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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 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, 2000
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 94-3211687
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3990 Westerly Place
Newport Beach, California 92660
(Address of principal executive offices) (Zip Code)
(949) 224-1917
(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 $4,711,000, based upon the closing sales price of
the Common Stock as reported on the Nasdaq National Market on March 15, 2001.
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
15, 2001 was 16,149,650 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 2001 Annual Meeting of Shareholders to be held June 19, 2001 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, 2000.
UNITED PANAM FINANCIAL CORP.
2000 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 11
Discontinued Operations - Mortgage Finance 11
Industry Segments 12
Competition 13
Economic Conditions, Government Policies, Legislation and Regulation 13
Employees 14
Regulation 14
Taxation 27
Subsidiaries 28
Factors That May Affect Future Results of Operations 28
Item 2. Properties 31
Item 3. Legal Proceedings 32
Item 4. Submission of Matters to a Vote of Security Holders 32
PART II
Item 5. Market For Registrant's Common Equity and Related Shareholder Matters 33
Item 6. Selected Financial Data 34
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 36
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 53
Item 8. Financial Statements and Supplementary Data 53
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures 53
PART III
Item 10. Directors and Executive Officers of the Registrant 54
Item 11. Executive Compensation 54
Item 12. Security Ownership of Certain Beneficial Owners and Management 54
Item 13. Certain Relationships and Related Transactions 54
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 55
SIGNATURES 61
PART I
Certain statements in this Annual Report on Form 10-K, including statements
regarding United PanAm Financial Corp.'s ("UPFC") 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: our limited operating history; loans we made to
credit-impaired borrowers; our need for additional sources of financing;
concentration of our business in California; estimates involving our
discontinued operations; valuation of our residual interests in securitizations;
reliance on operational systems and controls and key employees; competitive
pressure we face in the banking industry; changes in the interest rate
environment; rapid growth of our businesses; general economic conditions; impact
of inflation and changing prices; and other risks, some of which may be
identified from time to time in our 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
UPFC was incorporated in California on April 19, 1998 for the purpose of
reincorporating in California through the merger of United PanAm Financial
Corp., a Delaware corporation, into UPFC. Unless the context indicates
otherwise, all references to UPFC include the previous Delaware Corporation.
UPFC 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. UPFC, PAFI and the
Bank are considered to be minority owned. PAFI is a wholly-owned subsidiary of
UPFC, and the Bank is a wholly-owned subsidiary of PAFI. WorldCash
Technologies, Inc. ("WorldCash") was incorporated in 1999 as a wholly-owned
subsidiary of UPFC.
UPFC is a specialty finance company engaged primarily in originating and
acquiring for investment retail automobile installment sales contracts and
insurance premium contracts. We market to customers who generally cannot obtain
financing from traditional lenders. These customers usually pay higher loan
fees and interest rates than those charged by traditional lenders to gain access
to consumer financing. We fund our operations principally through retail and
wholesale deposits, Federal Home Loan Bank ("FHLB") advances, and whole loan
sales. All of our revenues are attributed to customers located in the United
States.
We 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. We have used the Bank as a base for expansion into our current
specialty finance businesses. In 1995, we commenced our insurance premium
finance business through a joint venture with BPN Corporation ("BPN") and in
1996 commenced our automobile finance business.
In December 1999, we closed our subprime mortgage finance operations to
focus on our auto lending and insurance premium finance businesses. The
subprime mortgage 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 is treated as discontinued operations for financial statement
reporting purposes. For more information, see "Item 1. Business - Discontinued
Operations - Mortgage Finance."
1
Automobile Finance
Business Overview
UPFC entered the nonprime automobile finance business in February 1996 by
establishing United Auto Credit Corporation ("UACC") as a subsidiary of the
Bank. UACC purchases auto contracts primarily from dealers in used automobiles,
approximately 75% from independent dealers and 25% from franchisees of
automobile manufacturers. UACC's borrowers are classified as nonprime because
they typically have limited credit histories or credit histories that preclude
them from obtaining loans through traditional sources. UACC's business strategy
includes controlled growth through a national retail branch network. At
December 31, 2000, UACC had a total of 28 branches, of which four were opened in
1996, five in 1997, five in 1998, six in 1999 and eight in 2000. UACC maintains
nine branch offices located in California, five branch offices located in
Florida, two branch offices located in each of North Carolina, Texas and
Washington, and one each in Arizona, Colorado, Georgia, Maryland, Missouri,
Oregon, Utah and Virginia. At December 31, 2000, UACC's portfolio contained
24,027 auto contracts in the aggregate gross amount of $176.3 million, including
unearned finance charges of $20.7 million.
Nonprime 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 nonprime 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 nonprime 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 nonprime market or
have done so only through programs that were not consistently available.
Independent companies specializing in nonprime 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.
2
Operating Summary
The following table presents a summary of UACC's key operating and
statistical results for the years ended December 31, 2000 and 1999.
At or For the
Years Ended
December 31,
-------------------------------------------------------
2000 1999
-------------------- ----------------------
(Dollars in thousands, except portfolio and other data)
Operating Data
Gross contracts purchased $174,645 $124,896
Gross contracts outstanding 176,255 128,093
Unearned finance charges 20,737 21,181
Net contracts outstanding 155,518 106,912
Average purchase discount 8.08% 8.79%
APR to customers 21.72% 21.47%
Allowance for loan losses $ 12,614 $ 7,915
Loan Quality Data
Allowance for loan losses (% of net contracts) 8.11% 7.40%
Delinquencies (% of net contracts)
31-60 days 0.31% 0.39%
61-90 days 0.08% 0.16%
90+ days 0.12% 0.08%
Net charge-offs (% of average net contracts) 4.17% 4.05%
Repossessions (net) (% of net contracts) 0.62% 0.47%
Portfolio Data
Used vehicles 99.0% 99.0%
Average vehicle age at time of contract (years) 5.7 6.0
Average original contract term (months) 44.2 42.6
Average gross amount financed to WSBB (1) 117% 119%
Average net amount financed to WSBB (2) 107% 108%
Average net amount financed per contract $ 8,329 $ 8,019
Average down payment 19% 19%
Average monthly payment $ 277 $ 272
Other Data
Number of branches 28 20
___________________
(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 four to seven years and (ii) an average original contract term of
42 to 46 months.
The target profile of a UACC borrower includes average time on the job of
four to five years, average time at current residence of three to four years, an
average ratio of total debt to total income of 33% to 35% and an average 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, 2000, we
allocated 9% of the net contract amount to the allowance for loan losses.
Management periodically reviews the percentage of net contracts allocated to the
allowance for loan losses.
3
Sales and Marketing
UACC markets its financing program to both independent 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 the basis of a salary with a bonus that recognizes the achievement
of delinquency, charge-off, volume and return on average assets targets
established for the branch, as well as satisfactory audit results. 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. 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 overall branch performance as well as individual dealer
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,
2000 1999
-------------- ------------
(Dollars in thousands)
Gross amount of contracts $174,645 $124,896
Average original term of contracts (months) 44.2 42.6
For the year ended December 31, 2000, 41% of UACC's auto contracts were
written by its California branches, compared to 68% at December 31, 1999 and 80%
at December 31, 1998. 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, 2000, no dealer accounted for more
than 1.7% of UACC's portfolio and the ten dealers from which UACC purchased the
most contracts accounted for approximately 9.6% 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 branch manager's approval limit must be approved by one of UACC's
Regional Managers, the Vice President of Operations or the 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"
4
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 branch
management, 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 charge-off accounts
delinquent in excess of 120 days or place them on nonaccrual. 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. When a loan is placed on nonaccrual, all previously accrued
but unpaid interest on such accounts is reversed. Accounts are not returned to
accrual status until they are brought current.
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, 2000, we 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 percentage of net contracts allocated to the allowance for loan
losses.
5
The following table reflects UACC's cumulative losses (i.e., net charge-
offs as a percent of original net contract balances) for contract pools (defined
as the total dollar amount of net contracts purchased in a six-month period)
purchased since UACC's inception through March 2000. Contract pools subsequent
to March 31, 2000 were not included in this table because the loan pools were
not seasoned enough to provide a meaningful comparison with prior periods.
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 Mar. 2000
---------- -------- ---------- --------- ---------- --------- ---------- ---------
1 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
4 0.0% 0.0% 0.1% 0.0% 0.0% 0.0% 0.1% 0.1%
7 0.3% 0.4% 0.5% 0.5% 0.5% 0.3% 0.5% 0.4%
10 1.7% 1.4% 1.7% 1.6% 1.5% 0.9% 1.4% 1.3%
13 4.4% 3.1% 3.3% 2.9% 2.7% 1.8% 2.3% 2.4%
16 6.3% 4.4% 4.5% 4.0% 3.6% 2.9% 3.4%
19 7.7% 5.4% 5.3% 4.7% 4.4% 3.8% 4.1%
22 8.7% 6.0% 6.0% 5.4% 5.0% 4.5%
25 9.1% 6.6% 6.8% 5.9% 5.6% 5.2%
28 9.4% 7.5% 7.2% 6.4% 5.9%
31 9.6% 7.9% 7.6% 6.7% 6.4%
34 9.9% 8.2% 7.9% 6.9%
37 10.0% 8.3% 8.0% 7.0%
40 10.1% 8.6% 8.1%
43 10.1% 8.8% 8.3%
46 10.0% 8.8%
49 10.0% 8.8%
52 10.1%
55 10.1%
57 10.0%
Original Pool ($000) $4,896 $9,297 $15,575 $22,488 $30,271 $36,773 $42,115 $47,979
======= ======= ======== ======== ======== ======== ======== ========
Remaining Pool ($000) $ 48 $ 202 $ 739 $ 2,433 $ 5,948 $11,833 $21,267 $33,021
======= ======= ======== ======== ======== ======== ======== ========
Remaining Pool (%) 1% 2% 5% 11% 20% 32% 51% 69%
======= ======= ======== ======== ======== ======== ======== ========
Insurance Premium Finance
Business Overview
In May 1995, we entered into a joint venture with BPN relating to an
insurance premium finance business 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. BPN markets this financing primarily to independent insurance
agents 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 age, 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
6
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 that 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, 2000, IPF had approximately 18% 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 4.8% of total loans outstanding. At December 31, 2000,
approximately 80% 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, 2000, the aggregate gross amount of insurance premium
finance contracts was $34.2 million with 56,120 contracts outstanding.
Commercial loan balances represented 24.4% of these loan balances at December
31, 2000. During 2000, IPF originated 100,244 insurance premium finance
contracts of which 10,717 or 10.7% were commercial loan contracts
Relationship with BPN
BPN is headquartered in Chino, California, and markets our insurance
premium finance program under the trade name "ClassicPlan." At December 31,
2000, BPN had 41 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.
7
UPFC has entered into an option agreement with BPN and its shareholders
whereby we 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 and to exercise this option, the Bank must pay a
$750,000 noncompete payment to certain shareholders and key employees of BPN
plus 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 of $750,000. 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.
In connection with the purchase of the rights to solicit new and renewal
business from a competitor, the Bank made loans to two shareholders of BPN in
the aggregate amount of $1.2 million. The loans, which have outstanding
balances of $364,000 in the aggregate at December 31, 2000, 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. Although reliable data concerning the size and
composition of the personal lines premium finance market is not available, we
believe that the industry is highly fragmented with no independent insurance
premium finance company accounting for a significant share of the market. UPFC
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 UPFC.
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 those offered by the
insurance premium finance companies and, therefore, many CAARP policies are
financed by others. At December 31, 2000, approximately 5.5% of the insurance
policies financed by IPF were issued under CAARP.
8
Operating Summary
The following table presents a summary of IPF's key operating and
statistical results for the years ended December 31, 2000 and 1999.
At or For the
Years Ended
December 31,
------------------------------------------------
2000 1999
-------------------- --------------------
(Dollars in thousands, except portfolio averages)
Operating Data
Loan originations $100,085 $107,212
Loans outstanding at period end 34,185 30,334
Average gross yield (1) 24.05% 22.32%
Average net yield (2) 15.36% 12.73%
Allowance for loan losses $ 346 $ 389
Loan Quality Data
Allowance for loan losses (% of loans outstanding) 1.01% 1.28%
Net charge-offs (% of average loans outstanding) (3) 0.61% 1.00%
Delinquencies (% of loans outstanding) (4) 1.44% 1.38%
Portfolio Data
Average monthly loan originations (number of loans) 8,353 9,018
Average loan size at origination $ 998 $ 991
Commercial insurance policies (% of loans outstanding) 24.40% 24.50%
CAARP policies (% of loans outstanding) 5.46% 13.79%
Cancellation rate (% of premiums financed) 37.6% 39.0%
__________
(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 we
believe 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. 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.
9
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, 2000, IPF canceled for nonpayment contracts representing
approximately 37.6% 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
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 defaulted
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 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 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 insurance company financial
statements or the ratings assigned to the insurance companies by A.M. Best, an
insurance company rating agency. 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.
10
Pan American Bank, FSB
Business Overview
The Bank is a federally-chartered stock savings bank, which was formed in
1994. It is the largest Hispanic-controlled savings association in California,
with five retail branch offices in the state and $348.2 million in deposits at
December 31, 2000. The Bank has been the principal funding source to date for
our insurance premium and automobile finance businesses primarily through its
retail and wholesale deposits and FHLB advances. In addition, the Bank holds a
portfolio of primarily traditional residential mortgage loans acquired from the
RTC in 1994 and 1995. These loans aggregated $16.8 million (before unearned
discounts and premiums) at December 31, 2000. The Bank has focused its branch
marketing efforts on building a middle-income customer base, including some
efforts targeted at local Hispanic communities. In addition to operating its
retail banking business through its branches, the Bank provides, subject to
appropriate cost sharing arrangements, compliance, risk management, executive,
financial, facilities and human resources management to other business units of
UPFC. The business of the Bank is subject to substantial government supervision
and regulatory requirement. See "Regulation - Regulation of the Bank."
On January 5, 2001, the Bank closed its San Mateo retail deposit branch and
transferred all of the outstanding deposits to its San Carlos deposit facility.
In addition, most of the financial and corporate functions that the Bank
provides to the other business units of UPFC are being relocated to Orange
County, California during the first quarter of 2001. The Bank's San Mateo
branch and corporate headquarters lease terminated on December 31, 2000. Rather
than renewing this lease, we elected to relocate the San Mateo branch deposits
and corporate offices to other facilities mainly due to escalating lease rates
in the San Francisco peninsula region.
In September 2000, the Bank filed an application with the California
Department of Financial Institutions (the "DFI") to convert from its present
status as a federally-chartered savings institution to a California state-
chartered commercial bank (a "Charter Conversion.") The Bank is seeking a
commercial bank charter because of certain lending restrictions in the federal
savings bank charter. Federal savings banks must meet the test of a "qualified
thrift lender" (see "Regulation - Regulation of UPFC") as well as certain
lending limits under the Home Owners Loan Act. While the Bank currently is in
compliance with these federal savings bank lending limitations and the "QTL"
test, now that the Bank has discontinued its subprime mortgage business, it will
be more difficult in the future to maintain its QTL status. In accordance with
the application review process, the DFI has finished an on-site examination of
the Bank and is presently completing its review of the Bank's conversion
application. A Charter Conversion, if and when approved and consummated, would
subject UPFC to regulation as a bank holding company rather than a savings and
loan holding company, and subject the Bank to regulation as a California-
chartered commercial bank rather than a federally-chartered savings association.
(See "Regulation-Charter Conversion")
Discontinued Operations - Mortgage Finance
From 1996 to the end of 1999, one of our primary lending businesses was
mortgage finance. We 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. To compensate for
declining loan sale prices, we 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, we decided to discontinue this division to
concentrate efforts on our other businesses. Accordingly, related operating
activity for UPAM has been reclassified and reported as discontinued operations
in the consolidated financial statements. A loss on disposal for UPAM of $6.2
million, net of tax, was included in the 1999 financial statements and provided
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 2000, UPFC recorded an additional loss of $3.3
11
million, net of tax, related to disposing of UPAM's remaining subprime mortgage
loans. This loss reflected further price deterioration primarily in UPAM's non-
performing mortgage portfolio.
Loan Origination
During 1999, UPAM originated $962.7 million in subprime mortgage loans and
originated another $76.0 million through February 2000 when this operation was
discontinued. UPAM originated loans through its retail and wholesale divisions.
The retail division, which originated loans through the direct solicitation of
borrowers by mail and telemarketing, accounted for $173.4 million, or 18% of
UPAM's total loan production in 1999. The wholesale division, which originated
loans through independent loan brokers, accounted for $789.3 million, or 82%, of
UPAM's total loan production during the same period.
Loan Sales and Securitizations
Whole Loan Sales. In connection with the disposition of UPAM's remaining
subprime loan portfolio, in 2000 UPAM sold, for cash paid in full at closing,
$215.1 million of mortgage loans through whole loan sales at a weighted average
sales price equal to 98.2% of the original principal balance of the loans sold.
Whole loan sales were made on a non-recourse basis pursuant to purchase
agreements containing customary representations and warranties by UPAM. In the
event of a breach of such representations and warranties, UPAM may be required
to repurchase certain loans. During 2000, UPAM repurchased from investors $4.3
million of such loans.
Securitizations. UPAM completed two securitizations in March and October
of 1999 in the aggregate principal amount of approximately $458.0 million. As
part of the 1999 securitizations, we recorded residual interests in
securitizations consisting 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. We
classify our residual interests in securitizations as trading securities and
record them at fair market value with any unrealized gains or losses recorded in
the results of operations. At December 31, 1999, UPFC's residual interests were
recorded at a fair value of $21.2 million. During 2000, we wrote-down the value
of these assets by $11.4 million and at December 31, 2000 reported them at a
fair value of $8.9 million in the consolidated statements of financial
condition.
