,000 3,000 3,000
Government and agency obligations
and other securities available for sale
at amortized cost. . . . . . . . . . . . . . 2,499 2,499 62,119 61,407
Loans receivable, net. . . . . . . . . . . . . 2,244 1,900 566,955 563,878
LIABILITIES:
Deposits:
Money market accounts. . . . . . . . . . . . 1,619 1,619 178,966 178,966
Passbook accounts. . . . . . . . . . . . . . 4,146 4,146 58,303 58,303
Certificates of deposit. . . . . . . . . . . 28,405 29,740 610,688 613,335
</TABLE>
NOTE 17-PARENT COMPANY FINANCIAL INFORMATION
This information should be read in conjunction with the other Notes to
Consolidated Financial Statements.
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
JUNE 30
---------------------------
1995 1994
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash . . . . . . . . . . . . . . . . $ 75 $ 143
Investment in subsidiaries . . . . . 1,926 34,407
Other assets . . . . . . . . . . . . -- 135
--------- --------
2,001 34,685
--------- --------
--------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities. . . . . . . . . . $ -- $ --
Common stock . . . . . . . . . . . . 272 272
Additional paid-in capital . . . . . 107,943 107,943
Accumulated deficit. . . . . . . . . (106,214) (73,530)
--------- --------
$ 2,001 $ 34,685
--------- --------
--------- --------
</TABLE>
81
<PAGE>
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JUNE 30
------------------------------------------
1995 1994 1993
---------- ------------ --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Interest income from subsidiary. . . . . . . . $ -- $ -- $ 12
Other (income) expense . . . . . . . . . . . . 199 40 65
Income taxes . . . . . . . . . . . . . . . . . 4 -- 1
-------- -------- ---------
Loss before equity in loss of subsidiary . . . (203) (40) (54)
Equity in loss of subsidiary . . . . . . . . . (32,481) (26,417) (32,030)
-------- -------- ---------
Net loss for the year . . . . . . . . . . $(32,684) $(26,457) $ (32,084)
-------- -------- ---------
-------- -------- ---------
</TABLE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JUNE 30
----------------------------------------
1995 1994 1991
-------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net Cash Flows from Operating Activities:
Net loss. . . . . . . . . . . . . . . . . . . . $ (32,684) $ (26,457) $ (32,084)
Adjustments to reconcile net loss to cash
provided by operating activities:
Equity in net loss of subsidiary. . . . . . . . 32,481 26,417 32,030
Other . . . . . . . . . . . . . . . . . . . . . -- (138) (274)
--------- --------- ---------
Net cash used by operating activities. . . . . . . . (203) (178) (328)
--------- --------- ---------
Cash Flows from Investing Activities:
Additional investment in subsidiaries . . . . . -- (44,100) --
Decrease in other assets. . . . . . . . . . . . 135 -- 6
--------- --------- ---------
Net cash provided (used) by investing activities . . 135 (44,100) 6
--------- --------- ---------
Cash Flows from Financing Activities:
Net proceeds from sale of common stock. . . . . -- 44,100 --
--------- --------- ---------
Net cash provided by financing activities. . . . . . -- 44,100 --
--------- --------- ---------
Net decrease in cash . . . . . . . . . . . . . . . . (68) (178) (322)
Cash at beginning of period. . . . . . . . . . . . . 143 321 643
--------- --------- ---------
Cash at end of period. . . . . . . . . . . . . . . . $ 75 $ 143 $ 321
--------- --------- ---------
--------- --------- ---------
</TABLE>
82
<PAGE>
NOTE 18-LOAN SERVICING AND SALE ACTIVITIES
Loan servicing and sale activities are summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Financial condition information:
Loans held for sale. . . . . . . . . . . . . . $ -- $ 45,320 $ 173,305
---------- -------- ---------
---------- -------- ---------
Statement of operations information:
Loan servicing fees. . . . . . . . . . . . . . 737 1,445 3,488
Amortization of excess servicing
fees . . . . . . . . . . . . . . . . . . . -- (552) (3,258)
---------- -------- ---------
Loan servicing fees, net . . . . . . . . . . . 737 893 230
---------- -------- ---------
---------- -------- ---------
(Loss)/gain on sale of assets
related to Bulk asset sales. . . . . . . . (18,562) -- --
Other (loss)/gain on sale of loans. . . . . . 1,080 (9) 2,019
---------- -------- ---------
(Loss)/gain on sale of loans, net. . . . . . . (17,482) (9) 2,019
Statement of cash flows information:
Loans originated for sale. . . . . . . . . . . $ 95,304 $206,058 $ 280,496
---------- -------- ---------
---------- -------- ---------
Proceeds from sale of loans. . . . . . . . . . $ 120,032 $142,447 $ 30,523
---------- -------- ---------
---------- -------- ---------
</TABLE>
The Bank originated mortgage loans, which depending upon whether the
loans met the Bank's investment objectives were sold in the secondary market or
to other private investors. The servicing of these loans may or may not have
been retained by the Bank. Indirect non-deferrable origination and servicing
costs for loan servicing and sale activities are not presented as these
operations are integrated with and not separable from the origination and
servicing of portfolio loans.
