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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, 2001
Or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
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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 $24,302,000, based upon the closing sales price of
the Common Stock as reported on the Nasdaq National Market on March 15, 2002.
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, 2002 was 15,571,400 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 2002 Annual Meeting of Shareholders to be held June 2002 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,
2001.
UNITED PANAM FINANCIAL CORP.
2001 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 12
Economic Conditions, Government Policies, Legislation and Regulation 12
Employees 13
Regulation 13
Taxation 24
Subsidiaries 24
Factors That May Affect Future Results of Operations 25
Item 2. Properties 28
Item 3. Legal Proceedings 28
Item 4. Submission of Matters to a Vote of Security Holders 28
PART II
Item 5. Market For Registrant's Common Equity and Related Shareholder Matters 29
Item 6. Selected Financial Data 30
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations 32
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 46
Item 8. Financial Statements and Supplementary Data 46
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosures 47
PART III
Item 10. Directors and Executive Officers of the Registrant 48
Item 11. Executive Compensation 48
Item 12. Security Ownership of Certain Beneficial Owners and Management 48
Item 13. Certain Relationships and Related Transactions 48
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 49
SIGNATURES 52
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; 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 by the Office of Thrift Supervision ("OTS") 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. United Auto Credit Corp. ("UACC")
was incorporated in 1996 as a wholly owned subsidiary of the Bank. For more
information on subsidiaries see Item 1, Business Subdivisions.
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 reverse
repurchase agreements. All of our revenues are attributed to customers located
in the United States of America.
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 an agreement 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 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, 2001, UACC had a total of 40 branches, of
which four were opened in 1996, five in 1997, five in 1998, six in 1999, eight
in 2000 and twelve in 2001. UACC maintains nine branch offices located in
California, five branch offices located in Florida, three branch offices located
in Texas, two branch offices located in each of North Carolina, Arizona, Georgia
and Washington, and one each in Colorado, Maryland, Missouri, Oregon, Utah,
Virginia, Kansas, Illinois, Kentucky, Tennessee, Ohio, Michigan, Indiana, New
Jersey and Massachusetts. At December 31, 2001, UACC's portfolio contained
32,171 auto contracts in the aggregate gross amount of $232.9 million, including
unearned finance charges of $18.9 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, 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, 2001 and 2000.
At or For the
Years Ended
December 31,
-------------------------------------------------
2001 2000
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(Dollars in thousands, except portfolio and other)
Operating Data
Gross contracts purchased $233,368 $174,645
Gross contracts outstanding 232,902 176,255
Unearned finance charges 18,881 20,737
Net contracts outstanding 214,021 155,518
Average purchase discount 7.89% 8.08%
Annual percentage rate to customers 21.82% 21.72%
Allowance for loan losses $ 16,756 $ 12,614
Loan Quality Data
Allowance for loan losses (% of net contracts) 7.83% 8.11%
Delinquencies (% of net contracts)
31-60 days 0.47% 0.31%
61-90 days 0.22% 0.08%
90+ days 0.11% 0.12%
Net charge-offs (% of average net contracts) 5.23% 4.17%
Repossessions (net) (% of net contracts) 0.82% 0.62%
Portfolio Data
Used vehicles 99.0% 99.0%
Average vehicle age at time of contract (years) 5.5 5.7
Average original contract term (months) 45.7 44.2
Average gross amount financed as a percentage of KWBB(1) 115% 117%
Average net amount financed as a percentage of KWBB (2) 107% 107%
Average net amount financed per contract $ 8,530 $ 8,329
Average down payment 17% 19%
Average monthly payment $ 278 $ 277
Other Data
Number of branches 40 28
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(1) KWBB 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 a used automobile with an average
age of five to seven years and an average original contract term of 42 to 47
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. At December 31, 2001, we were allocating 10.5% of the
net contract amount of new contracts to the allowance for loan losses compared
with 9.0% at December 31, 2000. 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. UACC 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 of up to 20% that recognizes the
achievement of low delinquency ratios, low charge-off percentages, volume and
return on average assets targets established for the branch, as well as
satisfactory audit results. The bonus calculation stresses loan quality with
only 17% based on volume and 83% based on quality and return. 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,
2001 2000
------------ ------------
(Dollars in thousands)
Gross amount of contracts $ 233,368 $ 174,645
Average original term of contracts (months) 45.7 44.2
For the year ended December 31, 2001, 29% of UACC's auto contracts were
written by its California branches, compared to 41% at December 31, 2000 and 68%
at December 31, 1999. 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, 2001, no dealer accounted for more than 1.5% of UACC's
portfolio and the ten dealers from which UACC purchased the most contracts
accounted for approximately 7.0% 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 directly by UACC from the credit bureaus 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, Division 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 Managers 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 Division 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 Division 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 allowances based on expected losses over the life of the contract are
established when each contract is purchased from the dealer. The allowance is
provided from the dealer discount that is taken on each transaction. Loss
allowance analyses are performed regularly to determine the adequacy of current
allowance levels. At December 31, 2001, we allocated 10.5% 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 from October 1996 through March 2001. Contract pools
subsequent to March 2001 were not included in this table because the loan pools
were not seasoned enough to provide a meaningful comparison with prior periods.
Number of Oct. 1996 Apr. 1997 Oct. 1997 Apr. 1998 Oct. 1998 Apr. 1999 Oct. 1999 Apr. 2000 Oct. 2000
Months - - - - - - - - -
Outstanding Mar. 1997 Sept. 1997 Mar. 1998 Sept. 1998 Mar. 1999 Sept. 1999 Mar. 2000 Sept.2000 Mar.2001
--------- ---------- --------- ---------- --------- ---------- --------- --------- ---------
1 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
4 0.0% 0.1% 0.0% 0.0% 0.0% 0.1% 0.1% 0.1% 0.0%
7 0.4% 0.5% 0.5% 0.5% 0.3% 0.5% 0.4% 0.5% 0.4%
10 1.4% 1.7% 1.6% 1.5% 0.9% 1.4% 1.3% 1.5% 1.4%
13 3.1% 3.3% 2.9% 2.7% 1.8% 2.3% 2.4% 2.4% 2.9%
16 4.4% 4.5% 4.0% 3.6% 2.9% 3.4% 3.3% 3.5%
19 5.4% 5.3% 4.7% 4.4% 3.8% 4.1% 4.2% 4.8%
22 6.0% 6.0% 5.4% 5.0% 4.5% 4.9% 5.0%
25 6.6% 6.8% 5.9% 5.6% 5.2% 5.7% 6.0%
28 7.5% 7.2% 6.4% 5.9% 5.8% 6.2%
31 7.9% 7.6% 6.7% 6.4% 6.3% 6.7%
34 8.2% 7.9% 6.9% 6.7% 6.6%
37 8.3% 8.0% 7.0% 6.9% 6.9%
40 8.6% 8.1% 7.2% 7.0%
43 8.8% 8.3% 7.2% 7.2%
46 8.8% 8.3% 7.3%
49 8.8% 8.4% 7.3%
52 8.8% 8.4%
55 8.8% 8.4%
58 8.8%
61 8.8%
Original Pool ($000) $9,297 $15,575 $22,488 $30,271 $36,773 $42,115 $47,979 $57,528 $67,873
========= ========== ========= ========== ========= ========== ========= ========= =========
Remaining Pool ($000) $ 20 $ 78 $ 508 $ 1,669 $ 3,401 $ 9,513 $17,276 $29,270 $46,850
========= ========== ========= ========== ========= ========== ========= ========= =========
Remaining Pool (%) 0% 1% 2% 6% 9% 23% 36% 51% 69%
========= ========== ========= ========== ========= ========== ========= ========= =========
Insurance Premium Finance
Business Overview
In May 1995, we entered into an agreement with BPN relating to an insurance
premium finance business under the name "ClassicPlan" (such business is referred
to herein as "IPF"). Under this ongoing agreement, 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
6
twelve-month insurance policy, the borrower makes a cash down payment of 15% to
25% of the premium (plus certain fees) and the balance is financed under a
contract that contains a payment period of shorter duration than the policy
term. In the event that the insured defaults on the loan, the Bank has the right
to obtain directly from the insurance company the unearned insurance premium
held by the insurance company, which can then be applied to the outstanding loan
balance (premiums are earned by the insurance company over the life of the
insurance policy). Each contract is designed to ensure that, at any point during
the term of the underlying policy, the unearned premium under the insurance
policy exceeds the unpaid principal amount due under the contract. Under the
terms of the contract, the insured grants IPF a power of attorney to cancel the
policy in the event the insured defaults under the contract. Upon cancellation,
the insurance company is required by California law to remit the unearned
premium to IPF, which, in turn, offsets this amount against any amounts due from
the insured. IPF does not sell or have the risk of underwriting the underlying
insurance policy. IPF seeks to minimize its credit risk by perfecting a security
interest in the unearned premium, avoiding concentrations of policies with
insurance companies that are below certain industry ratings, and doing
automobile premium financing to date only in California which maintains an
insurance guaranty fund 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 policies 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, 2001, IPF had approximately 11% of its commercial
loan balances with surplus line insurance companies doing business on a
non-admitted basis in California.
In addition to insurance premiums, IPF will also finance broker fees (i.e.,
fees paid by the insured to the agent). If a policy cancels, the agent repays
any unearned broker fee financed by IPF. Broker fee financing represents
approximately 3.4% of total loans outstanding. At December 31, 2001,
approximately 20% 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, 2001, the aggregate gross amount of insurance premium
finance contracts was $39.6 million with 57,651 contracts outstanding.
Commercial loan balances represented 27.56% of these loan balances at December
31, 2001. During 2001, IPF originated 98,792 insurance premium finance contracts
of which 12,937 or 13.0% 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,
2001, BPN had 26 employees.
BPN solicits insurance agents and brokers to submit their clients'
financing requests to IPF. 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. IPF 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 IPF, and the
earnings of the loan portfolio, which include 50% of the interest earned on
portfolio loans after IPF subtracts a specified floating portfolio interest rate
and 50% of late fees and returned check fees charged by IPF. Additionally, BPN
and IPF 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 IPF whereby they agree to pay any sums owed to IPF and not paid by BPN.
The total potential liability of the guarantors to IPF is limited to $2,000,000
plus any amounts by which BPN is obligated to indemnify IPF. Under these
guaranties, all debts of BPN to the guarantors are subordinated to the full
payment of all obligations of BPN to IPF.
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
"Share 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 were fully paid during 2001.
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 establish limits to the
amount of 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, 2001, approximately 6.6% 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, 2001 and 2000.
At or For the
Years Ended
December 31,
(Dollars in thousands, except portfolio averages)
-------------------------------------------------
2001 2000
-------- --------
Operating Data
Loan originations $104,771 $100,085
Loans outstanding at period end 39,631 34,185
Average gross yield (1) 19.96% 24.05%
Average net yield (2) 14.72% 15.36%
Allowance for loan losses $ 495 $ 346
Loan Quality Data
Allowance for loan losses (% of loans outstanding) 1.25% 1.01%
Net charge-offs (% of average loans outstanding) (3) 0.81% 0.89%
Delinquencies (% of loans outstanding) (4) 1.11% 1.44%
Portfolio Data
Average monthly loan originations (number of loans) 8,233 8,353
Average loan size at origination $ 824 $ 998
Commercial insurance policies (% of loans outstanding) 27.56% 24.40%
CAARP policies (% of loans outstanding) 6.58% 5.46%
Cancellation rate (% of premiums financed) 41.5% 37.6%
- ----------
(1) Gross yield represents total rates and fees paid by the borrower.
(2) Net yield represents the yield to IPF after interest and servicing fees
made to 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 1300 agents, located throughout California. 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. 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.
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 within 6 days following 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.
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 four retail branch offices in the state and $357.4 million in deposits at
December 31, 2001. 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. 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."
In December 2001 the Bank withdrew its application with the California
Department of Financial Institutions (the "DFI") to convert to a California
state-chartered commercial bank. The Bank had been seeking conversion so it
would not be required to meet the tests of a "qualified thrift lender" (see
Regulation - Regulation of the Bank - Qualified Thrift Lender Test") as well as
certain lending limits under the Home Owners Loan Act ("HOLA"). The Bank has
determined that it will be able to meet these requirements and maintain safety,
adequate capital ratios and profitability. Therefore, it withdrew its
application.
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 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
UPAM originated $76.0 million of mortgage loans in January and February
2000 when this operation was discontinued. No such loans were originated in
2001.
Loan Sales and Securitizations
Whole Loan Sales. In connection with the disposition of UPAM's remaining
subprime loan portfolio, in 2001 UPAM sold, for cash paid in full at closing,
$21.9 million of mortgage loans through whole loan sales at a weighted average
sales price equal to 95% 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 2001, UPAM repurchased from investors
$284,000 of such
11
loans compared with $4.3 million in 2000. The Bank believes it has minimal
exposure to loss from obligations to repurchase loans in the future.
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.
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.
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 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
12
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 the
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."
Employees
At December 31, 2001, UPFC had 335 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 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").
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 UPFC. 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 the Company
General. UPFC, as well as its subsidiary PAFI, is a unitary savings and
loan holding company subject to regulatory oversight by the Office of Thrift
Supervision. 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 a
domestic building and loan association pursuant to the Internal Revenue Code of
1986, as amended (the "Code"). UPFC presently intends to continue to operate as
a unitary savings and loan holding company. 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
Services 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
13
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. Furthermore, if UPFC were in the future to sell control of the Bank
to any other company, such company would not succeed to UPFC grandfathered
status under and would be subject to the same business activity restrictions.
See "Regulation of the Bank - Qualified Thrift Lender Test."
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 prior 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."
USA Patriot Act of 2001 On October 26, 2001, President Bush signed the USA
Patriot Act of 2001. Enacted in response to the terrorist attacks in New York,
Pennsylvania and Washington, D.C. on September 11, 2001, the Patriot Act is
intended to strengthen U.S. law enforcement's and the intelligence communities'
abilities to work cohesively to combat terrorism on a variety of fronts. The
potential impact of the Patriot Act on financial institutions of all kinds is
significant and wide ranging. The Patriot Act contains sweeping anti-money
laundering and financial transparency laws and requires various regulations,
including:
. due diligence requirements for financial institutions that administer,
maintain, or manage private banks accounts or correspondent accounts
for non-US persons;
. standards for verifying customer identification at account opening;
. rules to promote cooperation among financial institutions, regulators,
and law enforcement entities in identifying parties that may be
involved in terrorism or money laundering;
. reports by nonfinancial trades and businesses filed with the Treasury
Department's Financial Crimes Enforcement Network for transactions
exceeding $10,000; and
. filing of suspicious activities reports of securities by brokers and
dealers if they believe a customer may be violating U.S. laws and
regulations.
