<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 1996
OR
TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 1-9594
UNIONFED FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 95-4074126
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1055 W. Seventh Street, Suite 100
Los Angeles, California 90017
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (213) 688-8417
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No
----- -----
As of April 30, 1996, 27,201,993 shares of the Registrant's $.01 par value
common stock were outstanding.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
UNIONFED FINANCIAL CORPORATION
INDEX
PAGE
PART I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Financial 3
Condition (unaudited) as of March 31,
1996 and June 30, 1995
Consolidated Statements of Operations 4
(unaudited) for the three and nine month
periods ended March 31,1996 and 1995
Consolidated Statements of Cash Flows 5
(unaudited) for the nine month periods ended
March 31, 1996 and 1995
Notes to Consolidated Financial Statements 7
(unaudited)
Item 2. Management's Discussion and Analysis of 8
Financial Condition and Results of
Operations
PART II. Other Information (omitted items are inapplicable) 20
Item 1. Legal Proceedings
SIGNATURES 22
2
<PAGE>
UNIONFED FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION - UNAUDITED
(DOLLARS IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
March 31, June 30,
1996 1995
---------- ----------
<S> <C> <C>
ASSETS
Cash and cash equivalents $4,650 $5,802
Investment securities, net -- 2,499
Loans receivable 7,388 2,744
Valuation allowance for possible credit losses (512) (500)
Interest receivable 19 91
Real estate, net 21,894 24,982
Investment in Federal Home Loan Bank stock, at cost 108 100
Premises and equipment, net 280 343
Other assets 1,429 1,095
-------- --------
$35,256 $37,156
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Savings deposits $32,806 $34,170
Accounts payable and accrued liabilities 824 594
Deferred income taxes 275 391
-------- --------
Total liabilities 33,905 35,155
Commitments and contingencies -- --
Stockholders' equity
Preferred stock-par value $.01 per share; authorized,
1,000,000 shares, issued and outstanding, none -- --
Common stock-par value $.01 per share; authorized
60,000,000 shares, issued and outstanding,
27,201,993 shares (1994) 272 272
Additional paid-in capital 107,943 107,943
Accumulated deficit (106,864) (106,214)
-------- --------
Total stockholder's equity 1,351 2,001
-------- --------
$35,256 $37,156
-------- --------
-------- --------
</TABLE>
3
<PAGE>
UNIONFED FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
1996 1995 1996 1995
------- ------- ---- ----
<S> <C> <C> <C> <C>
Interest on loans $9 $10,286 $161 $31,766
Interest on mortgage-backed securities --- 3,074 --- 9,092
Interest and dividends on investments 40 1,285 114 3,806
---------- ---------- ---------- ----------
Total interest income 49 14,645 275 44,664
---------- ---------- ---------- ----------
Interest on savings deposits 494 9,350 1,437 26,003
Interest on borrowings --- 81 --- 717
---------- ---------- ---------- ----------
Total interest expense 494 9,431 1,437 26,720
---------- ---------- ---------- ----------
Net interest income( loss) before provision
for estimated loan losses (445) 5,214 (1,162) 17,944
Provision for estimated loan losses 1 7,360 (99) 13,639
---------- ---------- ---------- ----------
Net interest income( loss) after provision
for estimated loan losses (446) (2,146) (1,063) 4,305
---------- ---------- ---------- ----------
Non-interest income:
Gain on sales of loans and loan servicing --- (354) 199 445
Gain on sales of mortgage backed
securities and investment securities --- (46) --- (70)
Loan servicing fees, net --- 143 --- 634
Loan fees --- 88 --- 262
Loss on sale of branches --- --- (445) ---
Other, net 916 1,244 1,090 2,228
---------- ---------- ---------- ----------
Total non-interest income 916 1,075 844 3,499
---------- ---------- ---------- ----------
Non-interest expense:
Compensation and related expenses 136 2,393 (259) 7,682
Premises and occupancy 108 1,095 330 3,292
SAIF insurance premium 24 648 117 1,902
Other general and administrative 351 2,013 1,019 6,345
---------- ---------- ---------- ----------
Total general and administrative expense 619 6,149 1,207 19,221
Real estate operations, net 826 2,879 (44) 5,195
Core deposit intangible amortization --- 213 --- 648
---------- ---------- ---------- ----------
Total non-interest expense 1,445 9,241 1,163 25,064
---------- ---------- ---------- ----------
Loss before income taxes (975) (10,312) (1,382) (17,260)
Income tax benefit (746) (2,100) (738) (2,096)
---------- ---------- ---------- ----------
NET LOSS $ (229) ($8.212) ($644) ($15,164)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net loss per common share $(0.01) ($0.30) ($0.03) ($0.56)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
4
<PAGE>
UNIONFED FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
1996 1995
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($644) ($15,164)
Adjustments to reconcile net loss to cash provided by
operating activities:
Net decrease in loan fees and discounts -- (563)
Depreciation and amortization 62 1,924
Provisions for loan and real estate losses 211 16,973
(Gain)/loss on sale of investment securities and
mortgage-backed securities, net -- 70
(Gain)/loss on sales of loans and loan servicing (240) (445)
(Gain)/Loss on sale of real estate (1,290) (157)
Gain(Loss) on sales of branches (444) (200)
Federal Home Loan Bank stock dividends (70) (200)
Loans originated and purchased, held for sale -- (95,304)
Proceeds from sales of loans, held for sale -- 71,978
Proceeds from sales of loan servicing -- 794
Decrease in interest and dividends receivable (4) 700
(Increase)/decrease in prepaid expenses and other assets (334) 1,347
Increase/(decrease) in interest payable 317 34
Decrease in accounts payable and accrued liabilities (111) (710)
(Increase)/decrease in deferred income taxes 116 (2,099)
---------- ----------
Net cash used in operating activities (2,431) (20,822)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of investment securities -- 3,187
Proceeds from sale of investment securities available for sale 2,499 3,247
Principal reductions on mortgage-backed securities -- 9,249
Principal reductions on loans 13 48,044
Purchases of mortgage-backed securities -- (30,519)
Purchases of mortgage-backed securities, available for sale -- (8,043)
Proceeds from sale of mortgage-backed securities,
available for sale -- 18,080
Loans originated and purchased, held for investment (6,979) (18,573)
Net change in undisbursed loan funds -- (166)
Acquisitions of real estate (2,458) (773)
Proceeds from disposition of real estate 6,734 15,409
Other, net 1,049 --
---------- ----------
Net cash provided by(used in) investing activities 858 39,142
---------- ----------
</TABLE>
5
<PAGE>
UNIONFED FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
1996 1995