83
<PAGE>
NOTE 19-QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------
JUNE 30, MARCH 31, DEC. 31, SEPT. 30,
1995 1995 1994 1994
-------- ---------- --------- ----------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net interest income. . . . . . . . . . . $ 2,715 $ 5,214 $ 6,124 $ 6,606
Provision for estimated loan losses. . . 743 7,360 2,420 3,859
Non-interest income. . . . . . . . . . . (11,798) 1,075 1,392 1,032
Non-interest expense . . . . . . . . . . 7,895 9,241 8,368 7,455
Loss before income taxes . . . . . . . . (17,721) (10,312) (3,272) (3,676)
Income tax (benefit)/expense . . . . . . (201) (2,100) 4 --
Net loss . . . . . . . . . . . . . . . . (17,520) (8,212) (3,276) (3,676)
Net loss per share . . . . . . . . . . . (0.64) (0.30) (0.12) (0.14)
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------
JUNE 30, MARCH 31, DEC. 31, SEPT. 30,
1995 1995 1994 1994
-------- ---------- --------- ----------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net interest income. . . . . . . . . . . $ 5,611 $ 7,604 $ 7,214 $ 7,408
Provision for estimated loan losses. . . 2,500 1,986 4,825 5,039
Non-interest income. . . . . . . . . . . (316) (1,611) 1,710 5,687
Non-interest expense . . . . . . . . . . 12,607 9,324 11,337 12,143
Loss before income taxes . . . . . . . . (9,812) (5,317) (7,238) (4,087)
Income tax (benefit)/expense . . . . . . -- 2 1 --
Net loss . . . . . . . . . . . . . . . . (9,812) (5,319) (7,239) (4,087)
Net loss per share . . . . . . . . . . . (0.36) (0.20) (0.28) (3.10)
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The registrant intends to file with the SEC a definitive proxy
statement pursuant to Regulation 14A, which will involve the election of
directors, within 120 days of the end of the fiscal year covered by this Form
10-K (the "Proxy Statement"). Information regarding directors of UnionFed will
appear under the caption "Election of Directors" in the Proxy Statement for the
Annual Meeting of Stockholders to be held on November 15, 1995 and is
incorporated herein by reference. As required by Instruction 3 to Item 401(b)
of Regulation S-K, information regarding executive officers of UnionFed is
contained in Part I of this report under "Item 4A. Executive Officers of the
Registrant."
ITEM 11. EXECUTIVE COMPENSATION.
Information regarding executive compensation will appear under the
caption "Executive Compensation" in the Proxy Statement and is incorporated
herein by this reference.
84
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information to be included under the captions "Security Ownership of
Certain Beneficial Owners" and "Security Ownership of Management" in the Proxy
Statement is incorporated herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information to be included under the caption "Certain Transactions" in
the Proxy Statement is incorporated herein by this reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements
These documents are listed in the Index to
Consolidated Financial Statements under Item
8.
