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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark one)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended December 31, 1999
Or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to ___________
Commission File Number 000-24051
UNITED PANAM FINANCIAL CORP.
(Exact name of Registrant as specified in its charter)
California 95-3211687
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1300 South El Camino Real
San Mateo, California 94402
(Address of principal executive offices) (Zip Code)
(650) 345-1800
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, No
Par Value
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in PART III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the Common Stock held by non-affiliates of the
Registrant was approximately $7,230,000, based upon the closing sales price of
the Common Stock as reported on the Nasdaq National Market on March 13, 2000.
Shares of Common Stock held by each officer, director and holder of 5% or more
of the outstanding Common Stock have been excluded in that such persons may be
deemed to be affiliates. Such determination of affiliate status is not
necessarily a conclusive determination for other purposes.
The number of shares outstanding of the Registrant's Common Stock as of March
13, 2000 was 16,606,850 shares.
Documents Incorporated by Reference
Portions of the Registrant's Definitive Proxy Statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A in connection with
the 2000 Annual Meeting of Shareholders to be held June 20, 2000 are
incorporated by reference in PART III hereof. Such Proxy Statement will be
filed with the Securities and Exchange Commission not later than 120 days after
December 31, 1999.
UNITED PANAM FINANCIAL CORP.
1999 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
Item 1. Business 1
General 1
Automobile Finance 2
Insurance Premium Finance 6
Pan American Bank, FSB 12
Discontinued Operations - Mortgage Finance 12
Industry Segments 15
Competition 15
Employees 15
Supervision and Regulation 15
Taxation 24
Subsidiaries 25
Factors That May Affect Future Results of Operations 26
Item 2. Properties 29
Item 3. Legal Proceedings 29
Item 4. Submission of Matters to a Vote of Security Holders 29
PART II
Item 5. Market For Registrant's Common Equity and Related Shareholder Matters 30
Item 6. Selected Financial Data 31
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations 33
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 50
Item 8. Financial Statements and Supplementary Data 50
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosures 50
PART III
Item 10. Directors and Executive Officers of the Registrant 50
Item 11. Executive Compensation 50
Item 12. Security Ownership of Certain Beneficial Owners and Management 50
Item 13. Certain Relationships and Related Transactions 51
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 51
SIGNATURES 60
PART I
Certain statements in this Annual Report on Form 10-K, including statements
regarding United PanAm Financial Corp.'s (the "Company") strategies, plans,
objectives, expectations and intentions, may include forward-looking information
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These forward-
looking statements involve certain risks and uncertainties that could cause
actual results to differ materially from those expressed or implied in such
forward-looking statements. Such risks and uncertainties include, but are not
limited to, the following factors: limited operating history; loans made to
credit-impaired borrowers; need for additional sources of financing;
concentration of business in California; estimates involving discontinued
operations; valuation of residuals; interests in securitizations; reliance on
operational systems and controls and key employees; competitive pressure in the
banking industry; changes in the interest rate environment; rapid growth of the
Company's businesses; dependence on whole loan sale markets; general economic
conditions; and other risks, some of which may be identified from time to time
in the Company's filings with the Securities and Exchange Commission (the
"SEC"). See "Item 1. Business - Factors That May Affect Future Results of
Operations."
Item 1. Business
General
The Company was incorporated in California on April 19, 1998 for the
purpose of reincorporating its business in that state, through the merger of
United PanAm Financial Corp., a Delaware corporation (the "Predecessor"), into
the Company. Unless the context indicates otherwise, all references herein to
the "Company" include the Predecessor. The Company was originally organized as a
holding company for Pan American Financial, Inc., ("PAFI") and Pan American
Bank, FSB (the "Bank") to purchase certain assets and assume certain liabilities
of Pan American Federal Savings Bank from the Resolution Trust Corporation
("RTC") on April 29, 1994 pursuant to a whole purchase and assumption agreement.
The Company, PAFI and the Bank are considered to be minority owned. PAFI is a
wholly-owned subsidiary of the Company, and the Bank is a wholly-owned
subsidiary of PAFI. United PanAm Mortgage Corporation, a California corporation,
was organized in 1997 as a wholly-owned subsidiary of UPFC and is now inactive.
Effective, September 30, 1999, all of the outstanding common stock of United
PanAm Mortgage Corporation was contributed by the Company to the Bank, and,
accordingly, United PanAm Mortgage Corporation is now a wholly-owned subsidiary
of the Bank.
The Company is a diversified specialty finance company engaged primarily
in originating and acquiring for investment insurance premium finance contracts
and retail automobile installment sales contracts. The Company markets to
customers who generally cannot obtain financing from traditional lenders. These
customers usually pay higher loan origination fees and interest rates than those
charged by traditional lenders to gain access to consumer financing. The Company
has funded its operations to date principally through retail and wholesale
deposits, Federal Home Loan Bank ("FHLB") advances, warehouse lines of credit,
and whole loan sales or securitizations. All of the Company's revenues are
attributed to customers located in the United States.
The Company commenced operations in 1994 by purchasing from the RTC
certain assets and assuming certain liabilities of the Bank's predecessor, Pan
American Federal Savings Bank. The Bank is the largest Hispanic-controlled
savings association in California. The Company has used the Bank as a base for
expansion into its current specialty finance businesses. In 1995, the Company
commenced its insurance premium finance business through a joint venture with
BPN Corporation ("BPN") and in 1996 commenced its automobile finance business.
In December 1999, the Company decided to close its subprime mortgage
finance operations to focus on its auto lending and insurance premium finance
businesses. This business originated and sold or securitized subprime mortgage
loans secured primarily by first mortgages on single family residences. In
connection with
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the discontinuance of the mortgage finance division, all related operating
activity is treated as discontinued operations for financial statement reporting
purposes. See "Item 1. Business - Discontinued Operations - Mortgage Finance."
Automobile Finance
Business Overview
The Company entered the subprime automobile finance business in February
1996 through the establishment of United Auto Credit Corporation ("UACC") as a
subsidiary of the Bank. UACC purchases auto contracts primarily from dealers in
used automobiles, approximately 77% of which have been independent dealers and
23% of which have been franchisees of automobile manufacturers. The borrowers on
contracts purchased by UACC are classified as subprime because they typically
have limited credit histories or credit histories that preclude them from
obtaining loans through traditional sources. UACC maintains nine branch offices
located in California, three branch offices located in Florida, two branch
offices located in Washington and one each in Arizona, Colorado, Georgia, North
Carolina, Oregon and Utah. At December 31, 1999, UACC's portfolio contained
16,955 auto contracts in the aggregate gross amount of $128.1 million, including
unearned finance charges of $21.2 million.
Subprime Automobile Finance Industry
Automobile financing is one of the largest consumer finance markets in the
United States. In general, the automobile finance industry can be divided into
two principal segments: a prime credit market and a subprime credit market.
Traditional automobile finance companies, such as commercial banks, savings
institutions, thrift and loan companies, credit unions and captive finance
companies of automobile manufacturers, generally lend to the most creditworthy,
or so-called prime, borrowers. The subprime automobile credit market, in which
UACC operates, provides financing to borrowers who generally cannot obtain
financing from traditional lenders.
Historically, traditional lenders have not serviced the subprime market or
have done so only through programs that were not consistently available.
Independent companies specializing in subprime automobile financing and
subsidiaries of larger financial services companies have entered this segment of
the automobile finance market, but it remains highly fragmented, with no company
having a significant share of the market.
Business Strategy
UACC's business strategy includes controlled growth at the branch level,
with limited volume goals and the gradual addition of new branches. Each branch
is targeted to generate on average between $650,000 and $750,000 in gross
contracts per month within five months of opening. The Company believes that
UACC's strategy of controlled growth, disciplined underwriting, strong internal
audit procedures and focused servicing and collection efforts at the branch
level, will result in sustainable profitability and lower levels of delinquency
and loss than those experienced by many of its competitors, whose rapid growth
has resulted in portfolio quality problems.
The Company believes that the subprime automobile finance market is
inconsistently or poorly serviced by the consumer finance industry. As a
result, UACC's strategy is to differentiate itself by providing dealers with
consistent, same day decisions and up front verifications, which reduces the
percentage of rejected contracts submitted for purchase, and rapid funding of
approved contracts. The Company believes that UACC is also more flexible than
some of its competitors in financing older, higher mileage vehicles and
maintenance warranties.
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Operating Summary
The following table presents a summary of UACC's key operating and statistical
results for the years ended December 31, 1999 and 1998.
At or For the
Years Ended
December 31,
------------------------------------------------------
1999 1998
------------------------------------------------------
(Dollars in thousands, except portfolio and other data)
Operating Data
Gross contracts purchased $124,896 $86,098
Gross contracts outstanding 128,093 83,921
Unearned finance charges 21,181 17,371
Net contracts outstanding 106,912 66,550
Average purchase discount 8.79% 9.12%
APR to customers 21.47% 21.31%
Allowance for loan losses $ 7,915 $ 4,138
Loan Quality Data
Allowance for loan losses (% of net contracts) 7.40% 6.22%
Delinquencies (% of net contracts)
31-60 days 0.39% 0.44%
61-90 days 0.16% 0.16%
90+ days 0.08% 0.08%
Net charge-offs (% of average net contracts) 4.05% 4.56%
Repossessions (net) (% of net contracts) 0.47% 0.72%
Portfolio Data
Used vehicles 99.0% 99.0%
Vehicle age at time of contract (years) 6.0 6.2
Original contract term (months) 42.6 40.6
Gross amount financed to WSBB (1) 119% 117%
Net amount financed to WSBB (2) 108% 106%
Net amount financed per contract $ 8,019 $ 7,725
Down payment 19% 20%
Monthly payment $ 272 $ 270
Other Data
Number of branches 20 15
______________
(1) WSBB represents Kelly Wholesale Blue Book for used vehicles.
(2) Net amount financed equals the gross amount financed less unearned finance
charges or discounts.
Products and Pricing
UACC targets transactions which involve (i) a used automobile with an average
age of five to seven years and (ii) an average original contract term of 40 to
45 months.
The financial profile of the target transaction includes an amount financed
(before taxes, license, warranty and discount) equal to 95% to 100% of invoice
for new vehicles or current WSBB for used vehicles (after tax, license, warranty
and discount, the amount financed is targeted at 105% to 110%), a contract rate
and discount which yields 28.5%, an amount financed of $7,000 to $10,000 with a
down payment of 15% to 20% and a monthly payment from $225 to $325.
The target profile of a UACC borrower includes time on the job of three to
five years, time at current residence of three to five years, a ratio of total
debt to total income of 33% to 37% and a ratio of total monthly automobile
payments to total monthly income of 12% to 15%.
The application for an auto contract is taken by the dealer. UACC purchases
the auto contract from the dealer at a discount which increases the effective
yield on such contract. For the year ended December 31, 1999, the Company
allocated 90% of the discount to the allowance for loan losses, representing 9%
of the net
3
contract amount. Management periodically reviews the portion of the discount
allocated to the allowance for loan losses in light of the Company's operations.
Sales and Marketing
UACC markets its financing program to both independent used and franchised
automobile dealers. UACC's marketing approach emphasizes scheduled calling
programs, marketing materials and consistent follow-up. The Company uses
facsimile software programs to send marketing materials to established dealers
and potential dealers on a twice weekly basis in each branch market. UACC's
experienced local staff seeks to establish strong relationships with dealers in
their vicinity.
UACC solicits business from dealers through its branch managers who meet with
dealers and provide information about UACC's programs, train dealer personnel in
UACC's program requirements and assist dealers in identifying consumers who
qualify for UACC's programs. In order to both promote asset growth and achieve
required levels of credit quality, UACC compensates its branch managers on a
salary with a bonus that requires the achievement of delinquency, charge-off,
volume and return on average assets targets established for the branch, as well
as satisfactory audit results.
As of December 31, 1999, UACC directly marketed its programs to dealers
through its 20 branch offices in Arizona, California, Colorado, Florida,
Georgia, North Carolina, Oregon, Washington and Utah.
When a UACC branch decides to begin doing business with a dealer, a dealer
profile and investigation worksheet are completed. UACC and the dealer enter
into an agreement that provides UACC with recourse to the dealer in cases of
dealer fraud or a breach of the dealer's representations and warranties. When
UACC holds auto contracts aggregating $50,000 or more from a dealer, UACC
obtains a Experian Business Analysis Report for such dealer. Branch management
periodically monitors each dealer's overall performance and inventory to ensure
a satisfactory quality level, and regional managers regularly conduct audits of
the dealer's performance.
The following table sets forth certain data for auto contracts purchased by
UACC for the periods indicated.
For the Years Ended
--------------------------------
December 31, December 31,
1999 1998
--------------- -------------
(Dollars in thousands)
Gross amount of contracts $124,896 $86,098
Average original term of contracts (months) 42.6 40.6
At December 31, 1999, 68% of UACC's auto contracts were written by its
California branches, compared to 80% at December 31, 1998 and 95% at December
31, 1997. In addition to diversifying its geographic concentrations, UACC
maintains a broad dealer base to avoid dependence on a limited number of
dealers. At December 31, 1999, no dealer accounted for more than 1.5% of UACC's
portfolio and the ten dealers from which UACC purchased the most contracts
accounted for approximately 12% of its aggregate portfolio.
Underwriting Standards and Purchase of Contracts
Underwriting Standards and Purchase Criteria. Dealers submit credit
applications directly to UACC's branches. UACC uses credit bureau reports in
conjunction with information on the credit application to make a final credit
decision or a decision to request additional information. Only credit bureau
reports that have been obtained by UACC are acceptable.
UACC's credit policy places specific accountability for credit decisions
directly within the branches. The branch manager or assistant branch manager
reviews all credit applications. In general, no branch manager will have credit
approval authority for contracts greater than $15,000. Any transaction that
exceeds a
4
branch manager's approval limit must be approved by UACC's Regional Manager,
Operations Manager or President.
Verification. Upon approving or conditioning any application, all required
stipulations are presented to the dealer and must be satisfied before funding.
All dealers are required to provide UACC with written evidence of insurance in
force on a vehicle being financed when submitting the contract for purchase.
Prior to funding a contract, the branch must verify by telephone with the
insurance agent the customer's insurance coverage with UACC as loss payee. If
UACC receives notice of insurance cancellation or non-renewal, the branch will
notify the customer of his or her contractual obligation to maintain insurance
coverage at all times on the vehicle. However, UACC will not "force place"
insurance on an account if insurance lapses and, accordingly, UACC bears the
risk of an uninsured loss in these circumstances.
Post-Funding Quality Reviews. UACC's Regional Manager and Operations Manager
complete quality control reviews of the newly originated auto contracts. These
reviews focus on compliance with underwriting standards, the quality of the
credit decision and the completeness of auto contract documentation.
Additionally, UACC's Regional Manager and Operations Manager complete regular
branch audits that focus on compliance with UACC's policies and procedures and
the overall quality of branch operations and credit decisions.
Servicing and Collection
UACC services at the branch level all of the auto contracts it purchases.
Billing Process. UACC sends each borrower a coupon book. All payments are
directed to the customer's respective UACC branch. UACC also accepts payments
delivered to the branch by a customer in person.
Collection Process. UACC's collection policy calls for the following sequence
of actions to be taken with regard to all problem loans: call the borrower at
one day past due; immediate follow-up on all broken promises to pay; branch
management review of all accounts at ten days past due; and Regional Manager or
Operations Manager review of all accounts at 45 days past due.
UACC will consider extensions or modifications in working a collection
problem. All extensions and modifications require the approval of the branch
manager, and are monitored by the Regional Manager and Operations Manager.
Repossessions. It is UACC's policy to repossess the financed vehicle only
when payments are substantially in default, the customer demonstrates an
intention not to pay or the customer fails to comply with material provisions of
the contract. All repossessions require the prior approval of the branch
manager. In certain cases, the customer is able to pay the balance due or bring
the account current, thereby redeeming the vehicle.
When a vehicle is repossessed and sold at an automobile auction or through a
private sale, the sale proceeds are subtracted from the net outstanding balance
of the loan with any remaining amount recorded as a loss. UACC generally
pursues all customer deficiencies.
Allowance for Loan Losses. UACC's policy is to place on nonaccrual status
accounts delinquent in excess of 120 days on a contractual basis, and to reverse
all previously accrued but unpaid interest on such accounts. Accounts that have
had their collateral repossessed are placed on nonaccrual by the end of the
month in which they are repossessed regardless of delinquency status. Accounts
are not returned to accrual status until they are brought current.
UACC's policy is to charge-off accounts delinquent in excess of 120 days. The
remaining balance of accounts where the collateral has been repossessed and sold
is charged-off by the end of the month in which the collateral is sold and the
proceeds collected.
5
Loss reserves based on expected losses over the life of the contract are
established when each contract is purchased from the dealer. The reserve is
provided from the dealer discount that is taken on each transaction. Loss
reserve analyses are performed regularly to determine the adequacy of current
reserve levels. For the year ended December 31, 1999, the Company allocated 9%
of the net contract purchased to the allowance for loan losses. The loss
allowances recorded at the time of purchase represent an estimate of expected
losses for these loans. If actual experience exceeds estimates, an additional
provision for losses is established as a charge against earnings. Management
periodically reviews the portion of the discount allocated to the allowance for
loan losses in light of the Company's operations.
The following table reflects UACC's cumulative losses (i.e., net charge-offs
as a percent of original net contract balances) for each contract pool (defined
as the total dollar amount of net contracts purchased in a six-month period)
purchased since UACC's inception.
Number of Mar. 1996 Oct. 1996 Apr. 1997 Oct. 1997 Apr. 1998 Oct. 1998 Apr. 1999 Oct. 1999
Months - - - - - - - -
Outstanding Sept. 1996 Mar. 1997 Sept. 1997 Mar. 1998 Sept. 1998 Mar. 1999 Sept. 1999 Dec. 1999
---------- --------- ---------- --------- ---------- --------- ---------- ---------
1 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
3 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.1%
5 0.0% 0.0% 0.1% 0.1% 0.1% 0.1% 0.2%
7 0.3% 0.4% 0.5% 0.5% 0.5% 0.3% 0.5%
9 1.0% 0.9% 1.1% 1.2% 1.1% 1.7% 1.1%
11 2.8% 2.1% 2.3% 2.1% 1.9% 1.3%
13 4.4% 3.1% 3.3% 2.9% 2.7% 1.8%
15 5.9% 4.1% 4.2% 3.7% 3.2% 2.6%
17 6.8% 4.8% 4.8% 4.2% 3.8%
19 7.7% 5.4% 5.3% 4.7% 4.4%
21 8.5% 5.8% 5.7% 5.2% 4.8%
23 8.7% 6.3% 6.4% 5.5%
25 9.1% 6.6% 6.8% 5.9%
27 9.2% 7.2% 7.2% 6.2%
29 9.3% 7.6% 7.4%
31 9.6% 7.9% 7.6%
33 9.9% 8.1% 7.9%
35 10.0% 8.3%
37 10.0% 8.3%
39 10.2% 8.6%
41 10.1%
43 10.1%
45 10.0%
Original Pool ($000) $4,885 $9,297 $15,575 $ 22,488 $30,271 $36,773 $42,115 $21,551
======= ======= ======== ========= ======== ======== ======== ========
Remaining Pool ($000) $ 258 $ 971 $ 2,988 $ 7,284 $14,087 $24,234 $36,546 $21,169
======= ======= ========= ======== ======== ======== ======== ========
(%) 5% 10% 19% 32% 49% 66% 87% 98%
======= ======= ========= ======== ======== ======== ======== ========
UACC purchased its first auto contracts in March 1996 and, accordingly, a
maximum of 45 months of loss history was available at December 31, 1999.
Insurance Premium Finance
Business Overview
In May 1995, the Company entered into a joint venture with BPN under the name
"ClassicPlan" (such business is referred to herein as "IPF"). Under this joint
venture, which commenced operations in September 1995, the Bank underwrites and
finances private passenger automobile and small business ("commercial")
insurance premiums in California and BPN markets this financing primarily to
independent insurance agents
6
that sell automobile or commercial insurance policies in California and,
thereafter, services such loans for the Bank.
IPF markets its automobile insurance financing to drivers who are classified
by insurance companies as non-standard or high risk for a variety of reasons,
including ages, driving record, a lapse in insurance coverage or ownership of
high performance automobiles. Insurance companies that underwrite insurance for
such drivers, including those participating in the assigned risk programs
established by California law, generally either do not offer financing of
insurance premiums or do not offer terms as flexible as those offered by IPF.
IPF markets its commercial insurance financing to small businesses for
property/casualty and specialty classes of insurance on an excess or surplus
lines basis, including commercial multi peril, other liability, commercial
automobile liability/comprehensive, fire and product liability.
Customers are directed to BPN through a non-exclusive network of insurance
brokers and agents who sell automobile or commercial insurance and offer
financing through programs like those offered by IPF. On a typical twelve-month
insurance policy, the borrower makes a cash down payment of 15% to 25% of the
premium (plus certain fees) and the balance is financed under a contract that
contains a payment period of shorter duration than the policy term. In the
event that the insured defaults on the loan, the Bank has the right to obtain
directly from the insurance company the unearned insurance premium held by the
insurance company, which can then be applied to the outstanding loan balance
(premiums are earned by the insurance company over the life of the insurance
policy). Each contract is designed to ensure that, at any point during the term
of the underlying policy, the unearned premium under the insurance policy
exceeds the unpaid principal amount due under the contract. Under the terms of
the contract, the insured grants IPF a power of attorney to cancel the policy in
the event the insured defaults under the contract. Upon cancellation, the
insurance company is required by California law to remit the unearned premium to
IPF which, in turn, offsets this amount against any amounts due from the
insured. IPF does not sell or have the risk of underwriting the underlying
insurance policy. IPF seeks to minimize its credit risk by perfecting a
security interest in the unearned premium, avoiding concentrations of policies
with insurance companies that are below certain industry ratings, and doing
automobile premium financing to date only in California which maintains an
insurance guaranty fund which protects consumers and insurance premium finance
companies against losses from failed insurance companies.
IPF seeks to minimize its credit risks in the financing of commercial
insurance policies by perfecting a security interest in the unearned premium,
obtaining premium verifications on loans over $5,000, avoiding concentrations of
policies with insurance companies that are below certain ratings and limiting
the amount of surplus lines business which is not covered by California's
guaranty fund. At December 31, 1999, IPF had less than 9% of its commercial
loan balances with surplus line insurance companies doing business on a non-
admitted basis in California.
In addition to insurance premiums, IPF will also finance broker fees (i.e.,
fees paid by the insured to the agent). If a policy cancels, the agent repays
any unearned broker fee financed by IPF. Broker fee financing represents
approximately 3% of total loans outstanding. At December 31, 1999,
approximately 60.8% of all broker fee financing was to a single insurance
agency. When IPF agrees to finance an agent's broker fees, a credit limit is
established for the agent. Agents are required to maintain deposits with the
Bank to mitigate IPF's possible losses on broker fees financed. To date, the
Bank has not charged-off a broker fee balance.
At December 31, 1999, the aggregate gross amount of insurance premium finance
contracts was $30.3 million with 70,726 contracts outstanding. Commercial loan
balances represented 24.5% of these loan balances at December 31, 1999. During
1999, IPF originated 108,218 insurance premium finance contracts of which 9,996
or 9.2% were commercial loan contracts. During January 1998, the Company with
BPN, purchased from Providian National Bank for $450,000 the right to solicit
new and renewal personal and commercial insurance premium finance business from
brokers who previously provided contracts to Commonwealth Premium Finance
("CPF"). The purchase price for the agreement was provided 60% by the Company
and 40% by BPN. The relationship between the Company and BPN continues to be
governed by the joint venture arrangement already in effect. See "Relationship
with BPN" below. The Company also acquired the
7
Commonwealth name and certain equipment and software. The agreement also
provides that Providian National Bank and the servicers of its insurance premium
finance business may not solicit or engage in the insurance premium finance
business in California for a period of three years from the date of the
agreement.
During November 1998, the Company and BPN, purchased from Norwest Financial
Coast, Inc. ("Coast") for $3.0 million the right to solicit new and renewal
personal and commercial insurance premium finance business from brokers who
previously provided contracts to Coast. The purchase price for the agreement
was provided 60% by the Company and 40% by BPN. The Company also acquired the
"Coast" name, and certain furniture, equipment and software. The agreement also
provides that Coast may not solicit or engage in the insurance premium finance
business in California and certain other states for five years from the date of
the agreement. Existing Coast customer receivables were not acquired.
Relationship with BPN
BPN is headquartered in Chino, California, and markets the Company's insurance
premium finance program under the trade name "ClassicPlan." The Company
believes that IPF is the largest provider of financing for consumer automobile
insurance premiums in California. On a more limited basis, IPF also finances
insurance premiums for businesses purchasing property, casualty and liability
insurance. At December 31, 1999, BPN had 40 employees.
BPN solicits insurance agents and brokers to submit their clients' financing
requests to the Bank. BPN is responsible for monitoring the agents' performance
and assisting with IPF's compliance with applicable consumer protection,
disclosure and insurance laws, and providing customer service, data processing
and collection services to IPF. The Bank pays fees to BPN for these services.
The amount of these fees is based on fixed charges, which include a loan service
fee per contract and cancellation fees charged by the Bank, and the earnings of
the loan portfolio, which include 50% of the interest earned on portfolio loans
after the Bank subtracts a specified floating portfolio interest rate and 50% of
late fees and returned check fees charged by the Bank. Additionally, BPN and
the Bank share equally certain collection and legal expenses which may occur
from time-to-time, all net loan losses experienced on the insurance premium loan
portfolio and all net losses up to $375,000 experienced on the broker fees loan
portfolio. BPN bears losses over $375,000 experienced on the broker fees loan
portfolio.
The shareholders of BPN have entered into certain guaranty agreements in favor
of the Bank whereby they agree to pay any sums owed to the Bank and not paid by
BPN. The total potential liability of the guarantors to the Bank is limited to
$2,000,000 plus any amounts by which BPN is obligated to indemnify the Bank.
Under these guaranties, all debts of BPN to the guarantors are subordinated to
the full payment of all obligations of BPN to the Bank.
The Company has entered into an option agreement with BPN and its shareholders
whereby the Company may purchase all of the issued and outstanding shares of BPN
(the "Shares Option") and all additional shares of any BPN affiliate which may
be organized outside of California (the "Affiliate Share Option"). The option
period expires March 31, 2005. The Company has agreed not to exercise the Share
Option prior to April 29, 1999 unless BPN or its shareholders have breached
their outstanding agreements with the Company. Until the date occurring 90 days
after delivery to the Company of a notice stating that BPN has had $30,000,000
or more in loans outstanding for the six months preceding delivery of such
notice, which notice cannot be delivered prior to October 29, 1999, the Company
may exercise the Share Option for $3,250,000 and must pay a $750,000 noncompete
payment to certain shareholders and key employees of BPN (the "Noncompete
Payment"). If the Share Option is exercised any time thereafter, the Noncompete
Payment will be made and the option exercise price shall be the greater of
$3,250,000 or four times BPN's pre-tax earnings for the twelve complete
consecutive calendar months immediately preceding the date of exercise less the
Noncompete Payment. The Affiliate Share Option may not be exercised
independently of the Share Option. The exercise price of the Affiliate Share
Option will equal the sum of four times BPN Affiliate's pre-tax earnings for the
twelve-month period prior to exercise.
8
In connection with the purchase of the rights to solicit new and renewal
business from Coast, the Bank made loans to two shareholders of BPN in the
aggregate amount of $1.2 million. The loans earn interest at a rate of 9.25%
per annum and are secured by the common stock of BPN. The loans provide for
principal and interest payments over a three-year period.
Automobile Insurance Premium Finance Industry
Insurance Finance. The private passenger automobile insurance industry in
the United States is estimated by A.M. Best Company ("A.M. Best"), a provider of
independent ratings on the financial strength and claims payment ability of
insurance companies, to have been a $109 billion market in annual premium volume
during 1996, with nonstandard automobile insurance comprising $23 billion of
this market. Although reliable data concerning the size and composition of the
personal lines premium finance market is not available, the Company believes
that the industry is highly fragmented with no independent insurance premium
finance company accounting for a significant share of the market. The Company
believes that the insurance premium finance industry in California is somewhat
more concentrated than elsewhere in the nation, with several long-established
competitors. In addition, insurance companies offering direct bill payment
programs and direct sales of insurance policies to the consumer are providing
significant competition to the Company.
California Insurance Laws. Under current law, automobiles in the state of
California cannot be registered without providing proof of insurance or posting
required bonds with the Department of Motor Vehicles.
In California, as in most states, insurance companies fall into two
categories, admitted or non-admitted. All insurance companies licensed to do
business in California are required to be members of the California Insurance
Guarantee Association ("CIGA"), and are classified as "admitted" companies.
CIGA was established to protect insurance policyholders in the event the company
that issued a policy fails financially, and to establish confidence in the
insurance industry. Should an insurance company fail, CIGA is empowered to
raise money by levying member companies. CIGA pays claims against insurance
companies, which protects both the customer and the premium financiers should an
admitted insurance company fail. In such event, CIGA will refund any unearned
premiums. This provides protection to companies, such as IPF, that provide
insurance premium financing. As a result, IPF's policy is to limit financing of
insurance policies issued by non-admitted carriers.
Because insurance companies will not voluntarily insure drivers whom they
consider to be excessively high risk, California has a program called the
California Automobile Assigned Risk Program ("CAARP"), to which all admitted
companies writing private passenger automobile insurance policies must belong.
This 45-year-old program is an insurance plan for high risk, accident-prone
drivers who are unable to purchase insurance coverage from regular insurance
carriers. CAARP policies are distributed to the admitted companies in
proportion to their share of California's private passenger automobile insurance
market. The companies participating in CAARP do not have any discretion in
choosing the customers they insure under the program. The customers are
arbitrarily assigned to them by CAARP. Although CAARP offers financing of its
policy premiums, its terms are not as competitive as the insurance premium
finance companies and, therefore, many CAARP policies are financed by others.
At December 31, 1999, approximately 13.8% of the insurance policies financed by
IPF were issued under CAARP.
Business Strategy
IPF's business strategy is to increase profitably the volume of contracts
originated and maintained in its portfolio. IPF intends to implement this
strategy by:
. Strengthening its relationships with insurance brokers and agents by
offering a variety of high-quality support services (e.g., computer
hardware and software and customer reports) and finance programs
designed to enable them to better serve their customers;
9
. Investing additional resources to ensure IPF's ability to continue to
provide technologically advanced and efficient contract origination and
servicing systems and support services;
. Continuing to expand its premium financing to other insurance lines of
business (e.g., commercial, property, casualty and liability insurance);
and
. Expanding the Company's operations into other states.