---------- ----------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits $ 421 $ (4,169)
Repayment of short-term borrowings -- (821)
Repayment of FHLB Advances -- (13,000)
---------- ----------
Net cash provided by (used in) financing activities 421 (9,652)
---------- ----------
Net (decrease) increase in cash and cash equivalents (1,152) 8,668
Cash and cash equivalents at beginning of period 5,802 38,091
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $4,650 $46,749
---------- ----------
---------- ----------
SALE OF BRANCHES:
Loans and mortgage-backed securities $ -- $ --
Premises and equipment -- --
Excess of cost over net assets acquired -- --
Other assets -- --
Deposits -- --
Other liabilities -- --
Gain (loss) on sale (444) --
---------- ----------
Net cash used by sale of branches, net $ (444) $ --
---------- ----------
---------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest (net of amount capitalized) $ 535 $ 26,746
Delaware franchise tax 8 --
Non-cash Investing and Financing activities:
Additions to real estate acquired in settlement of loans 2,286 9,134
Loans exchanged for mortgage-backed securities -- 9,522
Loans to facilitate the sale of real estate 4,557 1,781
</TABLE>
6
<PAGE>
UNIONFED FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
1- In the opinion of the Company, the accompanying consolidated financial
statements contain all adjustments necessary to present fairly the
financial condition as of March 31, 1996 and June 30, 1995, the results of
operations for the three and nine month periods ended March 31, 1996 and
1995, and the cash flows for the nine month periods ended March 31, 1996
and 1995. The results of operations for the three month period ended March
31, 1996, are not necessarily indicative of operations to be expected for
the entire year.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and, therefore do
not include all information and footnotes necessary for a fair presentation
of financial condition, results of operations and statement of cash flows
in conformity with generally accepted accounting principles. Item 2,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", is written with the presumption that the users of the interim
financial statements have read or have access to the most recent 10-K
report that contains the latest audited financial statements and notes
thereto, together with Management's Discussion and Analysis of Financial
Condition and Results of Operations as of June 30, 1995, and for the year
then ended.
2- The Company has adopted FASB Statement of Financial Accounting Standards
No. 114 "Accounting for Impairment of a Loan" (SFAS 114) and No. 118
"Accounting by Creditors for Impairment of a Loan-Income Recognition and
Disclosures" (SFAS 118) effective July 1, 1995. Accordingly, all impaired
loans are carried at fair value of the collateral, and any valuation
adjustments have been reflected through the provision for loan losses. The
adoption of SFAS 114 and SFAS 118, applied prospectively as of July 1,
1995, has not had a material effect on the Company's financial statements.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
UnionFed Financial Corporation, (the "Company") parent of Union Federal Bank, a
federal savings bank (the "Bank") reported a net loss of ($229) thousand or
($0.01) per share for the quarter ended March 31, 1996.
This compares to a loss of ($8.2) million or ($0.30) per share in the
corresponding quarter during fiscal year 1995. The net loss for the March 1996
quarter was reduced due to the receipt of $1.5 million in federal income tax
refunds and interest for prior year disputes. Without the impact of the
income tax refunds , the Company had an operating loss of ($1.7) million for
the quarter, primarily due to net interest expense of $445 thousand, other
general and administrative expenses of $619 thousand and real estate operations
loss of $826 thousand. For the nine months ended March 31, 1996, the Company
reported a net loss of ($644) thousand, compared to a loss of ($15.2) million
for the equivalent nine month period in 1995.
In order to comply with a prompt corrective action directive (the "Directive")
of the Office of Thrift Supervision ("OTS") requiring a sale, merger or
recapitalization transaction, the Bank in June 1995 completed two significant
transactions. First, the Bank sold approximately $136 million of its classified
commercial, industrial and multi-family loan and real estate portfolio (the
"Asset Sales"), principally to "bulk sale" institutional buyers, for cash
proceeds of $101 million, including a $3.6 million holdback of funds held in
escrow accounts for potential representation and warranty breaches. These
warranties have all expired by March 31, 1996, and the holdback escrows have
been returned to the Bank with the exception of $395 thousand which continues
to be held in escrow for two disputed items. Second, the Bank sold 13 of its 14
retail banking offices and approximately $820 million of related deposit
liabilities to Glendale Federal Bank, a federal savings bank ("Glendale
Federal"). At closing, the Bank transferred cash and other assets, principally
single family and non-classified commercial and multi-family real estate loans
valued at Union Federal's book value, to Glendale Federal in an amount necessary
to offset the deposit and other liabilities assumed by Glendale Federal . The
Bank received a $6.9 million purchase price for the transfer plus a right to
receive a contingent payment based upon the actual performance of certain multi-
family, commercial and industrial real estate loans transferred to Glendale
Federal to the extent that such loans are repaid or otherwise resolved by June
30, 1998.
Following the Asset Sales and the Glendale Federal transaction, the Bank has
continued its business through its downtown Los Angeles retail banking
office. Under its agreement with Glendale Federal, the Bank is prohibited
until June 23, 1998 from opening additional branches using the Union Federal
or UnionFed name without Glendale Federal's consent. At March 31, 1996, the
Company had deposits of $32.8 million and a net worth of $1.35 million. At
March 31, 1996, the Bank had core capital of 3.36%, Tier 1 risk-based capital
of 3.80% and total risk-based capital of 3.38%. The required minimums for an
"adequately capitalized" institution are 4%, 4% and 8% respectively. The Bank
was considered a "significantly undercapitalized" savings institution as of
March 31, 1996. See "FDICIA Prompt Corrective Action Requirements" below.
The Bank is currently undergoing a regular examination by the Office of
Thrift Supervision ("OTS"), including a review of the Bank's carrying value
of its loan and real estate assets. While the examination has not been
concluded and no final determinations have been made, the OTS staff initially
proposed material downward adjustments to the carrying values of one of the
Bank's loans and one REO asset. It is expected that any adjustments would be
required to be made during the Company's fourth quarter ending June 30, 1996.