Valuations of the residual interests in securitizations at December 31,
1999 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 we believe is commensurate with the risks involved. We used
prepayment and default assumptions that market participants would use for
similar instruments subject to prepayment, credit and interest rate risks. The
assumptions we used for valuing the residual interests at December 31, 1999
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%.
UPFC sold all of the residual interests arising from the 1999
securitizations in January 2001. Accordingly, as of December 31, 2000, these
residual interests were valued based on the terms and conditions of the sales
contract and the cash proceeds received at the settlement date in January 2001.
Industry Segments
Information regarding industry segments is set forth in Footnote Number 19
to the Consolidated Financial Statements included in Item 8 to this Annual
Report on Form 10-K.
12
Competition
Each of our businesses is highly competitive. Competition in our 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 our competitors are substantially
larger and have considerably greater financial, technical and marketing
resources than UPFC. We compete 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. We compete
in the nonprime automobile finance industry with commercial banks, the captive
finance affiliates of automobile manufacturers, savings associations and
companies specializing in nonprime 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 UPFC. 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 we face. Competitors with lower
costs of capital have a competitive advantage over UPFC. During periods of
declining interest rates, competitors may solicit our customers to refinance
their loans. In addition, during periods of economic slowdown or recession, our
borrowers may face financial difficulties and be more receptive to offers of our
competitors to refinance their loans. As we seek to expand into new geographic
markets, we will face additional competition from lenders already established in
these markets.
Economic Conditions, Government Policies, Legislation, and Regulation
UPFC's profitability, like most financial institutions, is primarily
dependent on interest rate differentials. In general, the difference between
the interest rates paid by the Bank on interest-bearing liabilities, such as
deposits and other borrowings, and the interest rates received by the Bank on
its interest-earning assets, such as loans extended to its clients and
securities held in its investment portfolio, comprise the major portion of
UPFC's earnings. These rates are highly sensitive to many factors that are
beyond the control of UPFC and the Bank, such as inflation, recession and
unemployment, and the impact which future changes in domestic and foreign
economic conditions might have on UPFC and the Bank cannot be predicted.
The business of the Bank is also influenced by the monetary and fiscal
policies of the federal government and the policies of regulatory agencies,
particularly the Board of Governors of the Federal Reserve System (the "Federal
Reserve Board"). The Federal Reserve Board implements national monetary
policies (with objectives such as curbing inflation and combating recession)
through its open-market operations in U.S. Government securities by adjusting
the required level of reserves for depository institutions subject to its
reserve requirements, and by varying the target federal funds and discount rates
applicable to borrowings by depository institutions. The actions of the Federal
Reserve Board in these areas influence the growth of bank loans, investments,
and deposits and also affect interest rates earned on interest-earning assets
and paid on interest-bearing liabilities. The nature and impact on UPFC and the
Bank of any future changes in monetary and fiscal policies cannot be predicted.
From time to time, legislation, as well as regulations, are enacted which
have the effect of increasing the cost of doing business, limiting or expanding
permissible activities, or affecting the competitive balance between banks and
other financial services providers. Proposals to change the laws and
regulations governing the operations and taxation of banks, bank holding
companies, and other financial institutions and financial services providers are
frequently made in the U.S. Congress, in the state legislatures, and before
various regulatory agencies. This legislation may change banking statutes and
operating environment of UPFC and its subsidiaries in substantial and
unpredictable ways. If enacted, such legislation could increase or decrease the
cost of doing business, limit or expand permissible activities or affect the
competitive balance among banks, savings associations, credit unions, and other
financial institutions. UPFC cannot predict whether any of this potential
legislation will be enacted, and if enacted, the effect that it, or any
implementing regulations, would have on the financial condition or results of
operations of UPFC or any of its subsidiaries. See "Business - Regulation."
13
Employees
At December 31, 2000, UPFC had 264 full-time equivalent employees. We
believe that we have been successful in attracting quality employees and that
our employee relations are satisfactory.
Regulation
General
The Bank is currently a federally-chartered savings association insured
under the Savings Association Insurance Fund ("SAIF") and subject to extensive
regulation by the Office of Thrift Supervision ("OTS") and the Federal Deposit
Insurance Corporation ("FDIC"). Upon completion of a Charter Conversion, the
Bank would become a California-chartered commercial bank insured under the Bank
Insurance Fund ("BIF") and subject to extensive regulation by the DFI, the FDIC,
and the Federal Reserve Board. The following discussion addresses certain
aspects of regulations of UPFC and the Bank prior to a Charter Conversion. For
a discussion of certain aspects of regulation of UPFC and the Bank after a
Charter Conversion, see the discussion "Charter Conversion" below.
Regulation Prior to the Charter Conversion
Savings and loan holding companies and savings associations are extensively
regulated under both federal and state law. This regulation is intended
primarily for the protection of depositors and the SAIF and not for the benefit
of shareholders of the Company. The following information describes certain
aspects of that regulation applicable to UPFC and the Bank, and does not purport
to be complete. The discussion is qualified in its entirety by reference to all
particular statutory or regulatory provisions.
Regulation of UPFC
General. UPFC is a unitary savings and loan holding company subject to
regulatory oversight by the OTS. For purposes of this discussion, the
description of holding company regulation also applies to PAFI, a direct
subsidiary of UPFC and parent of the Bank. As such, UPFC 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
UPFC 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.
Activities Restriction Test. As a unitary savings and loan holding
company, UPFC 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 the Internal Revenue Code
of 1986, as amended (the "Code"). Recent legislation terminated the "unitary
thrift holding company exemption" for all companies that apply to acquire
savings associations after May 4, 1999. Since UPFC is grandfathered, its
unitary holding company powers and authorities were not affected. See
"Financial Modernization Legislation." However, if UPFC acquires control of
another savings association as a separate subsidiary, it would become a multiple
savings and loan holding company, and the activities of UPFC 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 "Charter
Conversion." Furthermore, if UPFC were in the future to sell control of the
Bank to any other company, such company would not succeed to UPFC's
grandfathered status under the law and would be subject to business activity
restrictions. See "- Regulation of the Bank - Qualified Thrift Lender Test."
14
On October 27, 2000 the OTS issued a proposed rule that would require some
savings and loan holding companies to notify the OTS 30 days before undertaking
certain significant new business activities. As proposed, thrift companies
would have to give the OTS advance notice if:
. debt, combined with all other transactions by the company or any
subsidiaries other than the thrift during the past 12 months,
increases non-thrift liabilities by 5 percent or more; and non-
thrift liabilities, after the debt transaction, equal 50 percent
or more of the company's consolidated core capital;
. an asset acquisition or series of such transactions by the
company or non-thrift subsidiary during the past 12 months that
involves assets other than cash, cash equivalents and securities
or other obligations guaranteed by the U.S. Government and
exceeds 15 percent of the company's consolidated assets; and
. any transaction that, when combined with all other transactions
during the past 12 months, reduces the company's capital by 10
percent or more.
Exempt from the notice requirement would be any holding company with
consolidated subsidiary thrift assets of less than 20 percent of total assets or
consolidated holding company capital of at least 10 percent. The OTS could
object to or conditionally approve an activity or transaction if it finds a
material risk to the safety and soundness and stability of the thrift. The
review period could be extended an additional 30 days if necessary.
The OTS proposal also would codify current practices and the factors
relevant to a holding company's need for capital. To determine the need for and
level of an explicit holding company capital requirement, the OTS will look at
overall risk at the thrift and the consolidated entity, their tangible and
equity capital, whether the holding company's debt-to-capital ratio is rising,
what investments or activities are funded by debt, its cash flow, how much the
holding company relies on dividends from subsidiary thrift to service debt or
fulfill other obligations, earnings volatility and the thrift's standing in the
corporate structure.
The comment period for the proposed rule was extended to February 9, 2001.
Restrictions on Acquisitions. UPFC 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
General. 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
15
. 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." The term "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.
The Financial Services Modernization Act provides that no company may
acquire control of an insured savings association 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, such as UPFC, that was a unitary savings and loan holding company on
May 4, 1999 or became 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. Such a grandfathered unitary
savings and loan holding company also 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 or permitted by
regulation.
UPFC and the Bank do not believe that the Financial Services Modernization
Act will have a material adverse effect on its operations 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 UPFC 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 UPFC and the
Bank. In addition, because UPFC 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.
Privacy. Under the Financial Services Modernization Act, federal banking
regulators are required to adopt rules that will limit the ability of banks and
other financial institutions to disclose non-public information about consumers
to nonaffiliated third parties. Federal banking regulators issued final rules
on May 10, 2000. Pursuant to those rules, financial institutions must provide:
. initial notices to customers about their privacy policies,
describing the conditions under which they may disclose nonpublic
personal information to nonaffiliated third parties and
affiliates;
. annual notices of their privacy policies to current customers;
and
. a reasonable method for customers to "opt out" of disclosures to
nonaffiliated third parties.
16
The rules were effective November 13, 2000, but compliance is optional
until July 1, 2001. These privacy provisions will affect how consumer
information is transmitted through diversified financial companies and conveyed
to outside vendors. It is not possible at this time to assess the impact of the
privacy provisions on UPFC's financial condition or results of operations.
Consumer Protection Rules - Sale of Insurance Products. In December 2000,
pursuant to the requirements of the Financial Services Modernization Act, the
federal bank and thrift regulatory agencies adopted consumer protection rules
for the sale of insurance products by depository institutions. The rules are
effective on April 1, 2001. The final rules apply to any depository institution
or any person selling, soliciting, advertising, or offering insurance products
or annuities to a consumer at an office of the institution or on behalf of the
institution. Before an institution can complete the sale of an insurance
product or annuity, the regulation requires oral and written disclosure that
such product:
. is not a deposit or other obligation of, or guaranteed by, the
depository institution or its affiliate;
. is not insured by the FDIC or any other agency of the United
States, the depository institution or its affiliate; and
. has certain risks in investment, including the possible loss of
value.
Finally, the depository institution may not condition an extension of
credit:
. on the consumer's purchase of an insurance product or annuity
from the depository institution or from any of its affiliates; or
. on the consumer's agreement not to obtain, or a prohibition on
the consumer from obtaining, an insurance product or annuity from
an unaffiliated entity.
The rule also requires formal acknowledgment from the consumer that
disclosures were received.
In addition, to the extent practicable, a depository institution must keep
insurance and annuity sales activities physically segregated from the areas
where retail deposits are routinely accepted from the general public.
Safeguarding Confidential Customer Information. In January 2000, the
banking agencies adopted guidelines requiring financial institutions to
establish an information security program to:
. identify and assess the risks that may threaten customer
information;
. develop a written plan containing policies and procedures to
manage and control these risks;
. implement and test the plan; and
. adjust the plan on a continuing basis to account for changes in
technology, the sensitivity of customer information, and internal
or external threats to information security.
Each institution may implement a security program appropriate to its size and
complexity and the nature and scope of its operations.
The guidelines outline specific security measures that institutions should
consider in implementing a security program. A financial institution must adopt
those security measures determined to be appropriate. The guidelines require
the board of directors to oversee an institution's efforts to develop,
implement, and maintain an effective information security program and approve
written information security policies and programs. The guidelines are
effective July 1, 2001.
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
17
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 Nonprime Automobile Lending
UACC's automobile lending activities are subject to various federal and
state consumer protection laws, including Truth in Lending, Equal Credit
Opportunity Act, Fair Credit Reporting Act, 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 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.
Regulation of the Bank
As a federally-chartered, SAIF-insured savings association, the Bank is
subject to extensive regulation by the OTS and the 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 Federal Reserve Board.
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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 UPFC, the Bank, and their
operations.
Insurance of Deposit Accounts. The SAIF, as administered by the FDIC,
insures the Bank's deposit accounts up to the maximum amount permitted by law.
The FDIC may terminate insurance of deposits 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.
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, 2000, SAIF members pay 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, all FDIC-insured
institutions are required to pay assessments to the FDIC at an annual rate of
approximately .0212% of insured deposits to fund interest payments on bonds
issued by the Financing Corporation ("FICO"), an agency of the Federal
government established to recapitalize the predecessor to the SAIF. These
assessments will continue until the FICO bonds mature in 2017.
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 3.0% 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.
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,
19
2000, 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 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, 2000.
Percent of
Amount Adjusted Assets
------------ ---------------
(Dollars in thousands)
GAAP Capital $ 42,451 8.83%
Tangible Capital: (1)
Regulatory requirement $ 7,189 1.50%
Actual capital 40,840 8.52%
----------- ---------------
Excess $ 33,651 7.02%
=========== ===============
Leverage (Core) Capital: (1)
Regulatory requirement $ 14,378 3.00%
Actual capital 40,840 8.52%
----------- ---------------
Excess $ 26,462 5.52%
=========== ===============
Risk-Based Capital: (2)
Regulatory requirement $ 19,354 8.00%
Actual capital 35,134 14.52%
----------- ---------------
Excess $ 15,780 6.52%
=========== ===============
____________
(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 $241.9 million.
As a result of a number of federally-insured financial institutions
extending their risk selection standards to attract lower credit quality
accounts due to such credits having higher interest rates and fees, in March
1999, the federal banking regulatory agencies jointly issued Interagency
Guidelines on Subprime Lending. Subprime lending involves extending credit to
individuals with less than perfect credit histories. The guidelines provide that
if the risks associated with subprime lending are not properly controlled, the
agencies consider subprime lending a high-risk activity that is unsafe and
unsound. The federal banking agencies believe that subprime lending activities
can present a greater than normal risk for financial institutions and the
deposit insurance funds. Therefore, the federal
20
banking agencies believe that the level of regulatory capital an institution
needs to support this activity should be commensurate with the additional risks
incurred.
Although no formal rulemaking has occurred related to increased regulatory
capital minimums for institutions engaged in subprime lending, regulatory
agencies may impose additional regulatory capital requirements upon an
institution as part of their comprehensive regulatory authority. Should a rule
be adopted to increase capital or the OTS require the Bank to maintain
additional regulatory capital as a result of our activities in subprime lending,
this could have an adverse affect on our future prospects and operations, and
may restrict our ability to grow. If we are unable to comply with any new
capital requirements, if adopted or imposed, then we may be subject to the
prompt corrective action regulations of the OTS. Although we believe we maintain
appropriate controls and regulatory capital for our subprime activities, we
cannot determine whether, or in what form, rules may eventually be adopted. In
addition, there can be no guaranty that the OTS, upon examination, will not
require us to increase capital or cease our activities in subprime lending.
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.
Proposed Capital Requirements for Community Institutions. In November 2000
the federal bank and thrift regulatory agencies requested public comment on an
advance notice of proposed rulemaking that considers the establishment of a
simplified regulatory capital framework for non-complex institutions.
In the proposal, the agencies suggested criteria that could be used to
determine eligibility for a simplified capital framework, such as the nature of
a bank's activities, its asset size and its risk profile. In the advance notice,
the agencies seek comment on possible minimum regulatory capital requirements
for non-complex institutions, including a simplified risk-based ratio, a simple
leverage ratio, or a leverage ratio modified to incorporate certain off-balance
sheet exposures.
The advance notice solicits public comment on the agencies' preliminary
views. Comments are due on the proposal on February 1, 2001. Given the
preliminary nature of the proposal, it is not possible to predict its impact on
the Bank at this time.
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, 2000, 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.
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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
undercapitalized, require it to comply with certain restrictions applicable to
significantly undercapitalized institutions.
Loans-to-One Borrower Limitations. 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, 2000, the Bank's loans-to-one-borrower limit was $6.3
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" pursuant to the Internal Revenue
Service Code. Qualified thrift investments are primarily residential mortgages
and related investments, including certain mortgage-related securities. 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. The FHLB also
relies on the qualified thrift lender test. A savings association will only
enjoy full borrowing privileges from an FHLB if the savings association is a
qualified thrift lender. As of December 31, 2000, the Bank was in compliance
with its QTL requirement by meeting the definition of a domestic building and
loan association.
In September 2000, the Bank filed its application with the DFI for approval
to convert from a federally-chartered savings association to a state-chartered
commercial bank due, in principal part, to lending restrictions which apply to
federally-chartered thrifts. As a result of the discontinuation of its subprime
mortgage business, it will be more difficult for the Bank to remain in
compliance with the "QTL" test and certain other consumer lending restrictions.
California-chartered commercial banks are not subject to compliance with the
"QTL" test or certain consumer lending limitations. In the event that a Charter
Conversion is not approved by the DFI, or is approved but not completed by the
Bank, the Bank would have to adjust its lending activities to ensure that it
continues to comply with the "QTL" and other consumer lending limitations in the
future.
Affiliate Transactions. Transactions between a savings association and its
"affiliates" are quantitatively and qualitatively restricted under 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, a savings association or its
subsidiaries are limited in their ability to engage in "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
22
. to an amount equal to 20% of the association's 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 other specified 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 nonaffiliated companies. A "covered transaction"
includes:
. 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 some 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;
. covered transactions and other specified 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; and
. with some exceptions, each loan or extension of credit by a
savings association to an affiliate must be secured by collateral
with a 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 decides to treat these
subsidiaries as affiliates. The regulation also requires savings associations to
make and retain records that reflect affiliate transactions in reasonable detail
and provides that specified 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, like 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 some circumstances
may:
. be required to file an application and await approval from the
OTS before it makes a capital distribution;
. be required to file a notice 30 days before the capital
distribution; or
. be permitted to make the capital distribution without notice or
application to the OTS.
The OTS regulations require a savings association to file an application
if:
. it 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 its net income for that year to date plus retained net
income for the preceding two years;
. it would not be at least adequately capitalized, under the prompt
corrective action regulations of the OTS following the
distribution; or
23
. the 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.