Operating Summary
The following table presents a summary of IPF's key operating and
statistical results for the years ended December 31, 1999 and 1998.
At or For the
Years Ended
December 31,
------------------------------------------------------
1999 1998
------------------------------------------------------
(Dollars in thousands, except portfolio averages)
Operating Data
Loan originations $107,212 $152,998
Loans outstanding at period end 30,334 44,709
Average gross yield (1) 22.32% 19.51%
Average net yield (2) 12.73% 13.90%
Allowance for loan losses $ 389 $ 349
Loan Quality Data
Allowance for loan losses (% of loans outstanding) 1.28% 0.78%
Net charge-offs (% of average loans outstanding) (3) 1.00% 0.78%
Delinquencies (% of loans outstanding) (4) 1.38% 1.79%
Portfolio Data
Average monthly loan originations (number of loans) 9,018 11,501
Average loan size at origination $ 991 $ 1,109
Commercial insurance policies (% of loans outstanding) 24.50% 13.14%
CAARP policies (% of loans outstanding) 13.79% 13.05%
Cancellation rate (% of premiums financed) 39.0% 42.1%
_______________
(1) Gross yield represents total rates and fees paid by the borrower.
(2) Net yield represents the yield to the Bank after interest and fee sharing
with BPN.
(3) Includes only the Bank's 50% share of charge-offs.
(4) This statistic measures delinquencies on canceled policy balances. Since
IPF seeks recovery of unearned premiums from the insurance companies, which
can take up to 90 days, loans are not considered delinquent until more than
90 days past due.
Products and Pricing
IPF generally charges from 16% to 23% annualized interest (depending on the
amount financed) and a $40 processing fee for each consumer contract, which the
Company believes is competitive in IPF's industry. In addition, contracts
provide for the payment by the insured of a delinquency charge and, if the
default results in cancellation of any insurance policy listed in the contract,
for the payment of a cancellation charge. Certain of these finance charges and
fees are shared with BPN. See "Relationship with BPN." The insured makes a
minimum 15% down payment on an annual policy and pays the remainder in a maximum
of ten monthly payments.
IPF designs its programs so that the unearned premium is equal to or
greater than the remaining principal amount due on the contract by requiring a
down payment and having a contract term shorter than the underlying policy term.
Sales and Marketing
IPF currently markets its insurance premium finance program through a
network of over 700 agents, primarily located in Los Angeles, Orange and San
Bernardino counties. Relationships with agents are established by BPN's
marketing representatives. The Company believes that IPF has been able to
attract and
10
maintain its relationship with agents by offering a higher level of service than
its competitors. IPF focuses on providing each agent with up-to-date information
on its customers' accounts, which allows the agent to service customers' needs
and minimize the number of policies that are canceled. Many of IPF's largest
agents have computer terminals provided by BPN in their offices, which allow on-
line access to customer information. Agents for IPF receive an average producer
fee ($20, equal to 50% of the aforementioned $40 processing fee per contract),
as collateral against early cancellations. IPF does not require return of this
$20 producer fee for early policy cancellation unless the policy pays off in the
first 30 days.
To minimize its exposure to reliance on a limited number of agents, the
Company has instituted portfolio guidelines generally limiting the dollar amount
of contracts originated by any agent to 15% of IPF's total portfolio. The
Company performs a quarterly analysis of all agents based on information
provided by BPN. At December 31, 1999, IPF had no agent that exceeded the 15%
portfolio parameter.
Underwriting Standards
IPF is a secured lender, and upon default, relies on its security interest
in the unearned premium held by the insurance company. IPF can, however, suffer
a loss on an insurance premium finance contract for four reasons: loss of all or
a portion of the unearned premium due to its failure to cancel the contract on a
timely basis; an insolvency of the insurance company holding the unearned
premium not otherwise covered by CIGA; inadequacy of the unearned premium to
cover charges in excess of unpaid principal amount; and cost of collection and
administration, including the time value of money, exceeding the unpaid
principal and other charges due under the contract. For the twelve months ended
December 31, 1999, IPF canceled for nonpayment contracts representing
approximately 39.0% of all premiums financed. Careful administration of
contracts is critical to protecting IPF against loss.
Credit applications are taken at the insurance agent's office. Given the
secondary source of repayment on unearned premiums due from the insurance
company on a canceled policy, and in most cases, access to CIGA, IPF does not
carry out a credit investigation of a borrower on loans under $25,000.
Servicing and Collection
The Company believes that an efficient and accurate servicing and
collection system is the most important management tool that an insurance
premium financing company can use to protect itself from losses as a result of
an insured's default on a contract. The insurance premium finance industry is
acutely time sensitive because insurance premiums are earned each day that an
insurance policy remains in effect, thus reducing, on a daily basis, the
collateral support provided by the unearned premium.
During July 1998, BPN purchased and installed a new computer system, a
Proliant 2500, manufactured by Compaq Computer Corporation. In addition, BPN
developed an Oracle-based management information system software which provides
complete online, real-time information processing services. The system also
provides direct electronic processing of many functions that were previously
paper intensive. This system satisfies IPF's current requirements for
application processing, payment processing and collections and monitoring and
reporting, and has significant capacity remaining. The Bank purchased a 50%
interest in the Oracle-based software developed by BPN for $175,000.
Billing Process. A customer's monthly payments are recorded in BPN's
computer system on the date of receipt. BPN's computer system is designed to
provide protection against principal loss by automatically canceling a policy no
later than 18 days after the customer's latest payment due date. If a payment is
not received on its due date, BPN's computer system automatically prints a
notice of intent to cancel and assesses a late fee which is mailed to the
insured and his or her insurance agent stating that payment must be received
within 18 days after the due date or IPF will cancel the insurance policy. If
payment is received within the 18 day period, BPN's computer system returns the
account to normal status.
Collections Process. If IPF does not receive payment within the statutory
period set forth in the notice of intent to cancel, BPN's computer system will
automatically generate a cancellation notice on the next
11
business day, instructing the insurance company to cancel the insured's
insurance policy and refund any unearned premium directly to IPF for processing.
Although California law requires the insurance company to refund unearned
premiums within 30 days of the cancellation date, most insurance companies pay
on more extended terms. After cancellation, IPF charges certain allowable fees
and continues to earn interest. Although the gross return premium may not fully
cover the fees and accrued interest owed to IPF by the insured, principal
generally is fully covered. Policies which are canceled in the first two months
generally have a greater risk of loss of fees.
IPF charges against income a general provision for possible losses on
finance receivables in such amounts as management deems appropriate. Case-by-
case direct write-offs, net of recoveries on finance receivables, are charged to
IPF's allowance for possible losses. This allowance amount is reviewed
periodically in light of economic conditions, the status of outstanding
contracts and other factors.
Insurance Company Failure. One of the principal risks involved in financing
insurance premiums is the possible insolvency of an insurance company. Another
risk is that an insurance company's financial circumstances cause it to delay
its refunds of unearned premiums. Either event can adversely affect the yield to
an insurance premium finance company on a contract. Despite the protection
afforded by CIGA, IPF also reviews the ratings assigned to the insurance
companies by A.M. Best or their financial statements. To minimize its exposure
to risks resulting from the insolvency of an insurance company, IPF limits the
number of policies financed that are issued by insurance companies rated "B" or
lower by A.M. Best.
Pan American Bank, FSB
Business Overview
The Bank is a federally chartered stock savings bank formed in 1994 to
purchase from the RTC certain assets and to assume certain liabilities of the
Bank's predecessor, Pan American Federal Savings Bank. It is the largest
Hispanic-controlled savings association in California, with five retail branch
offices in the state and $291.9 million in deposits at December 31, 1999. The
Bank has been the principal funding source to date for the Company's residential
mortgage, insurance premium and automobile finance businesses primarily through
its deposits, FHLB advances, warehouse lines of credit and whole loan sales. In
addition, the Bank holds a portfolio of primarily traditional residential
mortgage loans acquired from the RTC in 1994 and 1995 at a discount from the
unpaid principal balance of such loans, these loans aggregated $21.8 million
(before unearned discounts and premiums) at December 31, 1999. The Bank has
focused its branch marketing efforts on building a middle income customer base,
including efforts targeted at local Hispanic communities. The Bank has
bilingual employees in each of its branches, and key members of the Company's
and the Bank's Board of Directors and management are of Hispanic heritage and
are active in communities served by the Bank. In addition to operating its
retail banking business at four branches located in Northern California and one
in Southern California, the Bank provides, subject to appropriate cost sharing
arrangements, compliance, risk management, executive, financial, facilities and
human resources management to other business units of the Company. The business
of the Bank is subject to substantial government supervision and regulatory
requirement. See "Supervision and Regulation - Business Savings Bank
Regulation."
Discontinued Operations - Mortgage Finance
From 1996 to the end of 1999, one of the Company's primary lending
businesses was mortgage finance. The Company originated and sold or securitized
subprime mortgage loans secured primarily by first mortgages on single family
residences through United PanAm Mortgage, a division of the Bank (such business
is referred to as "UPAM").
The market for subprime mortgage lending deteriorated late in 1998 in
response to disruptions in the global capital markets, causing a severe
liquidity crisis in the mortgage securitization markets. As a result, the demand
for subprime mortgage loans was negatively affected and whole loan prices
dropped precipitously in the fourth quarter of 1998. During the first nine
months of 1998 the Company received an average price of
12
105% (of the principal amount of mortgages) for whole loan sales compared with
102.8% in the fourth quarter of 1998 and 103.2% for all of 1999.
To compensate for declining loan sale prices, the Company implemented a
number of actions including consolidating loan branches, reducing overhead costs
and improving loan quality. However, the mortgage finance division was unable to
achieve targeted profitability levels. Consequently, in December 1999, the
Company decided to discontinue this division in order to concentrate efforts on
its other businesses as well as to explore new finance businesses. Accordingly,
related operating activity for UPAM is reclassified and reported as discontinued
operations in the 1999 and the preceding years consolidated financial
statements. A loss on disposal for UPAM is also included in the 1999 financial
statements and provides for lease terminations, employment severance and
benefits, write-off of fixed assets and leasehold improvements and an accrual
for estimated future operating losses of UPAM.
During 1999, UPAM sold loans with servicing released to other mortgage
companies and investors through whole loan packages offered for bid several
times per month. During 1999, UPAM sold $552.2 million of loans through whole
loan sales at a weighted average sales price equal to 103.2% of the original
principal balance of the loans sold. Also, in 1999, UPAM completed two mortgage
loan securitizations totaling $458.0 million and recorded a weighted average
gain on these securitizations of 103.8% of the original principal balance of the
loans sold. In connection with these two securitizations, the Company recorded
residual interests of $22.3 million. These residual interests were not included
in the Company's discontinued mortgage finance operations.
Operating Summary
The following table presents a summary of UPAM's key operating results and
statistics for 1999 and 1998.
At of For the Years Ended
December 31,
-------------------------------------------------------
1999 1998
--------------------- --------------------
(Dollars in thousands)
Loan Origination Statistics
Loans originated $ 962,716 $1,189,741
Number of loans originated 8,833 11,934
Average principal balance per loan $ 109 $ 100
Weighted average interest rate
Fixed-rate loans 10.10% 10.35%
Adjustable-rate loans 9.86% 9.62%
Weighted average loan-to-value ratio 76% 76%
First mortgage loans 97% 96%
Fixed-rate loans 24% 29%
Owner occupied 89% 88%
Retail originations 18% 32%
California originations 35% 32%
Loans with prepayment penalties
Retail 94% 90%
Wholesale 84% 81%
Loan Sales Statistics
Loans sold or securitized $1,010,211 $1,084,701
Average whole loan sales price
(% of principal balance) 103.2% 104.8%
13
Loan Origination
During 1999, UPAM originated loans through its retail and wholesale
divisions. The retail division originated loans through the direct solicitation
of borrowers by mail and telemarketing and accounted for $173.4 million, or 18%
of UPAM's total loan production in 1999. The wholesale division originated loans
through independent loan brokers and accounted for $789.3 million, or 82%, of
UPAM's total loan production during the same period.
Loan Sales and Securitizations
Whole Loan Sales. During the twelve months ended December 31, 1999, UPAM
sold, for cash paid in full at closing, $552.2 million of mortgage loans
through whole loan sales at a weighted average sales price equal to 103.2% of
the original principal balance of the loans sold.
Whole loan sales were made on a non-recourse basis pursuant to a purchase
agreement containing customary representations and warranties by UPAM regarding
the underwriting criteria applied by UPAM in the origination process. In the
event of a breach of such representations and warranties, UPAM may be required
to repurchase or substitute loans. In addition, UPAM sometimes committed to
repurchase or substitute a loan if a payment default occurred within the first
month following the date the loan was funded, or if UPAM's appraisal was
significantly different than the purchaser's appraisal value, unless other
arrangements were made between UPAM and the purchaser. UPAM also was required
in some cases to repurchase or substitute a loan if the loan documentation was
alleged to contain fraudulent misrepresentations made by the borrower. During
1999, UPAM repurchased from investors $9.6 million of loans primarily as a
result of early payment defaults or property appraisal differences. If these
loans are non-performing, specific loss reserves have been recorded if the
outstanding principal balance is in excess of its estimated fair value.
Securitizations. UPAM completed its first securitization of mortgage loans
in December 1997, in the principal amount of $114.9 million. The Company sold
for cash, the residual interests from this securitization. No loan
securitizations were completed during 1998. UPAM completed two additional
securitizations in March and October of 1999 in the principal amount of
approximately $458.0 million. As part of the 1999 securitizations, the Company
recorded residual interests in securitizations of $22.3 million. The residual
interests consist of beneficial interests in the form of an interest-only strip
representing the subordinated right to receive cash flows from the pool of
securitized loans after payment of required amounts to the holders of the
securities and certain costs associated with the securitization. The Company
classifies its residual interests in securitizations as trading securities and
records them at fair market value with any unrealized gains or losses recorded
in the results of operations.
Valuations of the residual interests in securitizations at each reporting
period are based on discounted cash flows analyses. Cash flows are estimated as
the amount of the excess of the weighted average coupon on the loans sold over
the sum of the interest pass-through on the senior certificates, a servicing
fee, an estimate of annual future credit losses and prepayment assumptions and
other expenses associated with the securitization, discounted at an interest
rate which the Company believes is commensurate with the risks involved. The
Company uses prepayment and default assumptions that market participants would
use for similar instruments subject to prepayment, credit and interest rate
risks.
The assumptions used by the Company for valuing the residual interests
arising from its 1999 securitizations included prepayment assumptions of 5% for
the first year increasing to 30%-42% thereafter, an annual credit loss
assumption of 0.95% and a discount rate of 15%. The Company sold for cash, the
residual interests from its first securitization completed in 1997.
Loan Servicing and Delinquencies
UPAM sold most of its loans on a servicing released basis. All loans were
serviced and held by the Bank until sold. The Bank subcontracts with a third-
party sub-servicer to conduct its servicing operations, and monitors the sub-
servicers' activities to ensure that they comply with its guidelines. UPAM began
receiving
14
applications for mortgage loans under its regular lending programs in January
1996 and to date has sold many of its loans on a whole loan, servicing released
basis. Accordingly, UPAM does not have representative historical delinquency,
bankruptcy, foreclosure or default experience that may be referred to for
purposes of estimating future delinquency, loss and prepayment data with respect
to its loans.
In connection with discontinuing its subprime mortgage finance business,
the Company ceased originating loans in the first quarter of 2000. As part of
exiting this lending business, the Company expects to sell any remaining loans
on a whole loan servicing released basis as soon as practical. The costs
associated with these origination activities as well as an estimate of the
proceeds to be realized upon sale of the loans is included in the Company's loss
on disposal of discontinued operations.
Industry Segments
Information regarding industry segments is set forth in Footnote Number 21
to the Consolidated Financial Statements included in Item 8 to this Annual
Report on Form 10-K.
Competition
Each of the Company's businesses is highly competitive. Competition in the
Company's markets can take many forms, including convenience in obtaining a
loan, customer service, marketing and distribution channels, amount and terms of
the loan, loan origination fees and interest rates. Many of the Company's
competitors are substantially larger and have considerably greater financial,
technical and marketing resources than the Company. The Company competes in the
insurance premium finance business with other specialty finance companies,
independent insurance agents who offer premium finance services, captive premium
finance affiliates of insurance companies and direct bill plans established by
insurance companies. The Company competes in the subprime automobile finance
industry with commercial banks, the captive finance affiliates of automobile
manufacturers, savings associations and companies specializing in subprime
automobile finance, many of which have established relationships with automobile
dealerships and may offer dealerships or their customers other forms of
financing, including dealer floor plan financing and lending, which are not
offered by the Company. In attracting deposits, the Bank competes primarily
with other savings institutions, commercial banks, brokerage firms, mutual
funds, credit unions and other types of investment companies.
Fluctuations in interest rates and general and localized economic
conditions also may affect the competition the Company faces. Competitors with
lower costs of capital have a competitive advantage over the Company. During
periods of declining interest rates, competitors may solicit the Company's
customers to refinance their loans. In addition, during periods of economic
slowdown or recession, the Company's borrowers may face financial difficulties
and be more receptive to offers of the Company's competitors to refinance their
loans. As the Company seeks to expand into new geographic markets, it will face
additional competition from lenders already established in these markets.
Employees
At December 31, 1999, the Company had 607 full-time equivalent employees.
Included in this total are 395 full-time equivalent employees of the Company's
mortgage origination operations. Most of the mortgage origination employees
will be terminated during the first quarter of 2000 in connection with the
discontinuance of these operations. The Company believes its relations with its
employees are satisfactory.
Supervision and Regulation
Set forth below is a brief description of various laws and regulations
affecting the operations of the Company and its subsidiaries. The description
of laws and regulations contained herein does not purport to be complete and is
qualified in its entirety by reference to applicable laws and regulations. Any
change in applicable laws, regulations or regulatory policies may have a
material effect on the business, operations and prospects of the Company.
15
Holding Company Regulation
General. The Company is a unitary savings and loan holding company subject
to regulatory oversight by the Office of Thrift Supervision (the "OTS"). For
purposes of this discussion, the description of holding company regulation also
applies to PAFI, a direct subsidiary of the Company and the parent of the Bank.
As such, the Company is required to register and file reports with the OTS and
is subject to regulation and examination by the OTS. In addition, the OTS has
enforcement authority over the Company and its subsidiaries, which also permits
the OTS to restrict or prohibit activities that are determined to be a serious
risk to the subsidiary savings association.
Qualified Thrift Lender Test. As a unitary savings and loan holding
company, the Company generally is not subject to activity restrictions, provided
the Bank satisfies the Qualified Thrift Lender ("QTL") test or meets the
definition of domestic building and loan association pursuant to section 7701 of
the Internal Revenue Code of 1986, as amended (the "Code"). If the Company
acquires control of another savings association as a separate subsidiary, it
would become a multiple savings and loan holding company, and the activities of
the Company and any of its subsidiaries (other than the Bank or any other SAIF-
insured savings association) would become subject to restrictions applicable
to bank holding companies unless such other associations each also qualify as a
QTL or domestic building and loan association and were acquired in a supervisory
acquisition. See "- Business Savings Bank Regulation - Qualified Thrift Lender
Test."
Restrictions on Acquisitions. The Company must obtain approval from the
OTS before acquiring control of any other SAIF-insured association. Such
acquisitions are generally prohibited if they result in a multiple savings and
loan holding company controlling savings associations in more than one state.
However, such interstate acquisitions are permitted based on specific state
authorization or in a supervisory acquisition of a failing savings association.
Federal law generally provides that no "person," acting directly or
indirectly or through or in concert with one or more other persons, may acquire
"control," as that term is defined in OTS regulations, of a federally insured
savings association without giving at least 60 days written notice to the OTS
and providing the OTS an opportunity to disapprove the proposed acquisition. In
addition, no company may acquire control of such an institution without prior
OTS approval. These provisions also prohibit, among other things, any director
or officer of a savings and loan holding company, or any individual who owns or
controls more than 25% of the voting shares of a savings and loan holding
company, from acquiring control of any savings association not a subsidiary of
the savings and loan holding company, unless the acquisition is approved by the
OTS. For additional restrictions on the acquisition of a unitary thrift holding
company see "- Financial Services Modernization Legislation."
Financial Services Modernization Legislation. On November 12, 1999,
President Clinton signed into law the Gramm-Leach-Bliley Act of 1999 (the
"Financial Services Modernization Act"). The Financial Services Modernization
Act repeals the two affiliation provisions of the Glass-Steagall Act: Section
20, which restricted the affiliation of Federal Reserve Member Banks with firms
"engaged principally" in specified securities activities; and Section 32, which
restricts officer, director, or employee interlocks between a member bank and
any company or person "primarily engaged" in specified securities activities.
In addition, the Financial Services Modernization Act also contains provisions
that expressly preempt any state law restricting the establishment of financial
affiliations, primarily related to insurance. The general effect of the law is
to establish a comprehensive framework to permit affiliations among commercial
banks, insurance companies, securities firms, and other financial service
providers by revising and expanding the Bank Holding Company Act framework to
permit a holding company system to engage in a full range of financial
activities through a new entity known as a "Financial Holding Company."
"Financial activities" is broadly defined to include not only banking,
insurance, and securities activities, but also merchant banking and additional
activities that the Federal Reserve Board, in consultation with the Secretary of
the Treasury, determines to be financial in nature, incidental to such financial
activities, or complementary activities that do not pose a substantial risk to
the safety and soundness of depository institutions or the financial system
generally.
16
The Financial Services Modernization Act provides that no company may
acquire control of an insured savings association after May 4, 1999, unless that
company engages, and continues to engage, only in the financial activities
permissible for a Financial Holding Company, unless grandfathered as a unitary
savings and loan holding company. The Financial Institution Modernization Act
grandfathers any company that was a unitary savings and loan holding company on
May 4, 1999 (or becomes a unitary savings and loan holding company pursuant to
an application pending on that date). Such a company may continue to operate
under present law as long as the company continues to meet the two tests: it
can control only one savings institution, excluding supervisory acquisitions,
and each such institution must meet the QTL test. It further requires that a
grandfathered unitary savings and loan holding company must continue to control
at least one savings association, or a successor institution, that it controlled
on May 4, 1999.
The Financial Services Modernization Act also permits national banks to
engage in expanded activities through the formation of financial subsidiaries. A
national bank may have a subsidiary engaged in any activity authorized for
national banks directly or any financial activity, except for insurance
underwriting, insurance investments, real estate investment or development, or
merchant banking, which may only be conducted through a subsidiary of a
Financial Holding Company. Financial activities include all activities permitted
under new sections of the Bank Holding Company Act of 1956 ("BHCA") or permitted
by regulation.
The Company and the Bank do not believe that the Financial Services
Modernization Act will have a material adverse effect on the operations of the
Company and the Bank in the near-term. However, to the extent that the act
permits banks, securities firms, and insurance companies to affiliate, the
financial services industry may experience further consolidation. The Financial
Services Modernization Act is intended to grant to community banks certain
powers as a matter of right that larger institutions have accumulated on an ad
hoc basis and which unitary savings and loan holding companies already possess.
Nevertheless, this act may have the result of increasing the amount of
competition that the Company and the Bank face from larger institutions and
other types of companies offering financial products, many of which may have
substantially more financial resources than the Company and the Bank. In
addition, because the Company may only be acquired by other unitary savings and
loan holding companies or Financial Holding Companies, the legislation may have
an anti-takeover effect by limiting the number of potential acquirors or by
increasing the costs of an acquisition transaction by a bank holding company
that has not made the election to be a Financial Holding Company under the new
legislation.
Regulation of Mortgage Finance Operation
The consumer financing industry is a highly regulated industry. UPAM's
business is subject to extensive and complex rules and regulations of, and
examinations by, various federal, state and local government authorities. These
rules and regulations impose obligations and restrictions on UPAM's loan
origination, credit activities and secured transactions. In addition, these
rules limit the interest rates, finance charges and other fees UPAM may assess,
mandate extensive disclosure to UPAM's customers, prohibit discrimination and
impose multiple qualification and licensing obligations on UPAM. Failure to
comply with these requirements may result in, among other things, demands for
indemnification or mortgage loan repurchases, certain rights of rescission for
mortgage loans, class action lawsuits, administrative enforcement actions and
civil and criminal liability. Management of UPAM believes that UPAM is in
compliance with these rules and regulations in all material respects.
UPAM is subject to certain disclosure requirements under the Truth in
Lending Act ("TILA") and the Federal Reserve Board's Regulation Z promulgated
thereunder. TILA is designed to provide consumers with uniform, understandable
information with respect to the terms and conditions of loan and credit
transactions. TILA also guarantees consumers a three-day right to cancel certain
credit transactions, including loans of the type originated by UPAM. Such three-
day right to rescind may remain unexpired for up to three years if the lender
fails to provide the requisite disclosures to the consumer.
UPAM originates loans which are subject to the Home Ownership and Equity
Protection Act of 1994 (the "High Cost Mortgage Act"), which makes certain
amendments to TILA. The High Cost Mortgage Act
17
generally applies to consumer credit transactions secured by the consumer's
principal residence, in which the loan has either total points and fees upon
origination in excess of the greater of eight percent of the loan amount or $435
or an annual percentage rate of more than ten percentage points higher than
United States Treasury securities of comparable maturity ("Covered Loans"). The
High Cost Mortgage Act imposes additional disclosure requirements on lenders
originating Covered Loans. In addition, it prohibits lenders from, among other
things, originating Covered Loans that are underwritten solely on the basis of
the borrower's home equity without regard to the borrower's ability to repay the
loan and including prepayment fee clauses in Covered Loans to borrowers with a
debt-to-income ratio in excess of 50% or Covered Loans used to refinance
existing loans originated by the same lender. The High Cost Mortgage Act also
restricts, among other things, certain balloon payments and negative
amortization features. UPAM commenced originating Covered Loans during 1996.
UPAM is also required to comply with the Equal Credit Opportunity Act
("ECOA") and the Federal Reserve Board's Regulation B promulgated thereunder,
the Fair Credit Reporting Act ("FCRA"), the Real Estate Settlement Procedures
Act of 1974 ("RESPA") and the Home Mortgage Disclosure Act ("HMDA"). Regulation
B restricts creditors from requesting certain types of information from loan
applicants. FCRA requires lenders, among other things, to supply an applicant
with certain information if the lender denies the applicant credit. RESPA
requires lenders, among other things, to supply an applicant with certain
disclosures concerning settlement fees and changes and mortgage servicing
transfer practices. It also prohibits the payment or receipt of kickbacks or
referral fees in connection with the performance of settlement services. In
addition, beginning with loans originated in 1994, UPAM must file an annual
report with the Department of Housing and Urban Development pursuant to HMDA,
which requires the collection and reporting of statistical data concerning loan
transactions.
Regulation of Insurance Premium Finance Companies
The insurance premium finance industry is subject to state regulations. The
regulatory structure of each state places certain restrictions on the terms of
loans made to finance insurance premiums. These restrictions, among other
things, generally provide that the lender must provide certain cancellation
notices to the insured and the insurer in order to exercise an assigned right to
cancel an insurance policy in the event of a default under an insurance premium
finance agreement and to obtain in connection therewith a return from the
insurer of any unearned premiums that have been assigned by the insured to the
lender. Such state laws also require that certain disclosures be delivered by
the insurance agent or broker arranging for such credit to the insured regarding
the amount of compensation to be received by such agent or broker from the
lender.
Regulation of Subprime Automobile Lending
UACC's automobile lending activities are subject to various federal and
state consumer protection laws, including TILA, ECOA, FCRA, the Federal Fair
Debt Collection Practices Act, the Federal Trade Commission Act, the Federal
Reserve Board's Regulations B and Z, and state motor vehicle retail installment
sales acts. Retail installment sales acts and other similar laws regulate the
origination and collection of consumer receivables and impact UACC's business.
These laws, among other things, require UACC to obtain and maintain certain
licenses and qualifications, limit the finance charges, fees and other charges
on the contracts purchased, require UACC to provide specified disclosures to
consumers, limit the terms of the contracts, regulate the credit application and
evaluation process, regulate certain servicing and collection practices, and
regulate the repossession and sale of collateral. These laws impose specific
statutory liabilities upon creditors who fail to comply with their provisions
and may give rise to a defense to payment of the consumer's obligation. In
addition, certain of the laws make the assignee of a consumer installment
contract liable for the violations of the assignor.
Each dealer agreement contains representations and warranties by the dealer
that, as of the date of assignment, the dealer has compiled with all applicable
laws and regulations with respect to each contract. The dealer is obligated to
indemnify UACC for any breach of any of the representations and warranties and
to repurchase any non-conforming contracts. UACC generally verifies dealer
compliance with usury laws, but
18
does not audit a dealer's full compliance with applicable laws. There can be no
assurance that UACC will detect all dealer violations or that individual dealers
will have the financial ability and resources either to repurchase contracts or
indemnify UACC against losses. Accordingly, failure by dealers to comply with
applicable laws, or with their representations and warranties under the dealer
agreement, could have a material adverse affect on UACC.
UACC believes it is currently in compliance in all material respects with
applicable laws, but there can be no assurance that UACC will be able to
maintain such compliance. The failure to comply with such laws, or a
determination by a court that UACC's interpretation of any such law was
erroneous, could have a material adverse effect upon UACC. Furthermore, the
adoption of additional laws, changes in the interpretation and enforcement of
current laws or the expansion of UACC's business into jurisdictions that have
adopted more stringent regulatory requirements than those in which UACC
currently conducts business, could have a material adverse affect upon UACC.
If a borrower defaults on a contract, UACC, as the servicer of the
contract, is entitled to exercise the remedies of a secured party under the
Uniform Commercial Code as adopted in a particular state (the "UCC"), which
typically includes the right to repossession by self-help unless such means
would constitute a breach of the peace. The UCC and other state laws regulate
repossession and sales of collateral by requiring reasonable notice to the
borrower of the date, time and place of any public sale of collateral, the date
after which any private sale of the collateral may be held and the borrower's
right to redeem the financed vehicle prior to any such sale, and by providing
that any such sale must be conducted in a commercially reasonable manner.
Financed vehicles repossessed generally are resold by UACC through unaffiliated
wholesale automobile networks or auctions which are attended principally by used
automobile dealers.