Such a reduction, together with monthly operating losses at the Bank, could
cause the Bank to become "critically undercapitalized" under OTS regulations,
with a tangible capital ratio of less than 2%, and perhaps a negative capital
position on or before June 30, 1996.
Becoming a "critically undercapitalized" institution could result in the
imposition of additional operating restrictions or other regulatory actions
by the OTS, including the appointment of a conservator or receiver for the
Bank. A determination of the Bank as "critically undercapitalized" requires
the mandatory appointment of a conservator or receiver within ninety days of
becoming "critically undercapitalized" unless the OTS, with the concurrence
of the FDIC, determines that some other action would better resolve the
problems of the Bank at the least possible long-term loss to the insurance
fund, and documents the reasons for its determination. Such determinations
are required to be reviewed at 90-day intervals, and if the Bank remains
critically undercapitalized for more than 270 days, the decision not to
appoint a receiver would require certain affirmative findings by the OTS and
FDIC regarding the viability of the institution. See "FDICIA Prompt
Corrective Action Requirements" below. The appointment of a conservator or
receiver for the Bank effectively would eliminate the interests of the
Company's stockholders since the Bank is the Company's only significant asset.
In light of the Bank's current financial condition and the potential for a
near-term federal takeover, the Company is continuing its efforts to resolve
its assets and is seeking a buyer for the Bank's charter, assets, and/or
remaining operations. There can be no assurance that the Company will be
successful in its attempt to sell these operations. One of the Bank's
principal assets, the Broadway Trade Center in Los Angeles, California, is
the subject of active litigation, which itself, with or without adverse
determinations in the actions, could have a negative impact upon the ability
of the Company to sell the Bank.
There can be no assurance that the Company will be able to provide any future
return to stockholders. The Company has no significant resources other than
the Bank. At present, the Bank does not have any other significant income
generation capabilities other than income from its relatively small loan
portfolio and realization of its real estate assets. Given the structure of
its balance sheet, the Bank has limited flexibility in dealing with asset
liability management or to improve its earning power. In addition, one of
the Bank's major assets is subject to ongoing litigation. (See Part II, Item
1. "Legal Proceedings".)
The Company's ability to continue as a going concern will depend in significant
part on factors outside of its control, including regulatory actions.
8
<PAGE>
Since approximately 70% of the Bank's assets are nonperforming assets, the
Bank's interest income will not be sufficient to cover its interest expense
for deposits and general and administrative expenses.
The OTS is requiring the Bank to report monthly regarding its financial
condition, financial projections and the current status of its remaining
assets. To date the OTS has not required the filing of a capital
restoration plan for the Bank despite its "significantly undercapitalized"
status.
Under legislation currently pending in Congress, the Federal Deposit
Insurance Corporation ("FDIC") would be granted authority to impose a
one-time special charge on the solvency of the Savings Association Insurance
Fund ("SAIF"). In its current form, the legislation would permit the FDIC to
impose an assessment on an institution's total insured deposits as of the
measurement date, proposed to be March 31, 1995 (the "Assessment Date"). The
special assessment would be due on the first business day of the first month
beginning after enactment of the bill or such other date as the FDIC may
prescribe, but in no case later than 60 days after enactment of the bill. The
Assessment Date may be changed to a later date in the final version of the
bill and the amount of savings special assessment may change accordingly. If
the legislation is passed with this assessment date, which is prior to the
sale of deposits in June 1995 to Glendale Federal, the special assessment
could be up to $7.3 million for the Bank. Under the legislation as proposed,
the Board of Directors of the FDIC, in its sole discretion, would have the
authority to exempt any "weak" institution from such special assessment upon
application under criteria to be established by the Board, with the
institution continuing to pay FDIC assessments at June 1995 rates. If this
legislation is adopted in its current form, which is uncertain at this time,
the Bank intends to apply for an exemption as a "weak" institution to avoid
this substantial assessment, which would more than deplete the remaining net
worth of the Bank. There can be no assurance that the FDIC would grant a
requested exemption or that it would not determine that a conservatorship or
receivership is appropriate for the Bank.
9
<PAGE>
FINANCIAL HIGHLIGHTS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE)
<TABLE>
<CAPTION>
For the three months ended March 31, 1996 1995
-------- --------
<S> <C> <C>
Net interest income $ (445) $ 5,214
Provision for losses on loans 1 7,360
Non-interest income 916 1,244
Non-interest expense 1,445 9,241
Loss before income taxes (975) (10,312)
Income tax expense (benefit) (746) (2,100)
Net loss (229) (8,212)
Loss per share (0.01) (0.30)
Loans originated and purchased 2,449 14,672
Mortgage-backed securities purchased -- 1,000
Loans sold -- 16,541
Mortgage-backed securities sold -- 4,592
Interest rate spread during period (1) (3.52)% 2.69%
<CAPTION>
For the nine months ended March 31, 1995 1994
-------- --------
Net interest income $ (1,162) $ 17,944
Provision for losses on loans (99) 13,639
Non-interest income 844 3,499
Non-interest expense 1,163 25,064
Loss before income taxes (1,382) (17,260)
Income tax expense (benefit) (738) (2,096)
Net Loss (644) (15,164)
Loss per share (0.03) (0.56)
Loans originated and purchased 7,334 109,933
Mortgage-backed securities purchased -- 38,519
Loans sold -- 71,816
Mortgage-backed securities sold -- 18,104
Interest rate spread during period (1) (0.16)% 3.07%
<CAPTION>
OTHER INFORMATION 3/31/96 6/30/95
-------- --------
Total Assets $ 35,256 $ 37,156
Loan portfolio 7,388 2,244
Deposits 32,806 34,170
Stockholders' equity 1,351 2,001
Nonperforming assets, net 23,982 24,623
Nonperforming assets, net to total assets 68.19% 66.27%
Classified assets to total assets 68.02% 72.47%
End of period interest spread (1) (4.07)% 1.85%
</TABLE>
- --------------------
(1) Since the Bank's interest bearing deposits are dramatically larger than
the Bank's interest earning assets, the spread is not a meaningful measure of
earnings capacity at June 30, 1995 or March 31, 1996. In addition, one loan
was reclassified as non-performing during the March 1996 quarter thus having
a significant impact on the spread both during and at the end of the period.