2. Financial Statement Schedules
Financial Statement Schedules have been
omitted because they are not applicable or
the required information is shown in the
Consolidated Financial Statements or Notes
thereto.
(b) Reports on Form 8-K during the last quarter of fiscal year 1995.
Current Report on Form 8-K filed with the
Securities and Exchange Commission on June 2,
1995 for event dated May 20, 1995.
(c) Exhibits.*
EXHIBIT
NUMBER DESCRIPTION
3.1 Registrant's Certificate of Incorporation and Bylaws, as
amended to date.***
4.1 Copies of instruments defining the rights of holders of
long-term debt of the Company or any of its subsidiaries
are, under Item 601(b)(4)(iii)(A) of Regulation S-K, not
required to be filed, but will be filed upon request of the
Securities and Exchange Commission.
4.2 Form of Warrant to Purchase Common Stock.***
10.1 Employment Agreement of David S. Engelman dated as of April
1, 1991.**
10.1.1 Amendment to Employment Agreement of David S. Engelman dated
as of December 1, 1993.****
10.1.2 Second Amendment to Employment Agreement of David S.
Engelman dated as of June 20, 1995.
10.4 The UnionFed 1992 Stock Incentive Plan, as amended.****
10.5 Asset Purchase and Liability Assumption Agreement dated
May 20, 1995 between Glendale Federal Bank and Union Federal
Bank*****
85
<PAGE>
10.5.1 Amendment No. 1 dated June 23, 1995 to Asset Purchase and
Liability Assumption Agreement dated May 20, 1995 between
Glendale Federal Bank and Union Federal Bank******
10.6 Split-Dollar Insurance Agreement between the Company and
David S. Engelman dated April 6, 1994.****
22 Subsidiaries of the Company.***
27 Article 9 Financial Table.
- ------------
* Exhibit descriptions followed by a parenthetical reference or
asterisks indicate that the exhibit is incorporated herein by
reference from the described document.
** Filed as an exhibit to UnionFed's 1991 Annual Report on Form 10-K.
*** Filed as an exhibit to UnionFed's 1993 Annual Report on Form 10-K.
**** Filed as an exhibit to UnionFed's 1994 Annual Report on Form 10-K.
***** Filed as an exhibit to UnionFed's Current Report on Form 8-K filed
with the Securities and Exchange Commission on June 2, 1995.
****** Filed as an exhibit to UnionFed's Current Report on Form 8-K filed
with the Securities and Exchange Commission on July 21, 1995.
86
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By: /s/ David S. Engelman
-----------------------------------------
David S. Engelman
CHAIRMAN OF THE BOARD, PRESIDENT
AND CHIEF EXECUTIVE OFFICER
DATED: October 12, 1995
Pursuant to the requirements of the Securities Exchange Act or 1934,
this report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ David S. Engelman Director, Chairman of the October 12, 1995
------------------------ Board, President and Chief
David S. Engelman Executive Officer
(Principal Executive
Officer)
/s/ Michelle X. Dean Chief Financial Officer October 12, 1995
------------------------ (Principal Financial
Michelle X. Dean and Accounting
Officer)
/s/ Donald L. Criswell Director October 12, 1995
------------------------
Donald L. Criswell
/s/ William Donovan Director October 12, 1995
------------------------
William Donovan
/s/ Thomas P. Kemp Director October 12, 1995
------------------------
Thomas P. Kemp
/s/ David Primuth Director October 12, 1995
------------------------
David Primuth
/s/ Dale A. Welke Director October 12, 1995
------------------------
Dale A. Welke
/s/ John R. Wise Director October 12, 1995
------------------------
John R. Wise
87
<PAGE>
INDEX TO EXHIBITS*
EXHIBIT
NUMBER DESCRIPTION
3.1 Registrant's Certificate of Incorporation and Bylaws, as amended to
date.***
4.1 Copies of instruments defining the rights of holders of long-term debt
of the Company or any of its subsidiaries are, under Item
601(b)(4)(iii)(A) of Regulation S-K, not required to be filed, but
will be filed upon request of the Securities and Exchange Commission.