Business Savings Bank Regulation
As a federally chartered, SAIF-insured savings association, the Bank is
subject to extensive regulation by the OTS and the Federal Deposit Insurance
Corporation ("FDIC"). Lending activities and other investments of the Bank must
comply with various statutory and regulatory requirements. The Bank is also
subject to certain reserve requirements promulgated by the Board of Governors of
the Federal Reserve System ("Federal Reserve Board").
The OTS, in conjunction with the FDIC, regularly examines the Bank and
prepares reports for the consideration of the Bank's Board of Directors on any
deficiencies found in the operations of the Bank. The relationship between the
Bank and depositors and borrowers is also regulated by federal and state laws,
especially in such matters as the ownership of savings accounts and the form and
content of mortgage documents utilized by the Bank.
The Bank must file reports with the OTS and the FDIC concerning its
activities and financial condition, in addition to obtaining regulatory
approvals prior to entering into certain transactions such as mergers with or
acquisitions of other financial institutions. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the SAIF and depositors.
The regulatory structure also gives the regulatory authorities extensive
discretion in connection with their supervisory and enforcement activities and
examination policies, including policies with respect to the classification of
assets and the establishment of adequate loan loss reserves for regulatory
purposes. Any change in such regulations, whether by the OTS, the FDIC, or the
Congress could have a material adverse impact on the Company, the Bank, and
their operations.
Insurance of Deposit Accounts. The Bank's deposit accounts are insured by
the SAIF, as administered by the FDIC, up to the maximum amount permitted by
law. Insurance of deposits may be terminated by the FDIC upon a finding that
the institution has engaged in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation, rule, order, or condition imposed by the FDIC or the institution's
primary regulator.
19
The FDIC charges an annual assessment for the insurance of deposits based
on the risk a particular institution poses to its deposit insurance fund. Under
this system as of December 31, 1995, SAIF members paid within a range of 23
cents to 31 cents per $100 of domestic deposits, depending upon the
institution's risk classification. This risk classification is based on an
institution's capital group and supervisory subgroup assignment.
The FDIC charges an annual assessment for the insurance of deposits based
on the risk a particular institution poses to its deposit insurance fund. Under
this system as of December 31, 1999, SAIF members paid within a range of 0 cents
to 27 cents per $100 of domestic deposits, depending upon the institution's risk
classification. This risk classification is based on an institution's capital
group and supervisory subgroup assignment. In addition, pursuant to the
Economic Growth and Paperwork Reduction Act of 1996 (the "Paperwork Reduction
Act"), the Bank pays, in addition to its normal deposit insurance premium as a
member of the SAIF, an amount equal to approximately 6.4 basis points toward the
retirement of the Financing Corporation bonds ("Fico Bonds") issued in the 1980s
to assist in the recovery of the savings and loan industry. Members of the Bank
Insurance Fund ("BIF"), by contrast, pay, in addition to their normal deposit
insurance premium, approximately 1.3 basis points. Under the Paperwork Reduction
Act, the FDIC also is not permitted to establish SAIF assessment rates that are
lower than comparable BIF assessment rates. Effective January 1, 2000, the rate
paid to retire the Fico Bonds will be equal for members of the BIF and the SAIF.
The Paperwork Reduction Act also provided for the merging of the BIF and the
SAIF by January 1, 1999 provided there were no financial institutions still
chartered as savings associations at that time. Although legislation to
eliminate the savings association charter had been proposed, at January 1, 1999,
financial institutions such as the Bank were still chartered as savings
associations.
Regulatory Capital Requirements. OTS capital regulations require savings
associations to meet three capital standards: tangible capital equal to 1.5% of
total adjusted assets, leverage capital (core capital) equal to 3% of total
adjusted assets, and risk-based capital equal to 8.0% of total risk-based
assets. The Bank must meet each of these standards in order to be deemed in
compliance with OTS capital requirements. In addition, the OTS may require a
savings association to maintain capital above the minimum capital levels.
Under OTS regulations, a savings association with a greater than "normal"
level of interest rate exposure must deduct an interest rate risk ("IRR")
component in calculating its total capital for purposes of determining whether
it meets its risk-based capital requirement. Interest rate exposure is
measured, generally, as the decline in an institution's net portfolio value that
would result from a 200 basis point increase or decrease in market interest
rates (whichever would result in lower net portfolio value), divided by the
estimated economic value of the savings association's assets. The interest rate
risk component to be deducted from total capital is equal to one-half of the
difference between an institution's measured exposure and "normal" IRR exposure
(which is defined as 2%), multiplied by the estimated economic value of the
institution's assets. In August 1995, the OTS indefinitely delayed
implementation of its IRR regulation. Based on information voluntarily supplied
to the OTS, at December 31, 1999, the Bank would not have been required to
deduct an IRR component in calculating total risk-based capital had the IRR
component of the capital regulations been in effect.
These capital requirements are viewed as minimum standards by the OTS, and
most institutions are expected to maintain capital levels well above the
minimum. In addition, the OTS regulations provide that minimum capital levels
higher than those provided in the regulations may be established by the OTS for
individual savings associations, upon a determination that the savings
association's capital is or may become inadequate in view of its circumstances.
The OTS regulations provide that higher individual minimum regulatory capital
requirements may be appropriate in circumstances where, among others: a savings
association has a high degree of exposure to interest rate risk, prepayment
risk, credit risk, concentration of credit risk, certain risks arising from
nontraditional activities, or similar risks or a high proportion of off-balance
sheet risk; a savings association is growing, either internally or through
acquisitions, at such a rate that supervisory problems are presented that are
not dealt with adequately by OTS regulations; and a savings association may be
adversely affected by activities or condition of its holding company,
affiliates, subsidiaries, or other persons, or
20
savings associations with which it has significant business relationships. The
Bank is not subject to any such individual minimum regulatory capital
requirement.
As shown below, the Bank's regulatory capital exceeded all minimum
regulatory capital requirements applicable to it as of December 31, 1999.
Percent of
Amount Adjusted Assets
---------------- ------------------
(Dollars in Thousands)
GAAP Capital............................ $47,931 10.60%
Tangible Capital: (1)
Regulatory requirement.................. $ 6,542 1.50%
Actual capital.......................... 46,234 10.60%
---------------- ----------------
Excess............................... $39,692 9.10%
================ ================
Leverage (Core) Capital: (1)
Regulatory requirement.................. $13,084 3.00%
Actual capital.......................... 46,234 10.60%
---------------- ----------------
Excess............................... $33,150 7.60%
================ ================
Risk-Based Capital: (2)
Regulatory requirement.................. $22,327 8.00%
Actual capital.......................... 28,581 10.24%
---------------- ----------------
Excess............................... $ 6,254 2.24%
================ ================
____________
(1) Regulatory capital reflects modifications from GAAP capital due to goodwill
and other intangible assets and a portion of deferred tax assets not
permitted to be included in regulatory capital.
(2) Based on risk-weighted assets of $279.1 million.
The Home Owners' Loan Act ("HOLA") permits savings associations not in
compliance with the OTS capital standards to seek an exemption from certain
penalties or sanctions for noncompliance. Such an exemption will be granted
only if certain strict requirements are met, and must be denied under certain
circumstances. If an exemption is granted by the OTS, the savings association
still may be subject to enforcement actions for other violations of law or
unsafe or unsound practices or conditions.
Prompt Corrective Action. The prompt corrective action regulation of the
OTS, requires certain mandatory actions and authorizes certain other
discretionary actions to be taken by the OTS against a savings association that
falls within certain undercapitalized capital categories specified in the
regulation.
The regulation establishes five categories of capital classification: "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized," and "critically undercapitalized." Under the regulation, the
risk-based capital, leverage capital, and tangible capital ratios are used to
determine an institution's capital classification. At December 31, 1999, the
Bank met the capital requirements of a "well capitalized" institution under
applicable OTS regulations.
In general, the prompt corrective action regulation prohibits an insured
depository institution from declaring any dividends, making any other capital
distribution, or paying a management fee to a controlling person if, following
the distribution or payment, the institution would be within any of the three
undercapitalized categories. In addition, adequately capitalized institutions
may accept Brokered Deposits only with a waiver from the FDIC and are subject to
restrictions on the interest rates that can be paid on such deposits.
Undercapitalized institutions may not accept, renew, or roll-over Brokered
Deposits.
If the OTS determines that an institution is in an unsafe or unsound
condition, or if the institution is deemed to be engaging in an unsafe and
unsound practice, the OTS may, if the institution is well capitalized,
reclassify it as adequately capitalized; if the institution is adequately
capitalized but not well capitalized, require it to comply with restrictions
applicable to undercapitalized institutions; and, if the institution is
21
undercapitalized, require it to comply with certain restrictions applicable to
significantly undercapitalized institutions.
Loans-to-One Borrower. Savings associations generally are subject to the
lending limits applicable to national banks. With certain limited exceptions,
the maximum amount that a savings association or a national bank may lend to any
borrower (including certain related entities of the borrower) at one time may
not exceed 15% of the unimpaired capital and surplus of the institution, plus an
additional 10% of unimpaired capital and surplus for loans fully secured by
readily marketable collateral. Savings associations are additionally authorized
to make loans to one borrower, for any purpose, in an amount not to exceed
$500,000 or, by order of the Director of OTS, in an amount not to exceed the
lesser of $30,000,000 or 30% of unimpaired capital and surplus to develop
residential housing, provided: the purchase price of each single-family dwelling
in the development does not exceed $500,000; the savings association is in
compliance with its fully phased-in capital requirements; the loans comply with
applicable loan-to-value requirements and the aggregate amount of loans made
under this authority does not exceed 150% of unimpaired capital and surplus. At
December 31, 1999, the Bank's loans-to-one-borrower limit was $6.9 million based
upon the 15% of unimpaired capital and surplus measurement.
Qualified Thrift Lender Test. Savings associations must meet a QTL test,
which test may be met either by maintaining a specified level of assets in
qualified thrift investments as specified in HOLA or by meeting the definition
of a "domestic building and loan association" in section 7701 of the Code. If
the Bank maintains an appropriate level of certain specified investments
(primarily residential mortgages and related investments, including certain
mortgage-related securities) and otherwise qualifies as a QTL or a domestic
building and loan association, it will continue to enjoy full borrowing
privileges from the Federal Home Loan Bank ("FHLB"). The required percentage of
investments under HOLA is 65% of assets while the Code requires investments of
60% of assets. An association must be in compliance with the QTL test or the
definition of domestic building and loan association on a monthly basis in nine
out of every 12 months. Associations that fail to meet the QTL test will
generally be prohibited from engaging in any activity not permitted for both a
national bank and a savings association. As of December 31, 1999, the Bank was
in compliance with its QTL requirement and met the definition of a domestic
building and loan association.
Affiliate Transactions. Transactions between a savings association and its
"affiliates" are subject to quantitative and qualitative restrictions under
Sections 23A and 23B of the Federal Reserve Act. Affiliates of a savings
association include, among other entities, the savings association's holding
company and companies that are under common control with the savings
association.
In general, Sections 23A and 23B and OTS regulations issued in connection
therewith limit the extent to which a savings association or its subsidiaries
may engage in certain "covered transactions" with affiliates to an amount equal
to 10% of the association's capital and surplus, in the case of covered
transactions with any one affiliate, and to an amount equal to 20% of such
capital and surplus, in the case of covered transactions with all affiliates.
In addition, a savings association and its subsidiaries may engage in covered
transactions and certain other transactions only on terms and under
circumstances that are substantially the same, or at least as favorable to the
savings association or its subsidiary, as those prevailing at the time for
comparable transactions with non-affiliated companies. A "covered transaction"
is defined to include a loan or extension of credit to an affiliate; a purchase
of investment securities issued by an affiliate; a purchase of assets from an
affiliate, with certain exceptions; the acceptance of securities issued by an
affiliate as collateral for a loan or extension of credit to any party; or the
issuance of a guarantee, acceptance, or letter of credit on behalf of an
affiliate.
In addition, under the OTS regulations, a savings association may not make
a loan or extension of credit to an affiliate unless the affiliate is engaged
only in activities permissible for bank holding companies; a savings association
may not purchase or invest in securities of an affiliate other than shares of a
subsidiary; a savings association and its subsidiaries may not purchase a low-
quality asset from an affiliate; and covered transactions and certain other
transactions between a savings association or its subsidiaries and an affiliate
must be on terms and conditions that are consistent with safe and sound banking
practices. With certain exceptions, each loan or extension of credit by a
savings association to an affiliate must be secured by collateral with a
22
market value ranging from 100% to 130% (depending on the type of collateral) of
the amount of the loan or extension of credit.
The OTS regulation generally excludes all non-bank and non-savings
association subsidiaries of savings associations from treatment as affiliates,
except to the extent that the OTS or the Federal Reserve Board decides to treat
such subsidiaries as affiliates. The regulation also requires savings
associations to make and retain records that reflect affiliate transactions in
reasonable detail, and provides that certain classes of savings associations may
be required to give the OTS prior notice of affiliate transactions.
Capital Distribution Limitations. OTS regulations impose limitations upon
all capital distributions by savings associations, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to shareholders
of another institution in a cash-out merger and other distributions charged
against capital. The OTS recently adopted an amendment to these capital
distribution limitations. Under the new rule, a savings association in certain
circumstances may be required to file an application and await approval from the
OTS prior to making a capital distribution, may be required to file a notice 30
days prior to the capital distribution, or may be permitted to make the capital
distribution without notice or application to the OTS.
An application is required, if the savings association is not eligible for
expedited treatment of its other applications under OTS regulations; the total
amount of all of capital distributions (including the proposed capital
distribution) for the applicable calendar year exceeds net income for that year
to date plus retained net income for the preceding two years; the savings
association would not be at least adequately capitalized, under the prompt
corrective action regulations of the OTS following the distribution or the
savings association's proposed capital distribution would violate a prohibition
contained in any applicable statute, regulation, or agreement between the
savings association and the OTS (or the FDIC), or violate a condition imposed on
the savings association in an OTS-approved application or notice.
A notice of a capital distribution is required if a savings association is
not required to file an application, but: would not be well capitalized under
the prompt corrective action regulations of the OTS following the distribution;
the proposed capital distribution would reduce the amount of or retire any part
of your common or preferred stock or retire any part of debt instruments such as
notes or debentures included in capital (other than regular payments required
under a debt instrument approved by the OTS) or the savings association is a
subsidiary of a savings and loan holding company.
If neither the savings association nor the proposed capital distribution
meet any of the above listed criteria, no application or notice is required for
the savings association to make a capital distribution. The OTS may prohibit
the proposed capital distribution that would otherwise be permitted if the OTS
determines that the distribution would constitute an unsafe or unsound practice.
Activities of Subsidiaries. Federally chartered savings associations, such
as the Bank, are permitted to invest up to 2% of their assets in the capital
stock of, or secured or unsecured loans to, subsidiary service corporations,
with an additional investment of 1% of assets when such additional investment is
utilized primarily for community development purposes. Under the 2% limitation,
the Bank was permitted to invest up to approximately $8.7 million at December
31, 1999. A savings association seeking to establish a new subsidiary, acquire
control of an existing company or conduct a new activity through a subsidiary
must provide 30 days prior notice to the FDIC and the OTS and conduct any
activities of the subsidiary in accordance with regulations and orders of the
OTS. The OTS has the power to require a savings association to divest any
subsidiary or terminate any activity conducted by a subsidiary that the OTS
determines to pose a serious threat to the financial safety, soundness or
stability of the savings association or to be otherwise inconsistent with sound
banking practices.
Recent Legislation. Congress has been considering legislation in various
forms that would require federal thrifts, such as the Bank, to convert their
charters to national or state bank charters. The Treasury Department has been
studying the development of a common charter for federal savings associations
and commercial banks. Pursuant to the Paperwork Reduction Act, if the thrift
charter is eliminated after January 1, 1999, the Paperwork Reduction Act would
require the merger of the BIF and the SAIF into a single Deposit
23
Insurance Fund on that date. In the absence of appropriate "grandfather"
provisions, legislation eliminating the thrift charter could have a material
adverse effect on the Bank and the Company because, among other things, the
regulatory, capital, and accounting treatment for national and state banks and
savings associations differs in certain significant respects. The Bank cannot
determine whether, or in what form, such legislation may eventually be enacted
and there can be no assurance that any legislation that is enacted would contain
adequate grandfather rights for the Bank and the Company.
Community Reinvestment Act and the Fair Lending Laws. Savings associations
have a responsibility under the Community Reinvestment Act ("CRA") and related
regulations of the OTS to help meet the credit needs of their communities,
including low- and moderate-income neighborhoods. In addition, the ECOA and the
Fair Housing Act (together, the "Fair Lending Laws") prohibit lenders from
discriminating in their lending practices on the basis of characteristics
specified in those statutes. An institution's failure to comply with the
provisions of CRA could, at a minimum, result in regulatory restrictions on its
activities and the denial of certain applications, and failure to comply with
the Fair Lending Laws could result in enforcement actions by the OTS, as well as
other federal regulatory agencies and the Department of Justice.
Federal Home Loan Bank System. The Bank is a member of the FHLB system.
Among other benefits, each FHLB serves as a reserve or central bank for its
members within its assigned region. Each FHLB is financed primarily from the
sale of consolidated obligations of the FHLB system. Each FHLB makes available
to members loans (i.e., advances) in accordance with the policies and procedures
established by the Board of Directors of the individual FHLB.
As a member, the Bank is required to own capital stock in an FHLB in an
amount equal to the greater of: 1% of its aggregate outstanding principal amount
of its residential mortgage loans, home purchase contracts and similar
obligations at the beginning of each calendar year, 0.3% of total assets or 5%
of its FHLB advances (borrowings). At December 31, 1999, the Bank had $2.5
million in FHLB stock, which was in compliance with this requirement.
Liquidity Requirements. Under OTS regulations, a savings association is
required to maintain an average daily balance of liquid assets (including cash,
certain time deposits and savings accounts, bankers' acceptances, certain
government obligations, and certain other investments) in each calendar quarter
of not less than 4% of either its liquidity base (consisting of certain net
withdrawable accounts plus short-term borrowings) as of the end of the preceding
calendar quarter, or the average daily balance of its liquidity base during the
preceding quarter. This liquidity requirement may be changed from time to time
by the OTS to any amount between 4.0% to 10.0%, depending upon certain factors,
including economic conditions and savings flows of all savings associations.
The Bank maintains liquid assets in compliance with these regulations. Monetary
penalties may be imposed upon an institution for violations of liquidity
requirements.
Federal Reserve System. The Federal Reserve Board requires all depository
institutions to maintain non-interest bearing reserves at specified levels
against their transaction accounts (primarily checking, NOW, and Super NOW
checking accounts) and non-personal time deposits. The balances maintained to
meet the reserve requirements imposed by the Federal Reserve Board may be used
to satisfy the liquidity requirements that are imposed by the OTS. At December
31, 1999, the Bank was in compliance with these requirements.
Taxation
Federal
General. The Company and the Bank report their income on a consolidated
basis using the accrual method of accounting, and are subject to federal income
taxation in the same manner as other corporations with some exceptions,
including particularly the Bank's reserve for bad debts discussed below. The
following discussion of tax matters is intended only as a summary and does not
purport to be a comprehensive description of the tax rules applicable to the
Bank or the Company. The Company has not been audited by the Internal Revenue
Service. For its 1999 taxable year, the Company is subject to a maximum federal
income tax rate of 34.0%.
24
Bad Debt Reserves. For fiscal years beginning prior to December 31, 1995,
thrift institutions which qualified under certain definitional tests and other
conditions of the Code were permitted to use certain favorable provisions to
calculate their deductions from taxable income for annual additions to their bad
debt reserve. A reserve could be established for bad debts on qualifying real
property loans (generally secured by interests in real property improved or to
be improved) under the Percentage of Taxable Income Method or the Experience
Method. The reserve for non-qualifying loans was computed using the Experience
Method.
The Small Business Job Protection Act of 1996 (the "1996 Act"), which was
enacted on August 20, 1996, requires savings institutions to recapture certain
portions of their accumulated bad debt reserves. The 1996 Act repeals the
reserve method of accounting for bad debts effective for tax years beginning
after 1995. Thrift institutions that would be treated as small banks are
allowed to utilize the Experience Method applicable to such institutions, while
thrift institutions that are treated as large banks (those generally exceeding
$500 million in assets) are required to use only the specific charge-off method.
To the extent the allowable bad debt reserve balance using the thrift's
historical computation method exceeds the allowable bad debt reserve method
under the newly enacted provisions, such excess is required to be recaptured
into income under the provisions of Code Section 481(a). Any Section 481(a)
adjustment required to be taken into income with respect to such change
generally will be taken into income ratably over a six-taxable year period.
Under the 1996 Act, the Bank is permitted to use the Experience Method to
compute its allowable addition to its reserve for bad debts for the current
year. The Bank's bad debt reserve as of December 31, 1995 was computed using
the permitted Experience Method computation and was therefore not subject to the
recapture of any portion of its bad debt reserve as discussed above.
State
The California franchise tax applicable to the Bank is computed under a
formula which results in a rate higher than the rate applicable to non-financial
corporations because it reflects an amount "in lieu" of local personal property
and business license taxes paid by such corporation (but not generally paid by
banks or financial corporations such as the Bank). The variable tax rate was
10.84% in 1999 and 1998. The Company and its wholly owned subsidiaries file a
California franchise tax return on a combined reporting basis. The Company has
not been audited by the Franchise Tax Board. The Company does business in
various other states with corporate rates that vary based on numerous factors
including asset size, income or business operations.
Subsidiaries
Pan American Financial, Inc., a wholly-owned subsidiary of the Company, acts
as the parent company of Pan American Bank, FSB and was the obligor on loans
obtained from the RTC in connection with the Minority Interim Capital Assistance
Program provided under the Federal Home Loan Bank Act. These loans were paid-
off in full during 1999.
Pan American Bank, FSB, a wholly-owned subsidiary of Pan American Financial,
Inc., is the primarily operating subsidiary of the Company.
United Auto Credit Corporation, a wholly-owned subsidiary of the Bank, holds
for investment and services subprime retail automobile installment sales
contracts.
United PanAm Mortgage Corporation was originally organized in 1997 as a
wholly-owned subsidiary of the Company. Effective, September 30, 1999, all of
the outstanding common stock of this entity was contributed by the Company to
the Bank, and accordingly, United PanAm Mortgage Corporation is now a wholly-
owned subsidiary of the Bank. During 1999, this subsidiary was substantially
inactive, as all mortgage banking activities were conducted in the Bank.
Pan American Service Corporation, a wholly-owned subsidiary of the Bank, acts
as trustee under certain deeds of trust originated through the Bank's mortgage
lending activities.
25
Factors That May Affect Future Results of Operations
This Annual Report on Form 10-K contains forward-looking statements, including
statements regarding the Company's strategies, plans, objectives, expectations
and intentions, which are subject to a variety of risks and uncertainties. The
Company's actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set
forth in the "Factors That May Affect Results of Operations" and elsewhere in
this Annual Report. The cautionary statements made in this Annual Report should
be read as being applicable to all related forward-looking statements wherever
they appear in this Annual Report.
The following discusses certain factors, which may affect the Company's
financial results and operations and should be considered in evaluating the
Company.
Limited Operating History
The Company purchased certain assets and assumed certain liabilities of Pan
American Federal Savings Bank from the RTC in 1994. In 1995, the Company
commenced its insurance premium finance business through a joint venture with
BPN, and in 1996, the Company commenced its subprime mortgage and automobile
finance businesses. Accordingly, the Company has only a limited operating
history upon which an evaluation of the Company and its prospects can be based.
See "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Credit-Impaired Borrowers
Loans made to borrowers who cannot obtain financing from traditional lenders
generally entail a higher risk of delinquency and default and higher losses than
loans made to borrowers with better credit. Substantially all of the Company's
auto loans are made to individuals with impaired or limited credit histories,
limited documentation of income or higher debt-to-income ratios than are
permitted by traditional lenders. If the Company experiences higher losses than
anticipated, the Company's financial condition, results of operations and
business prospects would be materially and adversely affected.
Need for Additional Financing
The Company's ability to maintain or expand its current level of lending
activity will depend on the availability and terms of its sources of financing.
The Company has funded its operations to date principally through deposits, FHLB
advances, mortgage warehouse lines of credit, loan securitizations, and whole
loan sales at the Bank. The Bank competes for deposits primarily on the basis
of interest rates and, accordingly, the Bank could experience difficulty in
attracting deposits if it does not continue to offer rates that are competitive
with other financial institutions. Federal regulations restrict the Bank's
ability to lend to affiliated companies and limit the amount of non-mortgage
consumer loans that may be held by the Bank. Accordingly, the growth of the
Company's insurance premium and automobile finance businesses will depend to a
significant extent on the availability of additional sources of financing.
There can be no assurance that the Company will be able to develop additional
financing sources on acceptable terms or at all. To the extent the Bank is
unable to maintain its deposits and the Company is unable to develop additional
sources of financing, the Company will have to restrict its lending activities
which would materially and adversely affect the Company's financial condition,
results of operations and business prospects. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources."
Concentration of Business in California
The Company's lending activities are concentrated primarily in California and
are likely to remain so for the foreseeable future. The performance of the
Company's loans may be affected by changes in California's economic and business
conditions, including its residential real estate market. The occurrence of
26
adverse economic conditions or natural disasters in California could have a
material adverse effect on the Company's financial condition, results of
operations and business prospects.
Discontinued Operations
The Company discontinued its mortgage origination operations in December 1999
and included the estimated loss from discontinuing these operations in its 1999
financial statements. The loss was estimated based on the Company's plans for
discontinuing these operations during the first six months of 2000. If the
estimated loss on discontinued operations is higher than anticipated, additional
charges may be required in subsequent periods' results of operations. If these
charges are significant, they could have a material adverse effect on the
Company's financial condition, results of operations and business prospects.
Residual Interests in Securitizations
The Company completed two securitizations during 1999, and as part of these
securitizations recorded residual interests of $22.3 million. The residual
interests are comprised of beneficial interests in the form of an interest-only
strip representing the subordinated right to receive cash flows from the pool of
securitized loans after payment of required amounts to the holders of the
securities and certain costs associated with the securitization. Valuations of
the retained interests in securitizations at each reporting period are based on
discounted cash flow analyses using prepayment, default and interest rate
assumptions that market participants would use for similar instruments. If
actual prepayments and defaults in the securitizations are different than
estimates used by the Company for valuing its retained interests, it could have
a material adverse effect on the Company's financial condition, results of
operations and business prospects.
Reliance on Systems and Controls
The Company depends heavily upon its systems and controls, some of which have
been designed specifically for a particular business, to support the evaluation,
acquisition, monitoring, collection and administration of that business. There
can be no assurance that these systems and controls, including those specially
designed and built for the Company, are adequate or will continue to be adequate
to support the Company's growth. A failure of the Company's automated systems,
including a failure of data integrity or accuracy, could have a material adverse
effect upon the Company's financial condition, results of operations and
business prospects.
Reliance on Key Employees and Others
The Company is dependent upon the continued services of its key employees as
well as the key employees of BPN. The loss of the services of any key employee,
or the failure of the Company to attract and retain other qualified personnel,
could have a material adverse effect on the Company's financial condition,
results of operations and business prospects.
Competition
Each of the Company's businesses is highly competitive. Competition in the
Company's markets can take many forms, including convenience in obtaining a
loan, customer service, marketing and distribution channels, amount and terms of
the loan, loan origination fees and interest rates. Many of the Company's
competitors are substantially larger and have considerably greater financial,
technical and marketing resources than the Company. The Company competes in the
insurance premium finance business with other specialty finance companies,
independent insurance agents who offer premium finance services, captive premium
finance affiliates of insurance companies and direct bill plans established by
insurance companies. The Company competes in the subprime automobile finance
industry with commercial banks, the captive finance affiliates of automobile
manufacturers, savings associations and companies specializing in subprime
automobile finance, many of which have established relationships with automobile
dealerships and may offer dealerships or their customers other forms of
financing, including dealer floor plan financing and lending, which are not
offered by
27
the Company. In attracting deposits, the Bank competes primarily with other
savings institutions, commercial banks, brokerage firms, mutual funds, credit
unions and other types of investment companies.
Fluctuations in interest rates and general and localized economic conditions
also may affect the competition the Company faces. Competitors with lower costs
of capital have a competitive advantage over the Company. During periods of
declining interest rates, competitors may solicit the Company's customers to
refinance their loans. In addition, during periods of economic slowdown or
recession, the Company's borrowers may face financial difficulties and be more
receptive to offers of the Company's competitors to refinance their loans.
As the Company expands into new geographic markets, it will face additional
competition from lenders already established in these markets. There can be no
assurance that the Company will be able to compete successfully with these
lenders.
Changes in Interest Rates
The Company's results of operations depend to a large extent upon its net
interest income, which is the difference between interest income on interest-
earning assets, such as loans and investments, and interest expense on interest-
bearing liabilities, such as deposits and other borrowings. When interest-
bearing liabilities mature or reprice more quickly than interest-bearing assets
in a given period, a significant increase in market rates of interest could have
a material adverse effect on the Company's net interest income. Further, a
significant increase in market rates of interest could adversely affect demand
for the Company's financial products and services. Interest rates are highly
sensitive to many factors, including governmental monetary policies and domestic
and international economic and political conditions, which are beyond the
Company's control. The Company's liabilities generally have shorter terms
and are more interest rate sensitive than its assets. Accordingly, changes
in interest rates could have a material adverse effect on the profitability of
the Company's lending activities. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations - Management of
Internal Rate Risk."
Management of Growth
The Company has experienced growth in each of its businesses and intends to
pursue growth for the foreseeable future, particularly in its automobile finance
business. In addition, the Company intends to broaden its product offerings to
include additional types of consumer or, in the case of IPF, commercial loans.
Further, the Company may enter other specialty finance businesses. This growth
strategy will require additional capital, systems development and human
resources. The failure of the Company to implement its planned growth strategy
would have a material adverse effect on the Company's financial condition,
results of operations and business prospects.
Dependence on Loan Sale Markets
The Company is expected to sell its remaining portfolio of subprime mortgage
loans in the whole loan sale market. There can be no assurance that whole loan
purchasers will continue to purchase the Company's loans, or that they will
continue to purchase loans at present prices, and failure to do so could have a
material adverse effect on the Company's financial condition, results of
operations and business prospects. Further, adverse conditions in the asset-
backed securitization market could adversely affect the Company's ability to
sell loans at present prices.