10
<PAGE>
FINANCIAL CONDITION
The Company's consolidated assets totaled $35.3 million at March 31, 1996
compared to $37.2 million at June 30, 1995. Stockholders' equity totaled $1.4
million at March 31, 1996, a reduction of $0.6 million from $2.0 million at June
30, 1995. The decrease in stockholders' equity is directly attributable to the
net loss for the nine month period ended March 31, 1996.
CAPITAL RESOURCES AND LIQUIDITY
The Bank's sources of funds are limited largely to the raising of deposits in
the remaining Los Angeles retail banking office. Under its agreement with
Glendale Federal , the Bank is prohibited from opening additional offices
using the Union Federal or UnionFed name for three years. Some additional
funds are expected to be generated in the future with the sale of the Bank's
remaining REO properties, one of which is currently under contract with
specified take-down requirements. In March 1996, the buyers of the Truman
Annex REO extended their option to purchase the asset until March 1997 and
exercised a portion of the Purchase and Sale Agreement with a $2.8 million
takedown.
At March 31, 1996, approximately 89% of the Bank's deposit base was in time
certificates of deposit. The Bank continues to have a customer deposit base
that has allowed it to maintain its deposit levels after the Glendale Federal
transaction. The Bank continued to maintain deposits through the March 1996
quarter. The decline from June 1995 was due to the sale of IRA and custodial
accounts in July 1995. 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 March 31, 1996, the Bank's ratio was 12.54%
compared to 11.01% at December 31, 1995 and 13.17% at June 30, 1995. The
quarterly increase in liquidity was due to the sale of several parcels of the
Key West, Florida, REO for $2.8 million, with 15% received in cash and the
receipt of $1.5 million of cash from IRS tax refunds and interest. The Bank
intends to maintain liquidity above the required minimum, but its ability to
do so is principally dependent upon its ability to raise deposits.
The primary source of cash for the Company is dividends from the Bank. As long
as the Bank remains "significantly undercapitalized" for regulatory purposes,
the OTS cannot approve any capital distributions (including dividends) except
in connection with a capital-raising transaction by the Bank.
REGULATORY CAPITAL COMPLIANCE
FDICIA established three capital standards for savings institutions: a "leverage
(core) limit," a "tier 1 risk-based limit" and a "total risk-based" capital
requirement. Certain assets or portions thereof are required to be deducted
immediately from capital, while the inclusion of others in capital under one or
all of the capital standards is subject to various transitional rules or other
limitations. As of March 31, 1996, the Bank did not meet any of the three
components of the regulatory capital requirements and was considered to be
"significantly undercapitalized".
11
<PAGE>
The following is a reconciliation of the Bank's stockholders' equity to federal
regulatory capital, and a comparison of such regulatory capital to the industry
minimum requirements of the OTS, as of March 31, 1996:
<TABLE>
<CAPTION>
Leverage Tier 1 Total
(Core) % Risk Based % Risk Based %
----------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
GAAP Equity $1,194 $1,194 $1,194
Non-allowable assets:
Investment in Uni-Cal Financial (15) (15) (15)
Investment in Real Estate -- -- (299)
Additional capital items:
General loss reserves -- -- 170
-------- ---- -------- ---- -------- ----
Bank Regulatory Capital 1,179 3.36 1,179 3.80 1,050 3.38
Minimum capital requirement 1,404 4.00 1,243 4.00 2,485 8.00
-------- ---- -------- ---- -------- ----
Capital excess (deficiency) ($225) (0.64) ($64) (0.20) (1,435) 4.62
-------- ---- -------- ---- -------- ----
-------- ---- -------- ---- -------- ----
</TABLE>
FDICIA PROMPT CORRECTIVE ACTION REQUIREMENTS
FDICIA requires the OTS to implement a system requiring regulatory sanctions
against institutions that are not adequately capitalized, with the sanctions
growing more severe the lower the institution's capital. The OTS must establish
specific capital ratios for five separate capital categories: "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized," and "critically undercapitalized."
Under the OTS regulations implementing FDICIA, an institution is treated as well
capitalized if its risk-based capital ratio is at least 10.0%, its ratio of
core capital to risk - weighted assets (the "Tier 1 risk-based capital ratio")
is at least 6.0%, its leverage (core) capital ratio is at least 5.O%, and it is
not subject to any order or directive by OTS to meet a specific capital level.
An institution will be "adequately capitalized" if its risk-based capital ratio
is at least 8.0%, its tier 1 risk-based capital ratio is at least 4.0%, and its
leverage (core) capital ratio is at least 4.0% (3.0% if the institution receives
the highest rating on the CAMEL financial institutions rating system). An
institution whose capital does not meet the amounts required in order to be
adequately capitalized will be treated as "undercapitalized." Additionally, an
institution will be treated as "significantly undercapitalized" if the above
capital ratios are less than 6.0%, 3.0%, or 3.0% respectively. An institution
will be treated as "critically undercapitalized" if its ratio of "tangible
equity" (core capital plus cumulative preferred stock minus intangible assets
other than supervisory goodwill and purchased mortgage servicing rights) to
total assets is equal to or less than 2.0%. At March 31, 1996, the Bank's ratio
of tangible equity to total assets was 3.36%.
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.
12
<PAGE>
The OTS must act on the capital restoration plan expeditiously, and generally
not later than 60 days after the plan is submitted. The OTS may approve a
capital restoration plan only if the OTS determines that the plan is likely to
succeed in restoring the institution's capital and will not appreciably increase
the risks to which the institution is exposed. The OTS has not required the
Bank to submit a Capital Restoration Plan, but is requiring monthly report
meetings with the management of the institution.
LIMITS ON EXPANSION. An institution that is undercapitalized, even if its
capital restoration plan has been approved, may not acquire an interest in any
company, open a new branch office, or engage in a new line of business unless
the OTS determines that such action would further the implementation of the
institution's capital plan or the FDIC approves the action. An undercapitalized
institution also may not increase its average total assets during any quarter
except in accordance with an approved capital restoration plan.