The Company is not able to predict the impact of the Patriot Act on its
financial condition or results of operations at this time.
Financial Services Modernization Legislation
General. On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act of 1999 (the "GLB"). The GLB repeals the two affiliation
provisions of the Glass-Steagall Act:
. Section 20, which restricted the affiliation of Federal Reserve Member
Banks with firms "engaged principally" in specified securities activities;
and
. Section 32, which restricts officer, director, or employee interlocks
between a member bank and any company or person "primarily engaged" in
specified securities activities.
14
In addition, the GLB 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
organization to engage in a full range of financial activities through a new
entity known as a "Financial Holding Company." "Financial activities" is broadly
defined to include not only banking, insurance, and securities activities, but
also merchant banking and additional activities that the Federal Reserve Board,
in consultation with the Secretary of the Treasury, determines to be financial
in nature, incidental to such financial activities, or complementary activities
that do not pose a substantial risk to the safety and soundness of depository
institutions or the financial system generally.
The GLB 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 GLB
grandfathers any company 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 two tests: it controls only
one savings institution, excluding supervisory acquisitions, and each such
institution meets 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 GLB 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 GLB will have a material adverse
effect on the operations of UPFC and the Bank in the near-term. However, to the
extent that the act permits banks, securities firms, and insurance companies to
affiliate, the financial services industry may experience further consolidation.
The GLB 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, the
GLB 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 GLB.
Privacy. Under the GLB, federal banking regulators adopted rules that limit
the ability of banks and other financial institutions to disclose non-public
information about consumers to nonaffiliated third parties. Pursuant to these
rules, effective July 1, 2001, 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.
These privacy provisions affect how consumer information is transmitted through
diversified financial companies and conveyed to outside vendors.
15
Regulation of Insurance Premium Finance Companies
The insurance premium finance industry is subject to state regulations. The
regulatory structure of each state places certain restrictions on the terms of
loans made to finance insurance premiums. These restrictions, among other
things, generally provide that the lender must provide certain cancellation
notices to the insured and the insurer in order to exercise an assigned right to
cancel an insurance policy in the event of a default under an insurance premium
finance agreement and to obtain in connection therewith a return from the
insurer of any unearned premiums that have been assigned by the insured to the
lender. Such state laws also require that certain disclosures be delivered by
the insurance agent or broker arranging for such credit to the insured regarding
the amount of compensation to be received by such agent or broker from the
lender.
Regulation of 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.
16
Regulation of the Bank
General. 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.
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 documents utilized by the Bank.
The Bank must file reports with the OTS and the FDIC concerning its
activities and financial condition, in addition to obtaining regulatory
approvals prior to entering into certain transactions such as mergers with or
acquisitions of other financial institutions. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the SAIF and depositors.
The regulatory structure also gives the regulatory authorities extensive
discretion in connection with their supervisory and enforcement activities and
examination policies, including policies with respect to the classification of
assets and the establishment of adequate loan loss reserves for regulatory
purposes. Any change in such regulations, whether by the OTS, the FDIC, or the
Congress could have a material adverse impact on the Company, the Bank, and
their operations.
Insurance of Deposit Accounts. The 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, 2001, 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 for
the fourth quarter of 2001 at approximately $0.0184 per $100 of assessable
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.
Proposed Legislation. From time to time, new laws are proposed that could
have an effect on the financial institutions industry. For example, deposit
insurance reform legislation has recently been introduced in the U.S. Senate and
House of Representatives that would:
. Merge the BIF and the SAIF.
. Increase the current deposit insurance coverage limit for insured
deposits to $130,000 and index future coverage limits to inflation.
. Increase deposit insurance coverage limits for municipal deposits.
. Double deposit insurance coverage limits for individual retirement
accounts.
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. Replace the current fixed 1.25 designated reserve ratio with a reserve
ratio of 1-1.5%, giving the FDIC discretion in determining a level
adequate within this range.
While we cannot predict whether such proposals will eventually become law, they
could have an effect on our operations and the way we conduct business.
Regulatory Capital Requirements. OTS capital regulations require savings
associations to meet three capital standards:
. tangible capital equal to 1.5% of total adjusted assets;
. leverage capital (core capital) equal to 3% of total adjusted assets;
and
. risk-based capital equal to 8.0% of total risk-based assets.
The Bank must meet each of these standards in order to be deemed in compliance
with OTS capital requirements. In addition, the OTS may require a savings
association to maintain capital above the minimum capital levels.
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, 2001, 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.
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As shown below, the Bank's regulatory capital exceeded all minimum regulatory
capital requirements applicable to it as of December 31, 2001.
Percent of
Amount Adjusted Assets
------- ---------------
(Dollars in Thousands)
GAAP Capital ....................................... $51,565 7.48%
Tangible Capital: (1)
Regulatory requirement ............................. $10,301 1.50%
Actual capital ..................................... 49,707 7.24
------- ----
Excess .......................................... $39,406 5.74%
Leverage (Core) Capital: (1)
Regulatory requirement ............................. $20,602 3.00%
Actual capital ..................................... 49,707 7.24
------- ----
Excess .......................................... $29,105 4.24%
Risk-Based Capital: (2)
Regulatory requirement ............................. $27,076 8.00%
Actual capital ..................................... 53,181 15.71
------- -----
Excess .......................................... $26,105 7.71%
(1) Regulatory capital reflects modifications from GAAP capital due to a
portion of deferred tax assets not permitted to be included in regulatory
capital.
(2) Based on risk-weighted assets of $349.9 million.
The federal regulatory agencies have issued interagency guidelines
providing examination guidance for the supervision of subprime lending
activities. The term "subprime" refers to the credit characteristics of
individual borrowers. Subprime borrowers typically have weakened credit
histories that include payment delinquencies and possibly more severe problems
such as charge-offs, judgments and bankruptcies. Subprime loans are loans to
borrowers displaying one or more of these characteristics at the time of
origination of the loan. Our auto lending activities constitute subprime lending
which the interagency guidelines consider to be a high-risk activity unless the
risks associated with such subprime lending are properly controlled. The
interagency guidelines permit examiners to impose additional regulatory capital
requirements of 1 1/2 to 3 times higher than that typically set aside for prime
assets in any situation where an institution has subprime assets equal to or
greater than 25% or more of its tier 1 capital or has subprime portfolios
experiencing rapid growth or adverse performance trends or which are
administered by inexperienced management or have inadequate or weak controls.
Our subprime auto loan portfolio represented approximately 470% of our tier 1
capital as of December 31, 2001. We customarily seek to maintain regulatory
capital ratios of 1 1/2 times that which is normally required with respect to
our subprime portfolio. However, any requirement to maintain additional
regulatory capital as a result of our subprime lending activities could have an
adverse effect on our future prospects and operations and may restrict our
ability to grow. Although management believes that it maintains appropriate
controls and sufficient regulatory capital for its subprime lending activities,
it cannot predict or determine whether or to what extent additional capital
requirements will be imposed based upon regulatory supervision and examination.
The 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.
Predatory Lending. The term "predatory lending," much like the terms
"safety and soundness" and "unfair and deceptive practices," is far-reaching and
covers a potentially broad range of behavior. As such, it does not lend itself
to a concise or a comprehensive definition. But typically predatory lending
involves at least one, and perhaps all three, of the following elements:
. making unaffordable loans based on the assets of the borrower rather
than on the borrower's ability to repay an obligation ("asset-based
lending");
19
. inducing a borrower to refinance a loan repeatedly in order to charge
high points and fees each time the loan is refinanced ("loan
flipping"); or
. engaging in fraud or deception to conceal the true nature of the loan
obligation from an unsuspecting or unsophisticated borrower.
On December 14, 2001, Federal Reserve Board amended its regulations aimed
at curbing such lending. Compliance is not mandatory until October 1, 2002. The
rule significantly widens the pool of high-cost home-secured loans covered by
the Home Ownership and Equity Protection Act of 1994, a federal law that
requires extra disclosures and consumer protections to borrowers. The following
circumstances trigger coverage under the act:
. interest rates for first lien mortgage loans in excess of 8 percentage
points above comparable Treasury securities,
. subordinate-lien loans of 10 percentage points above Treasury
securities;. or
. fees such as optional insurance and similar debt protection costs paid
in connection with the credit transaction, when combined with points
and fees if deemed excessive.
In addition, the regulation bars loan flipping by the same lender or loan
servicer within a year. Lenders also will be presumed to have violated the law
- -- which says loans shouldn't be made to people unable to repay them -- unless
they document that the borrower has the ability to repay. Lenders that violate
the rules face cancellation of loans and penalties equal to the finance charges
paid.
The Bank is believes these rule changes and potential state action in this
area will not have a substantial effect on its financial condition or results of
operation.
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, 2001, the Bank met the capital requirements of a "well capitalized"
institution under applicable OTS regulations.
In general, the prompt corrective action regulation prohibits an insured
depository institution from declaring any dividends, making any other capital
distribution, or paying a management fee to a controlling person if, following
the distribution or payment, the institution would be within any of the three
undercapitalized categories. In addition, adequately capitalized institutions
may accept brokered deposits only with a waiver from the FDIC and are subject to
restrictions on the interest rates that can be paid on such deposits.
Undercapitalized institutions may not accept, renew, or roll-over brokered
deposits.
If the OTS determines that an institution is in an unsafe or unsound
condition, or if the institution is deemed to be engaging in an unsafe and
unsound practice, the OTS may, if the institution is well capitalized,
reclassify it as adequately capitalized; if the institution is adequately
capitalized but not well capitalized, require it to comply with restrictions
applicable to undercapitalized institutions; and, if the institution is
undercapitalized, require it to comply with certain restrictions applicable to
significantly undercapitalized institutions. Finally, pursuant to an interagency
agreement, the FDIC can examine any institution that has a substandard
regulatory examination score or is considered undercapitalized , without the
express permission of the institution's primary regulator.
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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, 2001, the Bank's loans-to-one-borrower limit was $7.6
million based upon the 150% of unimpaired capital and surplus measurement.
Qualified Thrift Lender Test. Savings associations must meet the QTL test,
which test may be met either by maintaining a specified level of assets in
qualified thrift investments as specified in the HOLA or by meeting the
definition of a "domestic building and loan association" in the Code. Qualified
thrift investments are primarily residential mortgages and related investments,
including certain mortgage-related securities. The required percentage of
investments under the HOLA is 65% of assets while the Code requires investments
of 60% of assets. Additionally, HOLA limits indirect consumer loans to 30% of
total assets. As of December 31, 2001 PAB indirect consumer loans comprised 29%
of total 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. This requirement may adversely affect
our ability to grow. For more information see the discussion of factors that may
affect future results of operations on page 27. The Bank applied in 2000 for
approval to convert from a federal thrift charter to become a
California-chartered commercial bank. California-chartered commercial banks do
not have to meet the QTL test. In December 2001, the Bank withdrew its
application for approval to convert to a state-chartered bank and, consequently,
will be required to meet the QTL test in the future. The Bank intends to adjust
and manage its sources of funds and control the growth and mix of its assets to
ensure that it meets the requirements of the QTL test going forward. As of
December 31, 2001, the Bank was in compliance with its QTL requirements and met
the definition of a domestic building and loan association.
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
. 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:
21
. 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 regulations generally exclude 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
. 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:
22
. 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.
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. Based on an
examination conducted November 5, 2001, the Bank received a satisfactory rating
under both the Community Reinvestment Act and Fair Lending Laws.
Effective January 1, 2002, the OTS raised the dollar amount limit in the
definition of small business loans from $500,000 to $2.0 million, if used for
commercial, corporate, business or agricultural purposes. Furthermore, the rule
raises the aggregate level that a thrift can invest directly in community
development funds, community centers and economic development initiatives in its
communities from the greater of a quarter of one percent of total capital or
$100,000 to one percent of total capital or $250,000.
Federal Home Loan Bank System. The Bank is a member of the Federal Home
Loan Bank ("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, 2001, the Bank had $6.5 million in FHLB stock, which was in
compliance with this requirement.
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. At December 31, 2001, the
Bank was in compliance with these requirements.
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
23
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.
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
2001 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") 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 corporations (but not generally paid by
banks or financial corporations such as the Bank). The marginal tax rate was
10.84% in 2001, 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.
Subsidiaries
PAFI, a wholly-owned subsidiary of UPFC, acts as the parent company of the
Bank 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 is a wholly-owned subsidiary of UPFC. In February 2001, WorldCash
terminated its money transfer activities, however, it still maintained an
investment in a software technology company. In March 2001 this
24
investment in the software company was determined to be without value and
subsequently charged against earnings. WorldCash is presently inactive.
The Bank a wholly-owned subsidiary of PAFI, is the primary operating
subsidiary of UPFC and is a federally-chartered savings bank.
UACC, 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 and is presently inactive.
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 reverse
repurchase agreements. The Bank competes for deposits primarily on the basis of
interest rates and, accordingly, the Bank could experience difficulty in
attracting deposits if it does not continue to offer rates that are competitive
with other financial institutions. Federal regulations restrict the Bank's
ability to lend to affiliated companies and limit the amount of non-mortgage
consumer loans that may be held by the Bank. Accordingly, the growth of 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
25
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 has a concentration of lending in California. The performance of our
loans may be affected by changes in California's economic and business
conditions. 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.
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.
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 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.
26
Changes in interest rates may adversely affect 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.
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.
Continuing qualification as a qualified thrift lender may adversely affect
our growth and performance.
The Bank filed an application in 2000 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 under the QTL test. As a result of the
discontinuation of its subprime mortgage business, management considered it to
be more difficult for the Bank to remain in compliance with the QTL test or
certain other consumer lending restrictions going forward. HOLA limits indirect
consumer loans to 30% of assets. As of December 31, 2001, PAB indirect consumer
loans comprised 29% of total assets. In December 2001, the Bank withdrew its
application for charter conversion. Although we believe the bank can meet the
QTL test in the future by adjusting and managing its sources of funds and
controlling the growth and mix of its assets, our current and projected lending
activities and our ability to grow may be adversely affected as a result of the
requirement that we meet the QTL test in the future.
27
Because we engage in a high level of "subprime" lending, we may be forced
to meet higher capital requirements.
The Bank engages in subprime lending, which is considered to be a high risk
activity by the OTS unless there are sufficient controls. Although Management
believes that its controls are sufficient, and customarily limits its subprime
lending activities to ensure that additional regulatory capital exists with
respect to such lending activities, the Bank may become subject to requirements
that it maintain regulatory capital in an amount that could adversely affect its
current lending activities or anticipated growth.
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 accounting principles generally accepted in the
United States of America ("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.
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 SEC.
Item 2. Properties
In March 2001, our principal executive offices were moved from Irvine,
California to premises consisting of approximately 13,300 square feet located at
3990 Westerly Place, Suite 200, Newport Beach, California 92660. As of December
31, 2001, UPFC maintained four branches for its banking business, 40 branches
for its automobile finance business, one location for its insurance premium
finance business and one office site for bank operations.