Change in General Economic Conditions
Each of the Company's businesses is affected directly by changes in general
economic conditions, including changes in employment rates, prevailing interest
rates and real wages. During periods of economic slowdown or recession, the
Company may experience a decrease in demand for its financial products and
services, an increase in its servicing costs, a decline in collateral values and
an increase in delinquencies and defaults. A decline in collateral values and
an increase in delinquencies and defaults increase the possibility and
28
severity of losses. Although the Company believes that its underwriting criteria
and collection methods enable it to manage the higher risks inherent in loans
made to such borrowers, no assurance can be given that such criteria or methods
will afford adequate protection against such risks. Any sustained period of
increased delinquencies, defaults or losses would materially and adversely
affect the Company's financial condition, results of operations and business
prospects.
Impact of Inflation and Changing Prices
The financial statements and notes thereto presented herein have been prepared
in accordance with Generally Accepted Accounting Principles ("GAAP"), which
require the measurement of financial position and operating results in terms of
historical dollar amounts without considering the changes in the relative
purchasing power of money over time due to inflation. The impact of inflation
is reflected in the increased cost of the Company's operations. Unlike
industrial companies, nearly all of the assets and liabilities of the Company
are monetary in nature. As a result, interest rates have a greater impact on
the Company's performance than do the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or to the same
extent as the price of goods and services.
Other Risks
From time to time, the Company details other risks with respect to its
business and financial results in its filings with the Securities and Exchange
Commission.
Item 2. Properties
The Company's principal executive offices occupy approximately 9,000 square
feet of office space located at 1300 South El Camino Real, San Mateo, California
94402. As of December 31, 1999, the Company maintained five branches for its
banking business, 20 branches for its automobile finance business, one branch
for its insurance premium finance business and 27 office sites for its
discontinued mortgage finance business. All of the Company's leased properties
are leased for terms expiring on various dates to March 2006, many with options
to extend the lease term. The net investment in premises, equipment and
leaseholds totaled $1.4 million at December 31, 1999 compared to $4.8 million at
December 31, 1998.
Item 3. Legal Proceedings
The Company is from time to time involved in litigation incidental to the
conduct of its businesses. The Company currently is not a party to any material
pending litigation.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the
fourth quarter of the year ended December 31, 1999.
29
PART II
Item 5. Market For Registrant's Common Equity And Related Shareholder Matters
The Common Stock has been traded on the Nasdaq National Market under the
symbol "UPFC" since the Company completed its initial public offering on April
23, 1998. As of March 13, 2000, the Company had approximately 453 shareholders
of record and 16,606,850 outstanding shares of common stock. The following
table sets forth the high and low sales prices per share of Common Stock as
reported on the Nasdaq National Market for the periods indicated.
Quarter Ended High Low
- ------------- ---- ---
March 31, 1999 $ 5.00 $3.25
June 30, 1999 $ 4.63 $2.88
September 30, 1999 $ 3.38 $1.69
December 31, 1999 $ 2.13 $1.25
June 30, 1998 $13.94 $9.75
September 30, 1998 $11.69 $5.50
December 31, 1998 $ 5.63 $3.38
On April 23, 1998, the Company's Registration Statement on Form S-1 (File No.
333-39941) for the initial public offering of 5,500,000 shares of its Common
Stock was declared effective by the SEC. The Company has never paid a cash
dividend on the Common Stock. The Company does not anticipate paying cash
dividends on the Common Stock in the foreseeable future. The payment of
dividends is within the discretion of the Company's Board of Directors and will
depend upon, among other things, the Company's earnings, financial condition,
capital requirements, level of indebtedness, contractual restrictions on the
payment of dividends and general business conditions. Federal regulations
restrict the Bank's ability to declare or pay any dividends to the Company. See
"Item 1. Business - Supervision and Regulation - Business Savings Bank
Regulation - Capital Distribution Limitations."
30
Item 6. Selected Financial Data
The following selected consolidated financial data with respect to the
Company's consolidated financial position as of December 31, 1999 and 1998 and
its results of operations for the years ended December 31, 1999, 1998 and 1997
has been derived from the Company's audited consolidated financial statements
appearing elsewhere in this Annual Report. This information should be read in
conjunction with such consolidated financial statements and notes thereto. The
selected financial data with respect to the Company's consolidated financial
position as of December 31, 1997, 1996 and 1995 and its results of operations
for the years ended December 31, 1996 and 1995 have been derived from the
Company's audited financial statements, which are not presented in this Annual
Report.
(In thousands, except per share amounts)
At or For the
Year Ended December 31,
-----------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ---------- ---------- ---------- ----------
Statement of Operations Data
Interest income $ 28,803 $ 24,540 $ 19,809 $ 16,135 $ 13,533
Interest expense 6,033 7,839 8,793 7,628 7,727
------------ ---------- ---------- ---------- ----------
Net interest income 22,770 16,701 11,016 8,507 5,806
Provision for loan losses 432 293 507 194 120
------------ ---------- ---------- ---------- ----------
Net interest income after provision for loan losses 22,338 16,408 10,509 8,313 5,686
------------ ---------- ---------- ---------- ----------
Non-interest income
Gains on sales of loans -- 976 -- -- 90
Other non-interest income 974 936 702 443 228
------------ ---------- ---------- ---------- ----------
Total non-interest income 974 1,912 702 443 318
------------ ---------- ---------- ---------- ----------
Non-interest expense
Compensation and benefits 10,843 8,370 5,534 3,739 2,750
SAIF special assessment -- -- -- 642 --
Other expense 7,800 6,031 4,570 3,162 2,412
------------ ---------- ---------- ---------- ----------
Total non-interest expense 18,643 14,401 10,104 7,543 5,162
------------ ---------- ---------- ---------- ----------
Income (loss) from continuing operations before income taxes 4,669 3,919 1,107 1,213 842
Income taxes (benefit) 1,908 1,645 466 511 384
------------ ---------- ---------- ---------- ----------
Income from continuing operations 2,761 2,274 641 702 458
------------ ---------- ---------- ---------- ----------
Income (loss) from discontinued operations, net of tax (941) 4,489 5,607 248 --
Loss on disposal of discontinued operations, net of tax (6,172) -- -- -- --
------------ ---------- ---------- ---------- ----------
Net income (loss) $ (4,352) $ 6,763 $ 6,248 $ 950 $ 458
============ ========== ========== ========== ==========
Earnings (loss) per share-basic:
Continuing operations $ 0.16 $ 0.15 $ 0.06 $ 0.07 $0.04
Discontinued operations $ (0.42) $ 0.29 $ 0.52 $ 0.02 $ --
Net income (loss) $ (0.26) $ 0.44 $ 0.58 $ 0.09 $0.04
Weighted average shares outstanding 16,854 15,263 10,739 10,669 10,669
Earnings (loss) per share-diluted:
Continuing operations $ 0.16 $ 0.14 $ 0.05 $ 0.07 $0.04
Discontinued operations $ (0.41) $ 0.28 $ 0.48 $ 0.02 $ --
Net income (loss) $ (0.25) $ 0.42 $ 0.53 $ 0.09 $0.04
Weighted average shares outstanding 17,253 16,143 11,875 10,669 10,669
Balance Sheet Data
Total assets $438,290 $425,559 $310,754 $188,743 $159,581
Loans 158,283 133,718 148,535 134,821 131,794
Loans held for sale 136,460 214,406 120,002 20,766 --
Allowance for loan losses (14,139) (10,183) (6,487) (5,356) (5,250)
Deposits 291,944 321,668 233,194 159,061 141,924
Notes payable -- 10,930 12,930 10,930 10,930
FHLB advances -- -- 28,000 4,000 --
Warehouse lines of credit 54,415 -- 6,237 -- --
Shareholders' equity 75,353 82,913 13,009 6,761 5,811
31
(In thousands, except per share amounts)
As or For the
Year Ended December 31,
-----------------------------------------------------------------
1999 1998 1997 1996 1995
------------- ------------ ----------- ---------- ---------
Operating Data
Return on average assets from continuing operations 1.25% 1.04% 3.51% 0.42% 0.27%
Return on average shareholders' equity from continuing operations 3.39% 4.04% 7.37% 11.90% 8.51%
Net interest margin 12.45% 9.13% 6.76% 5.46% 3.61%
Shareholders' equity to assets 17.19% 19.48% 4.19% 3.58% 3.64%
Tangible capital ratio of Bank 10.60% 6.94% 7.27% 8.85% 9.89%
Core capital ratio of Bank 10.60% 6.94% 7.27% 8.85% 9.89%
Risk-based capital ratio of Bank 10.24% 10.77% 12.34% 16.36% 17.19%
Asset Quality Data
Nonaccrual loans, net(2) $ 13,157 $ 18,632 $ 6,633 $ 5,835 $ 5,240
Real estate owned 2,590 1,877 562 988 298
Total non-performing assets 15,747 20,509 7,195 6,823 5,538
Non-performing assets to total assets 3.60% 4.82% 2.31% 3.61% 3.47%
Allowance for credit losses to loans held for investment 8.93% 7.62% 4.37% 3.97% 3.98%
Automobile Finance Data
Gross contracts purchased $124,896 $ 86,098 $ 44,056 $12,216 --
Number of contracts purchased 10,309 7,695 4,187 1,177 --
Average discount on contracts purchased 8.79% 9.12% 9.79% 10.00% --
Net charge-offs to average contracts 4.05% 4.56% 4.94% 1.50% --
Number of branches 20 15 10 4 --
Insurance Premium Finance Data
Loans originated $107,212 $ 152,998 $145,167 $99,012 $21,676
Loans outstanding at period end $ 30,334 $ 44,709 $ 39,990 $32,058 $16,975
Number of loans originated 108,218 137,743 125,315 83,839 21,137
Average net yield on loans originated 12.73% 13.90% 14.01% 13.62% 15.77%
Average loan size at origination $ 0.99 $ 1.11 $ 1.16 $ 1.18 $ 1.03
Net charge-offs to average loans 1.00% 0.78% 0.35% 0.39% --
Subprime Mortgage Finance Data(3)
Loan origination activities(4)
Wholesale originations $789,327 $ 807,382 $359,236 $58,456 --
Retail originations 173,389 382,359 219,386 13,055 --
------------ ------------- ----------- ---------- --------
Total loan originations 962,716 1,189,741 $578,622 $71,511 --
Percent of loans secured by first mortgages 97% 96% 96% 95% --
Weighted average initial loan-to-value ratio 76% 75% 75% 72% --
Originations by product type
Adjustable-rate mortgages 76% 71% 82% 85% --
Fixed-rate mortgages 24% 29% 18% 15% --
Weighted average interest rate
Adjustable-rate mortgages 9.86% 9.62% 9.48% 9.55% --
Fixed-rate mortgages 10.10% 10.35% 10.67% 10.76% --
Average balance per loan $ 109 $ 99 $ 104 $ 100 --
Loans sold through whole loan transactions(5) $552,200 $1,084,701 $360,210 $50,142 --
Loan securitizations $458,011 -- $114,904 -- --
_______________________
(1) Net income per share - basic is based on the weighted average shares of
Common Stock outstanding during the period adjusted for the 1,875-for-1
stock split effective in November 1997. Net income per share - diluted is
based on the weighted average shares of Common Stock and Common Stock
equivalents outstanding during the period adjusted for a 1,875-for-1 stock
split effective in November 1997.
(2) Nonaccrual loans are net of specific loss allowances.
(3) The subprime mortgage finance data presented is related to the Company's
discontinued mortgage operations.
(4) Does not include conforming loans purchased from the RTC in the aggregate
principal amount of $75.9 million and $57.2 million in the year ended
December 31, 1995 and conforming loan originations of $4.5 million in the
year ended December 31, 1995.
(5) Does not include $3.5 million in conforming loan sales in the year ended
December 31, 1995.
32
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Certain statements in this Annual Report on Form 10-K including statements
regarding the Company's strategies, plans, objectives, expectations and
intentions, may include forward-looking information within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These forward-looking statements
involve certain risks and uncertainties that could cause actual results to
differ materially from those expressed or implied in such forward-looking
statements. For discussion of the factors that might cause such a difference,
see "Item 1. Business - Factors That May Affect Future Results of Operations"
and other risks identified from time to time in the Company's filings with the
SEC.
General
The Company
The Company is a diversified specialty finance company engaged primarily in
originating and acquiring for investment personal automobile insurance premium
finance contracts and retail automobile installment sales contracts. The
Company markets to customers who generally cannot obtain financing from
traditional lenders. These customers usually pay higher loan origination fees
and interest rates than those charged by traditional lenders to gain access to
consumer financing. The Company has funded its operations to date principally
through retail deposits, FHLB advances, mortgage warehouse lines of credit, loan
securitizations, and whole loan sales at the Bank.
The Company commenced operations in 1994 by purchasing from the RTC certain
assets and assuming certain liabilities of the Bank's predecessor, Pan American
Federal Savings Bank. The Company has used the Bank as a base for expansion
into its current specialty finance businesses. In 1995, the Company commenced
its insurance premium finance business through a joint venture with BPN and in
1996, the Company commenced its automobile finance business.
In December 1999, the Company decided to close its subprime mortgage finance
business, and to focus on its auto lending and insurance premium finance
businesses. This business originated and sold or securitized subprime mortgage
loans secured primarily by first mortgages on single family residences. In
connection with the discontinuance of the mortgage finance division, all related
operating activity for all periods presented is treated as discontinued
operations for financial statement reporting purposes. For the purpose of
determining net interest income related to discontinued operations, the Company
included all interest income from its mortgage finance business less an
allocation for interest expense. The Company allocated deposits and warehouse
lines of credit to the discontinued mortgage operations in computing interest
expense. All non-interest income and non-interest expense of the mortgage
operations was also charged to discontinued operations. See "Item 1. Business
- - Discontinued Operations - Mortgage Finance."
Finance companies, such as the Company, generate income from a combination of
"spread" or "net interest" income (i.e., the difference between the yield on
loans, net of loan losses, and the cost of funding) and "non-interest" income
(i.e., the fees received for various services and gains on the sales of loans).
Income is used to cover operating expenses incurred (i.e., compensation and
benefits, occupancy and other expenses) in generating that income. Each of the
Company's businesses, as described below, generates income from a combination of
spread and non-interest income.
Automobile Finance
In 1996, the Bank commenced its automobile finance business through its
subsidiary, United Auto Credit Corporation (such business, "UACC"). UACC
acquires, holds for investment and services subprime retail automobile
installment sales contracts ("auto contracts") generated by franchised and
independent dealers of used automobiles. UACC's customers are considered
"subprime" because they typically have limited credit histories or credit
histories that preclude them from obtaining loans through traditional sources.
As UACC
33
provides all marketing, origination, underwriting and servicing
activities for its loans, income is generated from a combination of spread and
non-interest income and is used to cover all operating costs, including
compensation, occupancy and systems expense.
Insurance Premium Finance
In May 1995, the Bank entered into a joint venture with BPN under the name
"ClassicPlan" (such business, "IPF"). Under this joint venture, which commenced
operations in September 1995, the Bank underwrites and finances automobile and
commercial insurance premiums in California and BPN markets the financing
program and services the loans for the Bank. The Bank lends to individuals for
the purchase of single premium insurance policies and the Bank's collateral is
the unearned insurance premium held by the insurance company. The unearned
portion of the insurance premium is refundable to IPF in the event the
underlying insurance policy is canceled. The Company does not sell or have the
risk of underwriting the underlying insurance policy.
As a result of BPN performing substantially all marketing and servicing
activities, the Company's role is primarily that of an underwriter and funder of
loans. Therefore, IPF's income is generated primarily on a spread basis,
supplemented by non-interest income generated from late payment and returned
check fees. The Bank uses this income to cover the costs of underwriting and
loan administration, including compensation, occupancy and data processing
expenses.
The Bank
The Company has funded its operations to date primarily through the Bank's
deposits, FHLB advances, mortgage warehouse lines of credit and loan sales and
securitizations. As of December 31, 1999, the Bank was a five-branch federal
savings bank with $291.9 million in deposits. The loans generated by the
Company's insurance premium and automobile finance businesses currently are
funded and held by the Bank. In addition, the Bank holds a portfolio of
primarily traditional residential mortgage loans acquired from the RTC in 1994
and 1995 at a discount from the unpaid principal balance of such loans, which
loans aggregated $21.8 million in principal amount (before unearned discounts
and premiums) at December 31, 1999.
The Bank generates spread income not only from loans originated or purchased
by each of the Company's principal businesses, but also from loans purchased
from the RTC, its short-term investment portfolio, and consumer loans originated
by its retail deposit branches. This income is supplemented by non-interest
income from its branch banking activities (e.g., deposit service charges, safe
deposit box fees), and is used to cover operating costs and other expenses.
34
Average Balance Sheets
The following tables set forth information relating to the Company's
continuing operations for the years ended December 31, 1999, 1998 and 1997. The
yields and costs are derived by dividing income or expense by the average
balance of assets or liabilities allocated to continuing operations,
respectively, for the periods shown. The yields and costs include fees which
are considered adjustments to yields.
Year Ended December 31,
-----------------------------------------------------------------------------------------
1999 1998
-----------------------------------------------------------------------------------------
Average Average
Average Yield/ Average Yield/
Balance (1)(2) Interest(1) Cost Balance (1)(2) Interest(1) Cost
-----------------------------------------------------------------------------------------
(Dollars in thousands)
Assets
Interest earnings assets
Investment securities $ 37,682 $ 1,800 4.78% $ 25,672 $ 1,346 5.24%
Mortgage loans, net(3) 25,229 2,316 9.18% 63,224 5,450 8.62%
IPF loans, net(4) 37,681 5,271 13.99% 49,138 6,579 13.39%
Automobile installment contracts, 82,294 19,416 23.59% 44,809 11,165 24.92%
net(5)
-------- --------- -------- --------
Total interest earning assets 182,886 28,803 15.75% 182,843 24,540 13.42%
--------- --------
Non-interest earnings assets(5) 37,450 35,969
-------- --------
Total assets $220,336 $218,812
======== ========
Liabilities and Equity
Interest bearing liabilities
Customer deposits 119,049 5,787 4.86% 127,158 6,550 5.15%
Notes payable 4,919 246 5.01% 11,545 623 5.40%
FHLB advances 6 -- 5.84% 13,057 666 5.10%
-------- --------- -------- --------
Total interest bearing 123,974 6,033 4.87% 151,760 7,839 5.17%
--------- --------
Non-interest bearing liabilities 15,029 10,711
-------- --------
Total liabilities 139,003 162,471
Equity 81,333 56,341
-------- --------
Total liabilities and equity $220,336 $218,812
======== ========
Net interest income before provision
for loan losses $22,770 $16,701
========= ========
Net interest rate spread(6) 10.88%
Net interest margin(7) 12.45%
Ratio of interest earning assets to
interest bearing liabilities 147.50%
Year Ended December 31,
-------------------------------------------
1997
-------------------------------------------
Average
Average Yield/
Balance /(1)(2)/ Interest/(1)/ Cost
-------------------------------------------
Assets
Interest earnings assets
Investment securities $ 9,763 $ 639 6.55%
Mortgage loans, net(3) 92,364 8,538 9.24%
IPF loans, net(4) 43,923 6,179 14.07%
Automobile installment contracts, net(5) 16,980 4,453 26.22%
--------- --------
Total interest earning assets 163,030 19,809 12.15%
--------
Non-interest earnings assets(5) 19,778
---------
Total assets $182,808
=========
Liabilities and Equity
Interest bearing liabilities
Customer deposits 138,016 7,021 5.09%
Notes payable 11,541 669 5.80%
FHLB advances 18,526 1,103 5.95%
--------- ------
Total interest bearing 168,083 8,793 5.23%
liabilities
------
Non-interest bearing liabilities 6,028
---------
Total liabilities 174,111
Equity 8,697
---------
Total liabilities and equity $182,808
=========
Net interest income before provision
for loan losses $11,016
========
Net interest rate spread(6) 8.25% 6.92%
Net interest margin(7) 9.13% 6.76%
Ratio of interest earning assets to
interest bearing liabilities 120.50% 97.00%
(1) The table above excludes average assets and liabilities of the Company's
mortgage operations, as interest income and interest expense associated
with the subprime mortgage finance business are reported as discontinued
operations in the consolidated statements of operations as follows:
Year Ended December 31,
----------------------------------
1999 1998 1997
---------- --------- ---------
Average assets of continuing operations $220,336 $218,812 $182,808
Average mortgage loans of discontinued operations 235,124 214,229 69,303
---------- -------- --------
Total average assets $455,460 $433,041 $252,111
========== ========= ========
Average liabilities and equity of continuing operations $220,336 $218,812 $182,808
Average customer deposits allocated to discontinued operations 189,720 170,470 60,389
Average warehouse lines of credit of discontinued operations 45,404 43,759 8,914
---------- --------- --------
Total average liabilities and equity $455,460 $433,041 $252,111
========== ========= ========
(2) Average balances are measured on a month-end basis.
(3) Net of deferred loan origination fees, unamortized discounts, premiums and
allowance for estimated loan losses; includes non-performing loans.
(4) Net of allowance for estimated losses; includes non-performing loans.
(5) Net of unearned finance charges, allowance for estimated losses; includes
non-performing loans.
(6) Net interest rate spread represents the difference between the yield on
interest earning assets and the cost of interest bearing liabilities.
(7) Net interest margin represents net interest income divided by average
interest earning assets.
35
Rate and Volume Analysis
The following table presents the extent to which changes in interest rates and
changes in the volume of interest earning assets and interest bearing
liabilities have affected the Company's interest income and interest expense
from continuing operations during the periods indicated. Information is
provided in each category with respect to: (i) changes attributable to changes
in volume (changes in volume multiplied by prior rate); (ii) changes
attributable to changes in rate (changes in rate multiplied by prior volume);
and (iii) the net change. The changes attributable to the combined impact of
volume and rate have been allocated proportionately to the changes due to volume
and the changes due to rate.
Year Ended Year Ended
December 31, 1998 December 31, 1997
Compared to Compared to
Year Ended Year Ended
December 31, 1999 December 31, 1998
---------------------------------- -----------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
------------------------------------------------------------------------
Volume Rate Net/(1)/ Volume Rate Net/(1)/
------------------------------------------------------------------------
Interest earning assets
Investment securities $ 560 $(106) $ 454 $ 806 $ (99) $ 707
Mortgage loans, net (3,513) 379 (3,134) (2,544) (544) (3,088)
IPF loans, net (1,619) 311 (1,308) 674 (274) 400
Automobile installment contracts, net 8,811 (560) 8,251 6,923 (211) 6,712
----------- -------- --------- ---------- -------- --------
Total interest earning assets 4,239 24 4,263 5,859 (1,128) 4,731
----------- -------- --------- ---------- -------- --------
Interest bearing liabilities
Customer deposits (405) (358) (763) (561) 90 (471)
Notes payable (335) (42) (377) -- (46) (46)
FHLB advances (779) 113 (666) (294) (143) (437)
----------- -------- --------- ---------- -------- --------
Total interest bearing liabilities (1,519) (287) (1,806) (855) (99) (954)
----------- -------- --------- ---------- -------- --------
Change in net interest income $ 5,758 $ 311 $ 6,069 $ 6,714 $(1,029) $ 5,685
=========== ======== ========= ========== ======== ========
(1) The table above excludes interest income and interest expense from the
Company's mortgage operations as these items are reported as discontinued
operations in the consolidated statements of operations.
Comparison of Operating Results for the Years Ended December 31, 1999 and
December 31, 1998
General
The Company incurred a net loss of $4.4 million for the twelve months ended
December 31, 1999 compared to net income of $6.8 million for the same period in
1998. Included in these results is a loss from discontinued operations of $7.1
million in 1999 and income from discontinued operations of $4.5 million in 1998.
The Company's loss from discontinued operations of $7.1 million in 1999 and
income from discontinued operations in 1998 of $4.5 million resulted from the
closure of its subprime mortgage finance business. Included in the 1999 loss
from discontinued operations is a $6.2 million, net of tax, charge for the
estimated loss on disposal of this business. The estimated loss on disposal
includes lease termination costs, employment severance and benefits, write-off
of fixed assets and leasehold improvements and an accrual for estimated future
operating losses, net of estimated gains on loan sales related to the subprime
mortgage operations.
The discontinued mortgage business operating loss was $941,000 in 1999
compared with income of $4.5 million in 1998. The 1999 loss reflects
significantly lower gains on sales of loans compared with the prior year. The
1999 results also reflect lower operating expenses, however, the decline in loan
sale gains was much larger than the decline in operating expenses resulting in a
significant decline in operating income.
Income from continuing operations was $2.8 million, or $0.16 per diluted
share for 1999, compared with income from continuing operations of $2.3 million,
or $0.14 per diluted share for the same period in 1998. The 1998 results
include non-recurring gains of $976,000 from the sale of loans that were
purchased from the Resolution Trust Corporation in 1994 and 1995.
36
Growth in the Company's auto finance business resulted in an increase in
auto contracts purchased from $86.1 million for 1998 to $124.9 million for 1999,
while insurance premium finance originations decreased from $153.0 million to
$107.2 million, respectively. Mortgage loan originations were $962.7 million
for 1999 and $1.2 billion for the comparable period in 1998 while sales or
securitizations of mortgage loans were $1.0 billion for the twelve months ended
December 31, 1999 and $1.1 billion for the comparable period in 1998.
Interest Income
Interest income increased from $24.5 million for the twelve months ended
December 31, 1998 to $28.8 million for the twelve months ended December 31, 1999
due primarily to a 2.33% increase in the average yield on earning assets.
Average earning assets in total were substantially unchanged from 1998 to 1999.
The largest changes in the components of average earning assets were auto
contracts and mortgage loans purchased from the RTC. The average balance of
auto contracts increased from $44.8 million in 1998 to $82.3 million in 1999
principally resulting from the opening of new branch offices and the purchasing
of additional dealer contracts in these new market areas. The average balance
of mortgage loans decreased from $63.2 million in 1998 to $25.2 million in 1999
as a result of the sale of some of these loans in the fourth quarter of 1998.
Non-recurring gains on the sales of these loans of $976,000 were recorded in
1998. The increase in the average yield on earning assets is a direct result of
the origination or purchase of higher yielding loans in 1999, specifically auto
contracts.
Interest Expense
Interest expense decreased from $7.8 million for the twelve months ended
December 31, 1998 to $6.0 million for the twelve months ended December 31, 1999,
due to a $27.8 million decrease in average interest bearing liabilities, and a
0.30% decrease in the weighted average interest rate on interest bearing
liabilities. The largest component of the decline in interest bearing
liabilities was deposits with the Bank, which decreased from an average balance
of $127.2 million for 1998 to $119.0 million for 1999. The average cost of
deposits decreased from 5.15% for 1998 to 4.87% for 1999.
Provision for Loan Losses
Provision for loans losses increased from $293,000 for the twelve months
ended December 31, 1998 to $432,000 for the twelve months ended December 31,
1999. The increase reflects additional loss provisions associated with the
Company's insurance premium finance business, primarily as a result of higher
charge-offs in 1999 compared with 1998. Annualized net charge-offs to average
loans were 0.78% in 1998 compared to 1.00% in 1999.
All loan loss provisions related to the Company's mortgage finance business
were reported as discontinued operations in the consolidated statements of
operations.
A provision for loan losses is charged to operations based on the Company's
regular evaluation of its loan portfolio and the adequacy of its allowance for
loan losses. While management believes it has adequately provided for losses
and does not expect any material loss on its loans in excess of allowances
already recorded, no assurance can be given that economic or other market
conditions or other circumstances will not result in increased losses in the
loan portfolio.
Non-interest Income
Non-interest income decreased $938,000, from $1.9 million in 1998 to
$974,00 in 1999. The decrease resulted from $976,000 of non-recurring loan sale
gains in 1998 on loans purchased from the Resolution Trust Corporation in 1994
and 1995.
Other components of non-interest income include fees and charges for Bank
services and miscellaneous other income. The total of all of these items
increased $38,000 from $936,000 for the twelve months ended December 31, 1998 to
$974,000 for the twelve months ended December 31, 1999.
37
Non-interest Expense
Non-interest expense increased $4.2 million, from $14.4 million for the
twelve months ended December 31, 1998 to $18.6 million for the twelve months
ended December 31, 1999. This increase primarily reflects an increase in
salaries, employee benefits and other personnel costs of $2.5 million associated
with the expansion of the Company's automobile finance operations and additional
costs related to the Company's banking division. In addition, occupancy expense
increased $555,000, reflecting the costs associated with maintaining and
expanding the branch offices in the auto finance lending area. Also, as a
result of growth in the Company's automobile lending operations, other operating
expense, including supplies, data processing, loan servicing expense, telephone
and postage, increased $1.2 million during 1999 compared to the same period in
1998. Included in other expense is amortization of intangible assets, which
increased from $239,000 in 1998 to $600,000 in 1999. The increase is a result
of goodwill amortization associated with the purchase of rights to solicit
additional insurance premium finance businesses.
Income Taxes
Income taxes increased $300,000 from $1.6 million for the twelve months
ended December 31, 1998 to $1.9 million for the twelve months ended December 31,
1999. This increase occurred as a result of a $750,000 increase in income from
continuing operations before income taxes between the two periods, offset by a
decrease in the effective tax rate from 42.0% for 1998 to 40.9% for 1999.
Comparison of Financial Condition at December 31, 1999 and December 31, 1998
Total assets increased $12.7 million, from $425.6 million at December 31,
1998 to $438.3 million at December 31, 1999. The increase occurred primarily as
a result of an increase in cash and cash equivalents, and an increase in
retained interests in securitizations offset by a decrease in loans receivable.
Cash and cash equivalents increased $38.2 million, from $52.2 million at
December 31, 1998 to $90.4 million at December 31, 1999. At December 31, 1999,
the Company significantly increased its liquidity position in accordance with
Year 2000 contingency plans. Subsequent to the Year 2000 conversion, the excess
liquidity was used to paydown the Company's mortgage warehouse lines of credit.
Residual interests in securitizations consist of beneficial interests in
the form of an interest-only strip representing the subordinated right to
receive cash flows from a pool of securitized loans after payment of required
amounts to the holders of the securities and certain costs associated with the
securitization. The Company's residual interests of $21.2 million at December
31, 1999 were recorded in connection with two securitizations completed in 1999.
Valuations of the residual interests are based on discounted cash flow analyses
using prepayment and default assumptions that market participants would use for
similar instruments subject to prepayment, credit and interests rate risks.
Premises and equipment decreased from $4.8 million at December 31, 1998 to
$1.4 million at December 31, 1999 primarily as a result of the Company
discontinuing its mortgage finance division and writing-off fixed assets and
leasehold improvements associated with this business.