In addition, a savings association must give the OTS notice of a capital
distribution if the 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 the savings association's common or preferred
stock or retire any part of debt instruments like 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, the OTS does not require the savings
association to submit an application or give notice when making the proposed
capital distribution. The OTS may prohibit a proposed capital distribution that
would otherwise be permitted if the OTS determines that the distribution would
constitute an unsafe or unsound practice. Further, a federal savings
association, like the Bank, cannot distribute regulatory capital that is needed
for its liquidation account.
Activities of Subsidiaries. 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 compliance 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.
Community Reinvestment Act and the Fair Lending Laws. Savings associations
have a responsibility under the Community Reinvestment Act and related
regulations of the OTS to help meet the credit needs of their communities,
including low- and moderate-income neighborhoods. In addition, the Equal Credit
Opportunity Act and the Fair Housing Act 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 the
Community Reinvestment Act could, at a minimum, result in regulatory
restrictions on its activities and the denial of applications. In addition, an
institution's failure to comply with the Equal Credit Opportunity Act and the
Fair Housing Act could result in the OTS, other federal regulatory agencies as
well as the Department of Justice taking enforcement actions.
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
loans or advances to its members in compliance with the policies and procedures
established by the Board of Directors of the individual FHLB. As an FHLB 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 or borrowings.
At December 31, 2000, the Bank had $3.0 million in FHLB stock, which was in
compliance with this requirement.
24
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, 2000, the Bank was in compliance with these requirements.
Charter Conversion
Charter Conversion. The Bank's application seeking approval to convert
from a federal savings association charter to a state commercial bank charter
was filed with the DFI in September 2000. In accordance with the application
review process, the DFI has finished an on-site examination of the Bank and is
presently completing its review of the Bank's conversion application. In the
event that the application is approved, and the Bank converts to a California
commercial bank charter, certain aspects of federal and state regulation will be
affected. The discussion below describes selected aspects of federal and state
regulation to which UPFC and the Bank would become subject if and when a Charter
Conversion occurred.
Regulation of UPFC. UPFC would, upon consummation of a Charter Conversion,
become registered as a bank holding company subject to regulation under the Bank
Holding Company Act of 1956, as amended (the "BHCA"). UPFC would then be
required to file with the Federal Reserve Board periodic reports and such
additional information as the Federal Reserve Board may require pursuant to the
BHCA. The Federal Reserve Board may conduct examinations of UPFC and its
subsidiaries.
The Federal Reserve Board may require that UPFC terminate an activity or
terminate control of or liquidate or divest certain subsidiaries or affiliates
if the Federal Reserve Board believes the activity or the control of the
subsidiary or affiliate constitutes a significant risk to the financial safety,
soundness or stability of any of its banking subsidiaries. The Federal Reserve
Board also has the authority to regulate provisions of certain bank holding
company debt, including the authority to impose interest ceilings and reserve
requirements on such debt. Under certain circumstances, UPFC would be required
to file written notice and obtain approval from the Federal Reserve Board prior
to purchasing or redeeming its equity securities.
Further, UPFC would be required by the Federal Reserve Board to maintain
certain levels of capital. UPFC would be required to obtain the prior approval
of the Federal Reserve Board for the acquisition of more than 5% of the
outstanding shares of any class of voting securities or substantially all of the
assets of any bank or bank holding company. Prior approval of the Federal
Reserve Board would also be required for the merger or consolidation of UPFC and
another bank holding company.
UPFC would be prohibited by the BHCA, except in certain statutorily
prescribed instances, from acquiring direct or indirect ownership or control of
more than 5% of the outstanding voting shares of any company that is not a bank
or bank holding company and from engaging directly or indirectly in activities
other than those of banking, managing or controlling banks, or furnishing
services to its subsidiaries. However, UFPC, subject to the prior approval of
the Federal Reserve Board, could engage in any, or acquire shares of companies
engaged in, activities that are deemed by the Federal Reserve Board to be so
closely related to banking or managing or controlling banks as to be a proper
incident thereto.
Under Federal Reserve Board regulations, a bank holding company is required
to serve as a source of financial and managerial strength to its subsidiary
banks and may not conduct its operations in an unsafe or unsound manner. In
addition, it is the Federal Reserve Board's policy that a bank holding company
should stand ready to use available resources to provide adequate capital funds
to its subsidiary banks during periods of financial stress or adversity and
should maintain the financial flexibility and capital-raising capacity to obtain
additional resources for assisting its subsidiary banks. A bank holding
company's failure to meet its obligations to serve as a source of strength to
its subsidiary banks will generally be considered by the Federal Reserve Board
to be an unsafe and unsound banking practice or a violation of the Federal
Reserve Board's regulations or both.
25
UPFC will also become a bank holding company within the meaning of Section
3700 of the California Financial Code. As such, UPFC and its subsidiaries are
subject to examination by, and may be required to file reports with, the DFI.
Regulation of the Bank. The Bank, as a California-chartered commercial
bank following a Charter Conversion, would become subject to primary
supervision, periodic examination, and regulation by the DFI and the FDIC. In
addition, the Bank would cease to be insured under the SAIF as a savings
association and would, following a Charter Conversion, become insured under the
BIF as a state-chartered commercial bank. (See "Regulation-Regulation of the
Bank-Insurance of Deposit Accounts.") To a lesser extent, the Bank would also
become subject to certain regulations promulgated by the Federal Reserve Board.
If, as a result of an examination of the Bank, the FDIC should determine that
the financial condition, capital resources, asset quality, earnings prospects,
management, liquidity, or other aspects of the bank's operations are
unsatisfactory or that the Bank or its management is violating or has violated
any law or regulation, various remedies are available to the FDIC. Such
remedies include the power to enjoin "unsafe or unsound" practices, to require
affirmative action to correct any conditions resulting from any violation or
practice, to issue an administrative order that can be judicially enforced, to
direct an increase in capital, to restrict the growth of the Bank, to assess
civil monetary penalties, to remove officers and directors, and ultimately to
terminate the Bank's deposit insurance, which for a California chartered bank
would result in a revocation of the Bank's charter. The DFI has many of the
same remedial powers.
Various requirements and restrictions under the laws of the State of
California and the United States would affect the operations of the Bank after a
Charter Conversion. State and federal statutes and regulations relate to many
aspects of the Bank's operations, including reserves against deposits, ownership
of deposit accounts, interest rates payable on deposits, loans, investments,
mergers and acquisitions, borrowings, dividends, locations of branch offices,
and capital requirements. See "Business-Regulation-Regulation of the Bank-
Regulatory Capital Requirements."
The Financial Services Modernization Act also includes a new section of the
Federal Deposit Insurance Act governing subsidiaries of state banks that engage
in "activities as principal that would only be permissible" for a national bank
to conduct in a financial subsidiary. It expressly preserves the ability of a
state bank to retain all existing subsidiaries. Because California permits
commercial banks chartered by the state to engage in any activity permissible
for national banks, the Bank would be permitted to form subsidiaries to engage
in the activities authorized by the Financial Services Modernization Act to the
same extent as a national bank. In order to form a financial subsidiary, the
Bank must be well-capitalized, and the Bank would be subject to the same capital
deduction, risk management and affiliate transaction rules as applicable to
national banks.
The Federal Reserve Board would also have the authority to prohibit the
Bank from engaging in activities that, in the Federal Reserve Board's opinion,
constitute unsafe or unsound practices. It is possible, depending upon the
financial condition of the Bank and other factors, that the Federal Reserve
Board could assert that the payment of dividends or other payments might, under
some circumstances, be an unsafe or unsound practice. Further, the Federal
Reserve Board has established guidelines with respect to the maintenance of
appropriate levels of capital by banks or bank holding companies under its
jurisdiction. Compliance with the standards set forth in such guidelines and
the restrictions that are or may be imposed under the prompt corrective action
provisions of federal law could limit the amount of dividends which the Bank or
UPFC may pay. The DFI may impose similar limitations on the conduct of
California-chartered banks. See "Business-Regulation of the Bank-Regulatory
Capital Requirements" and "Prompt Corrective Action."
The Bank would also be subject to certain restrictions imposed by federal
laws on any extensions of credit to, or the issuance of a guarantee or letter of
credit on behalf of, UPFC or other affiliates, the purchase of or investment in,
stock or other securities thereof, the taking of such securities as collateral
for loans, and the purchase of assets of UPFC or other affiliates. Such
restrictions prevent UPFC and such other affiliates from borrowing from the Bank
unless the loans are secured by marketable obligations of designated amounts.
Further, such secured loans and investments by the Bank to or in UPFC or to or
in any other affiliate are limited, individually, to 10% of
26
the Bank's capital and surplus (as defined by federal regulations), and such
secured loans and investments are limited, in the aggregate, to 20% of the
Bank's capital and surplus (as defined by federal regulations). California law
also would impose certain restrictions with respect to transactions involving
UPFC and other controlling persons of the Bank. Additional restrictions on
transactions with affiliates may be imposed on the Bank under the prompt
corrective action provisions of federal law. See "Business-Regulation of the
Bank-Prompt Corrective Action."
Taxation
Federal
General. UPFC 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 UPFC. UPFC has not been audited by the Internal Revenue Service. For
its 2000 taxable year, UPFC is subject to a maximum federal income tax rate of
34.0%.
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 2000 and 1999. UPFC and its wholly owned subsidiaries file a
California franchise tax return on a combined reporting basis. UPFC has not
been audited by the Franchise Tax Board. UPFC does business in various other
states with corporate rates that vary based on numerous factors including asset
size, income or business operations.
27
Subsidiaries
Pan American Financial, Inc., a wholly-owned subsidiary of UPFC, 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.
WorldCash Technologies, Inc. is a wholly-owned subsidiary of UPFC and is
involved with the money transfer business. In February 2001, WorldCash
terminated its money transfer activities, however, it still maintains an
investment in a software technology company.
Pan American Bank, FSB, a wholly-owned subsidiary of Pan American
Financial, Inc., is the primary operating subsidiary of UPFC and is a federally-
chartered savings bank.
United Auto Credit Corporation, a wholly-owned subsidiary of the Bank,
holds for investment and services nonprime retail automobile installment sales
contracts.
United PanAm Mortgage Corporation is a wholly-owned subsidiary of the Bank
and is presently inactive.
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.
Factors That May Affect Future Results of Operations
This Annual Report on Form 10-K contains forward-looking statements,
including statements regarding UPFC's strategies, plans, objectives,
expectations and intentions, which are subject to a variety of risks and
uncertainties. UPFC'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 our financial
results and operations and should be considered in evaluating UPFC.
Because we have a limited operating history, we cannot predict our future
operating results.
UPFC purchased certain assets and assumed certain liabilities of Pan
American Federal Savings Bank from the RTC in 1994. In 1995, we commenced our
insurance premium finance business through a joint venture with BPN, and in
1996, we commenced our mortgage and automobile finance businesses. Accordingly,
we have only a limited operating history upon which an evaluation of UPFC and
its prospects can be based. For more information, see "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Because we loan money to credit-impaired borrowers, we may have a higher
risk of delinquency and default.
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
our 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 we experience higher losses than
anticipated, our financial condition, results of operations and business
prospects would be materially and adversely affected.
We may have to restrict our lending activities, if we are unable to
maintain or expand our sources of financing.
Our ability to maintain or expand our current level of lending activity
will depend on the availability and terms of our sources of financing. We fund
our operations principally through deposits, FHLB advances and whole loan sales.
The Bank competes for deposits primarily on the basis of interest rates and,
accordingly, the Bank
28
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 our 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 we 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 we are unable to develop additional
sources of financing, we may have to restrict our lending activities, which
would materially and adversely affect our financial condition, results of
operations and business prospects. For more information, see "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
Our California business focus and economic conditions in California could
adversely affect our operations.
UPFC's lending activities are concentrated primarily in California. The
performance of our loans may be affected by changes in California's economic and
business conditions, including its residential real estate market. The
occurrence of adverse economic conditions or natural disasters in California
could have a material adverse effect on our financial condition, results of
operations and business prospects.
If we have a higher loss on our discontinued operations than we previously
estimated, additional charges could adversely affect our financial
condition.
UPFC discontinued its mortgage origination operations in February 2000 and
included the estimated loss from discontinuing these operations in its 1999
financial statements. An additional loss on disposal was recorded in the 2000
financial statements. If actual losses on discontinued operations are 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 our financial condition, results of operations and
business prospects.
If we incorrectly value our residual interests in securitizations, our
financial condition could be adversely affected.
UPFC completed two securitizations during 1999, and as part of these
securitizations recorded residual interests. 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
estimates of current fair value, which may include 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 UPFC for valuing its
retained interests, it could have a material adverse effect on our financial
condition, results of operations and business prospects.
UPFC sold all of the residual interests arising from the 1999
securitizations in January 2001. Accordingly, as of December 31, 2000, these
residual interests were valued based on the terms and conditions of the sales
contract and the cash proceeds received at the settlement date in January 2001.
Our systems and controls may not be adequate to support our growth, and if
they are not adequate, it could have a material adverse effect on our
business.
UPFC 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 UPFC, are adequate or will continue to be adequate to
support our growth. A failure of our automated systems, including a failure of
data integrity or accuracy, could have a material adverse effect upon our
financial condition, results of operations and business prospects.
29
If we do not retain our key employees and we fail to attract new employees,
our business will be impaired.
UPFC 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 UPFC to attract and retain other qualified personnel, could have
a material adverse effect on our financial condition, results of operations and
business prospects.
Competition may adversely affect our performance.
Each of our businesses is highly competitive. Competition in our 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 our competitors are substantially
larger and have considerably greater financial, technical and marketing
resources than UPFC. We compete 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. We compete
in the nonprime automobile finance industry with commercial banks, the captive
finance affiliates of automobile manufacturers, savings associations and
companies specializing in nonprime 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 UPFC. 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 UPFC faces. Competitors with lower
costs of capital have a competitive advantage over UPFC. During periods of
declining interest rates, competitors may solicit our customers to refinance
their loans. In addition, during periods of economic slowdown or recession, our
borrowers may face financial difficulties and be more receptive to offers of our
competitors to refinance their loans.
As we expand into new geographic markets, we will face additional
competition from lenders already established in these markets. There can be no
assurance that we will be able to compete successfully with these lenders.
Changes in interest rates may adversely effect our performance.
UPFC'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 our net interest income. Further, a significant
increase in market rates of interest could adversely affect demand for our
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 our control. Our
liabilities generally have shorter terms and are more interest rate sensitive
than our assets. Accordingly, changes in interest rates could have a material
adverse effect on the profitability of our lending activities. For more
information, see "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Management of Interest Rate Risk."
We may be unable to manage our growth, and if we cannot do so, it could
have a material adverse effect on our business.
UPFC 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, we may broaden our product offerings to include
additional types of consumer or, in the case of IPF, commercial loans. Further,
we may enter other specialty finance businesses. This growth strategy will
require additional capital, systems development and human resources. The
failure of UPFC to implement its planned growth strategy would have a material
adverse effect on our financial condition, results of operations and business
prospects.
30
Changes in general economic conditions may adversely affect our
performance.
Each of our 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, we may experience
a decrease in demand for our financial products and services, an increase in our
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 severity of losses. Although we
believe that our underwriting criteria and collection methods enable us 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 our financial condition, results
of operations and business prospects.
Impact of inflation and changing prices may adversely affect our
performance.
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 our operations. Unlike
industrial companies, nearly all of the assets and liabilities of UPFC are
monetary in nature. As a result, interest rates have a greater impact on our
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.
If our application for approval of a Charter Conversion is not approved,
our current lending activities may be adversely affected.
The Bank filed its application with the DFI for approval to convert from a
federally-chartered savings association to a state-chartered commercial bank
due, in principal part, to lending restrictions which apply to federally-
chartered thrifts. As a result of the discontinuation of its subprime mortgage
business, it will be more difficult for the Bank to remain in compliance with
the "QTL" test or certain other consumer lending restrictions. California-
chartered commercial banks are not subject to compliance with the "QTL" test or
certain other consumer lending limitations. In the event that a Charter
Conversion is not approved by the DFI, or is approved but not completed by the
Bank, the Bank would have to adjust its lending activities to ensure that it
continues to comply with the "QTL" test or other consumer lending limitations in
the future.
We may face other risks.
From time to time, UPFC details other risks with respect to its business
and financial results in its filings with the Securities and Exchange
Commission.
Item 2. Properties
In January 2001, our principal executive offices were moved to premises
consisting of approximately 5,500 square feet of office space located at 17744
Skypark Circle, Irvine, California 92614. In March 2001, we are moving to new
headquarters office space consisting of approximately 13,300 square feet located
at 3990 Westerly Place, Suite 200, Newport Beach, California 92660. As of
December 31, 2000, UPFC maintained five branches for its banking business, 28
branches for its automobile finance business, one branch for its insurance
premium finance business and one office site for its discontinued mortgage
finance business. In January 2001, the Bank closed its San Mateo deposit branch
and transferred all outstanding deposits to another local branch facility.
All of our leased properties are leased for terms expiring on various dates
to 2007, many with options to extend the lease term. The net investment in
premises, equipment and leaseholds totaled $1.6 million at December 31, 2000
compared to $1.4 million at December 31, 1999.
31
Item 3. Legal Proceedings
UPFC is a party from time to time in legal proceedings incidental to the
conduct of its businesses. Management of UPFC believes that the outcome of such
proceedings will not have a material effect upon its financial condition.
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, 2000.
32
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 UPFC completed its initial public offering on April 23,
1998. As of March 15, 2001, we had approximately 400 shareholders of record and
16,149,650 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, 2000 $2.31 $1.03
June 30, 2000 $1.63 $0.78
September 30, 2000 $1.25 $0.75
December 31, 2000 $1.94 $0.81
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
UPFC has never paid a cash dividend on its Common Stock and we do not
anticipate paying cash dividends on the Common Stock in the foreseeable future.
The payment of dividends is within the discretion of our Board of Directors and
will depend upon, among other things, our 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 UPFC. For more information,
see "Item 1. Business - Regulation - Regulation of the Bank - Capital
Distribution Limitations."