4.2 Form of Warrant to Purchase Common Stock.***
10.1 Employment Agreement of David S. Engelman dated as of April 1,
1991.**
10.1.1 Amendment to Employment Agreement of David S. Engelman dated as of
December 1, 1993.****
10.1.2 Second Amendment to Employment Agreement of David S. Engelman dated as
of June 20, 1995.
10.4 The UnionFed 1992 Stock Incentive Plan, as amended.****
10.5 Asset Purchase and Liability Assumption Agreement dated May 20, 1995
between Glendale Federal Bank and Union Federal Bank.*****
10.5.1 Amendment No. 1 dated June 23, 1995 to Asset Purchase and Liability
Assumption Agreement dated May 20, 1995 between Glendale Federal Bank
and Union Federal Bank.******
10.6 Split-Dollar Insurance Agreement between the Company and David S.
Engelman dated April 6, 1994.****
22 Subsidiaries of the Company.***
27 Article 9 Financial Table.
- ----------
* Exhibit descriptions followed by a parenthetical reference or
asterisks indicate that the exhibit is incorporated herein by
reference from the described document.
** Filed as an exhibit to UnionFed's 1991 Annual Report on Form 10-K.
*** Filed as an exhibit to UnionFed's 1993 Annual Report on Form 10-K.
**** Filed as an exhibit to UnionFed's 1994 Annual Report on Form 10-K.
***** Filed as an exhibit to UnionFed's Current Report on Form 8-K filed
with the Securities and Exchange Commission on June 2, 1995.
****** Filed as an exhibit to UnionFed's Current Report on Form 8-K filed
with the Securities and Exchange Commission on July 21, 1995.
<PAGE>
EXHIBIT 10.1.2
SECOND AMENDMENT TO EMPLOYMENT AGREEMENT
This Second Amendment to Employment Agreement ("Second Amendment")
is entered into as of June 20, 1995, by and among UNIONFED FINANCIAL
CORPORATION, a Delaware corporation ("UnionFed"), UNION FEDERAL BANK, a
federal savings bank ("Union Federal") and DAVID S. ENGELMAN ("Executive").
WHEREAS, UnionFed, Union Federal and Executive are parties to an
Employment Agreement, entered into as of April 1, 1991, which provides for
the employment of Executive on the terms provided for therein, as amended by
an Amendment to Employment Agreement dated as of December 1, 1993
(collectively the "Agreement");
WHEREAS, UnionFed, Union Federal and Executive desire to amend the
Agreement in light of the contemplated sale, subject to regulatory approval,
of substantially all of Union Federal's branch system to Glendale Federal
Bank (the "Branch Sale") and the desire of UnionFed and Union Federal to
discharge its obligations under the Agreement and to reduce its obligations
to Executive on an ongoing basis;
WHEREAS, Section 17(b) of the Agreement provides that any successor
to all or substantially all of the business and/or assets of UnionFed or
Union Federal expressly assume and agree to perform the Agreement and that
the failure of UnionFed or Union Federal to obtain such agreement shall be a
breach of the Agreement;
WHEREAS, Glendale Federal Bank has expressly declined to assume the
obligations of UnionFed and Union Federal under the Agreement and,
accordingly, Executive will become entitled to compensation as of the Branch
Sale date as if Executive had terminated his employment for Good Reason (as
defined in the Agreement), in an amount estimated to be approximately $1.6
million, in addition to the Supplemental Retirement Plan assets held in trust
for the benefit of Executive; and
WHEREAS, UnionFed and Union Federal deem it in their best interests
to negotiate a reduction of this liability and a conversion of Executive's
employment to a month-to-month basis in accordance with the terms of this
Second Amendment and Executive is agreeable to such revised terms, to be
effective upon the closing of the Branch Sale.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants set forth herein, the parties hereto agree as follows, which terms
shall become effective upon the closing of the Branch Sale:
1. TERM.
(a) Section 1 of the Agreement shall be amended to read in full as
follows:
"Executive shall be employed on an at-will basis, provided
that UnionFed/Union Federal and Executive shall give at least sixty
(60) days' prior notice to the other party(ies) in the event that they
determine or he determines to terminate Executive's employment
hereunder."
