<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 1998
Or
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to ___________
Commission File Number 000-24051
UNITED PANAM FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
California 95-3211687
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1300 SOUTH EL CAMINO REAL
SAN MATEO, CALIFORNIA 94402
(Address of principal executive offices) (Zip Code)
(650) 345-1800
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last
report)
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 No X*
---- ----
The number of shares outstanding of the Registrant's Common Stock as of June 4,
1998 was 17,275,000 shares.
- -----------------------------
* The Registrant has not been subject to such filing requirements for the past
90 days and has had no reports to be filed since such time.
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UNITED PANAM FINANCIAL CORP.
FORM 10-Q
MARCH 31, 1998
INDEX
<TABLE>
<CAPTION>
<S> <C> <C>
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of
March 31, 1998 and December 31, 1997 1
Consolidated Statements of Operations
for the three months ended March 31, 1998
and March 31, 1997 2
Consolidated Statements of Cash Flows
for the three months ended March 31, 1998
and March 31, 1997 3
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 2. Changes in Securities and Use of Proceeds 26
Item 3. Defaults Upon Senior Securities 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 26
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
--------------------
UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
(Dollars in thousands, except per share data) 1998 1997
--------------------- ---------------------
ASSETS
<S> <C> <C>
Cash and due from banks $ 10,318 $ 15,026
Short term investments 18,000 4,000
--------------------- ---------------------
Cash and cash equivalents 28,318 19,026
Securities available for sale, at fair value -- 1,002
Residual interests in securitizations, at fair value -- 8,230
Loans, net 164,895 148,535
Loans held for sale 185,100 120,002
Federal Home Loan Bank stock, at cost 1,972 1,945
Accrued interest receivable 1,860 1,494
Real estate owned, net 346 562
Premises and equipment, net 3,618 3,085
Deferred tax assets 5,667 3,171
Intangible assets 426 457
Other assets 4,943 3,333
--------------------- ---------------------
Total assets $397,145 $310,842
===================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $288,232 $233,194
Federal Home Loan Bank advances 5,000 28,000
Notes payable 12,930 12,930
Warehouse line of credit 53,888 6,237
Accrued expenses and other liabilities 22,634 17,472
--------------------- ---------------------
Total liabilities 382,684 297,833
--------------------- ---------------------
Commitments and contingencies -- --
Preferred stock (par value $0.01 per share):
Authorized, 2,000,000 shares
None issued and outstanding -- --
Common stock (par value $0.01 per share):
Authorized, 20,000,000 shares
Issued and outstanding, 10,950,000 shares at
March 31, 1998 and December 31, 1997, respectively 110 110
Additional paid-in capital 5,127 5,127
Retained earnings 9,224 7,772
--------------------- ---------------------
Total stockholders' equity 14,461 13,009
--------------------- ---------------------
Total liabilities and stockholders' equity $397,145 $310,842
===================== =====================
</TABLE>
See notes to consolidated financial statements 1
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UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months
(Dollars in thousands, except per share data) Ended March 31,
-----------------------------------------------------
1998 1997
--------------------- ---------------------
<S> <C> <C>
INTEREST INCOME
Loans $ 9,020 $4,804
Accretion of discount on loans purchased 338 122
Short term investments and securities available
for sale 186 118
--------------------- ---------------------
Total interest income 9,544 5,044
--------------------- ---------------------
INTEREST EXPENSE
Deposits 3,247 1,995
Federal Home Loan Bank advances 301 135
Warehouse line of credit 559 --
Notes payable 188 148
--------------------- ---------------------
Total interest expense 4,295 2,278
--------------------- ---------------------
Net interest income 5,249 2,766
Provision for loan losses 38 94
--------------------- ---------------------
Net interest income after provision for loan
losses 5,211 2,672
--------------------- ---------------------
NON-INTEREST INCOME
Gain on sale of loans, net 9,897 2,380
Loan related charges and fees 27 82
Service charges and fees 143 51
Other income 31 10
--------------------- ---------------------
Total non-interest income 10,098 2,523
--------------------- ---------------------
NON-INTEREST EXPENSE
Compensation and benefits 8,600 3,149
Occupancy expense 1,112 457
Other expenses 3,085 1,194
--------------------- ---------------------
Total non-interest expense 12,797 4,800
--------------------- ---------------------
Income before income taxes 2,512 395
Income taxes 1,059 162
--------------------- ---------------------
Net income $ 1,453 $ 233
===================== =====================
Earnings per share-basic $0.13 $0.02
===================== =====================
Earnings per share-diluted $0.12 $0.02
===================== =====================
</TABLE>
See notes to consolidated financial statements. 2
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UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
(Dollars in thousands) Three Months
Ended March 31,
--------------------------------------------------------
1998 1997
----------------------- ------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,453 $ 233
Adjustments to reconcile net income
to net cash (used in) provided by operating activities:
Gain on sale of loans (9,897) (2,380)
Origination of mortgage loans held for sale (263,502) (67,776)
Sales of mortgage loans held for sale 202,957 42,634
Net proceeds from sale of residual interests in securitizations 8,302 --
Provision for loan losses 38 94
Accretion of discount on loans (338) (122)
Depreciation and amortization 377 123
FHLB stock dividend (27) (20)
Increase in accrued interest receivable (366) (111)
Increase in other assets (1,308) (41)
Deferred income taxes (2,496) 1,329
Increase (decrease) in accrued expenses and other liabilities 5,162 (2,875)
----------------------- ------------------------
Net cash used in operating activities (59,645) (28,912)