Deposit accounts at the Bank decreased $29.8 million, from $321.7 million
at December 31, 1998 to $291.9 million at December 31, 1999, due primarily to a
decrease in CDs of $44.1 million, from $272.1 million at December 31, 1998 to
$228.0 million at December 31, 1999. The decline in deposits reflects a
decrease in wholesale CDs of $57.6 million offset by an increase in retail
deposits of $27.9 million, primarily reflecting the Company's strategy to use
lower costing retail deposits for financing its lending activities. Included in
deposits at December 31, 1998 are brokered deposits of $10.3 million. There
were no brokered deposits outstanding at December 31, 1999.
RTC notes payable of $10.9 million were repaid between period ends 1998 and
1999. At December 31, 1999, $54.4 million of warehouse lines of credit were
outstanding related to financing the Company's loans held for sale. There were
no such borrowings outstanding at December 31, 1998.
38
Net deferred tax assets were $5.7 million at December 31, 1999 due
principally to temporary differences in the recognition of gain on sale of loans
and discontinued operations for federal and state income tax reporting and
financial statement reporting purposes. For income tax purposes, loans held for
sale are marked-to-market as compared to financial statement reporting where
loans are recorded at the lower of cost or market. In addition, net deferred
tax assets in 1999 included $4.3 million relating to the discontinuance of the
Company's mortgage operations.
Shareholders' equity decreased from $82.9 million at December 31, 1998 to
$75.4 million at December 31, 1999, principally as a result of the Company's
1999 net loss of $4.4 million and $3.7 million related to the repurchase of
stock by the Company.
Comparison of Operating Results for the Years Ended December 31, 1998 and
December 31, 1997
General
Net income was $6.8 for the twelve months ended December 31, 1998 compared to
$6.2 million for the twelve months ended December 31, 1997. Included in these
results is income from discontinued operations of $4.5 million in 1998 and $5.6
million in 1997.
The Company's income from discontinued operations of $4.5 million in 1998 and
$5.6 million in 1997 resulted from the closure of its subprime mortgage finance
business. The decline in operating income from discontinued operations
principally resulted from lower operating margins in 1998 compared with 1997, as
a result of a decline in the average price received on loan sales in 1998 as
compared with the prior year.
Income from continuing operations was $2.3 million, or $0.14 per diluted share
for the twelve months ended December 31, 1998, compared with income from
continuing operations of $641,000, or $0.05 per diluted share for the same
period in 1997. Contributing to the increase in income from continuing
operations in 1998 was an increase of $5.7 million in net interest income due
primarily to growth and expansion of the Company's auto finance business.
Growth in the Company's auto finance business resulted in an increase in auto
lending contracts purchased from $44.1 million in the twelve months ended
December 31, 1997 to $86.1 million in the same period in 1998, while insurance
premium finance originations increased from $145.2 million in 1997 to $153.0
million in 1998. Mortgage loan originations were $1.2 billion for the twelve
months ended December 31, 1998 and $578.6 million for the comparable period in
1997 while sales or securitizations of mortgage loans were $1.1 billion for the
twelve months ended December 31, 1998 and $475.1 million for the comparable
period in 1997.
Interest Income
Interest income increased from $19.9 million for the twelve months ended
December 31, 1997 to $24.5 million for the twelve months ended December 31, 1998
due primarily to a $19.8 million increase in average earning assets and a 1.27%
increase in the average yield on earning assets. The largest components of
growth in average earning assets were investment securities and auto contracts,
which increased $15.9 million and $27.8 million, respectively. The increase in
the average yield on earning assets was attributable to an increase in the
origination or purchase of higher yielding loans during 1998 principally related
to the expansion and growth of the automobile finance business. The growth in
auto contracts resulted from the opening of new branch offices and the
purchasing of additional dealer contracts in these new markets.
Interest Expense
Interest expense decreased from $8.8 million for the twelve months ended
December 31, 1997 to $7.8 million for the twelve months ended December 31, 1998,
due to a $16.3 million decrease in average interest bearing liabilities and a
0.06% decrease in the weighted average interest rate on interest bearing
liabilities. The largest component of the decline in interest bearing
liabilities was deposits with the Bank, which decreased from
39
an average balance of $138.0 million for the twelve months ended December 31,
1997 to $127.2 million for the twelve months ended December 31, 1998. The
average cost of deposits was 5.09% for the twelve months ended December 31, 1997
compared to 5.15% for the twelve months ended December 31, 1998.
The second largest component of the decline in interest bearing liabilities
was FHLB advances, which decreased from an average balance of $18.5 million for
the twelve months ended December 31, 1997 to $13.1 million for the comparable
period in 1998.
Provision for Loan Losses
Provision for loan losses decreased from $507,000 for the twelve months ended
December 31, 1997 to $293,000 for the twelve months ended December 31, 1998. The
decrease in the provision is due to a provision for loss of $350,000 in 1997
related to the Company's auto finance business. Subsequent to recording this
provision in 1997, the Company increased its allocation of the net contracts
purchased to the allowance for loan losses, accordingly, in 1998, a provision
for loan losses was not required for the auto finance business. All loan loss
provisions related to the Company's mortgage finance business were reported as
discontinued operations in the consolidated statements of operations.
A provision for loan losses is charged to operations based on the Company's
regular evaluation of its loan portfolio and the adequacy of its allowance for
loan losses. While management believes it has adequately provided for losses
and does not expect any material loss on its loans in excess of allowances
already recorded, no assurance can be given that economic or real estate market
conditions or other circumstances will not result in increased losses in the
loan portfolio.
Non-Interest Income
Non-interest income increased $1.2 million, from $702,000 for the twelve
months ended December 31, 1997 to $1.9 million for the twelve months ended
December 31, 1998. The increase results primarily from $976,000 of non-
recurring loan sale gains in 1998 on loans purchased from the Resolution Trust
Corporation in 1994 and 1995.
Other components of non-interest income include fees and charges for Bank
services and miscellaneous other income. The total of all of these items
increased $234,000 from $702,000 for the twelve months ended December 31, 1997
to $936,000 for the twelve months ended December 31, 1998.
Non-Interest Expense
Non-interest expense increased $4.3 million, from $10.1 million for the twelve
months ended December 31, 1997 to $14.4 million for the twelve months ended
December 31, 1998. This increase primarily reflects an increase in salaries,
employee benefits and other personnel costs of $2.8 million associated with the
expansion of the Company's automobile finance operations. In addition,
occupancy expense increased $405,000, reflecting an increase in the number of
automobile lending offices. Also, as a result of growth in the Company's
automobile and insurance premium finance lending operations, other operating
expense, including supplies, data processing, insurance, telephone and postage,
increased $1.1 million during the twelve months ended December 31, 1998 compared
to the same period in 1997.
Income Taxes
Income taxes increased $1.1 million from $466,000 for the twelve months ended
December 31, 1997 to $1.6 million for the twelve months ended December 31, 1998.
This increase occurred as a result of a $2.8 million increase in income from
continuing operations before income taxes between the two periods offset by a
slight decrease in the effective tax rate from 42.1% for 1997 to 42.0% for 1998.
40
Comparison of Financial Condition at December 31, 1998 and December 31, 1997
Total assets increased $114.8 million, from $310.8 million at December 31,
1997 to $425.6 million at December 31, 1998. This increase occurred primarily
as a result of a $79.6 million increase in loans receivable, from $268.5 million
at December 31, 1997 to $348.1 million as of December 31, 1998. The increase in
loans was comprised of a $94.4 million increase in mortgage loans held for sale,
a $36.3 million increase (net of unearned finance charges) in auto contracts and
a $4.7 million increase in insurance premium finance loans, offset by a $49.7
million decrease in loans purchased from the RTC.
Cash and cash equivalents increased $33.2 million, from $19.0 million at
December 31, 1997 to $52.2 million at December 31, 1998, primarily as a result
of an increase in the Company's short-term investments.
Residual interests in securitizations were $8.2 million at December 31, 1997
and were sold for cash in 1998 in an amount exceeding carrying value. The
Company did not complete any loan securitizations during 1998, accordingly,
there were no residual interests in securitizations at December 31, 1998.
Premises and equipment increased from $3.1 million at December 31, 1997 to
$4.8 million at December 31, 1998 as a result of purchases of furniture and
equipment for the Company's lending branch offices and the overall growth in
lending operations.
Deposit accounts at the Bank increased $88.5 million, from $233.2 million at
December 31, 1997 to $321.7 million at December 31, 1998, due primarily to an
increase in CDs of $75.0 million, from $197.1 million at December 31, 1997 to
$272.1 million at December 31, 1998. Included in deposits at December 31, 1998
are brokered deposits of $10.3 million compared to $17.5 million at December 31,
1997. The growth in deposits reflects the continued financing of the Company's
finance businesses with retail and wholesale deposits through the Bank's five-
branch network.
Other interest bearing liabilities include the RTC notes payable, which
remained unchanged at $10.9 million between period ends. At December 31, 1998,
there were no FHLB advances or warehouse lines of credit outstanding. At
December 31, 1997, there were $28.0 million in FHLB advances and $6.2 million in
warehouse lines of credit.
Net deferred tax assets were $3.0 million at December 31, 1998 due principally
to temporary differences in the recognition of gain on sale of loans for federal
and state income tax reporting and financial statement reporting purposes. For
income tax purposes, loans held for sale are marked-to-market as compared to
finance statement reporting where loans are recorded at the lower of cost or
market.
Shareholders' equity increased from $13.0 million at December 31, 1997 to
$82.9 million at December 31, 1998, as a result of the Company's net income of
$6.8 million for the year ended December 31, 1998, the net proceeds received of
$63.0 million from the Company's initial public offering completed in the second
quarter of 1998 and $140,000 related to the exercise of stock options and the
issuance of restricted stock.
Management of Interest Rate Risk
The principal objective of the Company's interest rate risk management program
is to evaluate the interest rate risk inherent in the Company's business
activities, determine the level of appropriate risk given the Company's
operating environment, capital and liquidity requirements and performance
objectives and manage the risk consistent with guidelines approved by the Board
of Directors. Through such management, the Company seeks to reduce the exposure
of its operations to changes in interest rates. The Board of Directors reviews
on a quarterly basis the asset/liability position of the Company, including
simulation of the effect on capital of various interest rate scenarios.
The Company's profits depend, in part, on the difference, or "spread," between
the effective rate of interest received on the loans it originates and the
interest rates paid on deposits and other financing facilities which can be
adversely affected by movements in interest rates. In addition, between the
time the Company originates loans and investors' sales commitments are received,
the Company may be exposed to interest rate risk to the extent that interest
rates move upward or downward during the time the loans are held for sale. The
41
Company mitigates these risks somewhat by purchasing or originating adjustable
rate mortgages that reprice frequently in an increasing or declining interest
rate environment. Also, the Company attempts to sell substantially all of its
loans held for sale on a regular basis, thereby reducing significantly the
amount of time these loans are held by the Company.
The Bank's interest rate sensitivity is monitored by the Board of Directors
and management through the use of a model which estimates the change in the
Bank's net portfolio value ("NPV") over a range of interest rate scenarios. NPV
is the present value of expected cash flows from assets, liabilities and off-
balance sheet instruments, and "NPV Ratio" is defined as the NPV in that
scenario divided by the market value of assets in the same scenario. The
Company reviews a market value model (the "OTS NPV model") prepared quarterly by
the OTS, based on the Bank's quarterly Thrift Financial Reports filed with the
OTS. The OTS NPV model measures the Bank's interest rate risk by approximating
the Bank's NPV under various scenarios which range from a 300 basis point
increase to a 300 basis point decrease in market interest rates. The OTS has
incorporated an interest rate risk component into its regulatory capital rule
for thrifts. Under the rule, an institution whose sensitivity measure, as
defined by the OTS, in the event of a 200 basis point increase or decrease in
interest rates exceeds 20% would be required to deduct an interest rate risk
component in calculating its total capital for purposes of the risk-based
capital requirement.
At September 30, 1999, the most recent date for which the relevant OTS NPV
model is available, the Bank's sensitivity measure resulting from a 200 basis
point decrease in interest rates was 172 basis points and would result in a
$11.8 million increase in the NPV of the Bank and a 200 basis point increase in
interest rates was 196 basis points and would result in a $12.8 million decrease
in the NPV of the Bank. At September 30, 1999, the Bank's sensitivity measure
was below the threshold at which the Bank could be required to hold additional
risk-based capital under OTS regulations.
Although the NPV measurement provides an indication of the Bank's interest
rate risk exposure at a particular point in time, such measurement is not
intended to and does not provide a precise forecast of the effect of changes in
market interest rates on the Bank's net interest income and will differ from
actual results. Management monitors the results of this modeling, which are
presented to the Board of Directors on a quarterly basis.
The following tables show the NPV and projected change in the NPV of the Bank
at September 30, 1999 and December 31, 1998 assuming an instantaneous and
sustained change in market interest rates of 100, 200 and 300 basis points
("bp"). These tables are based on data prepared by the OTS. The Company makes
no representation as to the accuracy of this data.
Interest Rate Sensitivity of Net Portfolio Value
September 30, 1999
Net Portfolio Value NPV as % of Portfolio Value of Assets
------------------------------------ --------------------------------------
Change in Rates $ Amount $ Change % Change NPV Ratio Change
--------------- ---------- ---------- ---------- ------------------- ----------------
(Dollars in thousands)
+300 bp $53,353 $(21,948) -29% 9.69% -344bp
+200 bp 62,544 (12,757) -17% 11.17% -196bp
+100 bp 69,888 (5,413) -7% 12.32% -81bp
0 bp 75,301 -- --% 13.13% --
-100 bp 80,070 4,769 +6% 13.83% +70bp
-200 bp 87,099 11,798 +16% 14.85% +172bp
-300 bp 95,641 20,340 +27% 16.06% +293bp
December 31, 1998
Net Portfolio Value NPV as % of Portfolio Value of Assets
------------------------------------------------------------------------------
Change in Rates $ Amount $ Change % Change NPV Ratio % Change
--------------- --------- ---------- ---------- ------------------- ----------------
(Dollars in thousands)
+300 bp $47,398 $(6,867) -13% 10.87% -129 bp
+200 bp 50,532 (3,733) -7% 11.48% -68 bp
+100 bp 52,427 (1,837) -3% 11.83% -33 bp
0 bp 54,265 -- -- 12.16% --
-100 bp 57,404 3,139 +6% 12.74% +58 bp
-200 bp 61,339 7,074 +13% 13.46% +130 bp
-300 bp 66,166 11,901 +22% 14.33% +217 bp
42
Liquidity and Capital Resources
General
The Company's primary sources of funds have been deposits at the Bank, FHLB
advances, financing under secured warehouse lines of credit, principal and
interest payments on loans, cash proceeds from the sale or securitization of
loans and, to a lesser extent, interest payments on short-term investments and
proceeds from the maturation of securities. While maturities and scheduled
amortization of loans are a predictable source of funds, deposit flows and loan
prepayments are greatly influenced by general interest rates, economic
conditions and competition. The Company has continued to maintain the required
minimum levels of liquid assets as defined by OTS regulations. This
requirement, which may be varied at the direction of the OTS depending upon
economic conditions and deposit flows, is based upon a percentage of deposits
and short-term borrowings. The required ratio is currently 4%, and the Company
has always met or exceeded this requirement. Management, through its Asset and
Liability Committee, which meets monthly or more frequently if necessary,
monitors rates and terms of competing sources of funds to use the most cost-
effective source of funds wherever possible.
On April 23, 1998, the Company's Registration Statement on Form S-1 for the
initial public offering of 5,500,000 shares of its Common Stock at a price of
$11.00 per share was declared effective by the SEC. The Company received
approximately $56 million from the sale of its common stock after underwriting
discount and expenses associated with the offering. On May 22, 1998, the
Underwriters' over-allotment option for 825,000 shares of Common Stock was
exercised resulting in $8 million of additional proceeds being received by the
Company, after underwriting discount. The net proceeds from the initial public
offering were used for general corporate purposes, including financing the
growth of the Company's lending operations, and to repay $2.0 million in
indebtedness to certain shareholders.
Sales and securitizations of loans have been one of the primary sources of
funds for the Company. Cash flows from sales and securitizations of loans were
$983.7 million during the twelve months ended December 31, 1999, compared to
$1.1 billion during the twelve months ended December 31, 1998.
Another source of funds consists of deposits obtained through the Bank's
five retail branches in California. The Bank offers checking accounts, various
money market accounts, regular passbook accounts and fixed interest rate
certificates with varying maturities and retirement accounts. Deposit account
terms vary by interest rate, minimum balance requirements and the duration of
the account. Interest rates paid, maturity terms, service fees and withdrawal
penalties are established by the Bank periodically based on liquidity and
financing requirements, rates paid by competitors, growth goals and federal
regulations. At December 31, 1999, such retail deposits were $276.2 million or
94.6% of total deposits.
The Bank uses wholesale and broker-originated deposits to supplement its
retail deposits and, at December 31, 1999, wholesale deposits were $15.8 million
or 5.4% of total deposits. The Bank solicits wholesale deposits by posting its
interest rates on a national on-line service, which advertises the Bank's
wholesale products to investors. Generally, most of the wholesale deposit
account holders are institutional investors, commercial businesses or public
sector entities. Broker deposits are originated through major dealers
specializing in such products.
The following table sets forth the average balances and rates paid on each
category of deposits for the dates indicated.
Years Ended December 31,
-----------------------------------------------------------------------------------------
1999 1998 1997
---------------------------- -------------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
Balance Rate Balance Rate Balance Rate
------------ ----------- ------------ ---------- ------------ -------------
(Dollars in thousands)
Passbook accounts $ 50,177 4.24% $ 31,476 3.80% $ 21,452 3.44%
Checking accounts 12,936 1.84% 9,820 1.50% 9,910 1.32%
Certificates of deposit
Under $100,000 175,257 5.20% 177,491 5.51% 134,961 5.53%
$100,000 and over 67,386 5.45% 78,656 5.67% 31,984 5.90%
------------ ------------ ------------
Total $305,755 4.96% $297,443 5.24% $198,307 5.15%
============ ============ ============
43
The following table sets forth the time remaining until maturity for all CDs
at December 31, 1999, 1998 and 1997.
December 31, December 31, December 31,
1999 1998 1997
-------------- ------------- -------------
(Dollars in thousands)
Maturity within one year $199,110 $242,447 $181,858
Maturity within two years 28,770 29,548 14,984
Maturity within three years 149 154 298
-------------- ------------- -------------
Total certificates of deposit $228,029 $272,149 $197,140
============== ============= =============
The following table sets forth the time remaining until maturity for CD's with
balances of $100,000 and over at December 31, 1999, 1998 and 1997.
December 31, December 31, December 31,
1999 1998 1997
-------------- ------------ -------------
(Dollars in thousands)
Maturity in:
Less than 3 months $21,342 $28,548 $26,705
3-6 months 14,767 13,682 6,635
6-12 months 19,696 30,934 11,808
Over 12 months 8,350 4,589 7,066
-------------- ------------ -------------
$64,155 $77,753 $52,214
============== ============ =============
Although the Bank has a significant amount of deposits maturing in less than
one year, the Company believes that the Bank's current pricing strategy will
enable it to retain a significant portion of these accounts at maturity and that
it will continue to have access to sufficient amounts of CDs which, together
with other funding sources, will provide the necessary level of liquidity to
finance its lending businesses. However, as a result of these shorter-term
deposits, the rates on these accounts may be more sensitive to movements in
market interest rates which may result in a higher cost of funds.
At December 31, 1999, the Bank exceeded all of its regulatory capital
requirements with tangible capital of $46.2 million, or 10.60% of total adjusted
assets, which is above the required level of $6.5 million, or 1.50%; core
capital of $46.2 million, or 10.60% of total adjusted assets, which is above the
required level of $13.1 million, or 3.00% and risk-based capital of $28.6
million, or 10.24% of risk-weighted assets, which is above the required level of
$22.3 million, or 8.00%
Under the Federal Deposit Insurance Corporation Act of 1991 ("FDICIA"), the
Bank is deemed to be "well capitalized" at December 31, 1999.
The Company has other sources of liquidity, including FHLB advances and its
liquidity and short-term investment portfolio. Through the Bank, the Company
may obtain advances from the FHLB, collateralized by its securities, mortgage
loans purchased from the RTC and the Bank's FHLB stock. The FHLB functions as a
central reserve bank providing credit for thrifts and certain other member
financial institutions. Advances are made pursuant to several programs, each of
which has its own interest rate and range of maturities. Limitations on the
amount of advances are based generally on a fixed percentage of net worth or on
the FHLB's assessment of an institution's credit-worthiness. As of December 31,
1999, the Bank's available borrowing capacity under this credit facility was
$7.9 million.
44
The following table sets forth certain information regarding the Company's
short-term borrowed funds (consisting of FHLB advances and its warehouse lines
of credit) at or for the periods ended on the dates indicated.
At or For Years Ended
December 31,
-------------------------------------------
1999 1998 1997
---------- ------------ -----------
(Dollars in thousands)
FHLB advances
Maximum month-end balance $ 2,300 $34,500 $40,900
Balance at end of period -- -- 28,000
Average balance for period 6 13,057 18,526
Weighted average interest rate on balance at end of period --% --% 7.07%
Weighted average interest rate on average balance for period 5.84% 5.10% 5.95%
Warehouse lines of credit
Maximum month-end balance $159,342 $95,000 $64,359
Balance at end of period 54,415 -- 6,237
Average balance for period 45,404 43,759 8,914
Weighted average interest rate on balance at end of period 5.78% --% 6.70%
Weighted average interest rate on average balance for period 5.84% 6.01% 6.10%
The Company had no material contractual obligations or commitments for capital
expenditures at December 31, 1999. At December 31, 1999, the Company had
outstanding commitments to originate loans of $26.8 million, compared to $23.3
million at December 31, 1998. The Company anticipates that it will have
sufficient funds available to meet its current origination commitments.
RTC Notes Payable
In connection with its acquisition of certain assets from the RTC, the Bank
obtained loans (the "RTC Notes Payable") from the RTC in the aggregate amount of
$10.9 million under the RTC's Minority Interim Capital Assistance Program
provided for in Section 21A(u) of the Federal Home Loan Bank Act, as amended
(the "FHLBA"). The FHLBA gives the RTC authority to provide interim capital
assistance to minority-owned institutions, defined in the FHLBA as more than
fifty percent (50%) owned or controlled by one or more minorities. The Bank,
PAFI and the RTC entered into an Interim Capital Assistance Agreement on April
29, 1994 with respect to a loan of $6,930,000 and a second Interim Capital
Assistance Agreement on September 9, 1994 with respect to a loan of $4,000,000
(together, the "RTC Agreements"). The RTC Agreements were repaid in single lump
sum installments on April 28, 1999 and September 8, 1999.
In connection with the RTC Agreements, PAFI and the RTC entered into Stock
Pledge Agreements pursuant to which PAFI pledged to the RTC all of the issued
and outstanding shares of the capital stock of the Bank as security for the
repayment of the RTC Notes Payable.
Lending Activities
To date, the Company has sold most of its loan originations to mortgage
companies and other investors through whole loan packages on a primarily non-
recourse, servicing released basis. As a result, upon sale, risks and rewards
of ownership transfer to the buyer. In December 1997, the Company completed its
first securitization of mortgage loans and in March 1998 sold its residual
interests in this securitization to a third-party. All loan sales in 1998 were
whole loan sales with servicing released to the purchaser. In March 1999, the
Company completed its second securitization of mortgage loans and in October
1999 the Company completed its third securitization of mortgage loans.
Summary of Loan Portfolio. At December 31, 1999, the Company's loan portfolio
constituted $294.7 million, or 67.2% of the Company's total assets, of which
$158.3 million, or 53.7%, was held for investment and $136.5 million, or 46.3%,
was held for sale. Loans held for investment are reported at cost, net of
unamortized discounts or premiums and allowance for losses. Loans held for sale
are reported at the lower of cost or market value. Subprime mortgage loans
included in the table below are part of the Company's discontinued mortgage
operations.
45
The following table sets forth the composition of the Company's loan portfolio
at the dates indicated.
December 31,
--------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ----------- ------------ ------------- ----------
Mortgage Loans
Mortgage loans (purchased primarily from RTC)
Held for sale $ -- $ 18,289 $ -- $ -- $ --
Held for investment 21,835 14,039 81,995 102,733 124,483
------------ ----------- ------------ ------------- ----------
Total mortgage loans 21,835 32,328 81,995 102,733 124,483
------------ ----------- ------------ ------------- ----------
Subprime mortgage loans
Held for sale 136,460 196,117 120,002 20,766 --
Held for investment 13,416 17,570 5,375 1,294 --
------------ ----------- ------------ ------------- ----------
Total subprime mortgage loans 149,876 213,687 125,377 22,060 --
------------ ----------- ------------ ------------- ----------
Total mortgage loans 171,711 246,015 207,372 124,793 124,483
------------ ----------- ------------ ------------- ----------
Consumer Loans
Automobile installment contracts 128,093 83,921 40,877 10,830 --
Insurance premium financing 30,334 44,709 39,990 32,058 16,975
Other consumer loans 879 1,245 267 230 31
------------ ----------- ------------ ------------- ----------
Total consumer loans 159,306 129,875 81,134 43,118 17,006
------------ ----------- ------------ ------------- ----------
Total loans 331,017 375,890 288,506 167,911 141,489
Unearned discounts and premiums (954) (212) (2,901) (3,697) (4,445)
Unearned finance charges (21,181) (17,371) (10,581) (3,271) --
Allowance for loan losses (14,139) (10,183) (6,487) (5,356) (5,250)
------------ ----------- ------------ ------------- ----------
Total loans, net $294,743 $348,124 $268,537 $155,587 $131,794
============ =========== ============ ============= ==========
Loan Maturities. The following table sets forth the dollar amount of loans
maturing in the Company's loan portfolio at December 31, 1999 based on scheduled
contractual amortization. Loan balances are reflected before unearned discounts
and premiums, unearned finance charges and allowance for losses.
At December 31, 1999
--------------------------------------------------------------------------------------------------------------
More Than 1 Year More Than 3 More Than 5 More Than 10
One Year or to Years to Years to Years to 20 More Than 20 Total
Less 3 Years 5 Years 10 Years Years Years Loans
------------ ---------------- ------------- ------------ ------------- ------------ ----------
(Dollars in thousands)
Mortgage loans held
for investment $ 52 $ 700 $ 661 $2,875 $12,526 $ 18,437 $ 35,251
Mortgage loans held
for sale -- -- 107 -- 8,054 128,299 136,460
Consumer loans 34,162 59,726 65,232 186 -- -- 159,306
------------ ------------ ------------- ------------ ------------ ---------- ---------
Total $34,214 $60,426 $66,000 $3,061 $20,580 $146,736 $331,017
============ ============ ============= ============ ============ ========== =========
The following table sets forth, at December 31, 1999, the dollar amount of
loans receivable that were contractually due after one year and indicates
whether such loans have fixed or adjustable interest rates.
Due After December 31, 2000
--------------------------------------
Fixed Adjustable Total
------------ ------------ ----------
(In thousands)
Mortgage loans held for investment $ 7,800 $ 27,399 $ 35,199
Mortgage loans held for sale 33,221 103,239 136,460
Consumer loans 125,144 -- 125,144
------------ ------------ ----------
Total $166,165 $130,638 $296,803
============ ============ ==========
Classified Assets and Allowance for Loan Losses
The Company maintains an asset review and classification process for purposes
of assessing loan portfolio quality and the adequacy of its loan loss
allowances. The Company's Asset Review Committee reviews for classification all
problem and potential problem assets and reports the results of its review to
the Board of Directors quarterly. The Company has incorporated the OTS internal
asset classifications as a part of its credit monitoring systems and in order of
increasing weakness, these designations are "substandard," "doubtful" and
"loss." Substandard assets have one or more defined weaknesses and are
characterized by the distinct possibility that some loss will be sustained if
the deficiencies are not corrected. Doubtful assets have the weaknesses of
substandard assets with the additional characteristic that the weaknesses make
collection or liquidation in full, on the basis of currently existing facts,
conditions and values, questionable and there is a
46
high possibility of loss. Loss assets are considered uncollectible and of such
little value that continuance as an asset is not warranted. Assets which do have
weaknesses but do not currently have sufficient risk to warrant classification
in one of the categories described above are designated as "special mention."
At December 31, 1999, the Company had $1.0 million in assets classified as
special mention, $18.2 million of assets classified as substandard, $94,000 in
assets classified as doubtful and no assets classified as loss.
The following table sets forth the remaining balances of all loans (before
specific reserves for losses) that were more than 30 days delinquent at December
31, 1999, 1998 and 1997.
Loan
- ---- December 31, % of Total December 31, % of Total December 31, % of Total
Delinquencies 1999 Loans 1998 Loans 1997 Loans
- ------------- --------------- ----------- ------------ ------------- ------------- -------------
(Dollars in thousands)
30 to 59 days $ 3,071 1.0% $ 9,743 2.8% $ 356 0.1%
60 to 89 days 2,443 0.8% 8,161 2.3% 994 0.4%
90+ days 13,307 4.6% 11,424 3.3% 7,101 2.6%
--------------- ----------- ------------ ------------- ------------- -------------
Total $18,821 6.4% $29,328 8.4% $8,451 3.1%
=============== =========== ============ ============= ============== =============
Nonaccrual and Past Due Loans. The Company's general policy is to discontinue
accrual of interest on a mortgage loan when it is two payments or more
delinquent, accordingly, loans are placed on non-accrual status generally when
they are 60-89 days delinquent. A non-mortgage loan is placed on nonaccrual
status when it is delinquent for 120 days or more. When a loan is reclassified
from accrual to nonaccrual status, all previously accrued interest is reversed.
Interest income on nonaccrual loans is subsequently recognized only to the
extent that cash payments are received or the borrower's ability to make
periodic interest and principal payments is in accordance with the loan terms,
at which time the loan is returned to accrual status. Accounts which are deemed
fully or partially uncollectible by management are generally fully reserved or
charged off for the amount that exceeds the estimated fair value (net of
selling costs) of the underlying collateral. The Company does not generally
modify, extend or rewrite loans and at December 31, 1999 had no troubled debt
restructured loans.
The following table sets forth the aggregate amount of nonaccrual loans (net
of unearned discounts and premiums and unearned finance charges) at December 31,
1999, 1998 and 1997.