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 $2.1 million at December 31, 2001
compared to $1.6 million at December 31, 2000.
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, 2001.
28
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, 2002, we had approximately 400 shareholders of record and
15,571,400 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
- ------------- ------ ------
December 31, 2001 $ 5.35 $ 4.40
September 30, 2001 $ 6.21 $ 3.95
June 30, 2001 $ 4.06 $ 1.19
March 31, 2001 $ 1.69 $ .88
December 31, 2000 $ 1.94 $ 0.81
September 30, 2000 $ 1.25 $ 0.75
June 30, 2000 $ 1.63 $ 0.78
March 31, 2000 $ 2.31 $ 1.03
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."
29
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, 2001, 2000 and 1999.
The selected consolidated financial data for the years ended December 31, 1998
and 1997 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,
---------------------------------------------------------
2001 2000 1999 1998 1997
--------- --------- --------- --------- ---------
Statement of Operations Data
Interest income $ 58,152 $ 44,375 $ 28,803 $ 24,540 $ 19,809
Interest expense 19,522 14,563 6,033 7,839 8,793
--------- --------- --------- --------- ---------
Net interest income 38,630 29,812 22,770 16,701 11,016
Provision for loan losses 615 201 432 293 507
--------- --------- --------- --------- ---------
Net interest income after provision for loan losses 38,015 29,611 22,338 16,408 10,509
--------- --------- --------- --------- ---------
Non-interest income
Loss on residual interests in securitizations -- (11,374) -- -- --
Gains on sales of loans, net 1,607 -- -- 976 --
Other non-interest income 1,097 462 974 936 702
--------- --------- --------- --------- ---------
Total non-interest income (loss) 2,704 (10,912) 974 1,912 702
--------- --------- --------- --------- ---------
Non-interest expense
Compensation and benefits 17,135 12,903 10,843 8,370 5,534
Other expense 10,857 11,258 7,800 6,031 4,570
--------- --------- --------- --------- ---------
Total non-interest expense 27,992 24,161 18,643 14,401 10,104
--------- --------- --------- --------- ---------
Income (loss) from continuing operations before income 12,727 (5,462) 4,669 3,919 1,107
taxes
Income taxes (benefit) 4,964 (2,094) 1,908 1,645 466
--------- --------- --------- --------- ---------
Income (loss) from continuing operations 7,763 (3,368) 2,761 2,274 641
--------- --------- --------- --------- ---------
Income (loss) from discontinued operations, net of tax -- -- (941) 4,489 5,607
Loss on disposal of discontinued operations, net of tax -- (3,291) (6,172) -- --
--------- --------- --------- --------- ---------
Net income (loss) $ 7,763 $ (6,659) $ (4,352) $ 6,763 $ 6,248
========= ========= ========= ========= =========
Earnings (loss) per share-basic: (1)
Continuing operations $ 0.48 $ (0.21) $ 0.16 $ 0.15 $ 0.06
Discontinued operations $ -- $ (0.20) $ (0.42) $ 0.29 $ 0.52
Net income (loss) $ 0.48 $ (0.41) $ (0.26) $ 0.44 $ 0.58
Weighted average shares outstanding 16,017 16,392 16,854 15,263 10,739
Earnings (loss) per share-diluted: (1)
Continuing operations $ 0.46 $ (0.21) $ 0.16 $ 0.14 $ 0.05
Discontinued operations $ -- $ (0.20) $ (0.41) $ 0.28 $ 0.48
Net income (loss) $ 0.46 $ (0.41) $ (0.25) $ 0.42 $ 0.53
Weighted average shares outstanding 16,931 16,392 17,253 16,143 11,875
Balance Sheet Data
Total assets $ 689,573 $ 489,978 $ 438,290 $ 425,559 $ 310,754
Loans 236,448 192,368 158,283 133,718 148,535
Loans held for sale 194 712 136,460 214,406 120,002
Allowance for loan losses (17,460) (15,156) (14,139) (10,183) (6,487)
Deposits 357,350 348,230 291,944 321,668 233,194
Notes payable and repurchase agreements 114,776 -- -- 10,930 12,930
FHLB advances 130,000 60,000 -- -- 28,000
Warehouse lines of credit -- -- 54,415 -- 6,237
Shareholders' equity 75,666 69,317 75,353 82,913 13,009
30
(In thousands, except per share amounts)
At or For the
Year Ended December 31,
--------------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- ---------- --------
Operating Data
Return on average assets from continuing operations 1.61% (0.95)% 1.25% 1.04% 3.51%
Return on average shareholders' equity from continuing 10.61% (4.61)% 3.39% 4.04% 7.37%
operations
Net interest margin 8.46% 9.39% 12.45% 9.13% 6.76%
Shareholders' equity to assets 10.98% 14.15% 17.19% 19.48% 4.19%
Tangible capital ratio of Bank 7.24% 8.52% 10.60% 6.94% 7.27%
Core capital ratio of Bank 7.24% 8.52% 10.60% 6.94% 7.27%
Risk-based capital ratio of Bank 15.71% 14.52% 10.24% 10.77% 12.34%
Asset Quality Data
Nonaccrual loans, net(2) $ 1,041 $ 3,067 $ 13,157 $ 18,632 $ 6,633
Real estate owned -- 871 2,590 1,877 562
Total non-performing assets 3,681 3,938 15,747 20,509 7,195
Non-performing assets to total assets 0.53% 0.80% 3.60% 4.82% 2.31%
Allowance for credit losses to loans held for investment 7.38% 7.88% 8.93% 7.62% 4.37%
Automobile Finance Data
Gross contracts purchased $233,368 $174,645 $124,896 $ 86,098 $ 44,056
Average discount on contracts purchased 7.89% 8.08% 8.79% 9.12% 9.79%
Net charge-offs to average contracts 5.23% 4.17% 4.05% 4.56% 4.94%
Number of branches 40 28 20 15 10
Insurance Premium Finance Data
Loans originated $104,771 $100,085 $107,212 $ 152,998 $145,167
Loans outstanding at period end $ 39,631 $ 34,185 $ 30,334 $ 44,709 $ 39,990
Average net yield on loans originated 14.72% 15.36% 12.73% 13.90% 14.01%
Average loan size at origination $ 824 $ 998 $ 990 $ 1,110 $ 1,160
Net charge-offs to average loans 0.81% 0.89% 1.41% 0.78% 0.35%
Subprime Mortgage Finance Data(3)
Loan origination activities
Wholesale originations -- $ 73,652 $789,327 $ 807,382 $359,236
Retail originations -- 2,345 173,389 382,359 219,386
-------- -------- -------- ---------- --------
Total loan originations -- $ 75,997 $962,716 $1,189,741 $578,622
Percent of loans secured by first mortgages -- 96% 97% 96% 96%
Weighted average initial loan-to-value ratio -- 76% 76% 75% 75%
Originations by product type --
Adjustable-rate mortgages -- 86% 76% 71% 82%
Fixed-rate mortgages -- 14% 24% 29% 18%
Average balance per loan -- $ 104 $ 109 $ 99 $ 104
Loans sold through whole loan transactions $215,133 $552,200 $1,084,701 $360,210
Loan securitizations -- -- $458,011 -- $114,904
- ----------
(1) Earnings (loss) per share 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
(2) Nonaccrual loans are net of specific loss allowances.
(3) The subprime mortgage finance data presented is related to our discontinued
mortgage operations.
31
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.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
management to make estimates and judgments that affect the reported amounts of
assets and liabilities, revenues and expenses, and related disclosures of
contingent assets and liabilities at the date of our financial statements.
Actual results may differ from these estimates under different assumptions or
conditions.
Accounting for the allowance for loan losses involves significant judgments
and assumptions by management, which has a material impact on the carrying value
of net loans; management considers this accounting policy to be a critical
accounting policy. The judgments and assumptions used by management are based on
historical data and management's view of the current economic environment as
described in "Allowance for Loan Losses".
Comparison of Operating Results for the Years Ended December 31, 2001 and
December 31, 2000
General
In 2001 UPFC reported income from continuing operations of $7.8 million, or
$0.46 per diluted share, compared with a loss from continuing operations of $3.4
million, or $0.21 per diluted share for the same period a year ago. Including
discontinued operations, we reported income of $7.8 million, or $0.46 per
diluted share in 2001, compared with a net loss of $6.7 million, or $0.41 per
diluted share in 2000.
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. The residual interests were sold in January 2001 and
were valued at December 31, 2000 according to the sale price and terms of this
contract.
A pre-tax charge of $1.3 million, which was included in other expenses in
the statement of operations, 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, 2001 increased to $58.2
million compared with $44.4 million in 2000 while net interest income increased
to $38.6 million for the year ended December 31, 2001 from $29.8 million in the
same period a year ago. Gross automobile receivables increased from $176.3
million at December 31, 2000 to $232.9 million at December 31, 2001 accounting
for much of the increase in interest income and net interest income.
32
Interest Income
Interest income increased from $44.4 million for the twelve months ended
December 31, 2000 to $58.2 million for the twelve months ended December 31, 2001
due primarily to a $139.0 million increase in average interest earning assets,
partially offset by a 123 basis point 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
$50.1 million, and securities, which increased $98.4 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
and the increase in assets required for the Bank to meet the QTL test of the
OTS.
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,
and to a general decline in market interest rates. Securities, with an average
yield of 5.11%, comprised 54% of our average interest earning assets at December
31, 2001 compared with 46% of our average interest earning assets at December
31, 2000.
Interest Expense
Interest expense increased from $14.6 million for the twelve months ended
December 31, 2000 to $19.5 million for the twelve months ended December 31,
2001, due to a $134.0 million increase in average interest bearing liabilities,
partially offset by a 61 basis point decrease 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 $241.0 million in 2000 to $362.5 million in 2001. The
increase in average deposits was due primarily to the reallocation of deposits
to continuing operations compared to a year ago. There were no deposits
allocated to discontinued operations in 2001.
The average cost of deposits decreased from 5.42% for 2000 to 5.00% for
2001, generally as a result of a decrease in market interest rates and the
repricing of deposits to these lower market rates.
Average Balance Sheets
The following tables set forth information relating to our continuing
operations for the years ended December 31, 2001, 2000 and 1999. 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,
-------------------------------------------------------------------------------------
2001 2000
--------------------------------------- -------------------------------------------
Average Average
Average Yield/ Average Yield/
Balance /(2)/ Interest/(1)/ Cost Balance/(1)//(2)/ Interest/(1)/ Cost
------------- ------------- ------- ----------------- ------------- -------
(Dollars in thousands)
Assets
Interest earnings assets
Securities $244,479 $12,504 5.11% $146,129 $9,561 6.54%
Mortgage loans, net/(3)/ 3,938 429 10.89% 18,546 1,630 8.79%
IPF loans, net/(4)/ 35,757 5,265 14.72% 30,647 4,791 15.63%
Automobile installment
contracts, net/(5)/ 172,424 39,954 23.17% 122,280 28,393 23.22%
-------- ------- -------- ------
Total interest earning assets 456,598 58,152 12.74% 317,602 44,375 13.97%
------- ------
Non-interest earning assets 26,141 33,410
-------- --------
Total assets $482,739 $351,012
======== ========
Liabilities and Equity
Interest bearing liabilities
Customer deposits 362,503 18,119 5.00% 240,974 13,057 5.42%
Notes payable 4,503 157 3.46% -- -- --
FHLB advances 30,830 1,246 4.04% 22,877 1,506 6.58%
-------- ------- -------- ------
Total interest bearing
liabilities 397,836 19,522 4.91% 263,851 14,563 5.52%
------- ------
Non-interest bearing liabilities 11,724 14,102
-------- --------
Total liabilities 409,560 277,953
Equity 73,179 73,059
--------
Year Ended December 31,
-------------------------------------------
1999
-------------------------------------------
Average
Average Yield/
Balance/(1)//(2)/ Interest/(1)/ Cost
----------------- ------------- -------
Assets
Interest earnings assets
Securities $ 37,682 $1,800 4.78%
Mortgage loans, net/(3)/ 25,229 2,316 9.18%
IPF loans, net/(4)/ 37,681 5,271 13.99%
Automobile installment
contracts, net/(5)/ 82,294 19,416 23.59%
-------- ------
Total interest earning assets 182,886 28,803 15.75%
------
Non-interest earning assets 37,450
--------
Total assets $220,336
========
Liabilities and Equity
Interest bearing liabilities
Customer deposits 119,049 5,787 4.86%
Notes payable 4,919 246 5.01%
FHLB advances 6 -- 5.84%
-------- ------
Total interest bearing
liabilities 123,974 6,033 4.87%
------
Non-interest bearing liabilities 15,029
--------
Total liabilities 139,003
Equity 81,333
--------
33
Year Ended December 31,
-------------------------------------------------------------------------------------
2001 2000
--------------------------------------- -------------------------------------------
Average Average
Average Yield/ Average Yield/
Balance /(2)/ Interest/ / Cost Balance/(1)//(2)/ Interest/(1)/ Cost
------------- ------------- ------- ----------------- ------------- -------
Total liabilities and --------
equity $482,739 $351,012
======== ========
Net interest income before
provision for loan losses $38,630 $29,812
======= =======
Net interest rate spread/(6)/ 7.83% 8.45%
Net interest margin/(7)/ 8.46% 9.39%
Ratio of interest earning assets
to interest bearing liabilities 114.77% 120.37%
Year Ended December 31,
-------------------------------------------
1999
-------------------------------------------
Average
Average Yield/
Balance/(1)//(2)/ Interest/(1)/ Cost
----------------- ------------- -------
Total liabilities and
equity $220,336
========
Net interest income before
provision for loan losses $22,770
=======
Net interest rate spread/(6)/ 10.88%
Net interest margin/(7)/ 12.45%
Ratio of interest earning assets
to interest bearing liabilities 147.50%
- ----------
/(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. Allocated assets and
liabilities for 2000 and 1999 are shown below. There were no such
allocations in 2001.
Year Ended December 31,
2000 1999
--------- ---------
Average assets of continuing operations $351,012 $220,336
Average mortgage loans of discontinued operations 63,264 235,124
-------- --------
Total average assets $414,276 $455,460
======== ========
Average liabilities and equity of continuing operations $351,012 $220,336
Average customer deposits allocated to discontinued operations 61,468 189,720
Average warehouse lines of credit of discontinued operations 1,796 45,404
-------- --------
Total average liabilities and equity $414,276 $455,460
======== ========
/(2)/ Average balances are measured on a month-end basis.
/(3)/ Net of deferred loan origination fees, unamortized discounts and premiums;
includes non-performing loans.
/(4)/ Includes non-performing loans.