33
Item 6. Selected Financial Data
The following table presents selected consolidated financial data for UPFC
and is derived from and should be read in conjunction with the Consolidated
Financial Statements of UPFC and the Notes thereto, which are included in this
Annual Report on Form 10-K for the years ended December 31, 2000, 1999 and 1998.
The selected consolidated financial data for the years ended December 31, 1997
and 1996 has been derived from our 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,
------------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
Statement of Operations Data
Interest income $ 44,375 $ 28,803 $ 24,540 $ 19,809 $ 16,135
Interest expense 14,563 6,033 7,839 8,793 7,628
-------- -------- -------- -------- --------
Net interest income 29,812 22,770 16,701 11,016 8,507
Provision for loan losses 201 432 293 507 194
-------- -------- -------- -------- --------
Net interest income after provision for loan losses 29,611 22,338 16,408 10,509 8,313
-------- -------- -------- -------- --------
Non-interest income
Loss on residual interests in securitizations (11,374) -- -- -- --
Gains on sales of loans, net -- -- 976 -- --
Other non-interest income 462 974 936 702 443
-------- -------- -------- -------- --------
Total non-interest income (loss) (10,912) 974 1,912 702 443
-------- -------- -------- -------- --------
Non-interest expense
Compensation and benefits 12,903 10,843 8,370 5,534 3,739
SAIF special assessment -- -- -- -- 642
Other expense 11,258 7,800 6,031 4,570 3,162
-------- -------- -------- -------- --------
Total non-interest expense 24,161 18,643 14,401 10,104 7,543
-------- -------- -------- -------- --------
Income (loss) from continuing operations before income taxes (5,462) 4,669 3,919 1,107 1,213
Income taxes (benefit) (2,094) 1,908 1,645 466 511
-------- -------- -------- -------- --------
Income (loss) from continuing operations (3,368) 2,761 2,274 641 702
-------- -------- -------- -------- --------
Income (loss) from discontinued operations, net of tax -- (941) 4,489 5,607 248
Loss on disposal of discontinued operations, net of tax (3,291) (6,172) -- -- --
-------- -------- -------- -------- --------
Net income (loss) $ (6,659) $ (4,352) $ 6,763 $ 6,248 $ 950
======== ======== ======== ======== ========
Earnings (loss) per share-basic: (1)
Continuing operations $ (0.21) $ 0.16 $ 0.15 $ 0.06 $ 0.07
Discontinued operations $ (0.20) $ (0.42) $ 0.29 $ 0.52 $ 0.02
Net income (loss) $ (0.41) $ (0.26) $ 0.44 $ 0.58 $ 0.09
Weighted average shares outstanding 16,392 16,854 15,263 10,739 10,669
Earnings (loss) per share-diluted: (1)
Continuing operations $ (0.21) $ 0.16 $ 0.14 $ 0.05 $ 0.07
Discontinued operations $ (0.20) $ (0.41) $ 0.28 $ 0.48 $ 0.02
Net income (loss) $ (0.41) $ (0.25) $ 0.42 $ 0.53 $ 0.09
Weighted average shares outstanding 16,392 17,253 16,143 11,875 10,669
Balance Sheet Data
Total assets $489,978 $438,290 $425,559 $310,754 $188,743
Loans 192,368 158,283 133,718 148,535 134,821
Loans held for sale 712 136,460 214,406 120,002 20,766
Allowance for loan losses (15,156) (14,139) (10,183) (6,487) (5,356)
Deposits 348,230 291,944 321,668 233,194 159,061
Notes payable -- -- 10,930 12,930 10,930
FHLB advances 60,000 -- -- 28,000 4,000
Warehouse lines of credit -- 54,415 -- 6,237 --
Shareholders' equity 69,317 75,353 82,913 13,009 6,761
34
(In thousands, except per share amounts)
At or For the
Year Ended December 31,
-------------------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- ----------- --------- --------
Operating Data
Return on average assets from continuing operations (0.95)% 1.25% 1.04% 3.51% 0.42%
Return on average shareholders' equity from continuing operations (4.61)% 3.39% 4.04% 7.37% 11.90%
Net interest margin 9.39% 12.45% 9.13% 6.76% 5.46%
Shareholders' equity to assets 14.15% 17.19% 19.48% 4.19% 3.58%
Tangible capital ratio of Bank 8.52% 10.60% 6.94% 7.27% 8.85%
Core capital ratio of Bank 8.52% 10.60% 6.94% 7.27% 8.85%
Risk-based capital ratio of Bank 14.52% 10.24% 10.77% 12.34% 16.36%
Asset Quality Data
Nonaccrual loans, net(2) $ 3,067 $ 13,157 $ 18,632 $ 6,633 $ 5,835
Real estate owned 871 2,590 1,877 562 988
Total non-performing assets 3,938 15,747 20,509 7,195 6,823
Non-performing assets to total assets 0.80% 3.60% 4.82% 2.31% 3.61%
Allowance for credit losses to loans held for investment 7.88% 8.93% 7.62% 4.37% 3.97%
Automobile Finance Data
Gross contracts purchased $174,645 $124,896 $ 86,098 $ 44,056 $12,216
Average discount on contracts purchased 8.08% 8.79% 9.12% 9.79% 10.00%
Net charge-offs to average contracts 4.17% 4.05% 4.56% 4.94% 1.50%
Number of branches 28 20 15 10 4
Insurance Premium Finance Data
Loans originated $100,085 $107,212 $ 152,998 $145,167 $99,012
Loans outstanding at period end $ 34,185 $ 30,334 $ 44,709 $ 39,990 $32,058
Average net yield on loans originated 15.36% 12.73% 13.90% 14.01% 13.62%
Average loan size at origination $ 0.99 $ 0.99 $ 1.11 $ 1.16 $ 1.18
Net charge-offs to average loans 0.61% 1.00% 0.78% 0.35% 0.39%
Subprime Mortgage Finance Data(3)
Loan origination activities
Wholesale originations $ 73,652 $789,327 $ 807,382 $359,236 $58,456
Retail originations 2,345 173,389 382,359 219,386 13,055
--------- --------- ----------- --------- --------
Total loan originations $ 75,997 $962,716 $1,189,741 $578,622 $71,511
Percent of loans secured by first mortgages 96% 97% 96% 96% 95%
Weighted average initial loan-to-value ratio 76% 76% 75% 75% 72%
Originations by product type
Adjustable-rate mortgages 86% 76% 71% 82% 85%
Fixed-rate mortgages 14% 24% 29% 18% 15%
Average balance per loan $ 104 $ 109 $ 99 $ 104 $ 100
Loans sold through whole loan transactions $215,133 $552,200 $1,084,701 $360,210 $50,142
Loan securitizations -- $458,011 -- $114,904 --
_________________
(1) Earnings (loss) 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. Earnings (loss) 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 our discontinued
mortgage operations.
35
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 our 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 our filings with the SEC.
General
The Company
UPFC is a specialty finance company engaged primarily in originating and
acquiring for investment retail automobile installment sales contracts and
automobile insurance premium finance contracts. We market 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. We fund our
operations principally through retail and wholesale deposits, FHLB advances and
whole loan sales.
UPFC 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. In 1995, we commenced our insurance premium finance business
through a joint venture with BPN and in 1996, we commenced our automobile
finance business.
In February 2000, we closed our subprime mortgage finance business to focus
on our auto lending and insurance premium finance businesses. The subprime
mortgage 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, we included all interest
income from our mortgage finance business less an allocation for interest
expense. We 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. For more information, see "Item 1.
Business - Discontinued Operations - Mortgage Finance."
During 2000, UPFC through its wholly-owned subsidiary, WorldCash, continued
its development of a cross-border money transfer business to be initially
dedicated to the Hispanic community. All development costs related to this
venture, approximating $870,000 in 2000, have been expensed in UPFC's
consolidated statements of operations. In addition to its business development
costs and as part of the software technology for this business, WorldCash made a
$1.0 million investment in AirTime Technologies, Inc. ("AirTime") representing a
20% ownership interest. In the fourth quarter of 2000, the Company wrote-down
this investment to $500,000 reflecting management's estimate of the current fair
value of this investment, and AirTime's most recent operating and revenue
projections. In February 2001, WorldCash terminated its activities associated
with developing a money transfer business, however, it still maintains its
investment in AirTime.
Finance companies, such as UPFC, 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 our
businesses, as described below, generates income from a combination of spread
and non-interest income.
36
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 nonprime retail automobile
installment sales contracts ("auto contracts") generated by franchised and
independent dealers of used automobiles. As UACC 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 relating to an
insurance premium finance business 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 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. UPFC 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, our 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
UPFC funds its operations primarily through the Bank's deposits, FHLB
advances and loan sales. As of December 31, 2000, the Bank was a five-branch
federal savings bank with $348.2 million in deposits. The loans generated by
our 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,
which loans aggregated $16.8 million in principal amount (before unearned
discounts and premiums) at December 31, 2000.
The Bank generates spread income not only from loans originated or
purchased by each of our principal businesses, but also from loans purchased
from the RTC, its securities 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.
37
Average Balance Sheets
The following tables set forth information relating to our continuing
operations for the years ended December 31, 2000, 1999 and 1998. 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,
-----------------------------------------------------------------------------------------
2000 1999 1998
--------------------------- --------------------------- ------------------------------
Average Average Average Average Average Average
Balance Interest Yield/ Balance Interest Yield/ Balance Interest Yield/
/(1)//(2)/ /(1)/ Cost /(1)//(2)/ /(1)/ Cost /(1)//(2)/ /(1)/ Cost
---------- -------- ------- ---------- -------- ------- ---------- -------- -------
(Dollars in thousands)
Assets
Interest earnings assets
Securities $146,129 $ 9,561 6.54% $ 37,682 $ 1,800 4.78% $ 25,672 $ 1,346 5.24%
Mortgage loans, net/(3)/ 18,546 1,630 8.79% 25,229 2,316 9.18% 63,224 5,450 8.62%
IPF loans, net/(4)/ 30,647 4,791 15.63% 37,681 5,271 13.99% 49,138 6,579 13.39%
Automobile installment contracts,
net/(5)/ 122,280 28,393 23.22% 82,294 19,416 23.59% 44,809 11,165 24.92%
-------- -------- -------- -------- --------- --------
Total interest earning assets 317,602 44,375 13.97% 182,886 28,803 15.75% 182,843 24,540 13.42%
-------- -------- --------
Non-interest earning assets 33,410 37,450 35,969
-------- -------- ---------
Total assets $351,012 $220,336 $218,812
======== ======== ========
Liabilities and Equity
Interest bearing liabilities
Customer deposits 240,974 13,057 5.42% 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 22,877 1,506 6.58% 6 -- 5.84% 13,057 666 5.10%
-------- -------- -------- -------- --------- --------
Total interest bearing liabilities 263,851 14,563 5.52% 123,974 6,033 4.87% 151,760 7,839 5.17%
-------- -------- --------
Non-interest bearing liabilities 14,102 15,029 10,711
Total liabilities 277,953 139,003 162,471
-------- -------- ---------
Equity 73,059 81,333 56,341
-------- -------- ---------
Total liabilities and equity $351,012 $220,336 $218,812
======== ======== ========
Net interest income before provision
for loan losses $29,812 $22,770 $16,701
======= ======= =======
Net interest rate spread/(6)/ 8.45% 10.88% 8.25%
Net interest margin/(7)/ 9.39% 12.45% 9.13%
Ratio of interest earning assets to
interest bearing liabilities 120.37% 147.50% 120.50%
___________________
(1) The table above excludes average assets and liabilities of our 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,
--------------------------------
2000 1999 1998
-------- -------- --------
Average assets of continuing operations $351,012 $220,336 $218,812
Average mortgage loans of discontinued operations 63,264 235,124 214,229
-------- -------- --------
Total average assets $414,276 $455,460 $433,041
======== ======== ========
Average liabilities and equity of continuing operations $351,012 $220,336 $218,812
Average customer deposits allocated to discontinued operations 61,468 189,720 170,470
Average warehouse lines of credit of discontinued operations 1,796 45,404 43,759
-------- -------- --------
Total average liabilities and equity $414,276 $455,460 $433,041
======== ======== ========
(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.
38
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 our interest income and interest expense from
continuing operations during the periods indicated. Information is provided in
each category with respect to: changes attributable to changes in volume
(changes in volume multiplied by prior rate), changes attributable to changes in
rate (changes in rate multiplied by prior volume) and 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, 1999 December 31, 1998
Compared to Compared to
Year Ended Year Ended
December 31, 2000 December 31, 1999
------------------------------- -------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
------------------------------- -------------------------------
Volume Rate Net/(1)/ Volume Rate Net/(1)/
------- ------ -------- ------- ----- --------
Interest earning assets
Securities $ 6,878 $ 883 $ 7,761 $ 560 $(106) $ 454
Mortgage loans, net (591) (95) (686) (3,513) 379 (3,134)
IPF loans, net (1,296) 816 (480) (1,619) 311 (1,308)
Automobile installment contracts, net 9,280 (303) 8,977 8,811 (560) 8,251
------- ------ -------- ------- ----- --------
Total interest earning assets 14,271 1,301 15,572 4,239 24 4,263
------- ------ -------- ------- ----- --------
Interest bearing liabilities
Customer deposits 6,540 730 7,270 (405) (358) (763)
Notes payable (123) (123) (246) (335) (42) (377)
FHLB advances 1,505 1 1,506 (779) 113 (666)
------- ------ -------- ------- ----- --------
Total interest bearing liabilities 7,922 608 8,530 (1,519) (287) (1,806)
------- ------ -------- ------- ----- --------
Change in net interest income $ 6,349 $ 693 $ 7,042 $ 5,758 $ 311 $ 6,069
======= ====== ======= ======= ===== =======
____________
(1) The table above excludes interest income and interest expense from our
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, 2000 and
December 31, 1999
General
UPFC incurred a loss from continuing operations of $3.4 million, or $0.21
per diluted share, compared with income from continuing operations of $2.8
million, or $0.16 per diluted share for the same period a year ago. Including
discontinued operations, we reported a net loss of $6.7 million, or $0.41 per
diluted share in 2000, compared with a net loss of $4.4 million, or $0.25 per
diluted share in 1999.
Contributing to our 2000 loss from continuing operations were charges as
described below.
We recorded a pre-tax charge of $11.4 million during 2000 to reflect a
write-down in the value of residual interests arising from our 1999 subprime
mortgage securitizations. We have subsequently sold these residual interests to
a third party in January 2001 and this sale was used to determine the fair value
of these assets at December 31, 2000.
A pre-tax charge of $1.3 million was also recorded during 2000, relating to
a write-down of our goodwill arising from the 1998 purchase of Norwest Financial
Coast's insurance premium finance operations. The write-down reflects impairment
in the value of this goodwill as a result of a decline in future benefits
expected to be received from this acquisition as a result of a change in market
conditions.
Interest income for the year ended December 31, 2000 increased to $44.4
million compared with $28.8 million in 1999 while net interest income increased
to $29.8 million for the year ended December 31, 2000 from $22.8 million in the
same period a year ago. Gross automobile receivables increased from $128.1
million at December 31, 1999 to $176.3 million at December 31, 2000 accounting
for much of the increase in interest income and net interest income.
39
Interest Income
Interest income increased from $28.8 million for the twelve months ended
December 31, 1999 to $44.4 million for the twelve months ended December 31, 2000
due primarily to a $134.7 million increase in average interest earning assets,
partially offset by a 1.78% decrease in the weighted average interest rate on
interest earning assets. The largest components of growth in our average
interest earning assets were automobile installment contracts, which increased
$40.0 million, and securities, which increased $108.4 million. The increase in
auto contracts principally resulted from the purchase of additional dealer
contracts in existing and new markets consistent with the planned growth of this
business unit. The increase in securities was primarily a result of the
reinvestment of proceeds received from the sale of discontinued mortgage assets.
The decline in the average yield on interest earning assets was principally
due to the increase in securities, which have lower yields compared to loans.
Securities, with an average yield of 6.54%, comprised 46% of our average
interest earning assets at December 31, 2000 compared with 21% of our average
interest earning assets at December 31, 1999.
Interest Expense
Interest expense increased from $6.0 million for the twelve months ended
December 31, 1999 to $14.6 million for the twelve months ended December 31,
2000, due to a $139.9 million increase in average interest bearing liabilities,
and a 0.65% increase in the weighted average interest rate on interest bearing
liabilities. The largest component of the increase in interest bearing
liabilities was deposits of the Bank, which increased from an average balance of
$119.0 million in 1999 to $241.0 million in 2000. The increase in average
deposits was due primarily to the reallocation of deposits to continuing
operations compared to a year ago. Sales of subprime mortgage loans
(discontinued operations) in 2000 reduced the average deposits allocated to
discontinued operations.
The average cost of deposits increased from 4.86% for 1999 to 5.42% for
2000, generally as a result of an increase in market interest rates and the
repricing of deposits to these higher market rates.
Provision for Loan Losses
Provision for loan losses was $201,000 for the year ended December 31,
2000, compared with $432,000 for the year ended December 31, 1999. The
provision for loan losses reflects estimated credit losses associated with our
insurance premium finance business.
Our total allowance for losses was $15.2 million at December 31, 2000
compared with $14.1 million at December 31, 1999, representing 7.9% of loans
held for investment at December 31, 2000 and 8.9% at December 31, 1999. Net
charge-offs to average loans were 5.0% for the year ended December 31, 2000
compared with 3.0% in 1999. The increase is due to higher charge-offs from
subprime mortgage loans in connection with the wind-down of our discontinued
mortgage operations.
In addition to provision for losses, our allowance for loan losses is also
increased by an allocation of acquisition discounts related to the purchase of
automobile installment contracts. We allocate the estimated amount of
acquisition discounts attributable to credit risk to the allowance for loan
losses.