CAPITAL DISTRIBUTIONS. An undercapitalized savings institution may not pay
dividends or other capital distributions, with the exception of repurchases or
redemptions of the institution's shares that are made in connection with the
issuance of additional shares to improve the institution's financial condition
and that are approved by the FDIC. Undercapitalized institutions also may not
pay management fees to any company or person that controls the institution.
BROKERED DEPOSITS AND BENEFIT PLAN DEPOSITS. An undercapitalized savings
institution cannot accept, renew, or rollover deposits obtained through a
deposit broker, and may not solicit deposits by offering interest rates that are
more than 75 basis points higher than market rates. Savings institutions that
are adequately capitalized but not well capitalized must obtain a waiver from
the FDIC in order to accept, renew, or rollover brokered deposits, and even if a
waiver is granted may not solicit deposits, through a broker or otherwise, by
offering interest rates that exceed market rates by more than 75 basis points.
Institutions that are ineligible to accept brokered deposits can only offer FDIC
insurance coverage for employee benefit plan deposits up to $100,000 per plan,
rather than $100,000 per plan participant, unless, at the time such deposits are
accepted, the institution meets all applicable capital standards and certifies
to the benefit plan depositor that its deposits are eligible for coverage on a
per-participant basis.
RESTRICTIONS ON SIGNIFICANTLY AND CRITICALLY UNDERCAPITALIZED INSTITUTIONS. In
addition to the above mandatory restrictions which apply to all undercapitalized
savings institutions, institutions that are significantly undercapitalized may
not without the OTS's prior approval (a) pay a bonus to any senior executive, or
(b) increase any senior executive officer's compensation over the average rate
of compensation (excluding bonuses, options and profit-sharing) during the 12
months preceding the month in which the institution became undercapitalized. The
same restriction applies to undercapitalized institutions that fail to submit or
implement an acceptable capital restoration plan.
If a savings institution is critically undercapitalized, the institution is also
prohibited from making payments of principal or interest on subordinated debt
beginning sixty days after the institution becomes critically undercapitalized,
unless the FDIC permits such payments or the subordinated debt was outstanding
on July 15, 1991 and has not subsequently been extended or renegotiated. In
addition, the institution cannot without the prior FDIC approval (a) enter into
any material transaction outside the ordinary course of business, (b) extend
credit for any highly leveraged transaction, (c) amend its charter or bylaws,
(d) make any material change in accounting methods, (e) make any loan to an
affiliate, purchase the assets of an affiliate, or issue a guarantee or letter
of credit for the benefit of an affiliate, (f) pay excessive compensation or
bonuses, or (g) pay interest on its liabilities (including deposits) at a rate
that would increase the institution's average cost of funds to a rate
significantly exceeding prevailing rates of interest.
Critically undercapitalized savings institutions must be placed in receivership
or conservatorship within 90 days
13
<PAGE>
of becoming critically undercapitalized unless the OTS, with the concurrence of
the FDIC, determines that some other action would better resolve the problems of
the institution at the least possible long term loss to the insurance fund, and
documents the reasons for its determination. A determination by the OTS not to
place a critically undercapitalized institution in conservatorship or
receivership must be reviewed every 90 days and the OTS must either make a new
determination or appoint a conservator or receiver. If the institution remains
critically undercapitalized on average during the calendar quarter beginning 270
days after it became critically undercapitalized, the OTS must appoint a
receiver unless (a) the OTS determines, with the concurrence of the FDIC, that
the institution (i) has positive net worth, (ii) has been in substantial
compliance with an approved capital restoration plan requiring consistent
improvement in the institution's capital, (iii) the institution is profitable or
has an upward trend in earnings which the OTS determines is sustainable, and
(iv) the institution is reducing its ratio of nonperforming loans to total
loans, and (b) the Director of the OTS and the Chairperson of the FDIC both
certify that the institution is viable and not expected to fail.
DISCRETIONARY SANCTIONS TIED TO PROMPT CORRECTIVE ACTION CAPITAL CATEGORIES:.
OPERATING RESTRICTIONS. With respect to an undercapitalized institution, the
OTS will, if it deems such actions necessary to resolve the institution's
problems at the least possible loss to the insurance fund, have the explicit
authority to:
(a) order the institution to recapitalize by selling shares of capital
stock or other securities,
(b) order the institution to agree to be acquired by another depository
institution holding company or combine with another depository
institution,
(c) restrict transactions with affiliates,
(d) restrict the interest rates paid by the institution on new deposits to
the prevailing rates of interest in the region where the institution
is located,
(e) require reduction of the institution's assets,
(f) restrict any activities that the OTS determines pose excessive risk to
the institution,
(g) order a new election of directors,
(h) order the institution to dismiss any director or senior executive
officer who held office for more than 180 days before the institution
became undercapitalized, subject to the director's or officer's right
to obtain administrative review of the dismissal,
(i) order the institution to employ qualified senior executive officers
subject to the OTS's approval,
(j) prohibit the acceptance of deposits from correspondent depository
institutions,
(k) require the institution to divest any subsidiary or the institution's
holding company to divest the institution or any other subsidiary, or
14
<PAGE>
(l) take any other action that the OTS determines will better resolve the
institution's problems at the least possible loss to the deposit
insurance fund.
If an institution is significantly undercapitalized, or if it is
undercapitalized and its capital restoration plan is not approved or implemented
within the required time periods, the OTS shall take one or more of the above
actions, and must take the actions described in clauses (a) or (b), (c) and (d)
above unless it finds that such actions would not resolve the institution's
problems at the least possible loss to the deposit insurance fund. The OTS may
also prohibit the institution from making payments on any outstanding
subordinated debt or entering into material transactions outside the ordinary
course of business without the OTS's prior approval.
The OTS's determination to order one or more of the above discretionary actions
will be evidenced by a written directive to the institution, and the OTS will
generally issue a directive only after giving the institution prior notice and
an opportunity to respond. The period for response shall be at least 14 days
unless the OTS determines that a shorter period is appropriate based on the
circumstances. The OTS, however, may issue a directive without providing any
prior notice if the OTS determines that such action is necessary to resolve the
institution's problems at the least possible loss to the deposit insurance fund.