/(5)/ Net of unearned finance charges; 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.
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, 2000 December 31, 1999
Compared to Compared to
Year Ended Year Ended
December 31, 2001 December 31, 2000
----------------------------- -----------------------------
(Dollars in thousands) Increase (Decrease) Increase (Decrease)
Due to Due to
----------------------------- -----------------------------
Volume Rate Net Volume Rate Net/(1)/
------- ------- ------- ------- ------ --------
Interest earning assets
Securities $ 4,356 $(1,413) $ 2,943 $ 6,878 $ 883 $ 7,761
Mortgage loans, net (1,728) 527 (1,201) (591) (95) (686)
IPF loans, net 727 (253) 474 (1,296) 816 (480)
Automobile installment contracts, net 11,620 (59) 11,561 9,280 (303) 8,977
------- ------- ------- ------- ------ --------
Total interest earning assets 14,975 (1,198) 13,777 14,271 1,301 15,572
------- ------- ------- ------- ------ --------
Interest bearing liabilities
Customer deposits 5,981 (919) 5,062 6,540 730 7,270
Notes payable 157 0 157 (123) (123) (246)
FHLB advances 2,341 (2,601) (260) 1,505 1 1,506
------- ------- ------- ------- ------ --------
Total interest bearing liabilities 8,479 (3,520) 4,959 7,922 608 8,530
------- ------- ------- ------- ------ --------
Change in net interest income $ 6,496 $ 2,322 $ 8,818 $ 6,349 $ 693 $ 7,042
======= ======= ======= ======= ====== ========
- ----------
/(1)/ The table excludes interest income and interest expense from our mortgage
operations as these items are reported as discontinued operations in the
consolidated statements of operations.
34
Provision for Loan Losses
Total provision for loan losses was $615,000 for the year ended December
31, 2001. Of this, $365,000 was the provision for loan losses reflecting
estimated credit losses associated with our insurance premium finance business,
compared with $201,000 for the year ended December 31, 2000. This increase
resulted from the growth in the insurance premium finance loan portfolio as well
as an increase in the allocation percentage from 1% of loans in 2000 to 1.25% in
2001. Also, after review of loss experience, an additional $250,000 provision
for loan losses was recognized in connection with the existing auto loan
portfolio. No comparable provision for the auto loan portfolio was recognized in
2000.
In addition to the provision for loan 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. At December 31, 2001, we allocated 10.5% of the net contract purchased
to provision for loan losses compared to 9.0% at December 31, 2000.
Our total allowance for losses was $17.5 million at December 31, 2001
compared with $15.2 million at December 31, 2000, representing 7.4% of loans
held for investment at December 31, 2001 and 7.9% at December 31, 2000. Net
charge-offs to average loans were 4.9% for the year ended December 31, 2001
compared with 5.0% in 2000.
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. 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 increased $13.6 million, from a loss of $10.9 million
in 2000 to $2.7 million in 2001. The increase resulted from an $11.4 million
pre-tax write-down of the value of residual interests in securitizations in 2000
and a $1.6 million gain on sales of loans in 2001. 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
increased $635,000 from $462,000 for the twelve months ended December 31, 2000
to $1.1 million for the twelve months ended December 31, 2001. Included in
non-interest income is a charge of $500,000 in both 2000 and 2001 in connection
with the write-off of UPFC's investment in AirTime Technology, related to the
discontinued World Cash subsidiary.
Non-interest Expense
Non-interest expense increased $3.8 million, from $24.2 million for the
twelve months ended December 31, 2000 to $28.0 million for the twelve months
ended December 31, 2001. This increase primarily reflects an increase in
salaries, employee benefits and other personnel costs of approximately $4.2
million associated with the expansion of our automobile finance operations. In
addition, occupancy expense increased $602,000, reflecting the costs associated
with maintaining and expanding the branch offices in the auto finance lending
area. Overall, other expenses decreased $1.0 million during 2001 compared to
2000. This decrease resulted from a $1.3 million pretax charge in 2000 in
connection with the write-down of goodwill arising from the 1998 purchase of
Northwest Financial Corp's insurance premium operations and a $700,000 pre-tax
provision in 2000 for the relocation of certain offices with no comparable
expenses in 2001. These reductions were partially offset by a $1.0 million
increase during 2001 compared to 2000 in other operating expense, including
professional fees, supplies, data processing, telephone and postage, as a result
of growth in our automobile lending operation.
35
Income Taxes (Benefit)
Income taxes (benefit) increased $7.1 million, from a benefit of $2.1
million for the twelve months ended December 31, 2000 to $5.0 million for the
twelve months ended December 31, 2001. This increase occurred as a result of an
$18.2 million increase in income from continuing operations before income taxes
between the two periods.
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 of subprime mortgage loans in 2001 were $21.9 million,
compared with $215.1 million in 2000. We originated no new sub prime mortgage
loans during 2001 compared with $76.0 million during the year ended December 31,
2000.
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. Included in our statement of financial condition as of December 31,
2001, is a reserve of $1.0 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.
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 average warehouse lines of credit of
$1.8 million for the year ended December 31, 2000. No such allocation was
required in 2001.
Comparison of Financial Condition at December 31, 2001 and December 31, 2000
Total assets increased $199.6 million, from $490.0 million at December 31,
2000 to $689.6 million at December 31, 2001. The increase occurred primarily as
a result of a $98.1 million increase in cash and cash equivalents, from $42.6
million at December 31,2000 to a $140.7 million at December 31, 2001, a $61.6
million increase in securities available for sale, from $223.3 million at
December 31, 2000 to $284.8 million at December 31, 2001, and a $44.0 million
increase in loans from $192.4 at December 31, 2000 to $236.4 at December 31,
2001.
Loans increased as a result of planned increases in our auto loan portfolio
and securities available for sale and cash and cash equivalents increased as a
result of the reinvestment of proceeds of increased borrowings from FHLB and
reverse repurchase agreements. The increase in assets is required in order for
UPFC to meet the 30% limitation on our auto loans as required by the QTL.
Residual interests in securitizations consisted 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.
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.
Premises and equipment increased from $1.6 million at December 31, 2000 to
$2.1 million at December 31, 2001 primarily as a result of the continuing growth
of our auto finance business.
Deposit accounts increased $9.1 million, from $348.2 million at December
31, 2000 to $357.3 million at December 31, 2001. This increase was primarily due
to an increase in brokered CD's from $28.6 million at
36
December 31, 2000 to $51.5 million at December 31, 2001. Retail deposits
decreased $21.1 million, from $299.1 million at December 31, 2000 to $278.0
million at December 31, 2001.
Other interest bearing liabilities include FHLB advances and repurchase
agreements. FHLB advances were $130.0 million at December 31, 2001 compared with
$60.0 million at December 31, 2000. Reverse repurchase agreements were $114.8 as
of December 31 2001. There were no outstanding repurchase agreements at December
31, 2000. The increase in FHLB advances and repurchase agreements was primarily
due to our use of wholesale borrowings as an alternative to deposits as a
funding source for asset growth.
Net deferred tax assets were $6.9 million at December 31, 2001 due
principally to temporary differences in the recognition of reserves for loan
losses and discontinued operations for federal and state income tax reporting
and financial statement reporting purposes.
Shareholders' equity increased from $69.3 million at December 31, 2000 to
$75.7 million at December 31, 2001, as a result of our 2001 profit of $7.8
million, $247,000 of unrealized gain on securities and a $1.4 million increase
as a result of stock options in the second quarter of 2001, partially offset by
a $3.1 million repurchase of UPFC stock.
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.
The Bank's interest rate sensitivity is monitored by the Board of Directors
and management, through the use of a model, which estimates the change in the
Bank's net portfolio value ("NPV") over a range of interest rate scenarios. NPV
is the present value of expected cash flows from assets, liabilities and
off-balance sheet instruments, and "NPV Ratio" is defined as the NPV in that
scenario divided by the market value of assets in the same scenario. 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.
At December 31, 2001, the Bank's sensitivity measure resulting from a 100
basis point decrease in interest rates was 25 basis points and would result in a
$2.5 million increase in the NPV of the Bank and a 200 basis point increase in
interest rates was 126 basis points and would result in a $11.1 million decrease
in the NPV of the Bank. At December 31, 2001, 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 December 31, 2001 and December 31, 2000 assuming an instantaneous and
sustained change in market interest rates of 100, 200 and 300 basis points
("bp"). The increase in sensitivity for December 31, 2001, as compared to
December 31, 2000 is a result of the Bank's purchase of securities, which are
more sensitive to movements in market interest rates. The Bank acquired these
securities in order to manage its sources of funds and the mix of its assets to
ensure it meets the QTL test. The December 31, 2001 table does not include data
for -200 bp or -300 bp because these changes in rates would infer negative
interest rates and are therefore not relevant.
37
Interest Rate Sensitivity of Net Portfolio Value
December 31, 2001
Net Portfolio Value NPV as % of Portfolio Value of Assets
------------------------------------------------------ -------------------------------------
Change in Rates $ Amount $ Change % Change NPV Ratio Change
- --------------- -------- -------- -------- -------------- ---------------
(Dollars in thousands)
+300 bp $75,034 $(19,212) -20% 10.59% -223 bp
+200 bp 83,139 (11,107) -12% 11.57% -126 bp
+100 bp 89,713 (4,533) -5% 12.33% -50 bp
0 bp 94,246 -- --% 12.83% -- bp
-100 bp 96,738 2,492 3% 13.08% +25 bp
-200 bp -- -- -- -- --
-300 bp -- -- -- -- --
December 31, 2001
Net Portfolio Value NPV as % of Portfolio Value of Assets
------------------------------------------------------ -------------------------------------
Change in Rates $ Amount $ Change % Change NPV Ratio Change
- --------------- -------- -------- -------- -------------- ---------------
(Dollars in thousands)
+300 bp $57,293 $ (3,042) -5% 11.64% -43 bp
+200 bp 58,616 (1,719) -3% 11.84% -23 bp
+100 bp 59,635 (700) -1% 11.98% -09 bp
0 bp 60,335 -- --% 12.07% -- bp
-100 bp 60,830 495 +1% 12.12% +05 bp
-200 bp 62,308 1,973 +3% 12.34% +27 bp
-300 bp 64,358 4,023 +7% 12.65% +58 bp
38
Liquidity and Capital Resources
General
UPFC's primary sources of funds are retail and wholesale deposits, FHLB
advances, reverse repurchase agreements, principal and interest payments on
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 levels of
liquid assets as defined by OTS regulations. 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.
A major 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, 2001, such retail deposits were $278.0 million or 77.8% of total
deposits.
The Bank uses wholesale and broker-originated deposits to supplement its
retail deposits and, at December 31, 2001, wholesale deposits were $79.4 million
or 22.2% 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. Brokered deposits are originated through major dealers
specializing in such products. Included in wholesale deposits at December 31,
2001 are $51.5 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.
2001 2000 1999
------------------- ---------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Balance Rate Balance Rate Balance Rate
-------- -------- -------- -------- -------- --------
(Dollars in thousands)
Passbook accounts $ 41,690 2.42% $ 45,811 4.26% $ 50,672 4.24%
Checking accounts 14,662 1.46% 14,394 2.10% 13,064 1.84%
Certificates of deposit
Under $100,000 226,368 5.47% 171,975 5.94% 176,983 5.20%
$100,000 and over 79,783 5.65% 70,262 6.16% 68,050 5.45%
-------- -------- --------
Total $362,503 5.00% $302,442 5.55% $308,769 4.96%
======== ======== ========
The following table sets forth the time remaining until maturity for all
CDs at December 31, 2001, 2000 and 1999.
December 31, December 31, December 31,
2001 2000 1999
------------- ---------------------- ------------
(Dollars in thousands)
Maturity within one year $237,683 $257,710 $199,110
Maturity within two years 46,170 36,440 28,770
Maturity within three years 7,657 100 149
Maturity over three years 4,117
-------- -------- --------
Total certificates of deposit $295,624 $294,250 $228,029
======== ======== ========
39
The following table sets forth the time remaining until maturity for CD's
with balances of $100,000 and over at December 31, 2001, 2000 and 1999.
December 31, December 31, December 31,
2001 2000 1999
------------- ---------------------- ------------
(Dollars in thousands)
Maturity in:
Less than 3 months $31,993 $24,859 $21,342
3-6 months 19,560 24,872 14,767
6-12 months 20,663 21,257 19,696
Over 12 months 10,427 11,835 8,350
------- ------- -------
$82,643 $82,823 $64,155
======= ======= =======
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, 2001, the Bank exceeded all of its regulatory capital
requirements with tangible capital of $49.7 million, or 7.24% of total adjusted
assets, which is above the required level of $10.3 million, or 1.50%; core
capital of $49.7 million, or 7.24% of total adjusted assets, which is above the
required level of $20.6 million, or 3.00% and risk-based capital of $53.2
million, or 15.71% of risk-weighted assets, which is above the required level of
$27.1 million, or 8.00%
Under the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), the Bank is deemed to be "well capitalized" at December 31, 2001.
UPFC has other sources of liquidity, including FHLB advances, repurchase
agreements and the liquidity and short-term securities portfolio. Through the
Bank, we may obtain advances from the FHLB collateralized by securities. 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, 2001, the Bank's borrowing capacity under
this credit facility was $137.9 million with $7.9 million unused.
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,
-------------------------------------
2001 2000 1999
--------- ------- ---------
(Dollars in thousands)
FHLB advances
Maximum month-end balance $130,000 $60,000 $ 2,300
Balance at end of period 130,000 60,000 --
Average balance for period 30,830 22,877 6
Weighted average interest
rate on balance at end
of period 1.97% 6.81% --%
Weighted average interest
rate on average balance
for period 4.04% 6.58% 5.84%
Warehouse lines of credit
Maximum month-end balance -- $26,623 $159,342
Balance at end of period -- -- 54,415
Average balance for period -- 1,796 45,404
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%
Repurchase agreements -- --
Maximum month-end balance $114,776 -- --
Balance at end of period 114,776 -- --
Average balance for period 4,503 -- --
Weighted average interest
rate on balance at end
of period 2.37% -- --
Weighted average interest
rate on average balance
for period 3.46% -- --
40
UPFC had no material contractual obligations or commitments for capital
expenditures at December 31, 2001.
Lending Activities
Summary of Loan Portfolio. At December 31, 2001 our loan portfolio
constituted $236.6 million, or 34.3% of our total assets.
The following table sets forth the composition of our loan portfolio at the
dates indicated.