A provision for loan losses is charged to operations based on our regular
evaluation of loans held for investment and the adequacy of the allowance for
loan losses. We report loans held for sale at the lower of cost or market
value, accordingly, loan loss provisions are not established for this portfolio.
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 $11.9 million, from $974,000 in 1999 to a
loss of $10.9 million in 2000. The decrease resulted from an $11.4 million pre-
tax write-down of the value of residual interests in securitizations.
40
We sold our residual interests in securitizations in January 2001 and this sale
was used to determine the fair value of these assets at December 31, 2000.
Other components of non-interest income include fees and charges for Bank
services and miscellaneous other items. The total of all of these items
decreased $512,000 from $974,000 for the twelve months ended December 31, 1999
to $462,000 for the twelve months ended December 31, 2000. Included in non-
interest income during 2000 is a charge of $500,000 in connection with the
write-down of UPFC's investment in AirTime.
Non-interest Expense
Non-interest expense increased $5.6 million, from $18.6 million for the
twelve months ended December 31, 1999 to $24.2 million for the twelve months
ended December 31, 2000. This increase primarily reflects an increase in
salaries, employee benefits and other personnel costs of approximately $2.1
million associated with the expansion of our automobile finance operations. In
addition, occupancy expense increased $596,000, reflecting the costs associated
with maintaining and expanding the branch offices in the auto finance lending
area. Also, as a result of growth in our automobile lending operations, other
operating expense, including professional fees, supplies, data processing, loan
servicing expense, telephone and postage, increased $2.9 million during 2000
compared to the same period in 1999. Also included in other expense is a pre-
tax charge of $1.3 million in connection with the write-down of goodwill arising
from the 1998 purchase of Norwest Financial Coast's insurance premium finance
operations and a $700,000 pre-tax provision for the relocation of certain
offices. The goodwill write-down reflects impairment as a result of a decline
in expected future benefits due to a change in market conditions. Most of this
decline is a result of lower insurance premiums in California and significant
competition from direct bill payment programs utilized by insurance companies,
which has reduced the amount of premiums available for financing. The provision
for office relocation expenses (consisting primarily of severance costs) is
attributable to the move of our corporate and executive offices from San Mateo,
California to Orange County, California.
Income Taxes (Benefit)
Income taxes (benefit) decreased $4.0 million, from $1.9 million for the
twelve months ended December 31, 1999 to a benefit of $2.1 million for the
twelve months ended December 31, 2000. This decrease occurred as a result of a
$10.1 million decrease in income from continuing operations before income taxes
between the two periods, and a decrease in the effective tax (benefit) rate from
40.9% for 1999 to 38.3% for 2000. The decline in the effective tax (benefit)
rate reflects an increase in income or loss apportioned to states with lower tax
rates.
Discontinued Operations - Mortgage Finance
As announced on February 9, 2000, we discontinued our subprime mortgage
origination operations. All related operating activity of the mortgage
operations has been reclassified and reported as discontinued operations in our
consolidated financial statements. In connection with the wind-down of these
operations, sales or securitizations of subprime mortgage loans in 2000 were
$215.1 million, compared with $1.0 billion in 1999. Prior to closing these
operations, we originated $76.0 million in subprime mortgage loans during 2000
compared with $962.7 million during the year ended December 31, 1999.
A loss from discontinued operations, net of tax, of $941,000 was recorded
in 1999 reflecting the operating activity of these operations during this
period. During the second quarter of 2000, a charge of $3.3 million, net of
tax, was recorded related to loss on disposal of our subprime mortgage finance
business. This was in addition to a charge of $6.2 million, net of tax,
included in our 1999 results of operations. Included in our statement of
financial condition as of December 31, 2000, is a reserve of $3.3 million
consisting primarily of lease and other contractual obligations related to the
estimated remaining costs of discontinuing the subprime mortgage operations. If
actual costs of disposal are higher than anticipated, additional charges may be
required in subsequent periods' results of operations. All activities related
to discontinued operations in 2000 were charged to the discontinued operations
reserve.
41
In determining net interest income charged to discontinued operations, we
included all interest income from our mortgage finance business less an
allocation for interest expense. We allocated average deposits of $61.5 million
for the year ended December 31, 2000 and $189.7 million for the year ended
December 31, 1999, and average warehouse lines of credit of $1.8 million for the
year ended December 31, 2000 and $45.4 million for the year ended December 31,
1999, to discontinued operations in computing interest expense.
Comparison of Financial Condition at December 31, 2000 and December 31, 1999
Total assets increased $51.7 million, from $438.3 million at December 31,
1999 to $490.0 million at December 31, 2000. The increase occurred primarily as
a result of a $213.4 million increase in securities available for sale, from
$9.9 million at December 31, 1999 to $223.3 million at December 31, 2000,
partially offset by a $135.7 million decrease in loans held for sale, from
$136.5 million at December 31, 1999 to $712,000 at December 31, 2000.
Cash and cash equivalents decreased $47.8 million, from $90.4 million at
December 31, 1999 to $42.6 million at December 31, 2000. At December 31, 1999,
we significantly increased our liquidity position in accordance with Year 2000
contingency plans. Subsequent to the Year 2000 conversion, the excess liquidity
was used to paydown our mortgage warehouse lines of credit. Securities
available for sale increased from $9.9 million at December 31, 1999 to $223.3
million at December 31, 2000. The increase reflects the reinvestment of
proceeds received from sales of loans of the discontinued mortgage business.
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. Our residual interests were $8.9 million at December 31, 2000
compared to $21.2 million at December 31, 1999. UPFC sold all of the residual
interests arising from the 1999 securitizations in January 2001. Accordingly,
as of December 31, 2000, these residual interests were valued based on the terms
and conditions of the sales contract and the net cash proceeds received at the
settlement date in January 2001. Valuations of the residual interests at
December 31, 1999 were 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 increased from $1.4 million at December 31, 1999 to
$1.6 million at December 31, 2000 primarily as a result of the continuing growth
of our auto finance business.
Deposit accounts increased $56.3 million, from $291.9 million at December
31, 1999 to $348.2 million at December 31, 2000. This increase was primarily
due to an increase in wholesale deposits, which grew from $15.8 million at
December 31, 1999 to $49.1 million at December 31, 2000 as a result of the
purchase of brokered CD's of $28.6 million in 2000. Retail deposits increased
$22.9 million, from $276.2 million at December 31, 1999 to $299.1 million at
December 31, 2000.
Other interest bearing liabilities include Federal Home Loan Bank advances
and warehouse lines of credit. FHLB advances were $60.0 million at December 31,
2000 and there were no advances outstanding at December 31, 1999. The increase
in FHLB advances was primarily due to our use of wholesale borrowings as an
alternative to deposits as a funding source for asset growth. Warehouse lines
of credit were $54.4 million at December 31, 1999. There were no outstanding
balances at December 31, 2000 as proceeds from sales of subprime mortgage loans
were used to pay down outstanding balances.
Net deferred tax assets were $10.8 million at December 31, 2000 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 2000 included approximately $5.8 million relating to the
discontinuance of our mortgage operations.
42
Shareholders' equity decreased from $75.4 million at December 31, 1999 to
$69.3 million at December 31, 2000, as a result of our 2000 net loss of $6.7
million, which was partially offset by $581,000 of unrealized gain on
securities.
Comparison of Operating Results for the Years Ended December 31, 1999 and
December 31, 1998
General
UPFC 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.
UPFC'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 our subprime mortgage finance business. Included in the 1999 loss from
discontinued operations is a $6.2 million charge, net of tax, 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.
Growth in our 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
43
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 our
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 our 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 our regular
evaluation of the loan portfolio and the adequacy of the allowance for loan
losses. While we believe that we have adequately provided for losses and do not
expect any material loss on our 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.
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 our automobile finance operations and additional costs
related to our 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
our 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.
44
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,
we significantly increased our liquidity position in accordance with Year 2000
contingency plans. Subsequent to the Year 2000 conversion, the excess liquidity
was used to pay down our 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. Our 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 interest 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 discontinuing our
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 our strategy to use lower cost
retail deposits for financing 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 our loans held for sale. There were no such
borrowings outstanding at December 31, 1998.
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 our
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 our 1999 net loss
of $4.4 million and $3.7 million related to the repurchase of stock by UPFC.
Management of Interest Rate Risk
The principal objective of our interest rate risk management program is to
evaluate the interest rate risk inherent in our business activities, determine
the level of appropriate risk given our 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, we
seek to reduce the exposure of our operations to changes in interest rates. The
Board of Directors reviews on a quarterly basis the asset/liability position of
UPFC, including simulation of the effect on capital of various interest rate
scenarios. UPFC'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 we originate loans and investors' sales commitments are received, we 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 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
45
instruments, and "NPV Ratio" is defined as the NPV in that scenario divided by
the market value of assets in the same scenario. We review 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, 2000, 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 21 basis points and would result in a $1.5
million increase in the NPV of the Bank and a 200 basis point increase in
interest rates was 34 basis points and would result in a $2.1 million decrease
in the NPV of the Bank. At September 30, 2000, 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, 2000 and December 31, 1999 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. We make no
representation as to the accuracy of this data.
Interest Rate Sensitivity of Net Portfolio Value
September 30, 2000
Net Portfolio Value NPV as % of Portfolio Value of Assets
------------------------------------ -------------------------------------
Change in Rates $ Amount $ Change % Change NPV Ratio Change
--------------- -------- -------- -------- -------------- -----------
(Dollars in thousands)
+300 bp $58,134 $(3,773) -6% 13.50% -63 bp
+200 bp 59,782 (2,126) -3% 13.79% -34 bp
+100 bp 61,042 (865) -1% 14.00% -13 bp
0 bp 61,907 -- --% 14.13% -- bp
-100 bp 62,149 242 --% 14.14% +1 bp
-200 bp 63,398 1,491 +2% 14.34% +21 bp
-300 bp 65,404 3,496 +6% 14.68% +55 bp
December 31, 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 $43,715 $(12,030) -22% 10.16% -239 bp
+200 bp 48,704 (7,041) -13% 11.17% -138 bp
+100 bp 52,857 (2,888) -5% 12.00% -55 bp
0 bp 55,745 -- --% 12.55% -- bp
-100 bp 57,571 1,826 +3% 12.88% +33 bp
-200 bp 60,782 5,037 +9% 13.47% +92bp
-300 bp 64,917 9,172 +16% 14.23% +168 bp
46
Liquidity and Capital Resources
General
UPFC's primary sources of funds are retail and wholesale deposits, FHLB
advances, principal and interest payments on loans, cash proceeds from the sale
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. We have 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 we have always met or exceeded this
requirement. Management, through its Asset and Liability Committee, monitors
rates and terms of competing sources of funds to use the most cost-effective
source of funds wherever possible.
Sales and securitizations of loans were one of the primary sources of funds
for the discontinued subprime mortgage operations. Cash flows from sales and
securitizations of loans were $203.6 million during the twelve months ended
December 31, 2000, compared to $983.7 million during the twelve months ended
December 31, 1999.
Another source of funds consists of deposits obtained through the Bank's
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, 2000, such retail deposits were $299.1 million or 85.9% of total
deposits.
The Bank uses wholesale and broker-originated deposits to supplement its
retail deposits and, at December 31, 2000, wholesale deposits were $49.1 million
or 14.1% 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. Included in wholesale deposits at December 31,
2000 are $28.6 million of broker-originated deposits.
The following table sets forth the average balances and rates paid on each
category of deposits for the dates indicated.
Years Ended December 31,
-------------------------------------------------------------------------------------------
2000 1999 1998
--------------------------- ---------------------------- ---------------------------
Weighted Weighted Weighted
Average Average Average
Balance Rate Balance Rate Balance Rate
---------- ----------- ----------- ----------- ----------- -----------
(Dollars in thousands)
Passbook accounts $ 45,811 4.26% $ 50,672 4.24% $ 31,496 3.80%
Checking accounts 14,394 2.10% 13,064 1.84% 9,826 1.50%
Certificates of deposit
Under $100,000 171,975 5.94% 176,983 5.20% 177,601 5.51%
$100,000 and over 70,262 6.16% 68,050 5.45% 78,705 5.67%
---------- ----------- -----------
Total $ 302,442 5.55% $ 308,769 4.96% $ 297,628 5.24%
========== =========== ===========
The following table sets forth the time remaining until maturity for all CDs
at December 31, 2000, 1999 and 1998.
December 31, December 31, December 31,
2000 1999 1998
------------ ------------ ------------
(Dollars in thousands)
Maturity within one year $ 257,710 $ 199,110 $ 242,447
Maturity within two years 36,440 28,770 29,548
Maturity within three years 100 149 154
------------ ------------ ------------
Total certificates of deposit $ 294,250 $ 228,029 $ 272,149
============ ============ =============
47
The following table sets forth the time remaining until maturity for CD's
with balances of $100,000 and over at December 31, 2000, 1999 and 1998.
December 31, December 31, December 31,
2000 1999 1998
------------ ------------ ------------
(Dollars in thousands)
Maturity in:
Less than 3 months $ 24,859 $ 21,342 $ 28,548
3-6 months 24,872 14,767 13,682
6-12 months 21,257 19,696 30,934
Over 12 months 11,835 8,350 4,589
------------ ------------ ------------
$ 82,823 $ 64,155 $ 77,753
============ ============ ============
Although the Bank has a significant amount of deposits maturing in less
than one year, we believe 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, 2000, the Bank exceeded all of its regulatory capital
requirements with tangible capital of $40.8 million, or 8.52% of total adjusted
assets, which is above the required level of $7.2 million, or 1.50%; core
capital of $40.8 million, or 8.52% of total adjusted assets, which is above the
required level of $14.4 million, or 3.00% and risk-based capital of $35.1
million, or 14.52% of risk-weighted assets, which is above the required level of
$19.4 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, 2000.
UPFC has other sources of liquidity, including FHLB advances and the
liquidity and short-term securities portfolio. Through the Bank, we may obtain
advances from the FHLB, collateralized by 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, 2000, the
Bank's available borrowing capacity under this credit facility was $76.6
million.
The following table sets forth certain information regarding our short-term
borrowed funds (consisting of FHLB advances and warehouse lines of credit) at or
for the periods ended on the dates indicated.
At or For Years Ended
December 31,
------------------------------------
2000 1999 1998
------------------------------------
(Dollars in thousands)
FHLB advances
Maximum month-end balance $60,000 $ 2,300 $34,500
Balance at end of period 60,000 -- --
Average balance for period 22,877 6 13,057
Weighted average interest rate on balance at end of period 6.81% --% --%
Weighted average interest rate on average balance for period 6.58% 5.84% 5.10%
Warehouse lines of credit
Maximum month-end balance $26,623 $159,342 $95,000
Balance at end of period -- 54,415 --
Average balance for period 1,796 45,404 43,759
Weighted average interest rate on balance at end of period --% 5.78% --%
Weighted average interest rate on average balance for period 6.27% 5.84% 6.01%
UPFC had no material contractual obligations or commitments for capital
expenditures at December 31, 2000. At December 31, 2000, we had no outstanding
commitments to originate loans, compared to $26.8 million at December 31, 1999.
48
Lending Activities
Summary of Loan Portfolio. At December 31, 2000, our loan portfolio
constituted $193.1 million, or 39.5% of our total assets, of which $192.4
million, or 99.6%, was held for investment and $0.7 million, or 0.4%, 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 our discontinued mortgage operations.
The following table sets forth the composition of our loan portfolio at the
dates indicated.
December 31,
----------------------------------
2000 1999 1998
----------------------------------
Consumer Loans
Automobile installment contracts $176,255 $128,093 $ 83,921
Insurance premium finance 25,843 23,846 40,440
Other consumer loans 577 864 1,209
-------- -------- --------
Total consumer loans 202,675 152,803 125,570
-------- -------- --------
Mortgage Loans
Mortgage loans (purchased primarily from RTC) 16,784 21,835 32,328
Subprime mortgage loans 1,845 149,876 213,687
-------- -------- --------
Total mortgage loans 18,629 171,711 246,015
-------- -------- --------
Commercial Loans
Insurance premium finance 8,342 6,488 4,269
Other commercial loans 55 15 36
-------- -------- --------
Total commercial loans 8,397 6,503 4,305
-------- -------- --------
Total loans 229,701 331,017 375,890
Unearned discounts and premiums (728) (954) (212)
Unearned finance charges (20,737) (21,181) (17,371)
Allowance for loan losses (15,156) (14,139) (10,183)
-------- -------- --------
Total loans, net $193,080 $294,743 $348,124
======== ======== ========
Loan Maturities. The following table sets forth the dollar amount of loans
maturing in our loan portfolio at December 31, 2000 based on scheduled
contractual amortization. Loan balances are reflected before unearned discounts
and premiums, unearned finance charges and allowance for losses.
At December 31, 2000
------------------------------------------------------------------------------------------------------------
More Than 1 Year More Than 3 More Than 5 More Than 10
One Year or to Years to Years to Years to More Than 20 Total Loans
Less 3 Years 5 Years 10 Years 20 Years Years
----------- ---------------- ----------- ----------- ----------------- ------------ -----------
(Dollars in thousands)
Consumer loans $31,749 $75,394 $95,234 $ 298 $ -- $ -- $202,675
Mortgage loans 41 515 348 2,204 11,681 3,840 18,629
Commercial loans 8,384 13 -- -- -- -- 8,397
----------- ---------------- ----------- ----------- ----------------- ------------ -----------
Total $40,174 $75,922 $95,582 $2,502 $11,681 $3,840 $229,701
============================================================================================================
The following table sets forth, at December 31, 2000, 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, 2001
---------------------------------
Fixed Adjustable Total
-------- ---------- --------
(In thousands)
Consumer loans $170,853 $ 73 $170,926
Mortgage loans 3,914 14,674 18,588
Commercial loans 1 12 13
-------- ---------- --------
Total $174,768 $ 14,759 $189,527
======== ======== ========
Classified Assets and Allowance for Loan Losses
UPFC maintains an asset review and classification process for purposes of
assessing loan portfolio quality and the adequacy of its loan loss allowances.