December 31,
---------------------------------------------------------
1999 1998 1997 1996 1995
---------- ----------- ----------- ------------ ---------
(Dollars in thousands)
Nonaccrual loans
Single-family residential $15,825 $19,242 $5,766 $5,504 $ 5,086
Multi-family residential and commercial 100 214 605 605 154
Consumer and other loans 1,060 1,168 1,426 928 --
---------- ----------- ----------- ------------ ---------
Total $16,985 $20,624 $7,797 $7,037 $ 5,240
========== =========== =========== ============ =========
Nonaccrual loans as a percentage of
Total loans held for investment 10.73% 15.42% 5.25% 5.22% 3.85%
Total assets 3.88% 4.85% 2.51% 3.73% 3.28%
Allowance for loan losses as a percentage of
Total loans held for investment 8.93% 7.62% 4.37% 3.97% 3.98%
Nonaccrual loans 83.24% 49.37% 83.20% 76.11% 100.19%
The amount of interest income that would have been recognized on nonaccrual
loans if such loans had continued to perform in accordance with their
contractual terms was $1.4 million for the year ended December 31, 1999, $1.1
million for the year ended December 31, 1998 and $337,000 for the year ended
December 31, 1997. The total amount of interest income recognized on nonaccrual
loans was $1.4 million, $470,000 and $212,000 for the years ended December 31,
1999, 1998 and 1997, respectively. Accruing loans over 90 days past due were
$30,000 at December 31, 1999, $19,000 at December 31, 1998 and $66,000 at
December 31, 1997.
Real Estate Owned. Real estate acquired through foreclosure or by deed in
lieu of foreclosure ("REO") is recorded at the lower of cost or fair value at
the time of foreclosure. Subsequently, an allowance for estimated losses is
established when the recorded value exceeds fair value less estimated selling
costs.
47
Holding and maintenance costs related to real estate owned are recorded as
expenses in the period incurred. Real estate owned was $2.6 million at December
31, 1999, $1.9 million at December 31, 1998, and $562,000 at December 31, 1997
and consisted entirely of one to four family residential properties.
Allowance for Loan Losses. The following is a summary of the changes in the
consolidated allowance for loan losses of the Company for the periods indicated.
At or For the
Year Ended
December 31,
-----------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- --------- ----------
(Dollars in thousands)
Allowance for Loan Losses
Balance at beginning of period $ 10,183 $ 6,487 $ 5,356 $5,250 $ 378
Provision for loan losses -
continuing operations 432 293 507 194 120
Provision for loan losses -
discontinued operations 7,376 5,560 -- -- --
Charge-offs
Mortgage loans (7,525) (4,536) (373) (285) (108)
Consumer loans (4,395) (3,793) (2,101) (433) --
---------- ---------- ---------- --------- ----------
Total charge-offs (11,920) (8,329) (2,474) (718) (108)
Recoveries
Mortgage loans 296 452 77 -- --
Consumer loans 414 1,138 1,068 274 --
---------- ---------- ---------- --------- ----------
Total recoveries 710 1,590 1,145 274 --
---------- ---------- ---------- --------- ----------
Net charge-offs (11,210) (6,739) (1,329) (444) (108)
Acquisition discounts
allocated to loss allowance 7,358 4,582 1,953 356 4,860
----------- ---------- ---------- --------- ----------
Balance at end of period $ 14,139 $10,183 $ 6,487 $5,356 $5,250
=========== ========== ========== ========= ==========
Annualized net charge-offs
to average loans 2.89% 1.73% 0.60% 0.30% 0.10%
Ending allowance to period
end loans, net 8.93% 7.62% 4.37% 3.97% 3.98%
At December 31,
------------------------------------------------------------------------------------------
1999 1998 1997
--------------------------- --------------------------- ----------------------------
Percent of Loans Percent of Loans Percent of Loans
in Each Category in Each Category in Each Category
Amount to Total Loans Amount to Total Loans Amount to Total Loans
-------- ---------------- -------- ---------------- -------- ----------------
(Dollars in thousands)
Distribution of end of period
Allowance by loan type
Mortgage loans held
for investment $ 5,800 19.9% $ 5,676 21.8% $3,653 51.9%
Consumer loans 8,339 80.1% 4,507 78.2% 2,246 48.1%
Unallocated -- -- -- -- 588 --
-------- ---------------- -------- ---------------- -------- ----------------
$14,139 100.0% $10,183 100.0% $6,487 100.0%
======== ================ ======== ================ ======== ================
The Company's policy is to maintain an allowance for loan losses to absorb
future losses which may be realized on its loan portfolio. These allowances
include specific reserves for identifiable impairments of individual loans and
general valuation allowances for estimates of probable losses not specifically
identified. In addition, the Company's allowance for loan losses is also
increased by its allocation of acquisition discounts related to the purchase of
automobile installment contracts. No loan loss provision is made for loans held
for sale.
The determination of the adequacy of the allowance for loan losses is based
on a variety of factors, including an assessment of the credit risk inherent in
the portfolio, prior loss experience, the levels and trends of non-performing
loans, the concentration of credit, current and prospective economic conditions
and other factors.
The Company's management uses its best judgment in providing for possible
loan losses and establishing allowances for loan losses. However, the allowance
is an estimate which is inherently uncertain and depends on the outcome of
future events. In addition, regulatory agencies, as an integral part of their
examinations process, periodically review the Bank's allowance for loan losses.
Such agencies may require the
48
Bank to increase the allowance based upon their judgment of the information
available to them at the time of their examination. The Bank's current year
examination by its regulatory agencies was completed recently and no adjustments
to the Bank's allowance for loan losses was required.
Cash Equivalents and Securities Portfolio
The Company's cash equivalents and securities portfolios are used primarily
for liquidity purposes and secondarily for investment income. Cash equivalents
and securities, which generally have maturities of less than 90 days, satisfy
regulatory requirements for liquidity.
The following is a summary of the Company's cash equivalents and securities
portfolios as of the dates indicated.
December 31,
------------------------------------
1999 1998 1997
--------- --------- ----------
(Dollars in thousands)
Balance at end of period
Overnight deposits $85,500 $47,000 $4,000
U.S. agency securities 9,918 -- 1,002
--------- --------- ----------
Total $95,418 $47,000 $5,002
========= ========= ==========
Weighted average yield at end of period
Overnight deposits 3.25% 3.00% 3.50%
U.S. agency securities 7.11% -- 6.54%
Weighted average maturity at end of period
Overnight deposits 1 day 1 day 1 day
U.S. agency securities 62 months -- 24 months
Impact of Inflation and Changing Prices
The financial statements and notes thereto presented herein have been
prepared in accordance with Generally Accepted Accounting Principles ("GAAP"),
which require the measurement of financial position and operating results in
terms of historical dollar amounts without considering the changes in the
relative purchasing power of money over time due to inflation. The impact of
inflation is reflected in the increased cost of the Company's operations. Unlike
industrial companies, nearly all of the assets and liabilities of the Company
are monetary in nature. As a result, interest rates have a greater impact on the
Company's performance than do the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or to the same
extent as the price of goods and services.
Accounting Standards
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), which establishes accounting
and reporting standards for derivative instruments and for hedging activities.
SFAS 133 requires that an entity recognize all derivatives as either assets or
liabilities in the statements of financial condition and measure those
instruments at fair value. SFAS 133 is effective for all periods after January
1, 2000.
SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained
after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise" ("SFAS 134"), was issued in October 1998. Prior to issuance of SFAS
134, when a mortgage banking company securitized mortgage loans held for sale
but did not sell the security in the secondary market, the security was
classified as trading. SFAS 134 requires that the security be classified either
trading, available for sale or held to maturity according to the Company's
intent, unless the Company has already committed to sell the security before or
during the securitization process. The statement is effective for all fiscal
years beginning after December 15, 1998. The implementation of this statement
did not have a material impact on the results of operations or financial
condition of the Company.
49
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Information regarding Quantitative and Qualitative Disclosures About Market
Risk is set forth under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Management of Interest Rate
Risk" of Item 7 to this Annual Report on Form 10-K.
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Finance Statements F-1
Independent Auditors' Report F-2
Consolidated Statements of Financial Condition
as of December 31, 1999 and 1998 F-3
Consolidated Statements of Operations for the
years ended December 31, 1999, 1998 and 1997 F-4
Consolidated Statements of Comprehensive Income for the
years ended December 31, 1999, 1998 and 1997 F-5
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1999, 1998 and 1997 F-6
Consolidated Statements of Cash Flows for the
years ended December 31, 1999, 1998 and 1997 F-7
Consolidated Statements of Cash Flows, Continued for the
years ended December 31, 1999, 1998 and 1997 F-8
Notes to Consolidated Financial Statements F-9
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
United PanAm Financial Corp. intends to file with the Securities and
Exchange Commission a definitive proxy statement (the "Proxy Statement")
pursuant to Regulation 14A. Incorporated herein by this reference is the
information required by this Item 10 set forth in the Sections entitled
"Information About Directors and Executive Officers - Executive Officers and Key
Employees," and "Did Directors, Executive Officers and Greater-Than-10%
Shareholders Comply With Section 16(a) Beneficial Ownership Reporting in 1999"
contained in the 2000 Proxy Statement to be filed with the SEC within 120 days
after December 31, 1999.
Item 11. Executive Compensation
Incorporated herein by this reference is the information required by this
Item 11 set forth in the Sections entitled "Information About Directors and
Executive Officers" contained in the 2000 Proxy Statement, to be filed with the
SEC within 120 days after December 31, 1999.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Incorporated herein by this reference is the information required by this
Item 12 set forth in the Section entitled "Information About UPFC Stock
Ownership" contained in the 2000 Proxy Statement, to be filed with the SEC
within 120 days after December 31, 1999.
50
Item 13. Certain Relationships and Related Transactions
Incorporated herein by this reference is the information set forth in the
Section entitled "Information About Directors and Executive Officers -
Relationships and Related Transactions" contained in the 2000 Proxy Statement,
to be filed with the SEC within 120 days after December 31, 1999.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Financial Statements. Reference is made to the Index to
Consolidated Financial Statements on page F-1 for a list of financial statements
filed as a part of this Annual Report.
(2) Financial Statement Schedules. All financial statement schedules
are omitted because of the absence of the conditions under which they are
required to be provided or because the required information is included in the
financial statements listed above and/or related notes.
(3) List of Exhibits. The following is a list of exhibits filed as a
part of this Annual Report.
Exhibit No. Description
- ---------- -----------
3.1.2* Articles of Incorporation of the Registrant, as amended.
3.2.2* Bylaws of the Registrant
10.1* Insurance Premium Financing Management Agreement dated May 17,
1995, between Pan American Bank, FSB and BPN Corporation.
10.2* First Amendment to Insurance Premium Financing Management Agreement
and Guaranties dated October 1995, between Pan American Bank, FSB
and BPN Corporation.
10.3* Second Amendment to Insurance Premium Financing Management
Agreement and Guaranties dated February 28, 1996, among Pan
American Bank, FSB, BPN Corporation, Cornelius J. O'Shea, Peter
Walski and Barbara Walski.
10.4* Guaranty dated May 17, 1995 by Peter Walski and Barbara Walski to
Pan American Bank, FSB.
10.5* Guaranty dated May 17, 1995 by Cornelius J. O'Shea to Pan American
Bank, FSB.
10.6* Stock Option Agreement dated May 17, 1995, among BPN Corporation,
Pan American Group, Inc., Peter A. Walski, Barbara R. Walski,
Cornelius J. O'Shea and The Walski Family Trust.
10.7* First Amendment to Stock Option Agreement dated October 1, 1997,
among BPN Corporation, Pan American Group, Inc., Peter A. Walski,
Barbara R. Walski, Cornelius J. O'Shea and The Walski Family Trust.
10.8* Interim Capital Assistance Agreement dated September 9, 1994, among
Pan American Financial, Inc., Pan American Bank, FSB and the
Resolution Trust Corporation.
10.9* Amendment No. 1 to Interim Capital Assistance Agreement dated May
1, 1997, among Pan American Financial, Inc., Pan American Bank, FSB
and the Federal Deposit Insurance Corporation.
51
Exhibit No. Description
- ---------- -----------
10.10* Interim Capital Assistance Agreement dated April 29, 1994, among
Pan American Financial, Inc., Pan American Bank, FSB and the
Resolution Trust Corporation.
10.10.1* Standard Purchase and Assumption Terms and Conditions, Theta
Version, dated July 26, 1993.
10.11* Letter agreement dated March 2, 1995, between Pan American Bank,
FSB and the Resolution Trust Corporation.
10.12* Promissory Note dated September 9, 1994 in the amount of $4 million
by Pan American Financial, Inc. to the Resolution Trust
Corporation.
10.13* Stock Pledge Agreement dated September 9, 1994, between Pan
American Financial, Inc. and the Resolution Trust Corporation.
10.14* Limited Branch Purchase and Assumption Agreement dated September 9,
1994, between the Resolution Trust Corporation as receiver of
Western Federal Savings Bank and Pan American Bank, FSB.
10.15* Lead Acquiror Waiver and Reimbursement Agreement dated September 9,
1994, between Home Savings of America, FSB and Pan American Bank,
FSB.
10.16* Indemnity Agreement dated September 9, 1994, between the Resolution
Trust Corporation and Pan American Bank, FSB.
10.17* Whole Purchase and Assumption Agreement dated April 29, 1994,
between the Resolution Trust Corporation and Pan American Bank,
FSB.
10.18* Indemnity Agreement dated April 29, 1994, between the Resolution
Trust Corporation and Pan American Bank, FSB.
10.19* Promissory Note dated April 29, 1994 in the amount of $6,930,000 by
Pan American Financial, Inc. to the Resolution Trust Corporation.
10.20* Stock Pledge Agreement dated April 29, 1994, between Pan American
Financial, Inc. and the Resolution Trust Corporation.
10.21* Advances and Security Agreement dated January 29, 1996, between the
Federal Home Loan Bank of San Francisco and Pan American Bank, FSB.
10.22* Retail CD Brokerage Agreement dated April 30, 1996, between Pan
American Bank, FSB and Merrill Lynch, Pierce, Fenner & Smith,
Incorporated.
10.23* Fixed Rate Interest bearing--3 Months and Longer Retail Certificate
of Deposit of Pan American, FSB, Master Certificate No. 2 dated May
12, 1997.
10.24* Fixed Rate Interest bearing--3 Months and Longer Retail Certificate
of Deposit of Pan American Bank, FSB, Master Certificate No. 3
dated May 12, 1997.
52
Exhibit No. Description
- ---------- -----------
10.25* License, Services, and Purchase Agreement dated December 1996,
between Associated Software Consultants, Inc. and Pan American, FSB
and all addendums thereto.
10.26* Agreement for Remote Computing Services dated April 4, 1995,
between Pan American Bank, FSB and Fiserv Fresno, Inc.
10.27* Amendment to Computer Operating Agreement between Pan American
Bank, FSB and Fiserv Fresno, Inc.
10.28* Addendum No. 2 to Agreement for Remote Computing Services effective
as of April 1, 1996, between Pan American Bank, FSB and Fiserv
Fresno, Inc.
10.29* Item Processing Agreement dated April 26, 1993, between Systematics
Financial Services, Inc. and Pan American Savings Bank, FSB.
10.30* Support Services Agreement dated October 31, 1995, between Alan
King and Company, Inc. and Pan American Savings Bank, FSB.
10.31* Technical Support Services Agreement dated May 1, 1995, between
Alan King and Company, Inc. and Pan American Savings Bank, FSB.
10.32* License Agreement dated May 1, 1995, between Alan King and Company,
Inc. and Pan American Savings Bank, FSB.
10.33* Subservicing Agreement dated March 2, 1995, between Pan American
Bank, FSB and Dovenmuehle Mortgage, Inc.
10.34* Interim Operating Agreement dated July 1, 1997, between United
PanAm Mortgage Corporation and Pan American Bank, FSB.
10.34.1* Amended and Restated Interim Operating Agreement dated as of
December 31, 1997, between United PanAm Mortgage Corporation and
Pan American Bank, FSB.
10.35* Inter-Company Agreement dated May 1, 1994, between Pan American
Financial, Inc. and Pan American Bank, FSB.
10.36* Inter-Company Agreement dated August 1, 1994, between Pan American
Group, Inc. and Pan American Bank, FSB.
10.37* Employment Agreement dated May 7, 1996, between Pan American Bank,
FSB and Ray C. Thousand.
10.38* Employment Agreement dated May 1, 1994, between Pan American Bank,
FSB and Lawrence J. Grill.
10.39* Employment Agreement dated October 1, 1997, among the Predecessor,
Pan American Bank, FSB and Lawrence J. Grill.
53
Exhibit No. Description
- ---------- -----------
10.39.1* Amendment No. 1 to Employment Agreement dated November 1, 1997,
among the Predecessor, Pan American Bank, FSB and Lawrence J.
Grill.
10.40* Employment Agreement dated October 1, 1997, between the Predecessor
and Guillermo Bron.
10.40.1* Amendment No. 1 to Employment Agreement dated November 1, 1997,
between the Predecessor and Guillermo Bron.
10.41* Employment Agreement dated October 1, 1997, between United PanAm
Mortgage Corporation and John T. French.
10.41.1* First Amendment to Employment Agreement dated November 14, 1997
between United PanAm Mortgage Corporation and John T. French.
10.42* Salary Continuation Agreement dated October 1, 1997, between Pan
American Bank, FSB and Lawrence J. Grill.
10.43* Salary Continuation Agreement dated October 1, 1997, between Pan
American Bank, FSB and Guillermo Bron.
10.44* Form of Indemnification Agreement between the Predecessor and Ms.
Bucci and each of Messrs. Bron, French, Grill, Haley, Kaufman,
Maizel, Thousand and Villanueva.
10.45* Agreement and Mutual General Release dated March 5, 1997, between
Pan American Bank, FSB and Robert Wilson.
10.46* Pan American Group, Inc. 1994 Stock Option Plan, together with
forms of incentive stock option and non-qualified stock option
agreements.
10.47* Pan American Group, Inc. 1997 Stock Incentive Plan, together with
forms of incentive stock option, non-qualified stock option and
restricted stock agreements.
10.48* Pan American Bank, FSB Management Incentive Plan.
10.48.1* Pan American Bank, FSB Retail Bank Management Incentive Plan.
10.48.2* Pan American Bank, FSB Corporate Management Incentive Plan.
10.49* Pan American Bank, FSB 401(k) Profit Sharing Plan, as amended.
10.50* Income Tax Allocation Agreement dated October 19, 1994, between Pan
American Bank, FSB, Pan American Financial, Inc. and the
Predecessor.
10.51* Lease Agreement dated September 26, 1994, between the Resolution
Trust Corporation and Old Stone Bank of California and Pan American
Bank, FSB.
10.52* First Amendment to Lease Agreement dated November 19, 1995, between
the Resolution Trust Corporation and Old Stone Bank of California
and Pan American Bank, FSB.
54
Exhibit No. Description
- ---------- -----------
10.53* Office Lease dated March 4, 1997, between Spieker Properties, L.P.
and Pan American Bank, FSB.
10.54* Office Space Lease dated January 18, 1996, between The Irvine
Company and Pan American Bank, FSB.
10.55* First Amendment to Office Space Lease dated July 2, 1996, between
The Irvine Company and Pan American Bank, FSB.
10.56* Standard Office Lease dated April 25, 1997, between CAL Portfolio
VI, L.L.C. and Pan American Bank, FSB.
10.57* Office Lease Agreement dated February 28, 1997, between P.R.A.
Biltmore Investments, L.L.C. and Pan American Bank, FSB.
10.58* Office Lease dated December 9, 1996, between Bernal Corporate Park
and Pan American Bank, FSB.
10.59* Bernal Corporate Park Lease First Amendment to Lease dated January
27, 1997.
10.60* Shopping Center Sublease dated September 22, 1995, between Panorama
Towne Center, L.P. and Pan American Bank, FSB.
10.61* Promissory Note in the principal amount of $225,000 dated October
15, 1997 by Lawrence J. Grill to the Predecessor.
10.62* Loan and Stock Pledge Agreement dated October 15, 1997, between
Lawrence J. Grill and the Predecessor.
10.63* Promissory Note in the principal amount of $1,628,000 dated July 1,
1997 by the Predecessor to Pan American Financial, L.P.
10.63.1* Amended and Restated Promissory Note in the principal amount of
$1,628,000 dated January 15, 1998 by the Predecessor to Pan
American Financial, L.P.
10.64* Promissory Note in the principal amount of $258,000 dated July 1,
1997 by the Predecessor to BVG West Corporation.
10.64.1* Amended and Restated Promissory Note in the principal amount of
$258,000 dated January 15, 1998 by the Predecessor to BVG West
Corporation.
10.65* Promissory Note in the principal amount of $52,500 dated July 1,
1997 by the Predecessor to Lawrence J. Grill.
10.65.1* Amended and Restated Promissory Note in the principal amount of
$52,500 dated January 15, 1998 by the Predecessor to Lawrence J.
Grill.
10.66* Promissory Note in the principal amount of $33,000 dated July 1,
1997 by the Predecessor to Robert Wilson.
55
Exhibit No. Description
- ---------- -----------
10.66.1* Amended and Restated Promissory Note in the principal amount of
$33,000 dated January 15, 1998 by the Predecessor to Robert Wilson.
10.67* Promissory Note in the principal amount of $28,500 dated July 1,
1997 by the Predecessor to Villanueva Management, Inc.
10.67.1* Amended and Restated Promissory Note in the principal amount of
$28,500 dated January 15, 1998 by the Predecessor to Villanueva
Management, Inc.
10.68* Master Repurchase Agreement Governing Purchases and Sales of
Mortgage Loans dated as of October 31, 1997, between Lehman
Commercial Paper Inc. and Pan American Bank, FSB.
10.69* Custodial Agreement dated November 6, 1997, among Lehman Commercial
Paper Inc., Pan American Bank, FSB and Bankers Trust Company of
California, N.A.
10.70* Loan Purchase and Sale Agreement dated April 1, 1997, among Aames
Capital Corporation, Aames Funding Corporation and Pan American
Bank, FSB.
10.71* Continuing Loan Purchase Agreement dated February 27, 1997, between
AMRESCO Residential Capital Markets, Inc. and Pan American Bank,
FSB.
10.72* Mortgage Loan Purchase Agreement dated May 28, 1997, between Saxon
Mortgage, Inc. and Pan American Bank, FSB.
10.73* Letter Agreement dated as of January 6, 1998, by and among the
Predecessor, NIPF Holding Company and Providian National Bank.
10.74* Master Assignment Agreement dated as of January 21, 1998 by and
between Pan American Bank, FSB d/b/a "Classic Plan" and Providian
National Bank d/b/a "Commonwealth," and National IPF Company.
10.75* Pooling and Servicing Agreement dated as of December 1, 1997, by
and among United PanAm Mortgage Corporation, Lehman ABS
Corporation, Pan American Bank, FSB and Bankers Trust Company of
California, N.A.
10.76* Mortgage Loan Purchase and Sale Agreement dated as of December 1,
1997, by and among United PanAm Mortgage Corporation, Pan American
Bank, FSB and Lehman ABS Corporation.
10.77* Insurance and Indemnity Agreement dated as of December 1, 1997, by
and among United PanAm Mortgage Corporation, Lehman ABS
Corporation, Pan American Bank, FSB and Financial Security
Assurance Inc.
10.78* Indemnification Agreement dated as of December 22, 1997, by and
among United PanAm Mortgage Corporation, Financial Security
Assurance Inc., Pan American Bank, FSB, Lehman ABS Corporation and
Lehman Brothers Inc.
10.79* Subservicing Agreement dated as of December 1, 1997, by and between
Pan American Bank, FSB and Ocwen Federal Bank, FSB.
56
Exhibit No. Description
- ---------- -----------
10.80* Premium Letter by and among United PanAm Mortgage Corporation,
Lehman ABS Corporation and Financial Security Assurance Inc.
10.81* Indemnification Agreement dated as of December 30, 1997 among
United PanAm Mortgage Corporation, Pan American Bank, FSB and
Lehman Brothers Inc.
10.82* Certificate and Prepayment Fee Purchase Agreement dated March 25,
1998 between Pan American Bank, FSB and Ocwen Partnership, L.P.
10.83* Residential Flow Servicing Agreement dated effective as of November
10, 1997, by and between Ocwen Federal Bank FSB, Servicer, and Pan
American Bank, FSB and United PanAm Mortgage Corporation.
10.84* United PanAm Mortgage Corporation 1998 Management Incentive Plan.
10.85* United Auto Credit Corporation 1998 Management Incentive Plan.
10.85.1* Forms of Incentive Stock Option Agreement and Nonqualified Stock
Option Agreement.
10.86** Mortgage Loan Purchase and Interim Servicing Agreement dated June
23, 1998, between Pan American Bank, FSB and Countrywide Home
Loans, Inc.
10.87** Assignment, Assumption and Recognition Agreement dated August 14,
1998, between Countrywide Home Loans, Inc., Associates Home Equity
Services, Inc. and Pan American Bank, FSB.
10.88** Assignment, Assumption and Recognition Agreement dated August 14,
1998, between Countrywide Home Loans, Inc., Fidelity Federal Bank,
FSB and Pan American Bank, FSB.
10.89** Assignment, Assumption and Recognition Agreement dated September
15, 1998 between Countrywide Home Loans, Inc., Southern Mortgage
Acquisitions, Inc. and Pan American Bank, FSB.
10.90** Assignment, Assumption and Recognition Agreement dated September
30, 1998, between Countrywide Home Loans, Fidelity Federal Bank,
FSB and Pan American Bank, FSB.
10.91** Employment Agreement dated July 6, 1998, between United PanAm
Mortgage Corporation and Edward Pollard.
10.92*** Agreement for Assignment of Software dated November 5, 1998 between
Pan American Bank, FSB and BPN Corporation.
10.93*** Loan and Stock Pledge Agreement dated November 5, 1998 by and among
Barbara R. Walski, Peter A. Walski, and the Walski Family Trust
u/d/t/ dated August 30, 1989, BPN Corporation and Pan American
Bank, FSB.
10.94*** Loan and Stock Pledge Agreement dated November 5, 1998 by and among
Cornelius J. O'Shea and the Cornelius J. O'Shea Living Trust, BPN
Corporation and Pan American Bank, FSB.
57
Exhibit No. Description
- ---------- -----------
10.95*** Promissory Note in the principal amount of $780,000 dated November
5, 1998 by and between Peter A. Walski, Barbara R. Walski, and the
Walski Family Trust u/d/t/ dated August 30, 1989 and Pan American
Bank, FSB.
10.96*** Promissory Note in the principal amount of $420,000 dated November
5, 1998 by and between Cornelius J. O'Shea and the Cornelius J.
O'Shea Living Trust and Pan American Bank, FSB.
10.97*** Agreement for Purchase of Assets dated November 5, 1998 by and
between Norwest Financial Coast, Inc., Pan American Bank, FSB and
BPN Corporation.
10.98*** Continuing Master Loan Repurchase Agreement dated October 2, 1995
between Advanta Mortgage Conduit Services, Inc. and Pan American
Bank, FSB.
10.99*** Assignment, Assumption and Recognition Agreement dated September
30, 1998 between Countrywide Home Loans, Inc. and Pan American
Bank, FSB.
10.100*** Whole Loan Sale Agreement dated December 23, 1998 between Fremont
Investment and Loan and Pan American Bank, FSB.
10.101*** Employment Agreement dated December 8, 1998, between Pan American
Bank, FSB and Ray C. Thousand
10.102*** On-line Computer Service Agreement dated June 19, 1998 between DHI
Computing, Inc. and Pan American Bank, FSB
10.103**** Pooling and Servicing Agreement dated as of March 1, 1999, by and
among Financial Asset Securities Corp., Pan American Bank, FSB,
Fairbanks Capital Corp., and Banker's Trust Company.
10.104**** Mortgage Loan Purchase Agreement dated as of March 1, 1999, by and
among Financial Asset Securities Corp. and Pan American Bank, FSB.
10.105 Mortgage Loan Purchase Agreement dated as of October 1, 1999, by
and among Asset Backed Funding Corporation and Pan American Bank,
FSB.
21.1* Subsidiaries.
23.1* Consent of KPMG LLP.
27.1 Financial Data Schedule.
_____________
* Incorporated herein by reference from the Exhibits to Form S-1
Registration Statement, declared effective on April 23, 1998, Registration
No. 333-39941.
** Incorporated herein by reference from the Exhibits to Form 10-Q for the
quarters ended June 30, 1998 and September 30, 1998.
*** Incorporated herein by reference from the Exhibits to Form 10-K for the
year ended December 31, 1998.
58
**** Incorporated herein by reference from the Exhibits to Form 10-Q for the
quarter ended March 31, 1999.
(b) Reports on Form 8-K. None
(c) Exhibits. Reference is made to the Exhibit Index and exhibits filed
as a part of this report.
(d) Additional Financial Statements. Not applicable.
59
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.
United PanAm Financial Corp.
By: /s/ Lawrence J. Grill
---------------------------------
Lawrence J. Grill
President, Chief Executive Officer
and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Guillermo Bron Chairman of the Board
- --------------------------------------
/s/ Lawrence J. Grill President, Chief Executive
- --------------------------------------
Officer, Secretary and
Director (Principal Executive
Officer)
/s/ Carol M. Bucci Senior Vice President -
- --------------------------------------
Chief Financial Officer and
Treasurer (Principal
Financial and Accounting
Officer)
/s/ Stephen W. Haley Senior Vice President -
- --------------------------------------
Compliance and Risk
Management
/s/ John T. French Director
- --------------------------------------
/s/ Edmund M. Kaufman Director
- --------------------------------------
/s/ Daniel L. Villanueva Director
- --------------------------------------
/s/ Luis Maizel Director
- --------------------------------------
/s/ Ron R. Duncanson Director
- --------------------------------------
60
EXHIBIT INDEX
Exhibits. Reference is made to the Exhibit Index and exhibits filed as a
part of this report.
61
United PanAm Financial Corp.
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report F-2
Consolidated Statements of Financial Condition
as of December 31, 1999 and 1998 F-3
Consolidated Statements of Operations for the
years ended December 31, 1999, 1998 and 1997 F-4
Consolidated Statements of Comprehensive Income for the
years ended December 31, 1999, 1998 and 1997 F-5
Consolidated Statements of Shareholders' Equity for
the years ended December 31, 1999, 1998 and 1997 F-6
Consolidated Statements of Cash Flows
for the years ended December 31, 1999, 1998 and 1997 F-7
Consolidated Statements of Cash Flows, Continued
for the years ended December 31, 1999, 1998 and 1997 F-8
Notes to Consolidated Financial Statements F-9
F-1
Independent Auditors' Report
The Board of Directors
United PanAm Financial Corp.:
We have audited the accompanying consolidated statements of financial
condition of United PanAm Financial Corp. and subsidiaries (the "Company") as of
December 31, 1999 and 1998, and the related consolidated statements of
operations, comprehensive income, shareholders' equity, and cash flows for each
of the years in the three year period ended December 31, 1999. The consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of United PanAm
Financial Corp. and subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows, for each of the years in the
three year period ended December 31, 1999 in conformity with generally accepted
accounting principles.