December 31,
-------------------------------------------------------------
(Dollars in thousands) 2001 2000 1999 1998 1997
--------- --------- --------- --------- ---------
Consumer Loans
Automobile installment contracts $ 232,902 $ 176,255 $ 128,093 $ 83,921 $ 40,877
Insurance premium finance 28,710 25,843 23,846 40,440 39,990
Other consumer loans 98 577 864 1,209 267
--------- --------- --------- --------- ---------
Total consumer loans 261,710 202,675 152,803 125,570 81,134
--------- --------- --------- --------- ---------
Mortgage Loans
Mortgage loans (purchased primarily from RTC) -- 16,784 21,835 32,328 81,995
Subprime mortgage loans 352 1,845 149,876 213,687 125,377
--------- --------- --------- --------- ---------
Total mortgage loans 352 18,629 171,711 246,015 207,372
--------- --------- --------- --------- ---------
Commercial Loans
Insurance premium finance 10,921 8,342 6,488 4,269 --
Other commercial loans -- 55 15 36 --
--------- --------- --------- --------- ---------
Total commercial loans 10,921 8,397 6,503 4,305 --
--------- --------- --------- --------- ---------
Total loans 272,983 229,701 331,017 375,890 288,506
Unearned discounts and premiums -- (728) (954) (212) (2,901)
Unearned finance charges (18,881) (20,737) (21,181) (17,371) (10,581)
Allowance for loan losses (17,460) (15,156) (14,139) (10,183) (6,487)
--------- --------- --------- --------- ---------
Total loans, net $ 236,642 $ 193,080 $ 294,743 $ 348,124 $ 268,537
========= ========= ========= ========= =========
Loan Maturities. The following table sets forth the dollar amount of loans
maturing in our loan portfolio at December 31, 2001 based on final maturity.
Loan balances are reflected before unearned discounts and premiums, unearned
finance charges and allowance for losses.
At December 31, 2001
-------------------------------------------------------------------------------------------
More Than 1 More Than 3 More Than 5 More Than 10
One Year Year to Years to Years to Years to 20 More Than 20 Total
or Less 3 Years 5 Years 10 Years Years Years Loans
-------- ----------- ----------- ----------- ------------ ------------ --------
(Dollars in thousands)
Consumer loans $ 35,625 $ 95,415 $ 130,395 $ 275 $ -- $-- $261,710
Mortgage loans -- -- -- -- 352 -- 352
Commercial loans 10,921 -- -- -- -- -- 10,921
-------- --------- --------- ----- ------ --- --------
Total $46,546 $ 95,415 $ 130,395 $275 $352 $-- $272,983
======== ========= ========= ====== ====== === ========
The following table sets forth, at December 31, 2001, 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, 2002
---------------------------------------
Fixed Adjustable Total
-------- ---------- --------
(In thousands)
Consumer loans $226,085 $ 0 $226,085
Mortgage loans -- 352 352
Commercial loans -- -- --
-------- ---- --------
Total $226,085 $352 $226,437
======== ==== ========
41
Classified Assets and Allowance for Loan Losses
UPFC monitors levels and trends of loan delinquencies to assure the
allowance for loan losses remains adequate. For UACC loans a percentage of each
new loan, currently 10.5% of net contract amount, is allocated to the allowance
for loan losses. This percentage is established by reviewing historical trends
and levels of delinquencies and charge offs. This percentage reflects the level
of losses expected over the life of the loans. Periodically thereafter,
management reviews the level of allowance for loan losses in light of any major
changes in delinquencies and charge offs to assure the balance remains adequate
to protect UPFC from unexpected loss. If this review reflects possible weakness,
management will allocate an additional provision for loan loss, charged against
current earnings, to maintain appropriate levels of allowance for loan losses.
For IPF loans, management establishes a level of allowance for loan losses based
on recent trends in delinquencies and historical charge offs, currently 1.25% of
loans, that it feels is adequate for the risk in the portfolio. Each month an
amount necessary to reach that level is charged against current earnings and
added to allowance for loan losses.
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, 2001, 2000 and 1999.
Loan
- ----- December 31, % of Total December 31, % of Total December 31, % of Total
Delinquencies 2001 Loans 2000 Loans 1999 Loans
- ------------- ------------ ---------- ------------ ---------- ------------ ----------
(Dollars in thousands)
30 to 59 days $1,368 0.6% $ 953 0.5% $ 3,071 1.0%
60 to 89 days 776 0.3% 494 0.3% 2,443 0.8%
90+ days 942 0.4% 2,374 1.2% 13,307 4.6%
------ --- ------ --- ------- ---
Total $3,086 1.3% $3,821 2.0% $18,821 6.4%
====== === ====== === ======= ===
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 and, 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.
The following table sets forth the aggregate amount of nonaccrual loans
(net of unearned discounts and premiums and unearned finance charges) at
December 31, 2001, 2000, 1999, 1998 and 1997
December 31,
------------------------------------------------------------
2001 2000 1999 1998 1997
--------- --------- ---------- ---------- ---------
Nonaccrual loans
Single-family residential $ 352 $ 2,281 $ 15,825 $ 19,242 $ 5,766
Multi-family residential and commercial -- -- 100 214 605
Consumer and other loans 688 1,323 1,060 1,168 1,426
--------- --------- ---------- ---------- ---------
Total $ 1,040 $ 3,604 $ 16,985 $ 20,624 $ 7,797
========= ========= ========== ========== =========
Nonaccrual loans as a percentage of
Total loans held for investment 0.44% 1.87% 10.73% 15.42% 5.25%
Total assets 0.15% 0.74% 3.88% 4.85% 2.51%
Allowance for loan losses as a percentage of
Total loans held for investment 7.38% 7.88% 8.93% 7.62% 4.37%
Nonaccrual loans 1678.84% 420.53% 83.24% 49.37% 83.20%
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 $21,000 for the year December 31, 2001, $176,000 for the
year ended December 31, 2000, and $1.4 million for the year ended December 31,
1999. The
42
total amount of interest income recognized on nonaccrual loans was $0, $698,000
and $1.4 million for the years ended December 31, 2001, 2000 and 1999,
respectively.
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 $0 at December 31,
2001, $871,000 at December 31, 2000 and $2.6 million at December 31, 1999 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,
---------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- -------
(Dollars in thousands)
Allowance for Loan Losses
Balance at beginning of year $ 15,156 $ 14,139 $ 10,183 $ 6,487 $ 5,356
Provision for loan losses - continuing operations 615 201 432 293 507
Provision for loan losses - discontinued -- 2,396 7,376 5,560 --
operations
Charge-offs
Mortgage loans (1,713) (6,402) (7,525) (4,536) (373)
Consumer loans (9,173) (6,025) (4,395) (3,793) (2,101)
-------- -------- -------- -------- -------
Total charge-offs (10,886) (12,427) (11,920) (8,329) (2,474)
Recoveries
Mortgage loans 140 327 296 452 77
Consumer loans 266 286 414 1,138 1,068
-------- -------- -------- -------- -------
Total recoveries 406 613 710 1,590 1,145
-------- -------- -------- -------- -------
Net charge-offs (10,480) (11,814) (11,210) (6,739) (1,329)
Acquisition discounts allocated to loss allowance 12,169 10,234 7,358 4,582 1,953
-------- -------- -------
Balance at end of year $ 17,460 $ 15,156 $ 14,139 $ 10,183 $ 6,487
======== ======== ======== ======== =======
Annualized net charge-offs to average loans 4.94% 5.03% 2.95% 1.73% 0.60%
Ending allowance to period end loans, net 7.38% 7.88% 8.93% 7.62% 4.37%
At December 31,
---------------------------------------------------------------------------
2001 2000 1999
----------------------- ----------------------- -----------------------
Percent of Percent of Percent of
Loans in Each Loans in Each Loans in Each
Amount Category to Amount Category to Amount Category to
Total Loans Total Loans Total Loans
------- ------------- ------- ------------- ------- -------------
(Dollars in thousands)
Distribution of end of
period
Allowance by loan type
Mortgage loans $ 159 0.1% $ 2,174 8.3% $ 5,800 19.9%
Consumer loans 17,165 95.9% 12,982 87.7% 8,339 76.3%
Commercial loans 136 4.0% -- 4.0% -- 3.8%
------- ----- ------- ----- ------- -----
$17,460 100.0% $15,156 100.0% $14,139 100.0%
======= ===== ======= ===== ======= =====
At December 31,
--------------------------------------------------------
1998 1997
Percent of Loans Percent of Loans
in Each Category in Each Category
Amount to Total Loans Amount to Total Loans
------- ---------------- ------- ----------------
(Dollars in thousands)
Distribution of end of
period
Allowance by loan type
Mortgage loans $ 5,676 21.8% $3,653 51.9%
Consumer loans 4,507 78.2% 2,246 48.1%
Commercial loans -- -- 588 --
------- ----- ------ -----
$10,183 100.0% $6,487 100.0%
======= ===== ====== =====
43
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.
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 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,
-----------------------------
2001 2000 1999
-------- -------- -------
(Dollars in thousands)
Balance at end of period
Overnight deposits $135,267 $ 36,477 $85,500
U.S. agency securities 229,660 166,838 9,918
U.S. agency mortgage-backed securities 35,016 46,376 --
Mutual funds (mortgage-backed securities) 20,162 10,051 --
-------- -------- -------
Total $420,104 $259,742 $95,418
======== ======== =======
The scheduled maturities and yields by security type are presented in the
following tables:
As of December 31, 2001
-------------------------------------------------------------------------
One Year or After 1 Year to After 5 Years to Over 10
Less Five Years 10 Years Years Total
----------- --------------- ---------------- -------- -----------
Maturity Distribution
Overnight deposits $135,267 $ -- $ -- $ -- $ 135,267
U.S. agency securities 5,594 110,752 31,461 81,852 229,659
U.S. agency mortgage backed securities (1) -- -- -- 35,016 35,016
Mutual funds (mortgage back securities) 20,162 -- -- -- 20,162
-------- --------- ------- -------- -----------
Total $161,023 $ 110,752 $31,461 $116,868 $ 420,104
======== ========= ======= ======== ===========
Weighted Average Yield
Overnight deposits 1.23% --% --% --% 1.23%
U.S. agency securities 1.74% 3.72% 3.80% 2.67% 3.35%
U.S. agency mortgage backed securities (1) --% --% --% 6.60% 6.60%
Mutual funds (mortgage backed securities --% --% --% --% 3.59%
-------- --------- ------- -------- -----------
Total 1.54% 3.72% 3.80% 3.85% 2.95%
======== ========= ======= ======== ===========
(1) Securities reflect stated maturities and not anticipated prepayments
44
As of December 31, 2000
------------------------------------------------------------------------
One Year or After 1 Year After 5 Years to Over 10
Less to Five Years 10 Years Years Total
----------- ------------- ----------------- -------- -----------
Maturity Distribution
Overnight deposits $ 36,477 $ -- $ -- $ -- $ 36,477
U.S. agency securities 166,838 -- -- -- 166,838
U.S. agency mortgage backed securities (1) -- -- -- 46,376 46,376
Mutual funds (mortgage back securities) 10,151 -- -- -- 10,051
----------- ------- ------ -------- -----------
Total $ 213,366 $ -- $ -- $ 46,376 $ 259,742
=========== ======= ====== ======== ===========
Weighted Average Yield
Overnight deposits 5.69% --% --% --% 5.69%
U.S. agency securities 6.27% --% --% --% 6.27%
U.S. agency mortgage backed securities (1) --% --% --% 7.35% 7.35%
Mutual funds (mortgage backed securities 6.59% --% --% --% 6.59%
----------- ------- ------ -------- -----------
Total 6.19% --% --% 7.35% 3.64%
=========== ======= ====== ======== ===========
(1) Securities reflect stated maturities and not anticipated prepayments
Impact of Inflation and Changing Prices
The financial statements and notes presented herein have been prepared in
accordance with Generally Accepted Accounting Principles in the United States of
America ("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.
Recent Accounting Developments
In July 2001, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS
No.141 requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001 as well as all purchase method
business combinations completed after June 30, 2001. SFAS No.141 also specifies
criteria which intangible assets acquired in a purchase method business
combination must meet in order to be recognized and reported apart from
goodwill. The adoption of this statement is not expected to have a material
effect on UPFC.
SFAS No.142 will require that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of SFAS No.142.
SFAS No.142 will also require that intangible assets with definite useful lives
be amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment. As permitted by SFAS No.142, UPFC
plans to adopt the new standard in the first quarter of the fiscal year 2002.
Upon adoption of SFAS No.142, UPFC will be required to reassess the useful lives
and residual values of all intangible assets acquired in purchase business
combinations, and make any necessary amortization period adjustments and/or
impairment adjustments. Any impairment loss will be measured as of the date of
adoption and recognized as the cumulative effect of a change in accounting
principle in the first interim period. Beginning on January 1, 2002,
amortization of goodwill and intangibles with indefinite lives will cease. It is
not anticipated that the adoption of this statement will have a material effect
on UPFC.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which requires that the fair value of a liability for
an asset retirement obligation be recognized in the period
45
in which it is incurred if a reasonable estimate of fair value can be made. The
associated asset retirement costs would be capitalized as part of the carrying
amount of the long-lived asset and depreciated over the life of the asset. The
liability is accreted at the end of each period through charges to operating
expense. If the obligation is settled for other than the carrying amount of the
liability, UPFC will recognize a gain or loss on settlement. Two provisions of
SFAS No.143 are effective for fiscal years beginning after June 15, 2002. The
adoption of this statement will have no material impact on UPFC.
In August 2001, the FASB issued SFAS No.144, " Accounting for the
Impairment or Disposal of Long-lived Assets." For long-lived assets to be held
and used, SFAS No.144 retains the requirements of SFAS No.121 to (a) recognize
an impairment loss only if the carrying amount of a long-lived asset is not
recoverable from its undiscounted cash flows and (b) measure an impairment loss
as the difference between the carrying amount and fair value. Further, SFAS
No.144 eliminates the requirement to allocate goodwill to long-lived assets to
be tested for impairment, describes a probability-weighted cash flow estimation
approach to deal with situations in which alternative courses of action to
recover the carrying amount of long-lived asset are under consideration or a
range is estimated for the amount of possible future cash flows, and establishes
a "primary-assets" approach to determine the cash flow estimation period. For
long-lived assets to be disposed of other than by sale (e.g., assets abandoned,
exchanged or distributed to owners in a spin off), SFAS No.144 requires that
such assets be considered held and used until disposed of. Further, an
impairment loss should be recognized at the date an asset is exchanged for a
similar productive asset or distributed to owners in a spin off if the carrying
amount exceeds its fair value. For long-lived assets to be disposed of by sale,
SFAS No.144 retains the requirement of SFAS No.121 to measure a long-lived asset
classified as held for sale at the lower of its carrying amount or fair value
less cost to sell and to cease depreciation. Discontinued operations would no
longer be measured on a net realizable value basis, and future operating losses
would no longer be recognized before they occur. SFAS No.144 broadens the
presentation of discontinued operations to include a component of an entity,
establishes criteria to determine when a long-lived asset is held for sale,
prohibits retroactive reclassification of the asset as held for sale at the
balance sheet date if the criteria are met after the balance sheet date but
before issue of the financial statements, and provides accounting guidance for
the reclassification of an asset from "held for sale" to `held and used". The
provisions of SFAS No.144 are effective for fiscal years beginning after
December 15 2001. It is not anticipated that the adoption of this statement will
have a material effect on UPFC.