Our Asset Review Committee reviews for classification all problem
49
and potential problem assets and reports the results of its review to the Board
of Directors quarterly. We have incorporated the OTS internal asset
classifications as a part of our 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 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, 2000, we had $1.0 million of assets classified as special
mention, $5.4 million of assets classified as substandard, $176,000 of 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, 2000, 1999 and 1998.
Loan December 31, % of Total December 31, % of Total December 31, % of Total
Delinquencies 2000 Loans 1999 Loans 1998 Loans
- ------------- ------------ ---------- ------------ ---------- ------------ ----------
(Dollars in thousands)
30 to 59 days $ 953 0.5% $ 3,071 1.0% $ 9,743 2.8%
60 to 89 days 494 0.3% 2,443 0.8% 8,161 2.3%
90+ days 2,374 1.2% 13,307 4.6% 11,424 3.3%
------------ ---------- ------------ ---------- ------------ ----------
Total $3,821 2.0% $18,821 6.4% $29,328 8.4%
============ ========== ============ ========== ============ ==========
Nonaccrual and Past Due Loans. UPFC'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 charged-off or 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. We do not generally
modify, extend or rewrite loans and at December 31, 2000 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, 2000, 1999 and 1998.
December 31,
-------------------------------
2000 1999 1998
------- ------- -------
(Dollars in thousands)
Nonaccrual loans
Single-family residential $ 2,281 $15,825 $19,242
Multi-family residential and commercial -- 100 214
Consumer and other loans 1,323 1,060 1,168
------- ------- -------
Total $ 3,604 $16,985 $20,624
======= ======= =======
Nonaccrual loans as a percentage of
Total loans held for investment 1.87% 10.73% 15.42%
Total assets 0.74% 3.88% 4.85%
Allowance for loan losses as a percentage of
Total loans held for investment 7.88% 8.93% 7.62%
Nonaccrual loans 420.53% 83.24% 49.37%
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 $176,000 for the year ended December 31, 2000, $1.4
million for the year ended December 31, 1999 and $1.1 million for the year ended
December 31, 1998. The total amount of interest income recognized on nonaccrual
loans was $698,000, $1.4 million and $470,000 for
50
the years ended December 31, 2000, 1999 and 1998, respectively. Accruing loans
over 90 days past due were $25,000 at December 31, 2000, $30,000 at December 31,
1999 and $19,000 at December 31, 1998.
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. Holding and maintenance costs related to real estate owned are recorded
as expenses in the period incurred. Real estate owned was $871,000 at December
31, 2000, $2.6 million at December 31, 1999 and $1.9 million at December 31,
1998 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 UPFC for the periods indicated.
At or For the
Year Ended
December 31,
---------------------------------------------
2000 1999 1998
---------- ---------- -----------
(Dollars in thousands)
Allowance for Loan Losses
Balance at beginning of period $ 14,139 $ 10,183 $ 6,487
Provision for loan losses - continuing operations 201 432 293
Provision for loan losses - discontinued operations 2,396 7,376 5,560
Charge-offs
Mortgage loans (6,402) (7,525) (4,536)
Consumer loans (6,025) (4,395) (3,793)
---------- ---------- -----------
Total charge-offs (12,427) (11,920) (8,329)
Recoveries
Mortgage loans 327 296 452
Consumer loans 286 414 1,138
---------- ---------- -----------
Total recoveries 613 710 1,590
---------- ---------- -----------
Net charge-offs (11,814) (11,210) (6,739)
Acquisition discounts allocated to loss allowance 10,234 7,358 4,582
---------- ---------- -----------
Balance at end of period $ 15,156 $ 14,139 $ 10,183
========== ========== ===========
Annualized net charge-offs to average loans 5.03% 2.95% 1.81%
Ending allowance to period end loans, net 7.88% 8.93% 7.62%
At December 31,
---------------------------------------------------------------------------------------------------
2000 1999 1998
------------------------------- ------------------------------- --------------------------------
Percent of Loans in Percent of Loans in Percent of Loans in
Each Category to Each Category to Each Category to
Amount Total Loans Amount Total Loans Amount Total Loans
----------- ------------------- ---------- ------------------- ---------- --------------------
(Dollars in thousands)
Distribution of end of period
Allowance by loan type
Mortgage loans held
for investment $ 2,174 8.3% $ 5,800 19.9% $ 5,676 21.8%
Consumer loans 12,982 87.7% 8,339 76.3% 4,507 75.2%
Commercial loans -- 4.0% -- 3.8% -- 3.0%
----------- ------------------- ---------- ------------------- ---------- -------------------
$ $15,156 100.0% $ 14,139 100.0% $ 10,183 100.0%
=========== =================== ========== =================== ========== ===================
UPFC'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, our allowance for loan losses is also increased by the
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.
UPFC'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
51
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 Bank to increase the allowance based
upon their judgment of the information available to them at the time of their
examination.
Cash Equivalents and Securities Portfolio
UPFC's cash equivalents and securities portfolios are used primarily for
liquidity and for investment income. UPFC's cash equivalents and securities
satisfy regulatory requirements for liquidity.
The following is a summary of our cash equivalents and securities
portfolios as of the dates indicated.
December 31,
-----------------------------------
2000 1999 1998
-------- ------- -------
(Dollars in thousands)
Balance at end of period
Overnight deposits $ 36,477 $85,500 $47,000
U.S. agency securities 166,838 9,918 --
U.S. agency mortgage-backed securities 46,376 -- --
Mutual funds (mortgage-backed securities) 10,051 -- --
-------- ------- -------
Total $259,742 $95,418 $47,000
======== ======= =======
Weighted average yield at end of period
Overnight deposits 5.69% 3.25% 3.00%
U.S. agency securities 6.27% 7.11% --%
U.S. agency mortgage-backed securities 7.35% --% --%
Mutual funds (mortgage-backed securities) 6.59% --% --%
Weighted average maturity at end of period
Overnight deposits 1 day 1 day 1 day
U.S. agency securities 5 months 62 months --
U.S. agency mortgage-backed securities 267 months -- --
Mutual funds (mortgage-backed securities) 1 day -- --
Impact of Inflation and Changing Prices
The financial statements and notes 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 our operations. Unlike industrial
companies, nearly all of the assets and liabilities of UPFC are monetary in
nature. As a result, interest rates have a greater impact on our 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 Financial Accounting Standards Board (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, as amended by SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133"
("SFAS 137") is effective for all fiscal quarters of fiscal years beginning
after June 15, 2000.
In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities" ("SFAS 138"), which
amends the accounting and reporting standards of SFAS 133 for certain derivative
instruments and certain hedging activities. SFAS 138 is effective concurrently
with SFAS 133 for all fiscal quarters of fiscal years beginning after June 15,
2000. Our adoption of SFAS 138 on January 1, 2001 had no impact on our results
of operations or financial condition.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions involving Stock Compensation" ("Interpretation 44"), which
provides guidance only for certain issues arising from the application of APB
Opinion No. 25, "Accounting for Stock Issued to Employees" ("Opinion 25").
Interpretation
52
44 is effective July 1, 2000, except as noted in the Interpretation, and did not
have a material impact on the results of operations or financial condition of
UPFC.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS
140"), which replaces SFAS 125. It revises the standards for accounting for
securitizations and other transfers of financial assets and collateral and
requires certain disclosures, but it carries over most of SFAS 125's provisions
without change. SFAS 140 is effective for transfers occurring after March 31,
2001 and for disclosures relating to securitization transactions and collateral
for fiscal years ending after December 15, 2000. SFAS 140 is not expected to
have a material impact on the results of our operations or our financial
condition.
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, 2000 and 1999 F-3
Consolidated Statements of Operations for the
years ended December 31, 2000, 1999 and 1998 F-4
Consolidated Statements of Comprehensive Income for the
years ended December 31, 2000, 1999 and 1998 F-5
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 2000, 1999 and 1998 F-6
Consolidated Statements of Cash Flows for the
years ended December 31, 2000, 1999 and 1998 F-7
Consolidated Statements of Cash Flows, Continued for the
years ended December 31, 2000, 1999 and 1998 F-8
Notes to Consolidated Financial Statements F-9
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
None.
53
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 10 is incorporated by reference to our 2001 definitive proxy statement
to be filed with the Securities and Exchange Commission within 120 days after
December 31, 2000. The information required by Item 10 is 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 2000".
Item 11. Executive Compensation
Item 11 is incorporated by reference to the Sections entitled "Information
About Directors and Executive Officers" contained in the 2001 Proxy Statement,
to be filed with the SEC within 120 days after December 31, 2000.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 12 is incorporated by reference to the Section entitled "Information
About UPFC Stock Ownership" contained in the 2001 Proxy Statement, to be filed
with the SEC within 120 days after December 31, 2000.
Item 13. Certain Relationships and Related Transactions
Item 13 is incorporated by reference to the Section entitled
"Information About Directors and Executive Officers - Relationships and Related
Transactions" contained in the 2001 Proxy Statement, to be filed with the SEC
within 120 days after December 31, 2000.
54
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.
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.
55
Exhibit No. Description
- ----------- -----------
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.
10.29* 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.
56
Exhibit No. Description
- ----------- -----------
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.
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.
10.42* 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.
10.46* 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.
10.49* 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.
10.53* 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.
57
Exhibit No. Description
- ----------- -----------
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.
10.73* 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.
10.85* United Auto Credit Corporation 1998 Management Incentive Plan.
10.85.1* Forms of Incentive Stock Option Agreement and Nonqualified Stock
Option Agreement.
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.
58
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.
10.101** 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.
10.106 Amended and Restated Loan and Stock Pledge Agreement dated
January 1, 2000, between Lawrence J. Grill and United PanAm
Financial Corp.
10.106.1 Amended and Restated Promissory Note in the principal amount of
$300,000 dated January 1, 2000 by Lawrence J. Grill.
10.107 Employment Agreement dated November 1, 2000, between Pan American
Bank, FSB and Lawrence J. Grill.
10.108 First Amendment to the Salary Continuation Agreement dated
December 21, 2000, between Pan American Bank, FSB and Lawrence J.
Grill.
59
Exhibit No. Description
- ----------- -----------
21.1* Subsidiaries.
23.1 Consent of KPMG LLP.
________
* 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 and Form 10-K for the
year ended December 1998.
*** Incorporated herein by reference from the Exhibits to Form 10-Q for the
quarter ended March 31, 1999 and Form 10-K for the year ended December 31,
1999.
(b) Reports on Form 8-K. On March 13, 2000, UPFC filed a report on Form 8-
K regarding the discontinuance of its subprime mortgage operations in
February 2000.
(c) Exhibits. Reference is made to the Exhibit Index and exhibits filed as
a part of this report.
(d) Additional Financial Statements. Not applicable.
60
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/ Guillermo Bron
------------------------------
Guillermo Bron
Chairman of the Board and
Chief Executive Officer
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 and March 21, 2001
- ----------------------------------
Chief Executive Officer
__________________________________ (Principal Executive Officer)
/s/ Ray C. Thousand President, Chief Operating March 21, 2001
- ----------------------------------
Officer, Secretary and
Director
/s/ Carol M. Bucci Senior Vice President - March 21, 2001
- ----------------------------------
Chief Financial Officer and
Treasurer (Principal
Financial and Accounting
Officer)
/s/ Lawrence J. Grill Director March 21, 2001
- ----------------------------------
/s/ John T. French Director March 21, 2001
- ----------------------------------
/s/ Edmund M. Kaufman Director March 21, 2001
- ----------------------------------
/s/ Daniel L. Villanueva Director March 21, 2001
- ----------------------------------
/s/ Luis Maizel Director March 21, 2001
- ----------------------------------
/s/ Ron R. Duncanson Director March 21, 2001
- ----------------------------------
61
EXHIBIT INDEX
Exhibits. Reference is made to the Exhibit Index and exhibits filed as a
part of this report.
62
United PanAm Financial Corp.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report F-2
Consolidated Statements of Financial Condition
as of December 31, 2000 and 1999 F-3
Consolidated Statements of Operations for the
years ended December 31, 2000, 1999 and 1998 F-4
Consolidated Statements of Comprehensive Income for the
years ended December 31, 2000, 1999 and 1998 F-5
Consolidated Statements of Shareholders' Equity for
the years ended December 31, 2000, 1999 and 1998 F-6
Consolidated Statements of Cash Flows
for the years ended December 31, 2000, 1999 and 1998 F-7
Consolidated Statements of Cash Flows, Continued
for the years ended December 31, 2000, 1999 and 1998 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, 2000 and 1999, and the consolidated statements of operations,
comprehensive income, shareholders' equity, and cash flows for each of the years
in the three year period ended December 31, 2000. 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 auditing standards generally
accepted in the United States of America. 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, 2000 and 1999, and the
results of their operations and their cash flows, for each of the years in the
three year period ended December 31, 2000 in conformity with accounting
principles generally accepted in the United States of America.
KPMG LLP
San Francisco, California
February 16, 2001
F-2
United PanAm Financial Corp. and Subsidiaries
Consolidated Statements of Financial Condition
December 31, December 31,
(Dollars in thousands) 2000 1999
----------- ------------
Assets
Cash and due from banks $ 6,115 $ 4,857
Short term investments 36,477 85,500
---------- ----------
Cash and cash equivalents 42,592 90,357
Securities available for sale, at fair value 223,265 9,918
Loans, net 192,368 158,283
Loans held for sale 712 136,460
Residual interests in securitizations, at fair value 8,861 21,227
Federal Home Loan Bank stock, at cost 3,000 2,505
Premises and equipment, net 1,591 1,429
Accrued interest receivable 814 1,501
Real estate owned, net 871 2,590
Goodwill and other intangible assets -- 1,736
Deferred tax assets 10,820 6,885
Other assets 5,084 5,399
---------- ----------
Total assets $ 489,978 $438,290
========== ==========
Liabilities and Shareholders' Equity
Deposits $ 348,230 $ 291,944
Federal Home Loan Bank advances 60,000 --
Warehouse lines of credit -- 54,415
Accrued expenses and other liabilities 12,431 16,578
---------- ----------
Total liabilities 420,661 362,937
---------- ----------
Common stock (no par value):
Authorized, 30,000,000 shares
Issued and outstanding, 16,149,650 and 16,369,350 shares at
December 31, 2000 and December 31, 1999, respectively 65,291 65,249
Retained earnings 3,524 10,183
Unrealized gain (loss) on securities available for sale, net 502 (79)
---------- ----------
Total shareholders' equity 69,317 75,353
---------- ----------
Total liabilities and shareholders' equity $ 489,978 $ 438,290
========== ==========
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,
------------------------------------------
2000 1999 1998
---------- ---------- ----------
Interest Income
Loans $ 34,814 $27,003 $23,194
Securities 9,561 1,800 1,346
---------- ---------- ----------
Total interest income 44,375 28,803 24,540
---------- ---------- ----------
Interest Expense
Deposits 13,057 5,787 6,550
Federal Home Loan Bank advances 1,506 -- 666
Notes payable -- 246 623
---------- ---------- ----------
Total interest expense 14,563 6,033 7,839
---------- ---------- ----------
Net interest income 29,812 22,770 16,701
Provision for loan losses 201 432 293
---------- ---------- ----------
Net interest income after provision for loan losses 29,611 22,338 16,408
---------- ---------- ----------
Non-interest Income
Loss on residual interests in securitizations (11,374) -- --
Gains on sales of loans, net -- -- 976
Loan related charges and fees 215 113 135
Service charges and fees 616 725 672
Other income (369) 136 129
---------- ---------- ----------
Total non-interest income (loss) (10,912) 974 1,912
---------- ---------- ----------
Non-interest Expense
Compensation and benefits 12,903 10,843 8,370
Occupancy 2,486 1,890 1,335
Other 8,772 5,910 4,696
---------- ---------- ----------
Total non-interest expense 24,161 18,643 14,401
---------- ---------- ----------
Income (loss) from continuing operations before income taxes (5,462) 4,669 3,919
Income taxes (benefit) (2,094) 1,908 1,645
---------- ---------- ----------
Income (loss) from continuing operations (3,368) 2,761 2,274
---------- ---------- ----------
Income (loss) from discontinued operations, net of tax -- (941) 4,489
Loss on disposal of discontinued operations, net of tax (3,291) (6,172) --
---------- ---------- ----------
Net income (loss) $ (6,659) $ (4,352) $ 6,763
========== ========== ==========
Earnings (loss) per share-basic:
Continuing operations $ (0.21) $ 0.16 $ 0.15
========== ========== ==========
Discontinued operations $ (0.20) $ (0.42) $ 0.29
========== ========== ==========
Net income (loss) $ (0.41) $ (0.26) $ 0.44
========== ========== ==========
Weighted average shares outstanding 16,392 16,854 15,263
========== ========== ==========
Earnings (loss) per share-diluted:
Continuing operations $ (0.21) $ 0.16 $ 0.14
========== ========== ==========
Discontinued operations $ (0.20) $ (0.41) $ 0.28
========== ========== ==========
Net income (loss) $ (0.41) $ (0.25) $ 0.42
========== ========== ==========
Weighted average shares outstanding 16,392 17,253 16,143
========== ========== ==========
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,
-------------------------------------------
2000 1999 1998
----------- ---------- ----------
Net income (loss) $ (6,659) $ (4,352) $ 6,763
Other comprehensive income, net of tax:
Unrealized gain (loss) on securities 581 (79) --
----------- ---------- ----------
Comprehensive income (loss) $ (6,078) $ (4,431) $ 6,763
=========== ========== ==========
See accompanying notes to consolidated financial statements.