<PAGE>
(b) In consideration of Executive's agreement to change the term of
the Agreement from a fixed term to an at-will relationship and to reduce the
salary and other benefits payable to Executive upon the effectiveness of the
Branch Sale, Union Federal agrees to pay Executive the sum of $350,000
concurrent with the closing of the Branch Sale.
2. COMPENSATION. Executive's base salary under Section 3(a) of the
Agreement shall be $150,000. Sections 3(b) and (c) of the Agreement providing
for guaranteed bonuses to Executive shall be and they hereby are deleted in
their entirety.
3. EMPLOYEE BENEFITS.
(a) Section 4(b) of the Agreement shall be amended to read in full as
follows:
"Executive shall be entitled to full participation in all plans
of life, accident, disability and health insurance plans which
generally are made available to officers of UnionFed or Union Federal.
In addition to any term life insurance provided to Executive in
accordance with such plans, Executive shall be provided with $500,000
of whole life insurance on a split dollar premium payment arrangement
as in force as June 1, 1995."
(b) Section 4(c) of the Agreement, which provides for Executive to
have supplemental retirement plan benefits under the 1991 Supplemental
Retirement Plan, is hereby deleted in its entirety. UnionFed and Union
Federal agree that in satisfaction of its obligations to Executive under
the Agreement to provide such benefits through June 30, 1997, it shall
cause the entire balance of the assets held in trust for the benefit of
Executive with Danielson Trust Company to be delivered to Executive
concurrent with the closing of the Branch Sale (estimated to be
approximately $899,000), with UnionFed and Union Federal to have funded the
trust through June 30, 1995. UnionFed and Union Federal shall pay any
costs of termination of the Plan and the Plan Trustee. Upon the execution
of this Second Amendment, UnionFed and Union Federal shall cause the Plan
Administrator to take such actions as are necessary or desirable to permit
the delivery of trust assets to Executive concurrent with the closing of
the Branch Sale.
(c) Section 4(d) of the Agreement is hereby amended to reduce
Executive's automobile allowance from $1,000 per month to $500 per month,
plus reasonable reimbursement for mileage driven by Executive in the
performance of his duties hereunder (excluding commuting miles).
(d) Section 4(g) of the Agreement is hereby amended to reduce the
obligations of UnionFed and Union Federal thereunder in fiscal years after
June 30, 1995 from $15,000 to $7,500.
4. TERMINATION PROVISIONS. In light of the at-will employment of
Executive hereafter, the provisions in the Agreement regarding termination by
UnionFed and Union Federal (Section 5), by Executive (Section 6) and the
severance payment provisions related thereto (Section 7) are hereby deleted in
their entirety.
5. WAIVER OF CERTAIN AGREEMENT PROVISIONS. Executive hereby waives
the provisions of Section 17(a) and (b) of the Agreement with respect to the
Branch Sale.
2
<PAGE>
6. EFFECT ON AGREEMENT. Except as modified by this Second
Amendment, the terms and provisions of the Agreement shall remain in full force
and effect throughout the term of the Agreement. In the event that the Branch
Sale does not occur, the Agreement shall remain in full force and effect without
change.
7. COUNTERPARTS. This Amendment may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of which
together will constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Second Amendment as of the date first above written.
UNIONFED FINANCIAL CORPORATION EXECUTIVE
By: /s/ Ronald M. Griffith /s/ David S. Engelman
--------------------------- ----------------------------
Senior Vice President David S. Engelman
General Counsel
UNION FEDERAL BANK,
a federal savings bank
By: /s/ Ronald M. Griffith
---------------------------
Senior Vice President
General Counsel
3
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