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, 2001 and 2000 F-3
Consolidated Statements of Operations for the
years ended December 31, 2001, 2000 and 1999 F-4
Consolidated Statements of Comprehensive Income for the
years ended December 31, 2001, 2000 and 1999 F-5
Consolidated Statements of Changes in Shareholders' Equity for the
years ended December 31, 2001, 2000 and 1999 F-6
46
Consolidated Statements of Cash Flows for the F-7
years ended December 31, 2001, 2000 and 1999
Notes to Consolidated Financial Statements F-9
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
None.
47
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 10 is incorporated by reference to our 2002 definitive proxy statement
to be filed with the Securities and Exchange Commission within 120 days after
December 31, 2001. 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 2001".
Item 11. Executive Compensation
Item 11 is incorporated by reference to the Sections entitled "Information
About Directors and Executive Officers" contained in the 2002 Proxy Statement,
to be filed with the SEC within 120 days after December 31, 2001.
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 2002 Proxy Statement, to be filed
with the SEC within 120 days after December 31, 2001.
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 2002 Proxy Statement, to be filed with the SEC within 120 days
after December 31, 2001.
48
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.
10.21* Advances and Security Agreement dated January 29, 1996, between the Federal Home Loan
Bank of San Francisco and Pan American Bank, FSB.
10.35* Inter-Company Agreement dated May 1, 1994, between Pan American Financial, Inc. and Pan
American Bank, FSB.
10.40* Employment Agreement dated October 1, 1997, between Pan American Group, Inc., Pan American
Bank FSB and Guillermo Bron.
10.40.1* Amendment No. 1 to Employment Agreement dated November 1, 1997, between the
Pan American Group, Inc., Pan American Bank FSB and Guillermo Bron.
49
Exhibit No. Description
- ----------- -----------
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 UPFC and officers and directors of UPFC.
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.
10.102** On-line Computer Service Agreement dated June 19, 1998 between DHI Computing, Inc. 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.
10.108# First Amendment to the Salary Continuation Agreement dated December 21, 2000, between Pan
American Bank, FSB and Lawrence J. Grill.
10.109## Employment Agreement dated December 8, 2000, between Pan American Bank, FSB and
Ray C. Thousand.
50
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.
# Incorporated herein by reference from Exhibits to Form 10K for
the year ended December 31, 2000
## Incorporated herein by reference from Exhibits to Form 10Q for the
Quarter ended March 31, 2001.
(b) Reports on Form 8-K
None
(c) Exhibits. Reference is made to the Exhibit Index and exhibits
filed as a part of this report.
(d) Additional Financial Statements. Not applicable.
51
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, 2002
- ---------------------------- Chief Executive Officer
(Principal Executive Officer)
/S/ RAY C. THOUSAND President, Chief Operating March 21, 2002
- ---------------------------- Officer, Secretary and
Director
/S/ GARLAND W. KOCH Senior Vice President - March 21, 2002
- ---------------------------- Chief Financial Officer and
Treasurer (Principal
Financial and Accounting
Officer)
/S/ LAWRENCE J. GRILL Director March 21, 2002
- ----------------------------
/S/ JOHN T. FRENCH Director March 21, 2002
- ----------------------------
/S/ MITCHELL LYNN Director March 21, 2002
- ----------------------------
/S/ LUIS MAIZEL Director March 21, 2002
- ----------------------------
/S/ RON R. DUNCANSON Director March 21, 2002
- ----------------------------
52
United PanAm Financial Corp.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report F-2
Consolidated Statements of Financial Condition
as of December 31, 2001 and 2000 F-3
Consolidated Statements of Operations for the
years ended December 31, 2001, 2000 and 1999 F-4
Consolidated Statements of Comprehensive Income for the
years ended December 31, 2001, 2000 and 1999 F-5
Consolidated Statements of Changes in Shareholders' Equity for
the years ended December 31, 2001, 2000 and 1999 F-6
Consolidated Statements of Cash Flows
for the years ended December 31, 2001, 2000 and 1999 F-7
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, 2001 and 2000, and the related consolidated statements of
operations, comprehensive income, changes in shareholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 2001.
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, 2001 and 2000, and the
results of their operations and their cash flows, for each of the years in the
three-year period ended December 31, 2001 in conformity with accounting
principles generally accepted in the United States of America.
/s/ KPMG LLP
Los Angeles, California
January 29, 2002
F-2
United PanAm Financial Corp. and Subsidiaries
Consolidated Statements of Financial Condition
December 31, December 31,
(Dollars in thousands) 2001 2000
------------ ------------
Assets
Cash and due from banks $ 5,428 $ 6,115
Short term investments 135,267 36,477
-------- --------
Cash and cash equivalents 140,695 42,592
Securities available for sale, at fair value 284,837 223,265
Residual interests in securitizations, at fair value -- 8,861
Loans, net 236,448 192,368
Loans held for sale 194 712
Federal Home Loan Bank stock, at cost 6,500 3,000
Premises and equipment, net 2,124 1,591
Accrued interest receivable 4,029 814
Real estate owned, net -- 871
Deferred tax assets 6,860 10,820
Other assets 7,886 5,084
-------- --------
Total assets $689,573 $489,978
======== ========
Liabilities and Shareholders' Equity
Deposits $357,350 $348,230
Federal Home Loan Bank advances 130,000 60,000
Repurchase agreements 114,776 --
Accrued expenses and other liabilities 11,781 12,431
-------- --------
Total liabilities 613,907 420,661
-------- --------
Common stock (no par value):
Authorized, 30,000,000 shares
Issued and outstanding, 15,571,400 and 16,149,650 shares at
December 31, 2001 and December 31, 2000, respectively 63,630 65,291
Retained earnings 11,287 3,524
Unrealized gain on securities available for sale, net 749 502
-------- --------
Total shareholders' equity 75,666 69,317
-------- --------
Total liabilities and shareholders' equity $689,573 $489,978
======== ========
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,
--------------------------------------
2001 2000 1999
-------- -------- --------
Interest Income
Loans $ 45,648 $ 34,814 $ 27,003
Securities 12,504 9,561 1,800
-------- -------- --------
Total interest income 58,152 44,375 28,803
-------- -------- --------
Interest Expense
Deposits 18,119 13,057 5,787
Federal Home Loan Bank advances 1,246 1,506 --
Notes payable 157 -- 246
-------- -------- --------
Total interest expense 19,522 14,563 6,033
-------- -------- --------
Net interest income 38,630 29,812 22,770
Provision for loan losses 615 201 432
-------- -------- --------
Net interest income after provision for loan losses 38,015 29,611 22,338
-------- -------- --------
Non-interest Income (loss)
Loss on residual interests in securitizations -- (11,374) --
Gains on sales of loans, net 1,607 -- --
Loan related charges and fees 680 215 113
Service charges and fees 280 616 725
Other income (loss) 137 (369) 136
-------- -------- --------
Total non-interest income (loss) 2,704 (10,912) 974
-------- -------- --------
Non-interest Expense
Compensation and benefits 17,135 12,903 10,843
Occupancy 3,088 2,486 1,890
Other 7,769 8,772 5,910
-------- -------- --------
Total non-interest expense 27,992 24,161 18,643
-------- -------- --------
Income (loss) from continuing operations before income taxes 12,727 (5,462) 4,669
Income taxes (benefit) 4,964 (2,094) 1,908
-------- -------- --------
Income (loss) from continuing operations 7,763 (3,368) 2,761
-------- -------- --------
Income (loss) from discontinued operations, net of tax -- -- (941)
Loss on disposal of discontinued operations, net of tax -- (3,291) (6,172)
-------- -------- --------
Net income (loss) $ 7,763 $ (6,659) $ (4,352)
======== ======== ========
Earnings (loss) per share-basic:
Continuing operations $ 0.48 $ (0.21) $ 0.16
======== ======== ========
Discontinued operations $ -- $ (0.20) $ (0.42)
======== ======== ========
Net income (loss) $ 0.48 $ (0.41) $ (0.26)
======== ======== ========
Weighted average shares outstanding 16,017 16,392 16,854
======== ======== ========
Earnings (loss) per share-diluted:
Continuing operations $ 0.46 $ (0.21) $ 0.16
======== ======== ========
Discontinued operations $ -- $ (0.20) $ (0.41)
======== ======== ========
Net income (loss) $ 0.46 $ (0.41) $ (0.25)
======== ======== ========
Weighted average shares outstanding 16,931 16,392 17,253
======== ======== ========
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,
---------------------------
2001 2000 1999
------ ------- -------
Net income (loss) $7,763 $(6,659) $(4,352)
Other comprehensive income, net of tax:
Unrealized gain (loss) on securities 247 581 (79)
------ ------- -------
Comprehensive income (loss) $8,010 $(6,078) $(4,431)
====== ======= =======
See accompanying notes to consolidated financial statements.
F-5
United PanAm Financial Corp. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
Unrealized
(Dollars in thousands) Gain (Loss) Total
Number Common Retained On Shareholders'
of Shares Stock Earnings Securities, Net Equity
---------- ------- -------- --------------- -------------
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)
Change in unrealized loss on securities, -- -- -- (79) (79)
net
---------- ------- ------- ------- --------
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)
Change in unrealized gain on securities,
net -- -- -- 581 581
---------- ------- ------- ------- --------
Balance, December 31, 2000 16,149,650 65,291 3,524 502 69,317
Net income -- -- 7,763 -- 7,763
Exercise of stock options 58,750 83 -- -- 83
Effect of compensation expense for options -- 1,369 -- -- 1,369
Issuance of restricted stock 9,000 -- -- -- --
Repurchase of stock (646,000) (3,113) -- -- (3,113)
Change in unrealized gain on securities,
net -- -- -- 247 247
---------- ------- ------- ------- --------
Balance, December 31, 2001 15,571,400 $63,630 $11,287 $ 749 $ 75,666
========== ======= ======= ======= ========
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,
---------------------------------
2001 2000 1999
--------- --------- ---------
Cash flows from operating activities:
Net income (loss) $ 7,763 $ (6,659) $ (4,352)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Compensation expense for converting option plan 1,369 -- --
Discontinued operations -- 3,291 7,113
Gains on sales of loans (1,607) -- --
Origination of loans held for sale -- (76,368) (977,244)
Sales of loans held for sale 16,643 203,586 983,734
Provision for loan losses 615 201 432
Accretion of discount on loans (62) -- (178)
Depreciation and amortization 830 1,216 1,139
FHLB stock dividend (202) (168) (121)
Decrease in residual interests in securitizations 8,861 12,366 569
Decrease (increase) in accrued interest receivable (3,215) 687 533
Decrease (increase) in other assets (2,802) 3,897 7,438
Deferred income taxes 3,681 (4,285) (3,109)
Amortization of premiums (discounts) on securities 1,565 (4,645) --
Decrease in accrued expenses and other liabilities (650) (6,221) (1,223)
Other, net -- 34 373
--------- --------- ---------
Net cash provided by (used in) operating activities 32,789 126,932 15,104
--------- --------- ---------
Cash flows from investing activities:
Purchase of securities (499,547) (491,769) (9,918)
Proceeds from maturities of investment securities 436,936 284,021 --
Repayments of mortgage loans 849 13,006 39,128
Originations, net of repayments, of non-mortgage loans (60,036) (47,673) (22,244)
Purchases of premises and equipment (1,363) (900) (985)
Purchase of FHLB stock, net (3,298) (327) (264)
Proceeds from sale of real estate owned 907 7,434 7,120
Other, net -- (367) (286)
--------- --------- ---------
Net cash provided by (used in) investing activities (125,552) (236,575) 12,551
--------- --------- ---------
Cash flows from financing activities:
Net increase (decrease) in deposits 9,120 56,286 (29,724)
Proceeds (repayments) from warehouse lines of credit -- (54,415) 54,415
Purchase of treasury stock (3,113) (461) (3,695)
Proceeds (repayments) from repurchase agreements 114,776 -- (10,930)
Proceeds (repayments) from FHLB advances 70,000 60,000 --
Exercise of stock options 83 468 425
--------- --------- ---------
Net cash provided by financing activities 190,866 61,878 10,491
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 98,103 (47,765) 38,146
Cash and cash equivalents at beginning of year 42,592 90,357 52,211
--------- --------- ---------
Cash and cash equivalents at end of year $ 140,695 $ 42,592 $ 90,357
========= ========= =========
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,
----------------------------
2001 2000 1999
-------- ------- -------
Supplemental disclosures of cash flow information:
Cash paid for:
Interest $ 19,082 $17,924 $17,793
======== ======= =======
Taxes $ 2,669 $ 236 $ 253
======== ======= =======
Supplemental schedule of non-cash investing and financing activities:
Loans transferred to held for sale $ 14,187 $ -- $ --
======== ======= =======
Real estate acquired through foreclosure $ -- $ 5,715 $ 7,833
======== ======= =======
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 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. United Auto Credit Corp. ("UACC") was
incorporated in 1996 as a wholly-owned subsidiary of the Bank.
These financial statements have been prepared in conformity with generally
accepted accounting principles in the United States of America. In preparing
these consolidated financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the 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, 2001 and 2000.
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 original maturities of three months or less.
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.
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.
F-9
United PanAm Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
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 or estimated net recoverable value. Transfers of loans from the
held-for-investment portfolio to the held-for-sale portfolio are recorded at the
book 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 consisted 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 classified its residual interests in securitizations as trading
securities and recorded them at fair value with any unrealized gains or losses
recorded in the results of operations.
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.
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.
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, generally 8.5% to 10.5% of the net loan amount, of acquisition
discounts from our purchase of automobile installment contracts. This allocation
represents Management's estimate of the losses expected over the life of the
loan. 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
F-10
United PanAm Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
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 Corp, 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 Corp. 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, 2001
and 2000, there were no such allowances. Real estate owned at December 31, 2000
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.
F-11
United PanAm Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
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.
SEGMENT INFORMATION AND DISCLOSURE
- ----------------------------------
Accounting principles generally accepted in the United States of America
establish standards to report information about operating segments in annual
financial statements and requires reporting of selected information about
operating segments in interim reports to stockholders. It also establishes
standards for related disclosures about products and services, geographic areas
and major customers. UPFC has concluded it has three operating segments
consistent with the ones evaluated internally for operating decisions and
assessing performance.