In such a case, the directive will be effective immediately, but the institution
may appeal the directive to the OTS within 14 days.
RECEIVERSHIP OR CONSERVATORSHIP. In addition to the mandatory appointment of a
conservator or receiver for critically undercapitalized institutions, the OTS or
FDIC may appoint a receiver or conservator for an institution if the institution
is undercapitalized and (i) has no reasonable prospect of becoming adequately
capitalized, (ii) fails to submit a capital restoration plan within the required
time period, or (iii) materially fails to implement its capital restoration
plan.
ASSET / LIABILITY MANAGEMENT
Savings institutions are subject to interest rate risk to the degree that
interest-bearing liabilities reprice or mature more rapidly or on a different
basis than interest-earning assets. However, the Bank's current balance sheet
structure does not allow for meaningful management of interest rate risk. With
71% of the Company's total assets consisting of nonearning assets, interest
expense will exceed interest income and deposit maturities are managed to
support the workout of real estate assets rather than to manage interest rate
risk.
NET INTEREST INCOME
Net interest income(loss), before provisions for loan losses, was $(445)
thousand for the three month period ended March 31, 1996 compared to $5.2
million for the same period in 1995 For the nine month period ended March 31,
1996, net interest income decreased to ($1.2) million from $17.9 million, in the
comparable period of 1995. The decrease is primarily attributable to the Asset
Sales and the Glendale Federal transaction in June 1995, which were completed in
an effort to comply with a Capital Directive from the OTS.
The during-period spread continued to be negative, as interest bearing deposits
far exceeded interest bearing assets. In addition, one loan for $2.3 million
was placed on non-accrual status during the quarter. This asset previously had
a yield of 10.8%. The rate paid on deposits remained flat from the prior
quarter with a cost of funds of 6.13% for the quarter. The Bank has one large
broker certificate that matures in Ocotber 1996, at which time the cost of funds
is expected to decrease significantly. Net interest income is expected to
continue as a net expense, due to the fact that 71% of the Company's assets
consist of nonearning assets.
15
<PAGE>
NONPERFORMING ASSETS AND IMPAIRED LOANS
Nonperforming assets consist of real estate acquired in settlement of loans and
in-substance foreclosures (collectively, "REO") and nonaccrual loans.
The following table sets forth the amounts of nonperforming assets of the Bank
at the dates indicated:
<TABLE>
<CAPTION>
March 31, June 30,
1996 1995
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Nonaccrual loans $ 2,848 $ --
Real estate owned 26,690 35,609
------ ------
Total nonperforming assets $29,538 35,609
--------- ---------
Specific Reserves- Nonaccrual loans (400) --
Specific Reserves - REO ( 5,155) (10,986)
--------- ---------
Total nonperforming asset, net $20,983 $24,623
--------- ----------
--------- ----------
Total assets $35,257 $37,156
------------ ------------
------------ ------------
Nonperforming assets, net as
a percentage of total assets 68.19% 66.27%
</TABLE>
NONACCRUAL LOANS
Nonaccrual loans generally represent loans for which interest accruals have been
suspended. At March 31, 1996, the Company had one nonaccrual loan totalling $2.4
million net, The loan is secured by a second trust deed on a 155 unit
multifamily building in Los Angeles. The Bank has placed a receiver on the
property and the first trust deed is being maintained.
The Bank's nonaccrual policy provides that interest accruals generally cease
once a loan is past due as to interest or principal for a period of 90 days or
more. Loans may also be placed on nonaccrual status even though they are less
than 90 days past due if management concludes that there is little likelihood
that the borrower will be able to comply with the repayment terms of the loan.
REAL ESTATE OWNED (REO)
REO consists of real estate acquired in settlement of loans and loans accounted
for as in-substance foreclosures. When there is an indication that a borrower
will not make all the required payments on a loan; the borrower no longer has
equity in the property collateralizing a loan; it appears doubtful that equity
will be rebuilt in the foreseeable future; or the borrower has (effectively or
actually) abandoned control of the collateral, the property
16
<PAGE>
is considered an in-substance foreclosure. Real estate acquired in settlement
of loans is recorded at the fair value of the collateral, less estimated
selling cost. Subsequently, valuation allowances for estimated losses are
charged to real estate operations expense if the carrying value of real estate
exceeds estimated fair value. The Bank does not accrue interest income on loans
classified as in-substance foreclosures.
REO, net decreased to $21.5 million at March 31, 1996 from $24.6 million at June
30, 1995. The decrease from June 30, 1995 is primarily attributable to the
sale of several parcels of the Key West, Florida property for $2.7 million in
December 1995 and $2.8 million in March 1996. These reductions were offset by
the foreclosure of a property which previously secured a loan which was
repurchased in September 1995 from one of the Asset Sale buyers. The Bank's REO
portfolio at March 31, 1996, consists of three properties, $5.1 million of land
in a planned development project in Key West, Florida, $14.1 million of a mixed
use retail/garment manufacturing building in Los Angeles, California, and a 179
room motel in Phoenix, Arizona, carried at $2.3 million.
The Bank's investment in the Los Angeles property will continue to increase as
the Bank completes the mandatory capital expenditures to meet the requirements
of the Conditional Use Permit, which was approved in final form without the
option of additional appeals in March 1996.
IMPAIRED LOANS
Effective July 1, 1995, the Company adopted Statement of Financial Accounting
Standards No. 114, "Accounting for Creditors for Impairment of a Loan"("SFAS
114"), as amended by Statement of Financial Accounting Standards No. 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures" ("SFAS 118"). Under SFAS 114, a loan is impaired when it is
"probable" that a creditor will be unable to collect all amounts due (i.e. both
principal and interest) according to the contractual terms of the loan
agreement. The measurement of impairment may be based on (i) the present value
of the expected future cash flows of the impaired loan discounted at the loans'
original effective interest rate, (ii) the observable market price of the
impaired loan, or (iii)the fair value of the collateral of a collateral-
dependent loan. The adoption of SFAS 114, as amended by SFAS 118, had no
material impact on the Company's consolidated financial statements as the
Company's existing policy of measuring loan impairment is consistent with
methods prescribed in these standards.