F-5
United PanAm Financial Corp. and Subsidiaries
Consolidated Statements of Shareholders' Equity
Unrealized
(Dollars in thousands) Gain (Loss) Total
Number Common Retained On Shareholders'
of Shares Stock Earnings Securities, Net Equity
----------- --------- -------- --------------- -------------
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)
Issuance of 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
Net loss -- -- (6,659) -- (6,659)
Exercise of stock options 267,500 468 -- -- 468
Issuance of restricted stock 13,400 35 -- -- 35
Repurchase of stock (500,600) (461) -- -- (461)
Unrealized gain on securities, net -- -- -- 581 581
----------- --------- -------- --------------- -------------
Balance, December 31, 2000 16,149,650 $ 65,291 $ 3,524 $ 502 $ 69,317
=========== ========= ======== =============== =============
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,
---------------------------------------
2000 1999 1998
--------- --------- -----------
Cash flows from operating activities:
Net income (loss) $ (6,659) $ (4,352) $ 6,763
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Discontinued operations 3,291 7,113 (4,489)
Gains on sales of loans -- -- (976)
Origination of loans held for sale (76,368) (977,244) (1,192,869)
Sales of loans held for sale 203,586 983,734 1,119,008
Net proceeds from sale of residual interests in securitizations -- -- 8,302
Provision for loan losses 201 432 293
Accretion of discount on loans -- (178) (596)
Depreciation and amortization 1,216 1,139 615
FHLB stock dividend (168) (121) (114)
Decrease in residual interests in securitizations 12,366 569 --
Decrease (increase) in accrued interest receivable 687 533 (540)
Decrease (increase) in other assets 3,897 7,438 (5,667)
Deferred income taxes (4,285) (3,109) 130
Amortization of discount on securities (4,645) -- --
Decrease in accrued expenses and other liabilities (6,221) (1,223) (10,771)
Other, net 34 373 60
--------- --------- -----------
Net cash provided by (used in) operating activities 126,932 15,104 (80,851)
--------- --------- -----------
Cash flows from investing activities:
Purchase of securities, net of maturities (207,748) (9,918) 1,002
Repayments of mortgage loans 13,006 39,128 40,630
Originations, net of repayments, of non-mortgage loans (47,673) (22,244) (39,982)
Purchases, net of sales, of premises and equipment (900) (985) (3,320)
Purchase of treasury stock (461) (3,695) --
Purchase of FHLB stock, net (327) (264) (61)
Increase in goodwill and other intangible assets -- -- (2,130)
Proceeds from sale of real estate owned 7,434 7,120 2,579
Other, net (367) (286) --
--------- --------- -----------
Net cash provided by (used in) investing activities (237,036) 8,856 (1,282)
--------- --------- -----------
Cash flows from financing activities:
Net increase (decrease) in deposits 56,286 (29,724) 88,474
Proceeds (repayments) from warehouse lines of credit (54,415) 54,415 (6,237)
Proceeds (repayments) from notes payable -- (10,930) (2,000)
Proceeds from initial public offering of common stock, net -- -- 63,001
Proceeds (repayments) from FHLB advances 60,000 -- (28,000)
Exercise of stock options 468 425 80
--------- --------- -----------
Net cash provided by financing activities 62,339 14,186 115,318
--------- --------- -----------
Net increase (decrease) in cash and cash equivalents (47,765) 38,146 33,185
Cash and cash equivalents at beginning of period 90,357 52,211 19,026
--------- --------- -----------
Cash and cash equivalents at end of period $ 42,592 $ 90,357 $ 52,211
========= ========= ===========
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,
-----------------------------
2000 1999 1998
------- ------- -------
Supplemental disclosures of cash flow information:
Cash paid for:
Interest $17,924 $17,793 $19,410
======= ======= =======
Taxes $ 236 $ 253 $ 8,285
======= ======= =======
Supplemental schedule of non-cash investing and financing activities:
Real estate acquired through foreclosure $ 5,715 $ 7,833 $ 3,893
======= ======= =======
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. ("UPFC" or the "Company") was incorporated in
California on April 9, 1998 for the purpose of reincorporating its business in
California, through the merger of United PanAm Financial Corp., a Delaware
corporation into UPFC. Unless the context indicates otherwise, all references
to UPFC include the previous Delaware corporation. UPFC 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 (the "RTC") on April 29, 1994. UPFC, PAFI and the Bank are
considered to be minority owned. PAFI is a wholly-owned subsidiary of UPFC and
the Bank is a wholly-owned subsidiary of PAFI. WorldCash Technologies, Inc.
("WorldCash") is a wholly-owned subsidiary of UPFC and was incorporated in 1999.
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 UPFC, PAFI,
WorldCash and the Bank. Substantially all of UPFC's revenues are derived from
the operations of the Bank and they represent substantially all of UPFC's
consolidated assets and liabilities as of December 31, 2000 and 1999.
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 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, 2000 and 1999.
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.
A decline in the market value of any available-for-sale or held-to-maturity
security below cost that is deemed other than temporary, results in a charge to
earnings and the establishment of a new cost basis for the security.
F-9
United PanAm Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Premiums and discounts are amortized or accreted over the life of the
related security as an adjustment to yield using the effective interest method.
Dividend and interest income are recognized when earned. Realized gains and
losses for securities classified as available for sale or held to maturity are
included in earnings and are derived using the specific identification method
for determining the cost of securities sold.
LOANS
- -----
UPFC originates and purchases loans for investment. Loans held for
investment are reported at cost, net of unamortized discounts or premiums,
unearned loan origination fees and allowances for losses. Loans held for sale,
which remain from UPFC's discontinued mortgage operations, 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. 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. UPFC ceases to accrue interest
on mortgage loans that are delinquent 90 days or more. The Company's policy is
to charge-off non-mortgage loans delinquent 120 days or more, or place the loan
on nonaccrual, if the ultimate collectibility of the interest is in doubt.
Interest income deemed uncollectible is reversed. UPFC 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.
UPFC 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 December 31, 1999 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 used 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 at December 31, 1999 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%.
UPFC sold all of its residual interests in January 2001. Accordingly, as
of December 31, 2000, its residual interests were valued based on the terms and
conditions of the sales contract and the net cash proceeds received at the
settlement date in January 2001.
F-10
United PanAm Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
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.
ALLOWANCE FOR LOAN LOSSES
- -------------------------
UPFC 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 our 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 our
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.
GOODWILL AND OTHER INTANGIBLE ASSETS
- ------------------------------------
Goodwill and other intangible assets consist 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, UPFC 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 of
$198,000 at December 31, 1999 were amortized over the estimated life of the
acquired deposit base, using the straight-line method. These core deposit
premiums were fully amortized by the end of 2000.
In January and November 1998, the Company purchased from Providian National
Bank and Norwest Financial Coast, respectively, the rights to solicit new and
renewal personal and commercial insurance premium finance business from brokers
who previously provided contracts to Providian National Bank and Norwest
Financial Coast. The excess of the cash consideration paid over the fair value
of the assets acquired of $2.1 million was considered goodwill. The unamortized
goodwill remaining from these acquisitions was $1.5 million at December 31,
1999. In 2000, the remaining goodwill was written-off as the Company determined
that its fair value was zero.
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, 2000
and
F-11
United PanAm Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
1999, there were no such allowances. Real estate owned at December 31, 2000 and
1999 consisted of one to four unit residential real estate.
INCOME TAXES
- ------------
UPFC 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, we file 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 Financial Accounting Standards Board (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, as amended by SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133"
("SFAS 137") is effective for all fiscal quarters of fiscal years beginning
after June 15, 2000.
In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities" ("SFAS 138"), which
amends the accounting and reporting standards of SFAS 133 for certain derivative
instruments and certain hedging activities. SFAS 138 is effective concurrently
with SFAS 133 for all fiscal quarters of fiscal years beginning after June 15,
2000. The adoption of SFAS 138 by the Company on January 1, 2001 had no impact
on its results of operations or financial condition.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions involving Stock Compensation" ("Interpretation 44"), which
provides guidance only for certain issues arising from the application of APB
Opinion No. 25, "Accounting for Stock Issued to Employees" ("Opinion 25").
Interpretation 44 is effective July 1, 2000, except as noted in the
Interpretation, and did not have a material impact on the results of operations
or financial condition of UPFC.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS
140"), which replaces SFAS 125. It revises the standards for accounting for
securitizations and other transfers of financial assets and collateral and
requires certain disclosures, but it carries over most of SFAS 125's provisions
without change. SFAS 140 is effective for transfers occurring after March 31,
2001 and for disclosures relating to securitization transactions and collateral
for fiscal years ending after December 15, 2000. SFAS 140 is not expected to
have a material impact on the results of operations or financial condition of
UPFC.
F-12
United PanAm Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
3. DISCONTINUED OPERATIONS
In February 2000, UPFC 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 2000 and the preceding years' consolidated
financial statements. Also included in our consolidated statements of financial
condition are the assets of the mortgage finance business of $55,000 and $145.0
million at December 31, 2000 and 1999, respectively, consisting of loans and
other assets. In addition, the liabilities of the mortgage business are $3.3
million and $63.5 million at December 31, 2000 and 1999, respectively,
consisting of other liabilities in 2000 and warehouse lines of credit and other
liabilities in 1999. 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 $61.5 million, $189.7 million and $170.5 million in 2000, 1999 and
1998, respectively, and average warehouse lines of credit of $1.8 million, $45.4
million and $43.8 million in 2000, 1999 and 1998, 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,
--------------------------------
2000 1999 1998
------- -------- -------
Net interest income after provision for loan losses $ -- $ 1,970 $ 3,838
Non-interest income -- 31,964 49,154
Non-interest expense -- 35,580 45,157
------- -------- -------
Operating income (loss) before income taxes and loss on disposal -- (1,646) 7,835
Loss on disposal (5,288) (10,511) --
------- -------- -------
Income (loss) before income taxes (benefit) (5,288) (12,157) 7,835
Income taxes (benefit) (1,997) (5,044) 3,346
------- -------- -------
Income (loss) from discontinued operations $(3,291) $ (7,113) $ 4,489
======= ======== =======
The loss on disposal in 1999 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. The 2000 loss on disposal represents an additional charge relating to
the disposal of the remaining subprime mortgage loans included in the
discontinued operations of the Company.
4. SECURITIES AVAILABLE FOR SALE
Securities available for sale are as follows:
Gross Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(Dollars in thousands) Cost Gains Losses Value
--------- ---------- ---------- ----------
2000
U.S. government agency securities $166,899 $ 1 $ 62 $ 166,838
U.S. government agency mortgage-backed securities 45,571 805 -- 46,376
Mutual funds 10,000 51 -- 10,051
-------- -------- -------- ---------
Total securities $222,470 $ 857 $ 62 $ 223,265
======== ======== ======== =========
1999
U.S. government agency securities $ 10,054 $ -- $ 136 $ 9,918
======== ======== ======== =========
F-13
United PanAm Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
The carrying and estimated fair values of securities at December 31, 2000
by contractual maturity, are shown on the following table. Actual maturities
may differ from contractual maturities because issuers generally have the right
to call or prepay obligations with or without call or prepayment penalties.
(Dollars in thousands)
Estimated
Amortized Fair
Cost Value
--------- ---------
One year or less $ 168,899 $ 168,888
One to five years 8,000 8,001
Mortgage-backed securities 45,571 46,376
--------- ---------
Total $ 222,470 $ 223,265
========= =========
5. LOANS
Loans are summarized as follows:
December 31,
----------------------
(Dollars in thousands) 2000 1999
-------- --------
Consumer loans:
Automobile installment contracts $176,255 $128,093
Insurance premium finance 25,843 23,846
Other consumer 577 864
--------- ---------
202,675 152,803
-------- --------
Commercial loans:
Insurance premium finance 8,342 6,488
Other commercial 55 15
-------- --------
8,397 6,503
-------- --------
Mortgage loans:
Fixed rate 14,428 8,517
Adjustable rate 3,489 26,734
-------- --------
17,917 35,251
-------- --------
Total loans 228,989 194,557
Less:
Unearned discounts and premiums (728) (954)
Unearned finance charges (20,737) (21,181)
Allowance for loan losses (15,156) (14,139)
-------- --------
Total loans, net $192,368 $158,283
======== ========
Contractual weighted average interest rate 19.62% 17.39%
-------- --------
At December 31, 2000 and 1999 approximately 80% of the Company's mortgage
loans were collateralized by first deeds of trust on one-to-four family
residences. At December 31, 2000 and 1999, approximately 59% and 68%,
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, 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
UPFC. 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 $364,000
and $697,000, at December 31, 2000 and 1999, respectively.
F-14
United PanAm Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
The activity in the allowance for loan losses consists of the following:
Years Ended December 31,
---------------------------------
(Dollars in thousands) 2000 1999 1998
---------------------------------
Balance at beginning of year $ 14,139 $ 10,183 $ 6,487
Provision for loan losses - continuing operations 201 432 293
Provision for loan losses - discontinued operations 2,396 7,376 5,560
Purchase discounts allocated to the allowance for loan losses 10,234 7,358 4,582
Charge-offs (12,427) (11,920) (8,329)
Recoveries 613 710 1,590
-------- -------- -------
Net charge-offs (11,814) (11,210) (6,739)
-------- -------- -------
Balance at end of year $ 15,156 $ 14,139 $10,183
======== ======== =======
The discounts allocated to the allowance for loan losses are comprised of
acquisition discounts on the Company's purchase of automobile installment
contracts. UPFC 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) 2000 1999
---------- ----------
Nonaccrual loans $3,067 $13,157
Real estate owned, net 871 2,590
---------- ----------
Totals $3,938 $15,747
========== ==========
Percentage of non-performing assets to total assets 0.80% 3.60%
========== ==========
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 investment in the loan and the fair value of the collateral securing the
loan. Consumer loans are not individually evaluated for impairment as the
Company collectively evaluates large groups of homogeneous loans for impairment.
At December 31, 2000, the aggregate investment in loans considered to be
impaired was $2.8 million and $17.2 million at December 31, 1999. Allowance for
loan losses was provided for all impaired loans at December 31, 2000 and 1999;
the related allowances were $364,000 and $3.2 million, respectively. For the
years ended December 31, 2000 and 1999, UPFC recognized interest income on
impaired loans of $698,000 and $1.4 million, respectively, all of which was
recorded using the cash received method. The average recorded investment in
impaired loans during the years ended December 31, 2000 and 1999 was
approximately $13.0 million and $18.6 million, respectively.
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 30,000 shares at December 31, 2000 and 25,045 shares
at December 31, 1999 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.
F-15
United PanAm Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
7. INTEREST RECEIVABLE
Interest receivable is as follows:
December 31,
--------------------------
(Dollars in thousands) 2000 1999
----------- ----------
Loans $ 170 $1,400
Securities 644 101
----------- ----------
Total $ 814 $ 1,501
=========== ==========
8. PREMISES AND EQUIPMENT
Premises and equipment are as follows:
(Dollars in thousands) December 31,
----------------------
2000 1999
-------- --------
Furniture and equipment $ 3,361 $ 7,644
Leasehold improvements 392 665
-------- --------
3,753 8,309
Less : Accumulated depreciation and amortization (2,162) (4,690)
Discontinued operations write-off -- (2,190)
-------- --------
Total $ 1,591 $ 1,429
======== ========
Depreciation and amortization expense was $739,000 for the year ended
December 31, 2000, $641,000 for the year ended December 31, 1999 and $375,000
for the year ended December 31, 1998. Depreciation expense of the subprime
mortgage operations is included in discontinued operations.
9. DEPOSITS
Deposits are summarized as follows:
December 31,
---------------------------------------------------------
2000 1999
---------------------------------------------------------
(Dollars in thousands) Weighted Weighted
Amount Average Rate Amount Average Rate
---------------------------------------------------------
Deposits with no stated maturity:
Regular and money market passbook $ 38,730 4.32% $ 47,151 4.35%
NOW accounts 14,828 2.24% 14,813 1.98%
Money market checking 422 2.47% 1,951 2.35%
-------- ---------- -------- ---------
53,980 3.73% 63,915 3.74%
-------- ---------- -------- ---------
Time deposits less than $100,000 211,427 6.40% 163,874 5.35%
Time deposits $100,000 and over 82,823 6.57% 64,155 5.51%
-------- ---------- -------- ---------
294,250 6.45% 228,029 5.39%
-------- ---------- -------- ---------
Total deposits $348,230 6.03% $291,944 5.03%
======== ========== ======== =========
A summary of time deposits by remaining maturity is as follows:
December 31,
------------------------
(Dollars in thousands) 2000 1999
-------- --------
Maturity within one year $257,710 $199,110
Maturity within two years 36,440 28,770
Maturity within three years 100 149
-------- --------
Total $294,250 $228,029
======== ========
10. WAREHOUSE LINES OF CREDIT
At December 31, 1999, the Company had $54.4 million outstanding under its
warehouse lines of credit at an interest rate of 5.78%. These credit facilities
were terminated in connection with discontinuing
F-16
United PanAm Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
the Company's mortgage finance operations and all amounts owed were repaid in
2000. The maximum amount outstanding at any month-end during 2000 and the
average amount outstanding during 2000 were $26.6 million and $1.8 million,
respectively. The credit facilities were secured by mortgage loans held for
sale.