KPMG LLP
San Francisco, California
February 11, 2000
F-2
United PanAm Financial Corp. and Subsidiaries
Consolidated Statements of Financial Condition
December 31, December 31,
(Dollars in thousands) 1999 1998
------------ ------------
Assets
Cash and due from banks $ 4,857 $ 5,211
Short term investments 85,500 47,000
------------ ------------
Cash and cash equivalents 90,357 52,211
Securities available for sale, at fair value 9,918 --
Residual interests in securitizations, at fair value 21,227 --
Loans, net 158,283 133,718
Loans held for sale 136,460 214,406
Premises and equipment, net 1,429 4,803
Federal Home Loan Bank stock, at cost 2,505 2,120
Accrued interest receivable 1,501 2,034
Real estate owned, net 2,590 1,877
Goodwill and other intangible assets 1,736 2,349
Deferred tax assets 5,747 2,819
Other assets 6,537 9,222
------------ ------------
Total assets $438,290 $425,559
============ ============
Liabilities and Shareholders' Equity
Deposits $291,944 $321,668
Notes payable -- 10,930
Warehouse lines of credit 54,415 --
Accrued expenses and other liabilities 16,578 10,048
------------ ------------
Total liabilities 362,937 342,646
------------ ------------
Common stock (no par value):
Authorized, 30,000,000 shares
Issued and outstanding, 16,369,350 and 17,375,000 shares at
December 31, 1999 and December 31, 1998, respectively 65,249 68,378
Retained earnings 10,183 14,535
Unrealized loss on securities available for sale, net (79) --
------------ ------------
Total shareholders' equity 75,353 82,913
------------ ------------
Total liabilities and shareholders' equity $438,290 $425,559
============ ============
See accompanying notes to consolidated financial statements.
F-3
United PanAm Financial Corp. and Subsidiaries
Consolidated Statements of Operations
(In thousands, except per share data) Years Ended December 31,
---------------------------------------------
1999 1998 1997
------------ ----------- -----------
Interest Income
Loans $27,003 $23,194 $19,170
Short term investments 1,800 1,346 639
------------ ----------- -----------
Total interest income 28,803 24,540 19,809
------------ ----------- -----------
Interest Expense
Deposits 5,787 6,550 7,021
Federal Home Loan Bank advances -- 666 1,103
Notes payable 246 623 669
------------ ----------- -----------
Total interest expense 6,033 7,839 8,793
------------ ----------- -----------
Net interest income 22,770 16,701 11,016
Provision for loan losses 432 293 507
------------ ----------- -----------
Net interest income after provision for loan losses 22,338 16,408 10,509
------------ ----------- -----------
Non-interest Income
Gains on sales of loans, net -- 976 --
Loan related charges and fees 113 135 422
Service charges and fees 725 672 230
Other income 136 129 50
------------ ----------- -----------
Total non-interest income 974 1,912 702
------------ ----------- -----------
Non-interest Expense
Compensation and benefits 10,843 8,370 5,534
Occupancy 1,890 1,335 930
Other 5,910 4,696 3,640
------------ ----------- -----------
Total non-interest expense 18,643 14,401 10,104
------------ ----------- -----------
Income from continuing operations before income taxes 4,669 3,919 1,107
Income taxes 1,908 1,645 466
------------ ----------- -----------
Income from continuing operations 2,761 2,274 641
------------ ----------- -----------
Income (loss) from discontinued operations, net of tax (941) 4,489 5,607
Loss on disposal of discontinued operations, net of tax (6,172) -- --
------------ ----------- -----------
Net income (loss) $(4,352) $ 6,763 $ 6,248
============ =========== ===========
Earnings (loss) per share-basic:
Continuing operations $ 0.16 $ 0.15 $ 0.06
============ =========== ===========
Discontinued operations $ (0.42) $ 0.29 $ 0.52
============ =========== ===========
Net income (loss) $ (0.26) $ 0.44 $ 0.58
============ =========== ===========
Weighted average shares outstanding 16,854 15,263 10,739
============ =========== ===========
Earnings (loss) per share-diluted:
Continuing operations $ 0.16 $ 0.14 $ 0.05
============ =========== ===========
Discontinued operations $ (0.41) $ 0.28 $ 0.47
============ =========== ===========
Net income (loss) $ (0.25) $ 0.42 $ 0.53
============ =========== ===========
Weighted average shares outstanding 17,253 16,143 11,875
============ =========== ===========
See accompanying notes to consolidated financial statements.
F-4
United PanAm Financial Corp. and Subsidiaries
Consolidated Statements of Comprehensive Income
(Dollars in thousands) Years Ended December 31,
--------------------------------------------------------
1999 1998 1997
------------- ------------- -------------
Net income (loss) $(4,352) $6,763 $6,248
Other comprehensive income, net of tax:
Unrealized loss on securities (79) -- --
------------- ------------- -------------
Comprehensive income (loss) $(4,431) $6,763 $6,248
============= ============= =============
See accompanying notes to consolidated financial statements.
F-5
United PanAm Financial Corp. and Subsidiaries
Consolidated Statements of Shareholders' Equity
Unrealized Total
Number Common Retained Loss On Shareholders'
(Dollars in thousands) of Shares Stock Earnings Securities, Net Equity
----------- ------- -------- --------------- -------------
Balance, December 31, 1996 10,668,750 $ 5,237 $ 1,524 $ -- $ 6,761
Net income -- -- 6,248 -- 6,248
Exercise of stock options 281,250 225 -- -- 225
Note receivable from shareholder -- (225) -- -- (225)
----------- ------- -------- --------------- -------------
Balance, December 31, 1997 10,950,000 5,237 7,772 -- 13,009
Net income -- -- 6,763 -- 6,763
Exercise of stock options 100,000 80 -- -- 80
Issuance of stock options -- 10 -- -- 10
Issuance of restricted stock -- 50 -- -- 50
Initial public offering of common
stock 6,325,000 63,001 -- -- 63,001
----------- ------- -------- --------------- -------------
Balance, December 31, 1998 17,375,000 68,378 14,535 -- 82,913
Net loss -- -- (4,352) -- (4,352)
Exercise of stock options 333,750 425 -- -- 425
Note receivable from shareholder -- (75) -- -- (75)
Restricted stock 35,600 216 -- -- 216
Repurchase of stock (1,375,000) (3,695) -- -- (3,695)
Unrealized loss on securities, net -- -- -- (79) (79)
----------- ------- -------- --------------- -------------
Balance, December 31, 1999 16,369,350 $65,249 $10,183 $ (79) $75,353
=========== ======= ======== =============== =============
See accompanying notes to consolidated financial statements.
F-6
United PanAm Financial Corp. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
Years Ended December 31,
-----------------------------------------------
1999 1998 1997
----------- ------------- -----------
Cash flows from operating activities:
Net (loss) income $ (4,352) $ 6,763 $ 6,248
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Discontinued operations 7,113 (4,489) (5,607)
Gains on sales of loans -- (976) --
Origination of loans held for sale (977,244) (1,192,869) (582,433)
Sales of loans held for sale 983,734 1,119,008 477,186
Net proceeds from sale of residual interests in securitizations -- 8,302 --
Provision for loan losses 432 293 507
Accretion of discount on loans (178) (596) (722)
Depreciation and amortization 1,139 615 345
FHLB stock dividend (121) (114) (95)
Decrease in residual interests in securitizations 569 -- --
Decrease (increase) in accrued interest receivable 533 (540) (649)
Decrease (increase) in other assets 7,438 (5,667) (2,159)
Deferred income taxes (3,109) 130 (1,678)
Increase (decrease) in accrued expenses and other liabilities (1,223) (10,771) 5,298
Other, net 373 140 --
----------- ------------- -----------
Net cash provided by (used in) operating activities 15,104 (80,771) (103,759)
----------- ------------- -----------
Cash flows from investing activities:
Proceeds from maturities of investment securities -- 1,002 1,000
Repayments of mortgage loans 39,128 40,630 22,431
Originations, net of repayments, of non-mortgage loans (22,244) (39,982) (29,782)
Purchase of securities available for sale (9,918) -- (2,002)
Purchases, net of sales, of premises and equipment (985) (3,320) (2,975)
Purchase of treasury stock (3,695) -- --
Purchase of FHLB stock, net (264) (61) (563)
Increase in goodwill and other intangible assets -- (2,130) --
Proceeds from sale of real estate owned 7,120 2,579 2,243
Other, net 139 -- --
----------- ------------- -----------
Net cash provided by (used in) investing activities 9,281 (1,282) (9,648)
----------- ------------- -----------
Cash flows from financing activities:
Net (decrease) increase in deposits (29,724) 88,474 74,133
Proceeds (repayments) from warehouse lines of credit 54,415 (6,237) 6,237
Proceeds (repayments) from notes payable (10,930) (2,000) 2,000
Proceeds from initial public offering of common stock, net -- 63,001 --
Proceeds (repayments) from FHLB advances -- (28,000) 24,000
----------- ------------- -----------
Net cash provided by financing activities 13,761 115,238 106,370
----------- ------------- -----------
Net increase (decrease) in cash and cash equivalents 38,146 33,185 (7,037)
Cash and cash equivalents at beginning of period 52,211 19,026 26,063
----------- ------------- -----------
Cash and cash equivalents at end of period $ 90,357 $ 52,211 $ 19,026
=========== ============= ===========
See accompanying notes to consolidated financial statements.
F-7
United PanAm Financial Corp. and Subsidiaries
Consolidated Statements of Cash Flows, Continued
(Dollars in thousands) Years Ended December 31,
---------------------------------------
1999 1998 1997
---------- ---------- ----------
Supplemental disclosures of cash flow information:
Cash paid for:
Interest $17,793 $19,410 $12,087
========== ========== ==========
Taxes $ 253 $ 8,285 $ 5,360
========== ========== ==========
Supplemental schedule of non-cash investing and financing activities:
Real estate acquired through foreclosure $ 7,833 $ 3,893 $ 1,817
========== ========== ==========
See accompanying notes to consolidated financial statements.
F-8
United PanAm Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
1. BUSINESS
ORGANIZATION
- ------------
United PanAm Financial Corp. (the "Company") was incorporated in California
on April 9, 1998 for the purpose of reincorporating its business in that state,
through the merger of United PanAm Financial Corp., a Delaware corporation (the
"Predecessor"), into the Company. Unless the context indicates otherwise, all
references herein to the "Company" include the Predecessor. The Company was
originally organized as a holding company for Pan American Financial, Inc.
("PAFI") and Pan American Bank, FSB (the "Bank") to purchase certain assets and
assume certain liabilities (the "Purchase Agreement") of Pan American Federal
Savings Bank from the Resolution Trust Corporation (the "RTC") on April 29,
1994. The Company, PAFI and the Bank are considered to be minority owned. PAFI
is a wholly-owned subsidiary of the Company and the Bank is a wholly-owned
subsidiary of PAFI.
On April 23, 1998, the Company's Registration Statement on Form S-1 for the
initial public offering of 5,500,000 shares of its Common Stock was declared
effective by the United States Securities and Exchange Commission. On May 22,
1998, the underwriters' over-allotment option for 825,000 shares of Common Stock
was exercised.
These financial statements have been prepared in conformity with generally
accepted accounting principles. In preparing these 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 financial
statements and the reported amount of revenues and expenses during the reporting
periods. Actual results could differ from those estimates.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
- ---------------------------
The consolidated financial statements include the accounts of the Company,
PAFI and the Bank. Substantially all of the Company's revenues are derived
from the operations of the Bank and they represent substantially all of the
Company's consolidated assets and liabilities as of December 31, 1999 and 1998.
Significant inter-company accounts and transactions have been eliminated in
consolidation.
CASH AND CASH EQUIVALENTS
- -------------------------
For financial statement purposes, cash and cash equivalents include cash on
hand, non-interest-bearing deposits, Federal funds sold, commercial paper and
highly liquid interest-bearing deposits with maturities of three months or less.
In accordance with regulations, the Bank must maintain an amount equal to
4% of the sum of total deposits and short-term borrowings in cash and U.S.
Government and other approved securities that are readily convertible to cash.
The Bank exceeded these requirements at December 31, 1999 and 1998.
SECURITIES
- ----------
Securities are classified in one of three categories; held to maturity,
trading, or available for sale. Investments classified as held to maturity are
carried at amortized cost because management has both the intent and ability to
hold these investments to maturity. Investments classified as trading are
carried at fair value with any gains and losses reflected in earnings. All
other investments are classified as available for sale and are carried at fair
value with any unrealized gains and losses included as a separate component of
shareholders' equity, net of applicable taxes.
F-9
United PanAm Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
LOANS
- -----
The Company originates and purchases loans for investment as well as for
sale in the secondary market. At the date of acquisition, mortgage loans are
designated as either held for sale or held for investment, and accounted for
accordingly. Loans held for sale are reported at the lower of cost or market
value applied on an aggregate basis. Market values of loans held for sale are
based upon prices available in the secondary market for similar loans. Loans
which are held for investment are reported at cost, net of unamortized discounts
or premiums, unearned loan origination fees and allowances for losses.
Transfers of loans from the held for sale portfolio to the held for investment
portfolio are recorded at the lower of cost or market value on the transfer
date.
INTEREST INCOME
- ---------------
Interest income is accrued as it is earned. Loan origination fees and
certain direct loan origination costs are deferred and recognized in interest
income over the contractual lives of the related loans using the interest
method. When a loan is paid-off or sold, the unamortized balance of these
deferred fees and costs is recognized in income. The Company ceases to accrue
interest on mortgage loans that are delinquent 90 days or more and on non-
mortgage loans delinquent 120 days or more, or earlier, if the ultimate
collectibility of the interest is in doubt. Interest income deemed
uncollectible is reversed. The Company ceases to amortize deferred fees on non-
performing loans. Income is subsequently recognized only to the extent cash
payments are received, until in management's judgment, the borrower's ability to
make periodic interest and principal payments is in accordance with the loan
terms, at which time the loan is returned to accrual status.
RESIDUAL INTERESTS IN SECURITIZATIONS
- --------------------------------------
Residual interests in securitizations consist of beneficial interests in
the form of an interest-only strip representing the subordinated right to
receive cash flows from a pool of securitized loans after payment of required
amounts to the holders of the securities and certain costs associated with the
securitization.
The Company classifies its residual interests in securitizations as trading
securities and records them at fair value with any unrealized gains or losses
recorded in the results of operations. Valuations of the residual interests in
securitizations at each reporting period are based on discounted cash flow
analyses. Cash flows are estimated as the amount of the excess of the weighted-
average coupon on the loans sold over the sum of the interest pass-through on
the senior certificates, a servicing fee, an estimate of annual future credit
losses and prepayment assumptions and other expenses associated with the
securitization, discounted at an interest rate which the Company believes is
commensurate with the risks involved. The Company uses prepayment and default
assumptions that market participants would use for similar instruments subject
to prepayment, credit and interest rate risks.
The assumptions used by the Company for valuing the residual interests
included prepayment assumptions of 5% for the first year increasing to 30%-42%
thereafter, an annual credit loss assumption of 0.95% and a discount rate of
15%.
GAIN ON SALE OF LOANS
- ---------------------
Gains or losses resulting from sales of loans are recognized at settlement
and are based on the difference between the sales proceeds and the carrying
value of the related loans sold. Non-refundable fees and direct costs
associated with the origination of loans are deferred and recognized when the
loans are sold.
F-10
United PanAm Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
ALLOWANCE FOR LOAN LOSSES
- -------------------------
The Company charges current earnings with a provision for estimated losses
on loans. The provision consists of losses identified specifically with certain
problem loans and a general provision for losses not specifically identified in
the loan portfolio. In addition, the allowance for loan losses includes a
portion of acquisition discounts from the Company's purchase of automobile
installment contracts. Management's determination of the adequacy of the
allowance for loan losses takes into consideration numerous factors, including
an assessment of the credit risk inherent in the portfolio, prior loss
experience, the levels and trends of non-performing loans, the concentration of
credit, current and prospective economic conditions and other factors.
Additionally, regulatory authorities, as an integral part of their examination
process, review the Company's allowance for estimated losses based on their
judgment of information available to them at the time of their examination and
may require the recognition of additions to the allowance.
PREMISES AND EQUIPMENT
- ----------------------
Premises and equipment are carried at cost, less accumulated depreciation
and amortization. Depreciation and amortization are computed on the straight-
line method over the shorter of the estimated useful lives of the related assets
or terms of the leases. Furniture, equipment, computer hardware, software and
data processing equipment are currently depreciated over 3-5 years.
PURCHASE ACCOUNTING
- -------------------
The Company applied business combinations purchase accounting principles to
its acquisition of assets and liabilities from the RTC. The purchase price was
allocated primarily to the assets acquired by the Company. The fair value was
determined based on management's best estimates in conformity with Accounting
Principles Board Opinion ("APB") No. 16 "Business Combinations".
Loan discount resulting from the valuation of the Company's loan portfolio
under purchase accounting requirements at the acquisition date is netted against
loans. The discount is being amortized over the contractual terms of the
related loans using the interest method.
GOODWILL AND OTHER INTANGIBLE ASSETS
- ------------------------------------
Goodwill and other intangible assets consists of core deposit premiums
arising from the acquisition of deposits and the excess of cost over the fair
value of certain net assets acquired. On a periodic basis, the Company reviews
its goodwill for events or changes in circumstances that may indicate that the
estimated undiscounted future cash flows from these acquisitions will be less
than the carrying amount of the goodwill. If it becomes probable that
impairment exists, a reduction in the carrying amount is recognized.
In 1994, the Company purchased deposits from the RTC and recorded core
deposit premiums in conjunction with the acquisition. Core deposit premiums
totaling $198,000 at December 31, 1999 and $330,000 at December 31, 1998 are
being amortized over seven years, the estimated life of the acquired deposit
base, using the straight-line method.
In January 1998, the Company purchased from Providian National Bank and
others the rights to solicit new and renewal personal and commercial insurance
premium finance business from brokers who previously provided contracts to
Providian National Bank. The excess of the cash consideration paid over the
fair value of the assets acquired of $330,000 was considered goodwill. Goodwill
of $109,000 at December 31, 1999 and $219,000 at December 31, 1998 is being
amortized over three years, the estimated life of the acquired assets, using the
straight-line method.
F-11
United PanAm Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
In November 1998, the Company purchased from Norwest Financial Coast
("Coast") the rights to solicit new and renewal personal and commercial
insurance premium finance business from brokers who previously provided
contracts to Coast. The excess of the cash consideration paid over the fair
value of the assets acquired of $1.8 million was considered goodwill. Goodwill
of $1.4 million at December 31, 1999 and $1.8 million at December 31, 1998 is
being amortized over five years, the estimated life of the acquired assets,
using the straight-line method.
REAL ESTATE OWNED
- -----------------
Real estate owned consists of properties acquired through foreclosure and
is recorded at the lower of cost or fair value at the time of foreclosure.
Subsequently, allowance for estimated losses are established when the recorded
value exceeds fair value less estimated costs to sell. As of December 31, 1999
and 1998, there were no such allowances. Real estate owned at December 31, 1999
and 1998 consisted of one to four unit residential real estate.
INCOME TAXES
- ------------
The Company uses the asset/liability method of accounting for income taxes.
Under the asset/liability method, deferred tax assets and liabilities are
recognized for the future consequences of differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases (temporary differences). Deferred tax assets and
liabilities are measured using tax rates expected to apply to taxable income in
the years in which those temporary differences are recovered or settled. The
effect of deferred tax assets and liabilities from a change in tax rate is
recognized in income in the period of enactment. For income tax return
purposes, the Company files as part of a consolidated group. Income taxes are
allocated to the group members in accordance with an income tax allocation
agreement adopted by each party in the group.
EARNINGS PER SHARE
- ------------------
Basic EPS excludes dilution and is computed by dividing income available to
common shareholders by the weighted average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted from issuance of common stock.
RECENT ACCOUNTING PRONOUNCEMENTS
- --------------------------------
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), which establishes accounting
and reporting standards for derivative instruments and for hedging activities.
SFAS 133 requires an entity to recognize all derivatives as either assets or
liabilities in the statements of financial condition and measure those
instruments at fair value. In June 1999, the FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133" ("SFAS 137"), which defers the
effective date of SFAS 133 to all fiscal quarters of all fiscal years beginning
after June 15, 2000 and requires certain selection dates for identifying
embedded derivative instruments. The implementation of this statement did not
have a material impact on the results of operations or financial condition of
the Company.
SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise"
("SFAS 134"), was issued in October 1998. Prior to issuance of SFAS 134, when a
mortgage banking company securitized mortgage loans held for sale but did not
sell the security in the secondary market, the security was classified as
trading. SFAS 134 requires that the security be classified either trading,
available for sale or held to maturity according to
F-12
United PanAm Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
the Company's intent, unless the Company has already committed to sell the
security before or during the securitization process. The statement is effective
for all fiscal years beginning after December 15, 1998. The implementation of
this statement did not have a material impact on the results of operations or
financial condition of the Company.
3. DISCONTINUED OPERATIONS
In February 2000, the Company announced that it had ceased originating
loans in its mortgage finance business as part of an overall corporate strategy
to focus on more profitable areas of lending. This business originated and sold
or securitized subprime mortgage loans secured primarily by first mortgages on
single family residences. In connection with the discontinuance of the mortgage
finance business, all related operating activity is reclassified and reported as
discontinued operations in the 1999 and the preceding years' consolidated
financial statements. Also included in the Company's consolidated statements of
financial condition are the assets of the mortgage finance business of $145.0
million and $210.9 million at December 31, 1999 and 1998, respectively,
consisting of loans and other assets. In addition, the liabilities of the
mortgage business are $63.5 million and $2.0 million at December 31, 1999 and
1998, respectively, consisting of warehouse lines of credit and other
liabilities. In determining net interest income charged to discontinued
operations, the Company included all interest income from its mortgage finance
business less an allocation of interest expense. The Company allocated average
deposits of $189.7 million, $170.5 million and $60.4 million in 1999, 1998 and
1997, respectively, and average warehouse lines of credit of $45.4 million,
$43.8 million and $8.9 million in 1999, 1998 and 1997, respectively, to the
discontinued mortgage operations in computing interest expense.
The results of discontinued operations are as follows:
(Dollars in thousands) Years Ended December 31,
----------------------------------------------
1999 1998 1997
------------ ------------ ------------
Net interest income after provision for loan losses $ 1,970 $ 3,838 $ 3,084
Non-interest income 31,965 49,154 26,526
Non-interest expense 35,580 45,157 19,978
------------ ------------ ------------
Operating income (loss) before income taxes and loss on disposal (1,645) 7,835 9,632
Loss on disposal (10,511) -- --
------------ ------------ ------------
Income (loss) before income taxes (benefit) (12,156) 7,835 9,632
Income taxes (benefit) (5,043) 3,346 4,025
------------ ------------ ------------
Income (loss) from discontinued operations $ (7,113) $ 4,489 $ 5,607
============ ============ ============
The loss on disposal provides for lease termination, employment severance
and benefits, write-off of fixed assets and leasehold improvements and an
accrual for estimated future operating losses, net of estimated gains on loan
sales, and is included in other liabilities.
4. SECURITIES AVAILABLE FOR SALE
Securities available for sale are as follows:
(Dollars in thousands) December 31, 1999 December 31, 1998
--------------------------- ----------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---------- ----------- ---------- ----------
U. S. government agency securities:
Maturity after one through five years $ 8,054 $7,963 $ -- --
Maturity after five through ten years 2,000 1,955 -- $ --
---------- ----------- ---------- ----------
Total $10,054 $9,918 $ -- $ --
========== =========== ========== ==========
F-13
United PanAm Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
The weighted average yield on U. S. government agency securities was 7.11%
at December 31, 1999. At December 31,1999 there were gross unrealized losses of
$136,000 on the securities available for sale, before related income taxes of
$57,000.
5. LOANS
Loans are summarized as follows:
December 31,
-----------------------------
(Dollars in thousands) 1999 1998
------------- -------------
Mortgage loans:
Fixed rate $ 8,517 $ 3,495
Adjustable rate 26,734 28,114
------------- -------------
35,251 31,609
------------- -------------
Consumer loans:
Insurance premium financing 30,334 44,709
Automobile installment contracts 128,093 83,921
Other 879 1,245
------------- -------------
159,306 129,875
------------- -------------
Total loans 194,557 161,484
Less:
Unearned discounts and premiums (954) (212)
Unearned finance charges (21,181) (17,371)
------------- -------------
Allowance for loan losses (14,139) (10,183)
------------- -------------
Total loans, net $158,283 $133,718
============= =============
Contractual weighted average interest rate 17.39% 17.07%
------------- -------------
At December 31, 1999 and 1998 approximately 97% of the Company's mortgage
loans were collateralized by first deeds of trust on one-to-four family
residences. At December 31, 1999 and 1998, approximately 68% and 83%,
respectively, of the Company's loan portfolio is related to collateral or
borrowers located in California.
In connection with the purchase of the rights to solicit new and renewal
personal and commercial insurance premium finance business from Coast, the
Company made loans in the original amount of $1.2 million to two stockholders of
BPN, the company that provides insurance premium finance marketing and sales
support for the Company. The loans earn interest at a rate of 9.25% per annum,
are secured by BPN's common stock and provide for principal and interest
payments over a three-year period. The amounts outstanding under these loan
agreements are $697,000 and $1.0 million, at December 31, 1999 and 1998,
respectively.
The activity in the allowance for loan losses consists of the following:
Years Ended December 31,
-------------------------------------------
(Dollars in thousands) 1999 1998 1997
------------ ------------ ------------
Balance at beginning of year $ 10,183 $ 6,487 $ 5,356
Provision for loan losses - continuing operations 432 293 507
Provision for loan losses - discontinued operations 7,376 5,560 --
Purchase discounts allocated to the allowance for loan losses, net 7,358 4,582 1,953
Charge-offs (11,920) (8,329) (2,474)
Recoveries 710 1,590 1,145
------------ ------------ ------------
Net charge-offs (11,210) (6,739) (1,329)
------------ ------------ ------------
Balance at end of year $ 14,139 $10,183 $ 6,487
============ ============ ============
F-14
United PanAm Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
The discounts allocated to the allowance for loan losses are comprised of
acquisition discounts on the Company's purchase of automobile installment
contracts. The Company allocates the estimated amount of discounts attributable
to credit risk to the allowance for loan losses.
The following table sets forth information with respect to the Company's
non-performing assets: (nonaccrual loans are shown net of specific allowances
for loan losses)
December 31,
--------------------------
(Dollars in thousands) 1999 1998
--------- ---------
Nonaccrual loans $13,157 $18,632
Real estate owned, net 2,590 1,877
--------- ---------
Totals $15,747 $20,509
========= =========
Percentage of non-performing assets to total assets 3.60% 4.82%
========= =========
A loan is impaired when, based on current information and events,
management believes it will be unable to collect all amounts contractually due
under a loan agreement. Loans are evaluated for impairment as part of the
Company's normal internal asset review process. When a loan is determined to be
impaired, a valuation allowance is established based upon the difference between
the Company's investment in the loan and the fair value of the collateral
securing the loan.
At December 31, 1999, the aggregate investment in loans considered to be
impaired was $17.2 million and $20.5 million at December 31, 1998. Allowance
for loan losses was provided for all impaired loans at December 31, 1999 and
1998; the related allowances were $3.2 million and $1.8 million, respectively.
For the years ended December 31, 1999 and 1998, the Company recognized interest
income on impaired loans of $1.4 million and $470,000, respectively, all of
which was recorded using the cash received method. The average recorded
investment in impaired loans during the years ended December 31, 1999 and 1998
was approximately $18.6 million and $12.8 million, respectively.
Under Federal regulations, the Company may not make real estate loans to
one borrower in an amount exceeding 15% of its unimpaired capital and surplus,
plus an additional 10% for loans secured by readily marketable collateral. At
December 31, 1999 and 1998, such limitation would have been approximately $6.9
million and $4.4 million, respectively, or $11.5 million and $7.3 million if
secured by readily marketable collateral. There are no loans in excess of these
limitations.
6. FEDERAL HOME LOAN BANK STOCK
The Bank is a member of the Federal Home Loan Bank System ("FHLB") and as
such is required to maintain an investment in capital stock of the FHLB of San
Francisco. The Bank owned 25,045 shares at December 31, 1999 and 21,195 shares
at December 31, 1998 of the FHLB's $100 par value capital stock. The amount of
stock required is adjusted annually based on a determination made by the FHLB.
The determination is based on the balance of the Bank's outstanding residential
loans and advances from the FHLB.
7. INTEREST RECEIVABLE
Interest receivable is as follows:
(Dollars in thousands) December 31,
--------------------------
1999 1998
--------- ---------
Loans $1,400 $1,985
Securities 101 49
--------- ---------
Total $1,501 $2,034
========= =========
F-15
United PanAm Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
8. PREMISES AND EQUIPMENT
Premises and equipment are as follows:
(Dollars in thousands) December 31,
-----------------------------
1999 1998
------------ --------------
Furniture and equipment $ 7,644 $ 6,856
Leasehold improvements 665 473
------------ --------------
8,309 7,329
Less : Accumulated depreciation and amortization (4,690) (2,526)
Discontinued operations write-off (2,190) --
------------ --------------
Total $ 1,429 $ 4,803
============ ==============
Depreciation and amortization expense was $641,000 for the year ended
December 31, 1999, $375,000 for the year ended December 31, 1998 and $218,000
for the year ended December 31, 1997. Depreciation expense of the subprime
mortgage operations is included in discontinued operations.