The Company considers a loan to be impaired when, based upon the current
information and events, it believes it is probable that the Company will be
unable to collect all amounts due according to the contractual terms of the loan
agreement. As the Company's current loan portfolio consists of nine loans to
facilitate the sale of REO and one loan secured by a multifamily property in Los
Angeles, California ("major loans"), as well as one deposit secured loan and
credit reserve loans, the evaluation of impaired loans is limited to an
evaluation of each of the major loans for consideration of the impairment
criteria.
At March 31, 1996, the carrying value of the loan that is considered to be
impaired under SFAS 114 totaled $2.4 million and consisted of a collateral
dependent loan secured by a multifamily property, and therefore measured based
upon the fair value of the collateral. At March 31, 1996, the allowance for
possible credit losses determined in accordance with the provisions of SFAS 114,
related to the loan considered to be impaired under SFAS 114, totaled $400
thousand. For the three months ended March 31, 1996, the Company recognized no
interest income on the impaired loan, as it was classified as nonaccrual. At
March 31, 1996, the impaired loan was also classified as a substandard asset.
REAL ESTATE HELD FOR INVESTMENT, DEVELOPMENT OR SALE
Real estate held for investment, development or sale at March 31, 1996 is
comprised of the real estate from one of the Bank's former branch offices and
Uni-Cal's wholly owned investments. At March 31, 1996, real estate held for
investment, development or sale totaled $359 thousand, unchanged from June 30,
1995.
17
<PAGE>
ALLOWANCE FOR LOAN AND REAL ESTATE LOSSES
It is the Company's policy to provide an allowance for estimated losses on loans
and real estate when it is probable that the value of the asset has been
impaired and the loss can be reasonably estimated. Loans are generally required
to be carried at the lower of amortized cost or net realizable value. Net
realizable value is the present value of the future cash flows, including the
costs of holding, refurbishment and selling, discounted at the combined cost of
debt and equity for the Bank. REO is carried at the lower of cost or fair value,
less selling costs. Consistent with the asset composition of the Company, the
monitoring system established by the Company to ensure compliance with the above
policies, requires quarterly review of each asset in excess of $500,000. This
review consists of evaluation of the cash flows of the property, along with the
considering the current economic environment surrounding the asset. This
evaluation is generally done by the preparation of internally prepared
discounted cash flow analyses, however based on the results of the review a new
appraisal may be obtained.
There was a slight provision for loan losses for the three months ended March
31, 1996 of $1 thousand for a credit reserve loan, compared to $7.4 million
for the same period in fiscal 1995. The provisions recorded in the third
quarter of fiscal 1995 related to loans that were sold during the fourth
quarter 1995 transactions.
The following table sets forth the Bank's general and specific valuation
allowances for loan and real estate losses at the dates indicated:
<TABLE>
<CAPTION>
March 31, June 30,
1996 1995
------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Loan general $ 112 $ --
Loan specific 400 500
----------- -----------
Total loan allowance $ 512 $ 500
----------- -----------
----------- -----------
Real estate general (1) $ -- $ --
Real estate specific 5,155 11,515
----------- -----------
Total real estate allowance $ 5,155 $ 10,986
----------- -----------
----------- -----------
Total valuation allowances $ 5,667 $ 11,486
----------- -----------
----------- -----------
</TABLE>
- ---------------------------
(1) At June 30, 1995, the Banks loan and real estate portfolios consisted of
only 5 assets. Each asset was individually evaluated, therefore no general
reserves were recorded.
NON-INTEREST INCOME AND EXPENSE
Non-interest income for the quarter ended March 31, 1996 was $916 thousand
compared to $1.1 million for the same period in 1995. For the nine month period
ended March 31, 1996, non-interest income decreased to $844 thousand from $3.5
million for the nine months ended March 31, 1995. The quarterly and nine month
decreases are both attributable to the significant change in the balance sheet
with the sales of deposits and assets in June 1995. Non-interest income for the
quarter ended March 31, 1996 was attributable to the interest received in
connection with the federal income tax refunds received by the Company during
the quarter.
18
<PAGE>
General and administrative expenses decreased to $619 thousand for the quarter
ended March 31, 1996 from $6.1 million for the same period in 1995, due to the
reduction of the Company's retail offices to one office and the reduction of
staff to 8 full time employees at March 31, 1996. Other general and
administrative expenses for the three months ended March 31,1996, included $70
thousand of equipment rental fees related to an obligation to terminate leases
on equipment rented by the Company prior to the June 1995 transactions. The
equipment leases will be terminated and settled in April 1996, with future
equipment rental minimum for the Company. In addition, general and
administrative expenses for the quarter ended March 31, 1996, included insurance
costs of $59 thousand and audit and accounting fees of $30 thousand and legal
fees of $53 thousand.
Real estate operations, net decreased to $826 thousand from $2.9 million for the
three months ended March 31, 1996 and 1995, respectively. The decrease is
attributable to the sale of the majority of the REO assets owned by the Bank at
March 31, 1995 during the June 1995 transactions. Real estate operations, net
for the three months ended March 31, 1996, included a provision for losses of
$312 thousand. In addition, it included legal fees of $248 thousand related to
the on-going litigation surrounding the Los Angeles, California property (See
"Legal Proceedings" below) as well as costs associated with the sale of the Key
West, Florida parcels.
INCOME TAXES
The income tax benefit for the quarter ended March 31, 1996, along with
associated interest in other non-interest income relates to refunds received
from settlements of prior years IRS examinations and carryback claims.
At March 31, 1996, the Company had unused net operating losses (NOL) for
federal income tax and California franchise tax purposes of $102 million and
$105 million, respectively. On August 5, 1994, the Company incurred an
"ownership change" within the meaning of Section 382 of the Internal Revenue
Code ("Section 382"). Section 382 generally provides that if a corporation
undergoes an ownership change, the amount of taxable income that the corporation
may offset after the date of the ownership change (the "change date") with net
operating loss carryforwards and certain built-in losses existing on the change
date will be subject to an annual limitation. In general, the annual limitation
equals the product of (i) the fair market value of the corporation's equity on
the change date (with certain adjustments) and (ii) a long term tax exempt bond
rate of return published by the Internal Revenue Service.