RECENT ACCOUNTING PRONOUNCEMENTS
- --------------------------------
In July 2001, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No.141 requires that the purchase method of accounting
be used for all business combinations initiated after June 30, 2001 as well as
all purchase method business combinations completed after June 30, 2001. SFAS
No.141 also specifies criteria intangible assets acquired in a purchase method
business combination must meet to be recognized and reported apart from
goodwill. The adoption of this statement is not expected to have a material
effect on UPFC.
SFAS No.142 will require that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of SFAS No.142.
SFAS No.142 will also require that intangible assets with definite useful lives
be amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment. As permitted by SFAS No.142, UPFC
plans to adopt the new standard in the first quarter of the fiscal year 2002.
Upon adoption of SFAS No.142, the Company will be required to reassess the
useful lives and residual values of all intangible assets acquired in purchase
business combinations, and make any necessary amortization period adjustments
and/or impairment adjustments. Any impairment loss will be measured as of the
date of adoption and recognized as the cumulative effect of a change in
accounting principle in the first interim period. Beginning on January 1, 2002,
amortization of goodwill and intangibles with indefinite lives will cease. It is
not anticipated that the adoption of this statement will have a material effect
on UPFC.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which requires that the fair value of a liability for
an asset retirement obligation be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs would be capitalized as part of the carrying amount of
the long-lived asset and depreciated over the life of the asset. The liability
is accreted at the end of each period through charges to operating expense. If
the obligation is settled for other than the carrying amount of the liability,
UPFC will recognize a gain or loss on settlement. The provisions of SFAS No.143
are effective for fiscal years beginning after June 15, 2002. The adoption of
this statement will have no impact on UPFC.
F-12
United PanAm Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
In August 2001, the FASB issued SFAS No.144, " Accounting for the
Impairment or Disposal of Long-lived Assets." For long-lived assets to be held
and used, SFAS No.144 retains the requirements of SFAS No.121 to (a) recognize
an impairment loss only if the carrying amount of a long-lived asset is not
recoverable from its undiscounted cash flows and (b) measure an impairment loss
as the difference between the carrying amount and fair value. Further, SFAS
No.144 eliminates the requirement to allocate goodwill to long-lived assets to
be tested for impairment, describes a probability-weighted cash flow estimation
approach to deal with situations in which alternative courses of action to
recover the carrying amount of long-lived asset are under consideration or a
range is estimated for the amount of possible future cash flows, and establishes
a "primary-assets" approach to determine the cash flow estimation period. For
long-lived assets to be disposed of other than by sale (e.g., assets abandoned,
exchanged or distributed to owners in a spin off), SFAS No.144 requires that
such assets be considered held and used until disposed of. Further, an
impairment loss should be recognized at the date an asset is exchanged for a
similar productive asset or distributed to owners in a spin off if the carrying
amount exceeds its fair value. For long-lived assets to be disposed of by sale,
SFAS No.144 retains the requirement of SFAS No.121 to measure a long-lived asset
classified as held for sale at the lower of its carrying amount or fair value
less cost to sell and to cease depreciation. Discontinued operations would no
longer be measured on a net realizable value basis, and future operating losses
would no longer be recognized before they occur. SFAS No.144 broadens the
presentation of discontinued operations to include a component of an entity,
establishes criteria to determine when a long-lived asset is held for sale,
prohibits retroactive reclassification of the asset as held for sale at the
balance sheet date if the criteria are met after the balance sheet date but
before issue of the financial statements, and provides accounting guidance for
the reclassification of an asset from "held for sale" to `held and used". The
provisions of SFAS No.144 are effective for fiscal years beginning after
December 15 2001. It is not anticipated that the adoption of this statement will
have a material effect on UPFC.
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 million at
December 31, 2000, consisting of loans and other assets. In addition, the
liabilities of the mortgage business were $3.3 million at December 31, 2000,
consisting of other liabilities in 2000. 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 and $189.7 million in 2000
and 1999, respectively, and average warehouse lines of credit of $1.8 million
and $45.4 million in 2000 and 1999, respectively, to the discontinued mortgage
operations in computing interest expense. No such allocations were made in 2001.
F-13
United PanAm Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
The results of discontinued operations are as follows:
(Dollars in thousands)
2000 1999
------- --------
Net interest income after provision for loan losses $ -- $ 1,970
Non-interest income -- 31,964
Non-interest expense -- 35,580
------- --------
Operating income (loss) before income taxes and loss on -- (1,646)
disposal
Loss on disposal (5,288) (10,511)
------- --------
Income (loss) before income taxes (benefit) (5,288) (12,157)
Income taxes (benefit) (1,997) (5,044)
------- --------
Income (loss) from discontinued operations $(3,291) $ (7,113)
======= ========
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
(Dollars in thousands) Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
2001
U.S. government agency securities $ 229,081 $ 674 $ 96 $ 229,659
U.S. government agency mortgage-backed securities 34,436 587 7 35,016
Mutual funds 20,000 162 -- 20,162
--------- ------- ----- ---------
Total securities $ 283,517 $1,423 $ 103 $ 284,837
========= ======= ===== =========
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
========= ======= ===== =========
F-14
United PanAm Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
The carrying and estimated fair values of securities at December 31, 2001
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. At
December 31, 2001 there were $250 million of securities pledged for FHLB
borrowings and repurchase agreements.
(Dollars in thousands) Estimated
Amortized Fair
Cost Value
--------- ---------
One year or less $ 20,000 $ 20,162
One to five years 116,017 116,345
Over five years 113,064 113,314
Mortgage-backed securities 34,436 35,016
--------- ---------
Total $ 283,517 $284,837
========= =========
5. LOANS
Loans are summarized as follows:
December 31,
-------------------
(Dollars in thousands) 2001 2000
-------- --------
Consumer loans:
Automobile installment contracts $232,902 $176,255
Insurance premium finance 28,710 25,843
Other consumer 98 577
-------- --------
261,710 202,675
-------- --------
Commercial loans:
Insurance premium finance 10,921 8,342
Other commercial -- 55
-------- --------
10,921 8,397
-------- --------
Mortgage loans:
Fixed rate 157 14,428
Adjustable rate 195 3,489
-------- --------
352 17,917
-------- --------
Total loans 272,983 228,989
Less:
Unearned discounts and premiums -- (728)
Unearned finance charges (18,881) (20,737)
Allowance for loan losses (17,460) (15,156)
-------- --------
Total loans, net $236,642 $192,368
======== ========
Contractual weighted average interest rate 21.54% 19.62%
-------- --------
At December 31, 2001 and 2000 approximately 100% of the Company's mortgage
loans were collateralized by first deeds of trust on one-to-four family
residences. At December 31, 2001 and 2000, approximately 50% and 59%,
respectively, of the Company's loan portfolio is related to collateral or
borrowers located in California.
The amount of interest income related to IPF loans included in the
Consolidated Statements of Operations was $2,229,000, $2,572,000 and $2,454,000
for 2001, 2000 and 1999 respectively. These amounts represented the interest
received by IPF after netting the servicing fees paid to BPN of $3,078,000
$2,264,000 and $2,589,000 respectively.
F-15
United PanAm Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
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 $0 and $364,000,
at December 31, 2001 and 2000, respectively. The loans were fully paid in 2001.
The activity in the allowance for loan losses consists of the following:
Years Ended December 31,
----------------------------
(Dollars in thousands) 2001 2000 1999
------- -------- -------
Balance at beginning of year $15,156 $14,139 $10,183
Provision for loan losses - continuing operations 615 201 432
Provision for loan losses - discontinued operations -- 2,396 7,376
Purchase discounts on automobile installment contracts allocated to 12,169 10,234 7,358
the allowance for loan losses
Charge-offs (10,886) (12,427) (11,920)
Recoveries 406 613 710
------- -------- -------
Net charge-offs (10,480) (11,814) (11,210)
------- -------- -------
Balance at end of year $17,460 $15,156 $14,139
======= ======== =======
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 based on an analysis of loss
history. Allocation amounts were 10.5%, 9.0% and 9.0% of net loan amount as of
December 31, 2001, 2000 and 1999, respectively.
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) 2001 2000
------- --------
Nonaccrual loans $ 1,041 $ 3,067
Real estate owned, net -- 871
------- --------
Totals $1,041 $ 3,938
======= ========
Percentage of non-performing assets to total assets 0.15% 0.80%
======= ========
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, 2001, the aggregate investment in loans considered to be
impaired was $353,000 compared to $2.8 million at December 31, 2000. Allowance
for loan losses was provided for all impaired loans at December 31, 2001 and
2000; the related allowances were $159,000 and $364,000 respectively. For the
years ended December 31, 2001 and 2000, UPFC recognized interest income on
impaired loans of zero and $698,000, respectively, all of which was recorded
using the cash received method. The average recorded investment in impaired
loans during the years ended December 31, 2001 and 2000 was approximately $1.3
million and $13.0 million, respectively.
F-16
United PanAm Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
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 65,000 shares at December 31, 2001 and 30,000 shares
at December 31, 2000 of the FHLB's $100 par value capital stock. The amount of
stock required is adjusted annually based on a determination made by the FHLB.
The determination is based on the balance of the Bank's outstanding residential
loans and advances from the FHLB.
7. INTEREST RECEIVABLE
Interest receivable is as follows:
December 31,
---------------
(Dollars in thousands) 2001 2000
------- -----
Loans $ 53 $ 170
Securities 3,976 644
------- -----
Total $ 4,029 $ 814
======= =====
8. PREMISES AND EQUIPMENT
Premises and equipment are as follows:
(Dollars in thousands) December 31,
---------------
2001 2000
------ ------
Furniture and equipment $4,701 $3,361
Leasehold improvements 237 392
------ ------
4,938 3,753
Less : Accumulated depreciation and amortization (2,814) (2,162)
------ ------
Total $2,124 $1,591
====== ======
Depreciation and amortization expense was $830,000 for the year ended
December 31, 2001, $739,000 for the year ended December 31, 2000 and $641,000
for the year ended December 31, 1999. Depreciation expense of the subprime
mortgage operations is included in discontinued operations.
9. DEPOSITS
Deposits are summarized as follows:
December 31,
---------------------------------------------------
2001 2000
------------------------- -----------------------
(Dollars in thousands) Weighted Weighted
Amount Average Rate Amount Average Rate
---------- ------------ -------- ------------
Deposits with no stated maturity:
Regular and money market passbook $ 47,931 2.31% $ 38,730 4.32%
NOW accounts 12,902 1.04% 14,828 2.24%
Money market checking 893 1.42% 422 2.47%
-------- ---- -------- ----
61,726 2.03% 53,980 3.73%
-------- ---- -------- ----
Time deposits less than $100,000 212,981 4.43% 211,427 6.40%
Time deposits $100,000 and over 82,643 4.33% 82,823 6.57%
-------- ---- -------- ----
295,624 4.40% 294,250 6.45%
-------- ---- -------- ----
Total deposits $357,350 3.99% $348,230 6.03%
======== ==== ======== ====
F-17
United PanAm Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
A summary of time deposits by remaining maturity is as follows:
December 31,
-------------------
2001 2000
(Dollars in thousands) -------- --------
Maturity within one year $237,683 $257,710
Maturity within two years 46,170 36,440
Maturity within three years 7,657 100
Maturity over three years 4,114 --
-------- --------
Total $295,624 $294,250
======== ========
10. Borrowings
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 years ended on the dates indicated. All borrowings had original
maturities of less than 1 year.
At or For Years Ended
December 31,
2001 2000
-------- -------
(Dollars in thousands)
FHLB advances
Maximum month-end balance $130,000 $60,000
Balance at end of period 130,000 60,000
Average balance for period 30,830 22,877
Weighted average interest rate on balance at end of
period 1.97% 6.81%
Weighted average interest rate on average balance for
period 4.04% 6.58%
Warehouse lines of credit
Maximum month-end balance -- $26,623
Balance at end of period -- --
Average balance for period -- 1,796
Weighted average interest rate on balance at end of
period -- --%
Weighted average interest rate on average balance for
period -- 6.27%
Repurchase Agreements --
Maximum month-end balance $114,776 --
Balance at end of period 114,776 --
Average balance for period 4,503 --
Weighted average interest rate on balance at end of
period 2.37% --
Weighted average interest rate on average balance for
period 3.46% --
11. INCOME TAXES
Total income tax expense (benefit) was allocated as follows:
(Dollers in thousands) Years Ended December 31,
-----------------------------
2001 2000 1999
------ ------- -------
Income (loss) from continuing operations $4,964 $(2,094) $ 1,908
Discontinued operations -- (1,997) (5,044)
------ ------- -------
Total tax expense (benefit) $4,964 $(4,091) $(3,136)
====== ======= =======
F-18
United PanAm Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
The provision for income taxes including discontinued operations is
comprised of the following:
(Dollars in thousands) Years Ended December 31,
------------------------------
2001 2000 1999
------ ------- -------
Federal taxes:
Current $1,186 $ 156 $ (20)
Deferred 2,651 (3,477) (2,514)
------ ------- -------
3,837 (3,321) (2,534)
------ ------- -------
State taxes:
Current 97 38 (7)
Deferred 1,030 (808) (595)
------ ------- -------
1,127 (770) (602)
------ ------- -------
Total $4,964 $(4,091) $(3,136)
====== ======= =======
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) 2001 2000
------- --------
Deferred tax assets:
Residual interests in securitizations $ -- $ 4,478
Net operating loss carryforwards 5,460 3,892
Loan loss allowances 73 --
Discontinued operations and accrued lease obligations 411 1,631
Intangible assets 847 915
Compensation related reserve 661 427
State taxes 11 2
Depreciation and amortization 140 141
Accrued liabilities 152 131
Other 20 15
------- --------
Total gross deferred tax assets 7,775 11,632
------- --------
Deferred tax liabilities:
FHLB stock dividends (344) (259)
Loan loss allowances -- (188)
Unrealized gain on securities available for sale (571) (292)
Loans marked to market for tax purposes -- (73)
------- --------
Total gross deferred tax liabilities (915) (812)
------- --------
Net deferred tax assets $ 6,860 $ 10,820
======= ========
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.
At December 31, 2001 and 2000, the Company had net current income tax
receivable (payable) of $1.2 million and ($1.2 million), respectively.
UPFC has $15.9 million in federal tax net operating loss carry-forwards
expiring under current tax laws in 2019-2021. The Company's state tax net
operating loss carry-forwards are $1.0 million and expire in 2004-2011.
F-19
United PanAm Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
UPFC's effective income tax rate differs from the federal statutory rate
due to the following:
Years Ended December 31,
----------------------------
2001 2000 1999
---- ---- ----
Expected statutory rate 34.0% 34.0% 34.0%
State taxes, net of federal benefits 5.8 4.9 5.0
Other, net (0.8) (0.8) 2.9
---- ---- ----
Effective tax rate 39.0% 38.1% 41.9%
==== ==== ====
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.