11. INCOME TAXES
Total income tax expense (benefit) was allocated as follows:
(Dollars in thousands) Years Ended December 31,
--------------------------------
2000 1999 1998
------- ------- ------
Income (loss) from continuing operations $(2,094) $ 1,908 $1,645
Discontinued operations (1,997) (5,044) 3,346
------- ------- ------
Total tax expense (benefit) $(4,091) $(3,136) $4,991
======= ======= ======
The provision for income taxes including discontinued operations is
comprised of the following:
(Dollars in thousands) Years Ended December 31,
--------------------------------
2000 1999 1998
--------------------------------
Federal taxes:
Current $ 156 $ (20) $3,718
Deferred (3,477) (2,514) 35
------- ------- ------
(3,321) (2,534) 3,753
------- ------- ------
State taxes:
Current 38 (7) 1,143
Deferred (808) (595) 95
------- ------- ------
(770) (602) 1,238
------- ------- ------
Total $(4,091) $(3,136) $4,991
======= ======= ======
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) 2000 1999
------- -------
Deferred tax assets:
Residual interests in securitizations $ 4,478 $ --
Net operating loss carryforwards 3,892 1,031
Discontinued operations and accrued lease obligations 1,631 4,385
Intangible assets 915 311
Compensation related reserve 427 415
State taxes 2 23
Loans marked to market for tax purposes -- 1,563
Unrealized loss on securities available for sale -- 57
Other 287 189
------- -------
Total gross deferred tax assets 11,632 7,974
------- -------
Deferred tax liabilities:
FHLB stock dividends (259) (188)
Loan loss allowances (188) (901)
Unrealized gain on securities available for sale (292) --
Loans marked to market for tax purposes (73) --
------- -------
Total gross deferred tax liabilities (812) (1,089)
------- -------
Net deferred tax assets $10,820 $ 6,885
======= =======
F-17
United PanAm Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
UPFC 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.
UPFC has $11.3 million in federal tax net operating loss carry-forwards
expiring under current tax laws in 2019-2020. The Company's state tax net
operating loss carry-forwards are $759,000 and expire in 2004-2010.
UPFC's effective income tax rate differs from the federal statutory rate
due to the following:
Years Ended December 31,
--------------------------
2000 1999 1998
-------- ------- ------
Expected statutory rate (34.0)% (34.0)% 34.0%
State taxes, net of federal benefits (4.9) (5.0) 7.0
Other, net 0.8 (2.9) 1.5
-------- ------- ------
Effective tax rate (38.1)% (41.9)% 42.5%
======== ======= =====
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 1999 are primarily a result of adjustments to conform to the tax
returns as filed.
12. 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, 2000 December 31, 1999
------------------------------ ---------------------------------
(Dollars in thousands) Actual Required Excess Actual Required Excess
-------- -------- -------- -------- -------- --------
Tangible capital $40,840 $ 7,189 $33,651 $46,234 $ 6,542 $39,692
Tangible capital ratio 8.52% 1.50% 7.02% 10.60% 1.50% 9.10%
Core capital $40,840 $14,378 $26,462 $46,234 $13,084 $33,150
Core capital (leverage) ratio 8.52% 3.00% 5.52% 10.60% 3.00% 7.60%
Risk-based capital $35,134 $19,354 $15,780 $28,581 $22,327 $ 6,254
Percent of risk-weighted assets 14.52% 8.00% 6.52% 10.24% 8.00% 2.24%
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.
F-18
United PanAm Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
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, 2000. Since that date, there
are no conditions or events that management believes would have changed its
"well-capitalized" designation.
The Bank had the following regulatory capital calculated in accordance with
FDICIA's capital standards for a "well capitalized" institution:
December 31, 2000 December 31, 1999
------------------------------ ---------------------------------
(Dollars in thousands) Actual Required Excess Actual Required Excess
-------- -------- -------- -------- -------- --------
Leverage $40,840 $23,964 $16,876 $46,234 $21,808 $24,426
Leverage ratio 8.52% 5.00% 3.52% 10.60% 5.00% 5.60%
Tier 1 risk-based $31,979 $14,515 $17,464 $25,007 $16,746 $ 8,261
Tier 1 risk-based ratio 13.22% 6.00% 7.22% 8.96% 6.00% 2.96%
Total risk-based $35,134 $24,192 $10,942 $28,581 $27,908 $ 673
Total risk-based ratio 14.52% 10.00% 4.52% 10.24% 10.00% 0.24%
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. In September 2000,
the Bank filed an application with the California Department of Financial
Institutions (the "DFI") to convert from its present status as a federally
chartered savings institution to a California state-chartered commercial bank.
The Bank is seeking a commercial bank charter because of certain lending
restrictions in its present charter. In accordance with the application review
process, the DFI has finished an on-site examination of the Bank and is
presently completing its review of the Bank's conversion application.
13. COMMITMENTS AND CONTINGENCIES
Certain branch and office locations are leased by UPFC under operating
leases expiring at various dates through the year 2007. Rent expense was $1.5
million, $1.1 million and $782,000 for the years ended December 31, 2000, 1999
and 1998, respectively.
Future minimum rental payments as of December 31, 2000 under existing
leases, including approximately $3.7 million to be recovered from sublease
rental arrangements through 2003, are set forth as follows:
(Dollars in thousands)
Years ending December 31:
2001 $1,801
2002 1,607
2003 1,468
2004 1,453
2005 1,093
Thereafter 569
======
Total $7,991
======
UPFC 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
F-19
United PanAm Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
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 UPFC and the purchaser. In the opinion of
management, the potential exposure related to these loan sale agreements will
not have a material effect on the financial position and operating results of
UPFC.
UPFC 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 UPFC.
14. STOCK OPTIONS
In 1994, UPFC 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.
Stock option activity is as follows:
Years Ended December 31,
-------------------------------------------------------------------------------
(Dollars in thousands, except per share Weighted Weighted Weighted
amounts) Average Average Average
Shares Exercise Shares Exercise Shares Exercise
2000 Price 1999 Price 1998 Price
-------------------------------------------------------------------------------
Balance at beginning of year 1,783,250 $ 5.82 1,820,000 $5.74 1,580,000 $ 4.55
Granted -- -- 445,000 3.66 350,000 9.82
Canceled or expired (354,500) 10.42 (148,000) 9.68 (10,000) 10.50
Exercised (267,500) 1.02 (333,750) 0.80 (100,000) 0.80
---------- ---------- ----------
Balance at end of year 1,161,250 $ 5.48 1,783,250 $5.82 1,820,000 $ 5.74
========== ========== ==========
Weighted average fair value per share
of options granted during the year $ -- $ 1.21 $ 5.62
========== ========== =========
Certain shares exercised in 1997 and 1999 were executed by a shareholder
and officer of UPFC. In connection with this transaction, UPFC 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% and is due and payable on December 31, 2002.
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 2000 and 1999, 13,400 and 35,500 shares,
respectively, of restricted stock vested and 59,000 and 23,000 shares,
respectively, were canceled.
UPFC applies APB Opinion No. 25 in accounting for the Plan. Compensation
expense related to this stock compensation plan was $35,000, $216,000 and
$60,000 in 2000, 1999 and 1998, respectively.
F-20
United PanAm Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
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,
--------------------------------
2000 1999 1998
------- -------- ------
Net income (loss) to common shareholders:
As reported $(6,659) $(4,352) $6,763
Pro-forma $(7,032) $(4,956) $6,334
Earnings (loss) per share:
As reported - basic $ (0.41) $ (0.26) $ 0.44
As reported - diluted $ (0.41) $ (0.25) $ 0.42
Pro-forma - basic $ (0.43) $ (0.29) $ 0.41
Pro-forma - diluted $ (0.43) $ (0.29) $ 0.39
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, risk-free interest rate of 7.0% and
expected lives of 5 years.
At December 31, 2000, options exercisable to purchase 879,750 shares of
UPFC'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 - $1.33 273,750 2006 $ 0.80 273,750 $ 0.80
$10.50 207,500 2007 10.50 205,000 10.50
$4.75-$12.10 260,000 2008 9.54 130,000 9.54
$2.50-$5.00 420,000 2009 3.55 271,000 3.50
---------- -------- -------- --------
1,161,250 $ 5.48 879,750 $ 5.18
========== ======== ======== ========
UPFC'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.
15. 401(k) PLAN
UPFC maintains the Pan American Bank, FSB 401(k) Profit Sharing Plan (the
"401(k) Plan") for the benefit of all eligible employees of UPFC. Under the
401(k) Plan, employees may contribute up to 15% of their pre-tax salary or the
annual dollar limit of $10,500 for 2000. 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 UPFC in 2000, 1999 and 1998
were $72,000, $419,000 and $402,000, respectively. The Company used account
forfeitures in 2000 to fund a portion of its contribution.
F-21
United PanAm Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
16. OTHER EXPENSES
Other expenses are comprised of the following:
Years Ended December 31,
-------------------------------
(Dollars in thousands) 2000 1999 1998
------- ------- -------
Amortization/write-off of intangible assets $ 1,735 $ 600 $ 239
Professional fees 1,174 792 720
Loan and collection expenses 927 655 450
Travel and entertainment 792 478 367
Marketing 780 256 101
Data processing 708 682 524
Corporate relocation 700 -- --
Forms, supplies, postage and delivery 546 477 432
Telephone 533 417 293
Insurance premiums 409 461 590
Loan servicing expense 54 559 345
Other 414 533 635
------- ------- -------
Total $ 8,772 $ 5,910 $ 4,696
======= ======= =======
17. EARNINGS FROM CONTINUING OPERATIONS PER SHARE
UPFC calculates earnings per share as shown below:
Years Ended December 31,
-----------------------------------
(In thousands, except per share amounts) 2000 1999 1998
-------- -------- --------
Earnings per share from continuing operations - basic:
Income from continuing operations $ (3,368) $ 2,761 $ 2,274
======== ======== ========
Average common shares outstanding 16,392 16,854 15,263
======== ======== ========
Per share $ (0.21) $ 0.16 $ 0.15
======== ======== ========
Earnings per share from continuing operations - diluted:
Income from continuing operations $ (3,368) $ 2,761 $ 2,274
======== ======== ========
Average common shares outstanding 16,392 16,854 15,263
Add: Stock options -- 399 880
-------- -------- --------
Average common shares outstanding - diluted 16,392 17,253 16,143
======== ======== ========
Per share $ (0.21) $ 0.16 $ 0.14
======== ======== ========
Options to purchase 273,750 shares of common stock at a weighted average
price of $0.80 per share were outstanding at December 31, 2000, but were not
included in the computation of diluted earnings per share because the Company
reported a loss from continuing operations in 2000.
F-22
United PanAm Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
18. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of UPFC's financial instruments are as follows at
the dates indicated:
December 31, December 31,
2000 1999
--------------------------------------------------
(Dollars in thousands) Carrying Fair Value Carrying Fair Value
Value Estimate Value Estimate
---------- ---------- -------- ----------
Assets:
Cash and cash equivalents $ 42,592 $ 42,592 $ 90,357 $ 90,357
Securities 223,265 223,265 9,918 9,918
Loans, net 192,368 192,368 158,283 158,283
Loans held for sale 712 712 136,460 138,275
Residual interests in securitizations 8,861 8,861 21,227 21,227
Federal Home Loan Bank Stock 3,000 3,000 2,505 2,505
Liabilities:
Deposits 348,230 349,221 291,944 291,258
Federal Home Loan Bank advances 60,000 60,000 -- --
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 UPFC'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.
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.
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.
Residual interests in securitizations: The fair value of residual interests
in securitizations at December 31, 1999 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. At December 31, 2000, the fair value of the residual interests is
based on the terms and conditions of the sales contract and the cash proceeds
received at the settlement date in January 2001.
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
F-23
United PanAm Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
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.
Federal Home Loan Bank advances: The fair value of FHLB advances 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 advances.
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.
19. OPERATING SEGMENTS
UPFC has three reportable segments: auto finance, insurance premium finance
and banking. The auto finance segment acquires, holds for investment and
services nonprime 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
federal savings bank and is the principal funding source for the auto and
insurance premium finance segments.
The accounting policies of the segments are the same as those described in
the 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).
F-24
United PanAm Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
UPFC's reportable segments are strategic business units that offer
different products and services. They are managed and reported upon separately
within UPFC.
At or For Year Ended December 31, 2000
-----------------------------------------------------------
Insurance
Auto Premium
Finance Finance Banking Total
-------- ------- -------- --------
Net interest income $ 21,637 $ 2,572 $ 5,603 $ 29,812
Provision for loan losses -- 147 54 201
Non-interest income 245 369 (11,526) (10,912)
Non-interest expense 13,609 2,429 8,123 24,161
-------- ------- -------- --------
Segment profit (loss) (pre-tax) $ 8,273 $ 365 $(14,100) $ (5,462)
======== ======= ======== ========
Total assets $145,018 $33,894 $311,011 $489,923
======== ======= ======== ========
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 (pre-tax) $ 2,326 $ 2,766 $ 5,016 $ 10,108
======== ======= ======== ========
Total assets $ 63,490 $46,582 $104,555 $214,627
======== ======= ======== ========
Substantially all expenses are recorded directly to each industry segment.
Segment total assets, interest income, non-interest income and segment profit
(loss) differ from the consolidated results due to the allocation of assets,
income and expense to discontinued operations as follows:
Years Ended December 31,
----------------------------------
2000 1999 1998
-------- -------- --------
Net interest income for reportable segments $ 29,812 $ 27,348 $ 21,090
Net interest income allocated to discontinued operations -- (4,578) (4,389)
-------- -------- --------
Consolidated net interest income $ 29,812 $ 22,770 $ 16,701
======== ======== ========
Non-interest income for reportable segments $(10,912) $ 2,254 $ 3,712
Non-interest income allocated to discontinued operations -- (1,280) (1,800)
-------- -------- --------
Consolidated non-interest income $(10,912) $ 974 $ 1,912
======== ======== ========
Segment profit (loss) for reportable segments $ (5,462) $ 10,527 $ 10,108
Loss allocated to discontinued operations -- (5,858) (6,189)
-------- -------- --------
Consolidated income (loss) from continuing operations before income taxes $ (5,462) $ 4,669 $ 3,919
======== ======== ========
Total assets for reportable segments $489,923 $293,320 $214,627
Total assets allocated to discontinued operations 55 144,970 210,932
-------- -------- --------
Consolidated total assets $489,978 $438,290 $425,559
======== ======== ========
F-25
United PanAm Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
20. HOLDING COMPANY FINANCIAL INFORMATION
Following are the financial statements of United PanAm Financial Corp.
(holding company only):
(Dollars in thousands) Years Ended December 31,
-----------------------------
2000 1999
---------- ----------
Statements of Financial Condition
Cash $ 151 $ 109
Note receivable from affiliate 14,022 26,306
Loans 7,619 --
Other assets 2,637 393
Investment in subsidiaries 45,539 49,090
---------- ----------
Total assets $ 69,968 $ 75,898
========== ==========
Other liabilities 651 545
---------- ----------
Total liabilities 651 545
Shareholders' equity 69,317 75,353
---------- ----------
Total liabilities and shareholders' equity $ 69,968 $ 75,898
========== ==========
Years Ended December 31,
------------------------------------------
2000 1999 1998
------------ ----------- -----------
Statements of Operations
Equity in undistributed income (loss) of subsidiaries $ $(7,261) $ (5,060) $ 6,155
Interest income 1,936 2,364 1,779
------------ ----------- -----------
Total income (5,325) (2,696) 7,934
------------ ----------- -----------
Interest expense -- -- 47
Other expense 858 1,137 679
------------ ----------- -----------
Total expense 858 1,137 726
------------ ----------- -----------
Income (loss) before income taxes (6,183) (3,833) 7,208
Income taxes 476 519 445
------------ ----------- -----------
Net income (loss) $ (6,659) $ (4,352) $ 6,763
============ =========== ===========
Statements of Cash Flows
Cash flows from operating activities:
Net income (loss) $ (6,659) $ (4,352) $ 6,763
Equity in earnings of subsidiaries 7,261 5,060 (6,155)
(Increase) decrease in accrued interest receivable (2,310) 1,492 (1,767)
(Increase) decrease in other assets 66 80 100
Increase in other liabilities 106 127 144
Other, net 95 219 60
------------ ------------ -----------
Net cash provided by (used in) operating activities (1,441) 2,626 (855)
------------ ------------ -----------
Cash flows from investing activities:
Purchase of loans held for investment (7,619) -- --
Purchase of treasury stock (461) (3,695) --
Repayment of notes receivable 12,284 31,832 --
Other, net (60) (77) --
------------ ------------ -----------
Net cash provided by investing activities 4,144 28,060 --
------------ ------------ -----------
Cash flows from financing activities:
Issuance of common stock -- -- 63,001
Issuance of note to subsidiary -- -- 58,138)
Capital contributed to subsidiary (3,129) (31,180) (2,200)
Increase (decrease) in notes payable to shareholders -- -- (2,000)
Exercise of stock options 468 425 80
------------ ------------ -----------
Net cash provided by (used in) financing activities (2,661) (30,755) 743
------------ ------------ -----------
Net increase (decrease) in cash and cash equivalents 42 (69) (112)
Cash and cash equivalents at beginning of year 109 178 290
------------ ------------ -----------
Cash and cash equivalents at end of year $ 151 $ 109 $ 178
============ ============ ===========
F-26
United PanAm Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
21. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(Dollars in thousands, except per share data) Three months ended
--------------------------------------------------------
March 31, June 30, September 30, December 31,
2000: 2000 2000 2000 2000
--------- -------- ------------- ------------
Net interest income $ 6,683 $ 7,266 $ 7,655 $ 8,208
Provision for loan losses 72 5 30 94
Non-interest income 239 (4,764) (5,087) (1,300)
Non-interest expense 5,156 5,480 7,819 5,706
--------- -------- ------------- ------------
Income (loss) from continuing operations before income taxes 1,694 (2,983) (5,281) 1,108
Income taxes (benefit) 692 (1,158) (1,970) 342
--------- -------- ------------- ------------
Income (loss) from continuing operations $ 1,002 $ (1,825) $ (3,311) $ 766
========= ======== ============= ============
Earnings (loss) from continuing operations per share - basic $ 0.06 $ (0.11) $ (0.20) $ 0.05
========= ======== ============= ============
Earnings (loss) from continuing operations share - diluted $ 0.06 $ (0.11) $ (0.20) $ 0.05
========= ======== ============= ============
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
========= ======== ============= ============
F-27