The Section 382 limitation will not have a material impact on the financial
statements of the Company as the Company has not utilized any net operating
losses to offset the reversal of taxable temporary differences. Although the
Section 382 limitation will affect the Company's ability to utilize its net
operating loss carryovers and certain recognized built-in losses, any income tax
benefits attributable to those net operating loss carryovers and recognized
built-in losses will not be available until operations of the Company result in
additional taxable income. The annual amount of the Section 382 limitation
potentially available to the Company has been estimated to approximate $563
thousand per year for a period of 15 years, for a potential NOL utilization of
$8.44 million.
19
<PAGE>
UNIONFED FINANCIAL CORPORATION
PART II OTHER INFORMATION
Item 1. Legal Proceedings
The Company is defendant in various legal actions arising in the
ordinary course of business which are not material to the
Company. At March 31, 1996, the Company was involved in the
following additional legal proceedings:
In HARBOUR PLACE CONDOMINIUMS ASSOC. V. HARBOUR PLACE DEVELOPMENT
CORPORATION, ET. AL., the plaintiff condominium association
alleges a series of purported construction defects in the Harbour
Place condominium project in Key West, Florida. The project was
initially developed and sold by a limited partnership in which a
subsidiary of the Bank was a limited partner and was later
completed and the remaining units sold by a subsidiary of the
Bank after a transfer of the property to such subsidiary in lieu
of foreclosure. The Bank has denied the plaintiff's claims. The
Bank has tendered the plaintiff's claims to its liability
carriers, one of which has accepted the Bank's tender and is
providing defense counsel subject to a reservation of rights
under the Bank's liability policies.
In UNION FEDERAL BANK V. BROADWAY TRADE CENTER, the Bank seeks a
declaratory judgment regarding its possessory right to two ground
leases and one ground sublease affecting the Broadway Trade
Center. In addition to its leasehold interest, the Bank and its
subsidiary hold title to approximately 82% of the property in fee
simple absolute. In the litigation, the Bank seeks a judgment
that its leases are in full force and effect following the Bank's
foreclosure on such leases as security for a Bank loan made to a
former owner. The lessor of such leases alleges that such leases
are in default for various reasons, all of which the Bank
contends are without merit. Based on these breach allegations,
the lessor seeks a declaration that the Bank is no longer
entitled to possession of the parcels covered by the leases. In
addition, the Bank is seeking a judgment that the Bank is
entitled to retain as liquidated damages the sum of $400,000
deposited with the Bank by a former owner of the property
pursuant to the terms of an agreement with such owner which the
Bank contends such owner breached. In three companion cases
entitled, SECURITY TRUST COMPANY V. UNION FEDERAL BANK, the
plaintiff, representing the lessor of the three leases at issue
in the Broadway Trade Center litigation, has filed for unlawful
detainer and damages with respect to such leases based on various
alleged defaults all of which the Bank contends are without
merit. In the above actions, the plaintiffs have demanded unpaid
rent totalling $5.0 million plus an escalation factor based on
the terms of the lease. The Bank's position in these cases is
that no unpaid rent is due. A portion of this action (two
unlawful detainer actions filed by Security Trust Company seeking
possession of two parcels and alleged unpaid rent) was recently
tried, and is now under submission to the Court. There can be no
assurance that the Bank will prevail in these matters.
20
<PAGE>
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. That motion was denied and
the case is scheduled for trial in October 1996. There can be no
assurance that the Bank will prevail in this matter.
In DOYLE V. HILL AND UNION FEDERAL BANK, plaintiff Michael Doyle
filed his original complaint against the Bank and an officer of
the Bank, John Hill ("Hill") , on April 20, 1989. The action
relates to two loans made to a limited partnership entitled
Cottonwood-Doyle Limited Partnership, in the amounts of
$3,600,000 and $1,625,000, respectively. Michael Doyle was and
is a lmited partnership. His complaint alleges that the Bank and
Hill conspired with the genral partner, Cottonwood Development
Corporation, to defraud Doyle. After defendants successfully
demurred to three prior purported complaints, the Court on
September 10, 1991, permitted plaintiff to proceed with a claim
for conspiracy to breach fiduciary duty and conspiracy to
defraud. Plaintiff's complaint alleges $8,000,000 in damages.
The Bank made a motion for summary judgement on all of
plaintiff's claims on March 7, 1995. That motion has been
franted and a judgement in the Bank's favor has been entered.
The Court also awarded the Bank over $500,000 in attorneys' fees
payable by Doyle. Doyle recently appealed the judgment against
him.
Item 2. None
Item 3. None
Item 4. None.
Item 5. None
Item 6. Exhibits and Reports on Form 8-K
There were no reports on Form 8-K filed for the three-
month period ended March 31, 1996.
21
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNIONFED FINANCIAL CORPORATION
Date May 13, 1996 By
------------- ---------------------------
David S. Engelman
Chairman of the Board and
President
Date May 13 , 1996 By
-------------- ---------------------------
Michelle X. Dean
Vice President
Chief Financial Officer
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<CIK> 0000802223
<NAME> UNIONFED FINANCIAL CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 746
<INT-BEARING-DEPOSITS> 68
<FED-FUNDS-SOLD> 2,900
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 7,388
<ALLOWANCE> (512)
<TOTAL-ASSETS> 35,256
<DEPOSITS> 32,806
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,099
<LONG-TERM> 0
0
0
<COMMON> 272
<OTHER-SE> 79
<TOTAL-LIABILITIES-AND-EQUITY> 35,256
<INTEREST-LOAN> 9
<INTEREST-INVEST> 40
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 49
<INTEREST-DEPOSIT> 494
<INTEREST-EXPENSE> 494
<INTEREST-INCOME-NET> (445)
<LOAN-LOSSES> 1
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,445
<INCOME-PRETAX> (975)
<INCOME-PRE-EXTRAORDINARY> (975)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (229)
<EPS-PRIMARY> (0.01)
<EPS-DILUTED> (0.01)
<YIELD-ACTUAL> 2.61
<LOANS-NON> 2,848
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> (512)
<CHARGE-OFFS> 1
<RECOVERIES> 0
<ALLOWANCE-CLOSE> (512)
<ALLOWANCE-DOMESTIC> (512)
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