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, 2001 the Bank had the following regulatory capital
requirements and capital position:
December 31, 2001 December 31, 2000
-------------------------------------- --------------------------------------
(Dollars in thousands) Actual Required Excess Actual Required Excess
---------- ---------- ---------- ---------- ---------- ----------
Tangible capital $ 49,707 $ 10,301 $ 39,406 $ 40,840 $ 7,189 $ 33,651
Tangible capital ratio 7.24% 1.50% 5.74% 8.52% 1.50% 7.02%
Core capital $ 49,707 $ 20,602 $ 29,105 $ 40,840 $ 14,378 $ 26,462
Core capital (leverage) ratio 7.24% 3.00% 4.24% 8.52% 3.00% 5.52%
Risk-based capital $ 53,181 $ 27,076 $ 26,105 $ 35,134 $ 19,354 $ 15,780
Percent of risk-weighted assets 15.71% 8.00% 7.71% 14.52% 8.00% 6.52%
The FDIC Improvement Act of 1991 ("FDICIA") required each federal banking
agency to implement prompt corrective actions for institutions that it
regulates. In response to these requirements, the OTS adopted final rules,
effective December 19, 1992, based upon FDICIA's five capital tiers: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized.
The rules provide that a savings association is "well capitalized" if its
leverage ratio is 5% or greater, its Tier 1 risk-based capital ratio is 6% or
greater, its total risk-based capital ratio is 10% or greater, and the
institution is not subject to a capital directive.
As used herein, leverage ratio means the ratio of core capital to adjusted
total assets, Tier 1 risk-based capital ratio means the ratio of core capital to
risk-weighted assets, and total risk-based capital ratio means the ratio of
total capital to risk-weighted assets, in each case as calculated in accordance
with current OTS capital regulations. Under these regulations, the Bank is
deemed to be "well capitalized" as of December 31, 2001. Since that date, there
are no conditions or events that management believes would have changed its
"well-capitalized" designation.
F-20
United PanAm Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
The Bank had the following regulatory capital calculated in accordance with
FDICIA's capital standards for a "well capitalized" institution:
December 31, 2001 December 31, 2000
------------------------------ ------------------------------
(Dollars in thousands) Actual Required Excess Actual Required Excess
-------- -------- -------- -------- -------- --------
Leverage $ 49,707 $ 34,336 $ 15,371 $ 40,840 $ 23,964 $ 16,876
Leverage ratio 7.24% 5.00% 2.24% 8.52% 5.00% 3.52%
Tier 1 risk-based $ 48,807 $ 20,316 $ 28,491 $ 31,979 $ 14,515 $ 17,464
Tier 1 risk-based ratio 14.41% 6.00% 8.41% 13.22% 6.00% 7.22%
Total risk-based $ 53,181 $ 33,860 $ 19,321 $ 35,134 $ 24,192 $ 10,942
Total risk-based ratio 15.71% 10.00% 5.71% 14.52% 10.00% 4.52%
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.
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 $1.9
million; $1.5 million and $1.1 million for the years ended December 31, 2001,
2000 and 1999, respectively.
Future minimum rental payments as of December 31, 2001 under existing
leases, including approximately $1.6 million to be recovered from sublease
rental arrangements through 2003, are set forth as follows:
(Dollars in thousands)
Years ending December 31:
2002 $2,607
2003 2,229
2004 2,035
2005 1,659
2006 895
Thereafter 118
------
Total $9,543
======
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 these representations
and warranties may require the Company to repurchase loans previously sold or to
reimburse investors for losses incurred. 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 or
operating results of UPFC.
14. STOCK OPTIONS
F-21
United PanAm Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
In 1994, UPFC adopted a stock option plan and, in November 1997 and June
2001, 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
5,000,000. 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 amounts) Weighted Weighted Weighted
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
2001 Price 2000 Price 1999 Price
--------- -------- ---------- -------- ---------- --------
Balance at beginning of year 1,161,250 $5.48 1,783,250 $ 5.82 1,820,000 $ 5.74
Granted 2,899,195 3.15 -- -- 445,000 3.66
Canceled or expired (372,704) 6.96 (354,500) 10.42 (148,000) 9.68
Exercised (58,750) 1.41 (267,500) 1.02 (333,750) 0.80
--------- -------- ---------- ----------
Balance at end of year 3,628,991 $3.53 1,161,250 $ 5.48 1,783,250 $ 5.82
========= ========== ==========
Weighted average fair value per share
of options granted during the year $ 1.13 $ -- $ 1.21
========= ========== ==========
Certain shares exercised in 1997 and 1999 were exercised 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 2001, stock options representing 1,884,029 shares were granted as
part of the conversion of UACC's Stock Option Plan to the Plan. These shares
were included in the total number granted in 2001.
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 2001, 2000 and 1999, 9,000,13,400 and 35,600
shares, respectively, of restricted stock vested and 7,500, 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 $1,369,000, $35,000 and
$216,000 in 2001, 2000 and 1999, respectively. 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,
--------------------------
2001 2000 1999
------ ------- -------
Net income (loss) to common shareholders:
As reported $7,763 $(6,659) $(4,352)
Pro-forma $7,025 $(7,032) $(4,956)
Earnings (loss) per share:
As reported - basic $ 0.48 $ (0.41) $ (0.26)
As reported - diluted $ 0.46 $ (0.41) $ (0.25)
Pro-forma - basic $ 0.44 $ (0.43) $ (0.29)
Pro-forma - diluted $ 0.41 $ (0.43) $ (0.29)
F-22
United PanAm Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
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, 76% and 72%
volatility in 2001 and 1999, respectively, risk-free interest rate of 5.5% in
2001 and 7.0% in 1999 and expected lives of 5 years.
At December 31, 2001, options exercisable to purchase 2,554,075 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
- ------------------------------ --------- ---------- -------- --------- --------
$11.00 - $12.10 120,000 2002 $11.55 120,000 $11.55
$3.00 20,000 2005 3.00 20,000 3.00
$0.80 150,000 2006 0.80 150,000 0.80
$10.50 - $11.00 80,000 2007 10.63 80,000 10.63
$0.24 - $4.75 1,644,431 2008 0.96 1,619,721 0.93
$1.31 - $5.00 451,675 2009 3.45 439,001 3.47
$1.78 - $3.35 105,922 2010 2.57 42,820 1.98
$1.78 - $10.00 1,056,963 2011 6.61 82,533 4.00
--------- ------ --------- ------
3,628,991 $ 3.53 2,554,075 $ 1.89
========= ====== ========= ======
During 2001, options granted by UACC were converted to options of UPFC.
Compensation expense of $1.4 million was recognized in connection with these
options.
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 2001. 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 2001, 2000 and 1999
were $173,000, $72,000 and $419,000, respectively. The Company used account
forfeitures in 2001 to fund a portion of its contribution.
16. OTHER EXPENSES
Other expenses are comprised of the following:
Years Ended December 31,
------------------------
(Dollars in thousands) 2001 2000 1999
------ ------ ------
Amortization/write-off of intangible assets $ 561 $1,735 $ 600
Professional fees 903 1,174 792
Loan and collection expenses 1,351 927 655
Travel and entertainment 1,057 792 478
Marketing 505 780 256
Data processing 759 708 682
Corporate relocation -- 700 --
Forms, supplies, postage and delivery 819 546 477
Telephone 801 533 417
Insurance premiums 489 409 461
Loan servicing expense 13 54 559
Other 511 414 533
------ ------ ------
Total $7,769 $8,772 $5,910
====== ====== ======
F-23
United PanAm Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
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) 2001 2000 1999
------- -------- -------
Earnings per share from continuing operations - basic:
Income from continuing operations $ 7,763 $ (3,368) $ 2,761
======= ======== =======
Average common shares outstanding 16,017 16,392 16,854
======= ======== =======
Per share $ 0.48 $ (0.21) $ 0.16
======= ======== =======
Earnings per share from continuing operations - diluted:
Income from continuing operations $ 7,763 $ (3,368) $ 2,761
======= ======== =======
Average common shares outstanding 16,017 16,392 16,854
Add: Stock options 914 -- 399
------- -------- -------
Average common shares outstanding - diluted 16,931 16,392 17,253
======= ======== =======
Per share $ 0.46 $ (0.21) $ 0.16
======= ======== =======
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.
18. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of UPFC's financial instruments is as follows at
the dates indicated:
December 31, December 31,
2001 2000
--------------------- ---------------------
(Dollars in thousands) Carrying Fair Value Carrying Fair Value
Value Estimate Value Estimate
-------- ---------- -------- ----------
Assets:
Cash and cash equivalents $140,695 $140,695 $ 42,592 $ 42,592
Securities 284,837 284,837 223,265 223,265
Loans, net 236,448 236,448 192,368 192,368
Loans held for sale 194 194 712 712
Residual interests in securitizations -- -- 8,861 8,861
Federal Home Loan Bank Stock 6,500 6,500 3,000 3,000
Liabilities:
Deposits 357,350 361,181 348,230 349,221
Federal Home Loan Bank advances 130,000 130,000 60,000 60,000
Other borrowings 114,776 114,776 -- --
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.
F-24
United PanAm Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
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 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: 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 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 and note rates consistent with present
market rates.
Other Borrowings: The fair value of the other borrowings is considered to
approximate carrying value due to the short period to maturity and note rates
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-25
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, 2001
------------------------------------------
Insurance
Auto Premium
Finance Finance Banking Total
-------- ------- -------- --------
Net interest income $ 30,378 $ 2,299 $ 5,953 $ 38,630
Provision for loan losses 250 365 -- 615
Non-interest income 321 459 1,924 2,704
Non-interest expense 18,846 255 8,891 27,992
-------- ------- -------- --------
Segment profit (loss) (pre-tax) $ 11,603 $ 2,138 $ (1,014) $ 12,727
======== ======= ======== ========
Total assets $200,665 $39,632 $449,276 $689,573
======== ======= ======== ========
At or For Year End ed 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 (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
======== ======= ======== ========
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. No allocations were required in
2001.
Years Ended December 31
-----------------------
2000 1999
-------- --------
Net interest income for reportable segments $ 29,812 $ 27,348
Net interest income allocated to discontinued operations -- (4,578)
-------- --------
Consolidated net interest income $ 29,812 $ 22,770
======== ========
Non-interest income for reportable segments $(10,912) $ 2,254
Non-interest income allocated to discontinued operations -- (1,280)
-------- --------
Consolidated non-interest income $(10,912) $ 974
======== ========
Segment profit (loss) for reportable segments $ (5,462) $ 10,527
Loss allocated to discontinued operations -- (5,858)
-------- --------
Consolidated income (loss) from continuing operations before income
taxes $ (5,462) $ 4,669
======== ========
Total assets for reportable segments $489,923 $293,320
Total assets allocated to discontinued operations 55 144,970
-------- --------
F-26
United PanAm Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Consolidated total assets $489,978 $438,290
======== ========
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,
------------------------
2001 2000
------- -------
Statements of Financial Condition
Cash $ 1,195 $ 151
Note receivable from affiliate 21,203 14,022
Loans 232 7,619
Other assets 1,566 2,637
Investment in subsidiaries 51,536 45,539
------- -------
Total assets $75,732 $69,968
======= =======
Other liabilities 66 651
------- -------
Total liabilities 651
Shareholders' equity 75,666 69,317
------- -------
Total liabilities and shareholders' equity $75,732 $69,968
======= =======
Years Ended December 31,
------------------------------
2001 2000 1999
------- -------- -------
Statements of Operations
Equity in undistributed income (loss) of subsidiaries $ 8,362 $ (7,261) $(5,060)
Interest income 1,446 1,936 2,364
------- -------- -------
Total income 9,808 (5,325) (2,696)
------- -------- -------
Interest expense -- -- --
Other expense 2,433 858 1,137
------- -------- -------
Total expense 2,433 858 1,137
------- -------- -------
Income (loss) before income taxes 7,375 (6,183) (3,833)
Income taxes (388) 476 519
------- -------- -------
Net income (loss) $ 7,763 $ (6,659) $(4,352)
======= ======== =======
Statements of Cash Flows
Cash flows from operating activities:
Net income (loss) $ 7,763 $ (6,659) $(4,352)
Equity in earnings of subsidiaries (8,362) 7,261 5,060
(Increase) decrease in accrued interest receivable 2,226 (2,310) 1,492
(Increase) decrease in other assets (1,155) 66 80
Increase in other liabilities (585) 106 127
Compensation expense for converting option plan 1,369
Other, net -- 95 219
------- -------- -------
Net cash provided by (used in) operating activities 1,256 (1,441) 2,626
------- -------- -------
Cash flows from investing activities:
Purchase of loans held for investment -- (7,619) --
Repayment of notes receivable 206 12,284 31,832
Other, net -- (60) (77)
------- -------- -------
Net cash provided by investing activities 206 4,605 31,755
------- -------- -------
Cash flows from financing activities:
Purchase of treasury stock (3,113) (461) (3,695)
Capital contributed to subsidiary 2,612 (3,129) (31,180)
Exercise of stock options 83 468 425
------- -------- -------
Net cash (used in) financing activities (418) (3,122) (34,450)
------- -------- -------
Net increase (decrease) in cash and cash equivalents 1,044 42 (69)
Cash and cash equivalents at beginning of year 151 109 178
------- -------- -------
Cash and cash equivalents at end of year $ 1,195 $ 151 $ 109
======= ======== =======
F-27
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,
2001 2001 2001 2001
--------- -------- ------------- ------------
2001:
Net interest income $8,395 $9,289 $10,109 $10,835
Provision for loan losses 44 124 108 339
Non-interest income 630 1,518 267 289
Non-interest expense 6,452 7,631 6,761 7,146
------ ------ ------- -------
Income (loss) from continuing operations before
income taxes 2,529 3,052 3,507 3,639
Income taxes (benefit) 985 1,190 1,369 1,420
------ ------ ------- -------
Income (loss) from continuing operations $1,544 $1,862 $ 2,138 $ 2,219
====== ====== ======= =======
Earnings (loss) from continuing operations per share -
basic $ 0.10 $ 0.12 $ 0.13 $ 0.14
====== ====== ======= =======
Earnings (loss) from continuing operations share
diluted $ 0.10 $ 0.11 $ 0.12 $ 0.13
====== ====== ======= =======
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 from continuing operations before income
taxes 1,694 (2,983) (5,281) 1,108
Income taxes 692 (1,158) (1,970) 342
------ ------- ------- -------
Income from continuing operations $1,002 $(1,825) $(3,311) $ 766
====== ======= ======= =======
Earnings from continuing operations per share - basic $ 0.06 $ (0.11) $ (0.20) $ 0.05
====== ======= ======= =======
Earnings from continuing operations share - diluted $ 0.06 $ (0.11) $ (0.20) $ 0.05
====== ======= ======= =======
F-28