9. DEPOSITS
Deposits are summarized as follows:
December 31,
------------------------------------------------------------
1999 1998
---------------------------- -----------------------------
(Dollars in thousands) Weighted Weighted
Amount Average Rate Amount Average Rate
------------ -------------- ------------ --------------
Deposits with no stated maturity:
Regular and money market passbook $ 47,151 4.35% $ 37,348 4.05%
NOW accounts 14,813 1.98% 9,967 1.15%
Money market checking 1,951 2.35% 2,204 2.35%
------------ -------------- ------------ --------------
63,915 3.74% 49,519 3.39%
------------ -------------- ------------ --------------
Time deposits less than $100,000 163,874 5.35% 194,396 5.40%
Time deposits $100,000 and over 64,155 5.51% 77,753 5.32%
------------ -------------- ------------ --------------
228,029 5.39% 272,149 5.38%
------------ -------------- ------------ --------------
Total deposits $291,944 5.03% $321,668 5.07%
============ ============== ============ ==============
A summary of time deposits by remaining maturity is as follows:
December 31,
-----------------------------
(Dollars in thousands) 1999 1998
------------ --------------
Maturity within one year $199,110 $242,447
Maturity within two years 28,770 29,548
Maturity within three years 149 154
------------ --------------
Total $228,029 $272,149
============ ==============
10. NOTES PAYABLE
The RTC notes payable totaling $10.9 million at December 31, 1998 were
issued in connection with the Company's acquisition of certain assets and
liabilities from the RTC. On April 28, 1999, $6.9 million in RTC notes were
repaid and on September 8, 1999, the remaining $4.0 million were repaid. See
Note 15 for a description of the terms and conditions of these notes.
11. WAREHOUSE LINES OF CREDIT
The Company has available $300 million in master repurchase credit
facilities bearing interest based on one month LIBOR. The credit facilities
provide for a committed amount of $50 million. At December 31, 1999, the
Company had $54.4 million outstanding under its warehouse lines of credit at an
interest rate of 5.78%. At December 31, 1998, the Company had no outstanding
balances under these credit facilities.
F-16
United PanAm Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
The maximum amount outstanding at any month-end during 1999 and the average
amount outstanding during 1999 were $159.3 million and $45.4 million,
respectively. The credit facilities are secured by mortgage loans held for sale.
12. INCOME TAXES
Total income tax expense (benefit) was allocated as follows:
(Dollars in thousands) Years Ended December 31,
----------------------------------
1999 1998 1997
---------- ---------- ----------
Income from continuing operations $ 1,908 $1,645 $ 466
Discontinued operations (5,044) 3,346 4,025
---------- ---------- ----------
Total tax expense (benefit) $(3,136) $4,991 $4,491
========== ========== ==========
The provision for income taxes including discontinued operations is
comprised of the following:
(Dollars in thousands) Years Ended December 31,
----------------------------------
1999 1998 1997
---------- ---------- ----------
Federal taxes:
Current $ (20) $3,718 $ 4,622
Deferred (2,514) 35 (1,303)
---------- ---------- ----------
(2,534) 3,753 3,319
---------- ---------- ----------
State taxes:
Current (7) 1,143 1,547
Deferred (595) 95 (375)
---------- ---------- ----------
(602) 1,238 1,172
---------- ---------- ----------
Total $(3,136) $4,991 $ 4,491
========== ========== ==========
The tax effects of significant items comprising the Company's net deferred
taxes as of December 31 are as follows:
December 31,
---------------------
(Dollars in thousands) 1999 1998
---------- ----------
Deferred tax assets:
Discontinued operations and accrued lease obligations $ 4,342 $ 329
Loans marked to market for tax purposes 1,548 2,300
Compensation related reserve 455 302
Intangible assets 307 160
Franchise taxes 2 301
Other 235 80
---------- ----------
Total gross deferred tax assets 6,889 3,472
---------- ----------
Deferred tax liabilities:
Loan loss allowances (899) (508)
FHLB stock dividends (186) (145)
Unrealized loss on securities available for sale (57) --
---------- ----------
Total gross deferred tax liabilities (1,142) (653)
---------- ----------
Net deferred tax assets $ 5,747 $2,819
========== ==========
The Company believes a valuation allowance is not needed to reduce the net
deferred tax assets as it is more likely than not that the deferred tax assets
will be realized through recovery of taxes previously paid or future taxable
income.
F-17
United PanAm Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
The Company's effective income tax rate differs from the federal statutory
rate due to the following:
Years Ended December 31,
----------------------------------------
1999 1998 1997
----------- ------------ -----------
Expected statutory rate 34.0% 34.0% 34.0%
State taxes, net of federal benefits 5.0 7.0 7.2
Other, net 2.9 1.5 0.6
----------- ------------ -----------
Effective tax rate 41.9% 42.5% 41.8%
=========== ============ ===========
Amounts for the current year are based upon estimates and assumptions as of
the date of this report and could vary significantly from amounts shown on the
tax returns as filed. Accordingly, the variances from the amounts previously
reported for 1998 are primarily a result of adjustments to conform to the tax
returns as filed.
13. REGULATORY CAPITAL REQUIREMENTS
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") established new capital standards for savings institutions, requiring
the Office of Thrift Supervision ("OTS") to promulgate regulations to prescribe
and maintain uniformly applicable capital standards for savings institutions.
Such regulations include three capital requirements: a tangible capital
requirement equal to 1.5% of adjusted total assets, a leverage limit or core
capital requirement equal to 3.0% of adjusted total assets, and a risk-based
capital requirement equal to 8.0% of risk-weighted assets.
At December 31, the Bank had the following regulatory capital requirements
and capital position:
December 31, 1999 December 31, 1998
--------------------------------------- ----------------------------------------
(Dollars in thousands) Actual Required Excess Actual Required Excess
---------- ------------ ----------- ----------- ------------ -----------
Tangible capital $46,234 $ 6,542 $39,692 $29,251 $ 6,321 $22,930
Tangible capital ratio 10.60% 1.50% 9.10% 6.94% 1.50% 5.44%
Core capital $46,234 $13,084 $33,150 $29,251 $12,642 $16,609
Core capital (leverage) ratio 10.60% 3.00% 7.60% 6.94% 3.00% 3.94%
Risk-based capital $28,581 $22,327 $ 6,254 $33,154 $24,625 $ 8,529
Percent of risk-weighted assets 10.24% 8.00% 2.24% 10.77% 8.00% 2.77%
The FDIC Improvement Act of 1991 ("FDICIA") required each federal banking
agency to implement prompt corrective actions for institutions that it
regulates. In response to these requirements, the OTS adopted final rules,
effective December 19, 1992, based upon FDICIA's five capital tiers: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized.
The rules provide that a savings association is "well capitalized" if its
leverage ratio is 5% or greater, its Tier 1 risk-based capital ratio is 6% or
greater, its total risk-based capital ratio is 10% or greater, and the
institution is not subject to a capital directive.
As used herein, leverage ratio means the ratio of core capital to adjusted
total assets, Tier 1 risk-based capital ratio means the ratio of core capital to
risk-weighted assets, and total risk-based capital ratio means the ratio of
total capital to risk-weighted assets, in each case as calculated in accordance
with current OTS capital regulations. Under these regulations, the Bank is
deemed to be "well capitalized" as of December 31, 1999. Since that date, there
are no conditions or events that management believes would have changed its
"well-capitalized" designation.
F-18
United PanAm Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
The Bank had the following regulatory capital calculated in accordance with
FDICIA's capital standards for a "well capitalized" institution:
December 31, 1999 December 31, 1998
--------------------------------------- ----------------------------------------
(Dollars in thousands) Actual Required Excess Actual Required Excess
---------- ------------ ----------- ----------- ------------ -----------
Leverage $46,234 $21,808 $24,426 $29,251 $21,070 $ 8,181
Leverage ratio 10.60% 5.00% 5.60% 6.94% 5.00% 1.94%
Tier 1 risk-based $46,234 $26,170 $20,064 $29,251 $18,469 $10,782
Tier 1 risk-based ratio 10.60% 6.00% 4.60% 9.50% 6.00% 3.50%
Total risk-based $28,581 $27,908 $ 673 $33,154 $30,781 $ 2,373
Total risk-based ratio 10.24% 10.00% 0.24% 10.77% 10.00% 0.77%
At periodic intervals, both the OTS and Federal Deposit Insurance
Corporation ("FDIC") routinely examine the Bank's financial statements as part
of their legally prescribed oversight of the savings and loan industry. Based
on these examinations, the regulators can direct that the Bank's financial
statements be adjusted in accordance with their findings.
14. COMMITMENTS AND CONTINGENCIES
Certain branch and office locations are leased by the Company under
operating leases expiring at various dates through the year 2006. Rent expense
was $1.1 million, $782,000 and $653,000 for the years ended December 31, 1999,
1998 and 1997, respectively.
Future minimum rental payments as of December 31, 1999 under existing
leases are set forth as follows:
(Dollars in thousands)
Years ending December 31:
2000 $2,916
2001 2,762
2002 2,235
2003 926
2004 185
Thereafter 160
------
Total $9,184
======
Under the RTC Minority Preference Resolution Program, the Company's
Mission Street branch was subject to a rent-free lease until April 30, 1999.
The Company executed a new five-year lease with the landlord at current market
rates, commencing May 1, 1999.
In order to meet the borrowing needs of its customers, the Company is a
party to certain commitments to extend credit which have specified interest
rates and fixed expiration dates. These commitments, substantially all of which
are to fund mortgages on one-to-four family residences, are considered off-
balance sheet financial instruments. These instruments involve elements of
credit risk and interest rate risk in excess of amounts recognized in the
accompanying statements of financial condition. The Company's exposure to credit
loss from these commitments to extend credit, in the event of borrower
nonperformance, is represented by the contractual amount of these commitments.
Certain of the commitments are expected to expire without being drawn upon and,
accordingly, the total commitment amounts do not necessarily represent future
cash requirements.
F-19
United PanAm Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
At December 31, 1999 and 1998, the Company had outstanding commitments
to originate loans of approximately $26.8 million and $23.3 million,
respectively. Commitments outstanding included $21.2 million and $17.8 million
of adjustable rate loans at December 31, 1999 and 1998 and $5.6 million and $5.5
million of fixed rate loans at December 31, 1999 and 1998, respectively. The
fixed rate loan commitments have interest rates ranging from 7.88% to 15.13% at
December 31, 1999 and 8.38% to 14.38% at December 31, 1998.
The Company has entered into loan sale agreements with investors in the
normal course of business which include standard representations and warranties
customary to the mortgage banking industry. Violations of these representations
and warranties may require the Company to repurchase loans previously sold or to
reimburse investors for losses incurred. In addition, the Company may commit to
repurchase or substitute a loan if a payment default occurs within the first
month following the date the loan is funded, unless other arrangements are made
between the Company and the purchaser. In the opinion of management, the
potential exposure related to the Company's loan sale agreements will not have a
material effect on the financial position and operating results of the Company.
The Company is involved in various claims or legal actions arising in the
normal course of business. In the opinion of management, the ultimate
disposition of such matters will not have a material effect on the financial
position and operating results of the Company.
15. NOTES PAYABLE, RESTRICTION ON DIVIDEND PAYMENTS AND PLEDGE OF BANK
STOCK.
In connection with the April 29, 1994 purchase of assets and assumption of
certain liabilities from the RTC, the Bank and the Company, entered into a five
year Interim Capital Assistance Loan Agreement ("ICA") with the RTC (the Bank is
not a direct or indirect obligor, or a guarantor of the loan) for $6.9 million
at a fixed interest rate of 3.69% for two years and 0.125% above the 13-week
Treasury Bill auction rate for the remaining three years, adjusted annually. On
September 9, 1994, the Bank acquired deposits from the RTC totaling
approximately $65 million located in Panorama City in Southern California. This
branch is located in a "Predominately Minority Neighborhood," as defined by the
RTC. In connection with this acquisition, the RTC provided PAFI, $4.0 million
in the form of an additional ICA loan for a term of five years with interest at
0.125% above the 13 week Treasury Bill auction rate, adjusted quarterly. The
entire amount was invested in the Bank and qualifies as regulatory capital for
the Bank. In addition, the OTS required $750,000 of additional capital from the
shareholders to be invested in the Bank in connection with the Panorama City
branch acquisition.
These Agreements, as amended, provide among other things, that the Bank may
not declare or pay any dividends until the loans are repaid by the Company.
Dividends may be paid to the Company if the funds are used exclusively for
payment of principal or interest on the obligation of PAFI to the RTC or the
Bank has provided the FDIC with 30 days prior written notice of its intent to
declare or pay such dividends and the Bank is in compliance with certain
conditions as required under the Agreements. The stock of the Bank was pledged
by PAFI to the RTC as collateral for the loans.
16. STOCK OPTIONS
In 1994, the Company adopted a stock option plan and, in November 1997,
amended and restated such plan as the United PanAm Financial Corp. 1997 Employee
Stock Incentive Plan (the "Plan"). The maximum number of shares that may be
issued to officers, directors, employees or consultants under the Plan is
2,550,000. Options issued pursuant to the Plan have been granted at an exercise
price of not less than fair market value on the date of grant. Options
generally vest over a three to five year period and have a maximum term of ten
years.
F-20
United PanAm Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31,
-------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
1999 Price 1998 Price 1997 Price
---------- ---------- ---------- ---------- ----------- ----------
Balance at beginning of year 1,820,000 $ 5.74 1,580,000 $ 4.55 1,143,750 $ 0.80
Granted 445,000 3.66 350,000 9.82 717,500 9.06
Canceled or expired (148,000) (9.68) (10,000) (10.50) -- --
Exercised (333,750) (0.80) (100,000) (0.80) (281,250) (0.80)
---------- ---------- -----------
Balance at end of year 1,783,250 $ 5.82 1,820,000 $ 5.74 1,580,000 $ 4.55
========== ========== ===========
Weighted average fair value per share
of options granted during the year $ 1.21 $ 5.62 $ 2.61
========== ========== ===========
Certain shares exercised in 1997 and 1999 were executed by a shareholder
and officer of the Company. In connection with this transaction, the Company
loaned this individual $300,000 to finance the exercise of these options which
loan is secured by the shares purchased. The loan bears interest at an annual
rate of 5.81% payable on the earlier of December 31, 2001 or the termination of
this individual's employment with the Company.
During 1998, 147,500 shares of restricted stock were granted to certain key
employees. The weighted average market value per share of the restricted stock
at the grant date was $5.00. During 1999, 35,600 shares of restricted stock
vested and 23,000 shares were canceled.
The Company applies APB Opinion No. 25 in accounting for the Plan.
Compensation expense related to this stock compensation plan was $216,000 and
$60,000 in 1999 and 1998, respectively. During 1997, no compensation expense
was recorded for the Plan. Had the Company determined compensation cost based
on the fair value at the grant date for its stock options under Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," the Company's net income (loss) and earnings (loss) per share
would have been reduced to the pro-forma amounts indicated below for the years
ended December 31:
Years Ended December 31,
--------------------------------------
1999 1998 1997
---------- ---------- ---------
Net income (loss) to common shareholders:
As reported $(4,352) $6,763 $6,248
Pro-forma $(4,956) $6,334 $6,031
Earnings (loss) per share:
As reported - basic $ (0.26) $ 0.44 $ 0.58
As reported - diluted $ (0.25) $ 0.42 $ 0.53
Pro-forma - basic $ (0.29) $ 0.41 $ 0.56
Pro-forma - diluted $ (0.29) $ 0.39 $ 0.51
The fair value of options and restricted stock granted under the Plan was
estimated on the date of grant using the Black-Sholes option-pricing model with
the following weighted average assumptions used: no dividend yield, 72% and 61%
volatility in 1999 and 1998, respectively, and zero volatility in 1997, risk-
free interest rate of 7% and expected lives of 5 years.
F-21
United PanAm Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
At December 31, 1999, options exercisable to purchase 991,831 shares of the
Company's common stock under the Plan were outstanding as follows:
Options Outstanding Options Exercisable
------------------------------------------ -------------------------
Weighted Weighted
Average Average
Expiration Exercise Exercise
Range of Exercise Prices Shares Date Price Shares Price
- ------------------------------------- ------------ ------------ ----------- ---------- -----------
$0.80 - $1.33 541,250 2006 $ 0.91 541,250 $ 0.91
$10.50 485,000 2007 10.50 361,250 10.50
$4.75-$12.10 332,000 2008 9.78 89,331 9.84
$2.50-$5.00 425,000 2009 3.62 -- --
------------ ----------- ---------- -----------
1,783,250 $ 5.82 991,831 $ 5.21
============ =========== ========== ===========
The Company's auto finance subsidiary has granted options to certain of its
key employees to purchase up to 15.0% of that subsidiary. These options vest
over a five year period and are exercisable at a predetermined price which
increases each year.
17. 401(k) PLAN
The Company maintains the Pan American Bank, FSB 401(k) Profit Sharing Plan
(the "401(k) Plan") for the benefit of all eligible employees of the Company.
Under the 401(k) Plan, employees may contribute up to 15% of their pre-tax
salary or the annual dollar limit of $10,000 for 1999. The Company will match,
at its discretion, 50% of the amount contributed by the employee up to a maximum
of 6% of the employee's salary. The contributions made by the Company in 1999
and 1998 were $419,000 and $402,000, respectively. There were no contributions
made by the Company in 1997.
18. OTHER EXPENSES
Other expenses are comprised of the following:
Years Ended December 31,
-----------------------------------------------------
(Dollars in thousands) 1999 1998 1997
----------- ---------- ----------
Professional fees $ 792 $ 720 $ 508
Data processing 682 524 494
Amortization of intangible assets 600 239 127
Loan servicing expense 559 345 349
Travel and entertainment 478 367 161
Forms, supplies, postage and delivery 477 432 397
Insurance premiums 461 590 240
Telephone 417 293 206
Loan expenses 295 216 417
Marketing 256 101 94
Other 893 869 647
----------- ---------- ----------
Total $5,910 $4,696 $3,640
=========== ========== ==========
F-22
United PanAm Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
19. EARNINGS FROM CONTINUING OPERATIONS PER SHARE
The Company calculates earnings per share as shown below:
Years Ended December 31,
--------------------------------------------
(In thousands, except per share amounts) 1999 1998 1997
------------ ----------- -----------
Earnings per share from continuing operations - basic:
Income from continuing operations $ 2,761 $ 2,274 $ 641
============ =========== ===========
Average common shares outstanding 16,854 15,263 10,739
============ =========== ===========
Per share $ 0.16 $ 0.15 $ 0.06
============ =========== ===========
Earnings per share from continuing operations - diluted:
Income from continuing operations $ 2,761 $ 2,274 $ 641
============ =========== ===========
Average common shares outstanding 16,854 15,263 10,739
Add: Stock options 399 880 1,136
------------ ----------- -----------
Average common shares outstanding - diluted 17,253 16,143 11,875
============ =========== ===========
Per share $ 0.16 $ 0.14 $ 0.05
============ =========== ===========
Options to purchase 1.1 million shares of common stock at a weighted
average price of $8.43 per share were outstanding at December 31, 1999, but were
not included in the computation of diluted earnings per share because the
exercise price of the options was greater than the average market price of the
common stock during the period.
20. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of the Company's financial instruments are as
follows at the dates indicated:
December 31, December 31,
1999 1998
---------------------------- ---------------------------
(Dollars in thousands) Carrying Fair Value Carrying Fair Value
Value Estimate Value Estimate
---------- ----------- --------- -----------
Assets:
Cash and cash equivalents $ 90,357 $ 90,357 $ 52,211 $ 52,211
Securities 9,918 9,918 -- --
Residual interests in securitizations 21,227 21,227 -- --
Loans, net 158,283 158,283 133,718 133,718
Loans held for sale 136,460 138,275 214,406 220,431
Federal Home Loan Bank Stock 2,505 2,505 2,120 2,120
Liabilities:
Deposits 291,944 291,258 321,668 322,724
Notes payable -- -- 10,930 10,930
Warehouse lines of credit 54,415 54,415 -- --
The following summary presents a description of the methodologies and
assumptions used to estimate the fair value of the Company's financial
instruments. Because no ready market exists for a significant portion of the
Company's financial instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and, therefore, cannot be determined with precision. The
use of different assumptions and/or estimation methodologies may have a material
effect on the estimated fair value amounts.
F-23
United PanAm Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Cash and cash equivalents: Cash and cash equivalents are valued at their
carrying amounts included in the consolidated statements of financial condition,
which are reasonable estimates of fair value due to the relatively short period
to maturity of the instruments.
Securities: Securities are valued at quoted market prices where available.
If quoted market prices are not available, fair values are based on quoted
market prices of comparable instruments.
Residual interests in securitizations: The fair value of residual
interests in securitizations is determined by discounting the estimated cash
flows received over the life of the asset using prepayment, default, and
interest rate assumptions that market participants would use for similar
financial instruments also subject to prepayment, credit and interest rate risk.
Loans, net: For real estate loans, fair values were estimated using quoted
prices for equivalent yielding loans as adjusted for interest rates, margin
differences and other factors. For non-mortgage loans, fair values, were
estimated at carrying amounts due to their short-term maturity and portfolio
interest rates that are equivalent to present market interest rates.
Loans held for sale: The fair value of loans held for sale is based on
current pricing of whole loan transactions that a purchaser unrelated to the
seller would demand for a similar loan.
Federal Home Loan Bank stock: Since no secondary market exists for FHLB
stock and the stock is bought and sold at par by the FHLB, fair value of these
financial instruments approximates the carrying value.
Deposits: The fair values of demand deposits, passbook accounts, money
market accounts, and other deposits immediately withdrawable, by definition,
approximate carrying values for the respective financial instruments. For fixed
maturity deposits, the fair value was estimated by discounting expected cash
flows by the current offering rates of deposits with similar terms and
maturities.
Notes payable: The fair value of notes payable is considered to
approximate carrying value as their note rates are consistent with present
market rates.
Warehouse lines of credit: The fair value of the warehouse lines of credit
is considered to approximate carrying value as their note rates are consistent
with present market rates.
Financial instruments with off-balance sheet risk: No fair value is
ascribed to the Company's outstanding commitments to fund loans since commitment
fees are not significant and predominantly all such commitments are variable-
rate loan commitments.
21. OPERATING SEGMENTS
The Company has three reportable segments: auto finance, insurance premium
finance and banking. The auto finance segment acquires, holds for investment and
services subprime retail automobile installment sales contracts generated by
franchised and independent dealers of used automobiles. The insurance premium
finance segment, through a joint venture, underwrites and finances automobile
and commercial insurance premiums in California. The banking segment operates a
five-branch federal savings bank and is the principal funding source for the
Company's auto and insurance premium finance segments.
The accounting policies of the segments are the same as those described in
the Company's summary of significant accounting policies except for funds
provided by the banking segment to the other operating segments which are
accounted for at a predetermined transfer price (including certain overhead
costs).
The Company's reportable segments are strategic business units that offer
different products and services. They are managed and reported upon separately
within the Company.
F-24
United PanAm Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
At or For Year Ended December 31, 1999
----------------------------------------------------------
Insurance
Auto Premium
Finance Finance Banking Total
---------- ----------- ---------- ----------
Net interest income $ 14,780 $ 2,454 $ 10,114 $ 27,348
Provision for loan losses -- 432 -- 432
Non-interest income 190 439 1,625 2,254
Non-interest expense 9,961 957 7,725 18,643
---------- ----------- ---------- ----------
Segment profit (pre-tax) $ 5,009 $ 1,504 $ 4,014 $ 10,527
========== =========== ========== ==========
Total assets $100,955 $31,598 $160,767 $293,320
========== =========== ========== ==========
At or For Year Ended December 31, 1998
----------------------------------------------------------
Insurance
Auto Premium
Finance Finance Banking Total
---------- ----------- ---------- ----------
Net interest income $ 8,498 $ 3,035 $ 9,557 $ 21,090
Provision for loan losses -- 293 -- 293
Non-interest income 104 410 3,198 3,712
Non-interest expense 6,276 386 7,739 14,401
---------- ----------- ---------- ----------
Segment profit (loss) (pre-tax) $ 2,326 $ 2,766 $ 5,016 $ 10,108
========== =========== ========== ==========
Total assets $ 63,490 $46,582 $104,555 $214,627
========== =========== ========== ==========
At or For Year Ended December 31, 19987
----------------------------------------------------------
Insurance
Auto Premium
Finance Finance Banking Total
---------- ----------- ---------- ----------
Net interest income $ 3,370 $ 2,978 $ 5,938 $ 12,286
Provision for loan losses 350 (85) 242 507
Non-interest income 27 190 1,085 1,302
Non-interest expense 3,487 275 6,342 10,104
---------- ----------- ---------- ----------
Segment profit (loss) (pre-tax) $ (440) $ 2,978 $ 439 $ 2,977
========== =========== ========== ==========
Total assets $ 29,259 $39,726 $115,594 $184,579
========== =========== ========== ==========
For the reportable segment information presented, there are no reconciling
items between the Company's consolidated assets and segment assets.
Substantially all expenses are recorded directly to each industry segment.
Segment interest income, non-interest income and segment profit (loss) differ
from the consolidated results due to allocations of income and expense to
discontinued operations as follows:
Years Ended December 31,
--------------------------------------------
1999 1998 1997
----------- ------------ -----------
Net interest income for reportable segments $ 27,348 $ 21,090 $ 12,286
Net interest income allocated to discontinued operations (4,578) (4,389) (1,270)
----------- ------------ -----------
Consolidated net interest income $ 22,770 $ 16,701 $ 11,016
=========== ============ ===========
Non-interest income for reportable segments $ 2,254 $ 3,712 $ 1,302
Non-interest income allocated to discontinued operations (1,280) (1,800) (600)
----------- ------------ -----------
Consolidated non-interest income $ 974 $ 1,912 $ 702
=========== ============ ===========
Segment profit for reportable segments $ 10,527 $ 10,108 $ 2,977
Loss allocated to discontinued operations (5,858) (6,189) (1,870)
----------- ------------ -----------
Consolidated income from continuing operations before income taxes $ 4,669 $ 3,919 $ 1,107
=========== ============ ===========
Total assets for reportable segments $293,320 $214,627 $184,579
Total assets allocated to discontinued operations 144,970 210,932 126,175
----------- ------------ -----------
Consolidated total assets $438,290 $425,559 $310,754
=========== ============ ===========
F-25
United PanAm Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
22. HOLDING COMPANY FINANCIAL INFORMATION
Following are the financial statements of United PanAm Financial Corp.
(holding company only):
(Dollars in thousands) Years Ended
December 31,
-----------------------------
1999 1998
------------- ------------
Statements of Financial Condition
Cash $ 109 $ 178
Note receivable from affiliate 26,306 58,138
Other assets 393 1,965
Investment in subsidiaries 49,090 23,050
------------- ------------
Total assets $75,898 $83,331
============= ============
Other liabilities 545 418
------------- ------------
Total liabilities 545 418
Shareholders' equity 75,353 82,913
------------- ------------
Total liabilities and shareholders' equity $75,898 $83,331
============= ============
Years Ended
December 31,
--------------------------------------------
1999 1998 1997
------------- ------------ -------------
Statements of Operations
Equity in undistributed income (loss) of subsidiaries $ (5,060) $ 6,155 $ 6,294
Interest income 2,364 1,779 11
------------- ------------ -------------
Total income (2,696) 7,934 6,305
------------- ------------ -------------
Interest expense -- 47 74
Other expense 1,137 679 25
------------- ------------ -------------
Total expense 1,137 726 99
------------- ------------ -------------
Income before income taxes (3,833) 7,208 6,206
Income taxes (benefit) 519 445 (42)
------------- ------------ -------------
Net income (loss) $ (4,352) $ 6,763 $ 6,248
============= ============ =============
Statements of Cash Flows
Cash flows from operating activities:
Net income (loss) $ (4,352) $ 6,763 $ 6,248
Equity in earnings of subsidiaries 5,060 (6,155) (6,294)
(Increase) decrease in accrued interest receivable 1,492 (1,767) --
(Increase) decrease in other assets 80 100 (268)
Increase in other liabilities 127 144 274
Other, net 219 140 --
------------- ------------ -------------
Net cash provided by (used in) operating activities 2,626 (775) (40)
------------- ------------ -------------
Cash flows from investing activities:
Purchase of treasury stock (3,696) -- --
Repayment of notes receivable 31,832 -- --
Other, net 349 -- --
------------- ------------ -------------
Net cash provided by investing activities 28,485 -- --
------------- ------------ -------------
Cash flows from financing activities:
Issuance of common stock -- 63,001 --
Issuance of note to subsidiary -- (58,138) --
Capital contributed to subsidiary (31,180) (2,200) (1,702)
Increase (decrease) in notes payable to shareholders -- (2,000) 2,000
------------- ------------ -------------
Net cash provided by (used in) financing activities (31,180) 663 298
------------- ------------ -------------
Net increase (decrease) in cash and cash equivalents (69) (112) 258
Cash and cash equivalents at beginning of period 178 290 32
------------- ------------ -------------
Cash and cash equivalents at end of period $ 109 $ 178 $ 290
============= ============ =============
F-26
United PanAm Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
23. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(Dollars in thousands, except per share data) Three months ended
--------------------------------------------------------
March 31, June 30, September 30, December 31,
1999: 1999 1999 1999 1999
----------- --------- -------------- -------------
Net interest income $5,246 $5,449 $5,902 $6,173
Provision for loan losses 72 199 98 63
Non-interest income 280 254 205 235
Non-interest expense 4,426 4,570 4,910 4,737
----------- --------- -------------- -------------
Income from continuing operations before income taxes 1,028 934 1,099 1,608
Income taxes 423 384 452 649
----------- --------- -------------- -------------
Income from continuing operations $ 605 $ 550 $ 647 $ 959
=========== ========= ============== =============
Earnings from continuing operations per share - basic $ 0.03 $ 0.03 $ 0.04 $ 0.06
=========== ========= ============== =============
Earnings from continuing operations share - diluted $ 0.03 $ 0.03 $ 0.04 $ 0.06
=========== ========= ============== =============
Three months ended
--------------------------------------------------------
March 31, June 30, September 30, December 31,
1998: 1998 1998 1998 1998
----------- --------- -------------- -------------
Net interest income $3,562 $4,154 $4,895 $4,090
Provision for loan losses 38 35 61 159
Non-interest income 201 239 239 1,233
Non-interest expense 2,871 4,191 3,805 3,534
----------- --------- -------------- -------------
Income from continuing operations before income taxes 854 167 1,268 1,630
Income taxes 360 73 528 684
----------- --------- -------------- -------------
Income from continuing operations $ 494 $ 94 $ 740 $ 946
=========== ========= ============== =============
Earnings from continuing operations - basic $ 0.05 $ 0.01 $ 0.04 $ 0.05
=========== ========= ============== =============
Earnings from continuing operations - diluted $ 0.04 $ 0.01 $ 0.04 $ 0.05
=========== ========= ============== =============
F-27