----------------------- ------------------------
Cash flows from investing activities:
Proceeds from maturities of investment securities 1,002 --
Originations, net of repayments, of mortgage loans 7,410 3,338
Originations, net of repayments, of non-mortgage loans (18,428) (17,011)
Purchase of securities available for sale -- (2,002)
Purchase of premises and equipment (851) (598)
Purchase of FHLB stock, net -- (342)
Proceeds from sale of real estate owned 445 801
Other, net (330) --
----------------------- ------------------------
Net cash used in investing activities (10,752) (15,814)
----------------------- ------------------------
Cash flows from financing activities:
Net increase in deposits 55,038 13,356
Proceeds, net of repayments, from warehouse line of credit 47,651 --
Proceeds, net of repayments, from FHLB advances (23,000) 12,000
----------------------- ------------------------
Net cash provided by financing activities 79,689 25,356
----------------------- ------------------------
Net increase (decrease) in cash and cash equivalents 9,292 (19,370)
Cash and cash equivalents at beginning of period 19,026 26,063
----------------------- ------------------------
Cash and cash equivalents at end of period $ 28,318 $ 6,693
======================= ========================
</TABLE>
See notes to consolidated financial statements. 3
<PAGE>
UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(UNAUDITED)
<TABLE>
<CAPTION>
(Dollars in thousands) Three Months Ended
March 31,
-----------------------------------------------------
1998 1997
---------------------- ----------------------
Supplemental disclosures of cash flow information:
Cash paid for:
<S> <C> <C>
Interest $3,909 $2,269
====================== ======================
Taxes $1,585 $ --
====================== ======================
Supplemental schedule of non-cash investing and financing
activities:
Acquisition of real estate owned through
foreclosure of related mortgage loans $ 270 $ 749
====================== ======================
</TABLE>
See notes to consolidated financial statements. 4
<PAGE>
UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
1. ORGANIZATION
United PanAm Financial Corp. (the "Company") was incorporated in California
on April 9, 1998 for the purpose of reincorporating its business in that state,
through the merger of United PanAm Financial Corp., a Delaware corporation (the
"Predecessor") into the Company. Unless the context indicates otherwise, all
reference herein to the "Company" include the Predecessor. The Company was
originally organized as a holding company for Pan American Financial, Inc.
("PAFI") and Pan American Bank, FSB (the "Bank") to purchase certain assets and
assume certain liabilities (the "Purchase Agreement") of Pan American Federal
Savings Bank from the Resolution Trust Corporation (the "RTC") on April 29,
1994. The Company, PAFI and the Bank are considered to be minority owned. PAFI
is a wholly-owned subsidiary of the Company, and the Bank is a wholly-owned
subsidiary of PAFI. United PanAm Mortgage Corporation was organized in 1997 as
a wholly-owned subsidiary of the Company and is presently acting as agent for
the Bank in secondary marketing activities.
In 1997, the Company changed its fiscal year end from June 30 to December
31 for financial reporting purposes. For income tax purposes, the Company has
filed an application with the appropriate taxing authorities to change its
fiscal year end from June 30 to December 31.
2. BASIS OF PRESENTATION
Certain statements in this Form 10-Q, including statements regarding the
Company's strategies, plans, objectives, expectations and intentions, may
include forward-looking information within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. These forward-looking statements involve certain risks
and uncertainties that could cause actual results to differ materially from
those expressed or implied in such forward-looking statements. Such risks and
uncertainties include, but are not limited to, the following factors: limited
operating history; loans made to credit-impaired borrowers; need for additional
sources of financing; concentration of business in California; reliance on
operational systems and controls and key employees; competitive pressure in the
banking and mortgage lending industry; changes in the interest rate environment;
rapid growth of the Company's businesses; risks in connection with the
securitization of mortgage loans; general economic conditions; and other risks
identified from time to time in the Company's filings with the Securities and
Exchange Commission.
The accompanying unaudited consolidated financial statements include the
accounts of United PanAm Financial Corp., Pan American Financial, Inc., United
PanAm Mortgage Corporation and Pan American Bank, FSB. Substantially all of the
Company's revenues are derived from the operations of the Bank and United PanAm
Mortgage Corporation and they represent substantially all of the Company's
consolidated assets and liabilities as of March 31, 1998 and December 31, 1997.
Significant inter-company accounts and transactions have been eliminated in
consolidation.
These consolidated financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation of the Company's
financial condition and results of operations for the interim periods presented
have been included. Operating results for the interim periods are not
necessarily indicative of financial results for the full year. These unaudited
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto included in the Company's
Registration Statement on Form S-1 (File No. 333-39941), as amended, filed with
the Securities and Exchange Commission on April 23, 1998 in connection with its
initial public offering.
5
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The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
3. EARNINGS PER SHARE
At December 31, 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("SFAS 128"). SFAS 128 establishes
standards for computing and presenting earnings per share ("EPS") and applies to
entities with publicly held common stock or potential common stock. Under SFAS
128, 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.
Basic EPS and diluted EPS are calculated as follows for the three months
ended March 31, 1998 and 1997:
<TABLE>
<CAPTION>
Three Months
(Dollars in thousands, except per share amounts) Ended March 31,
---------------------------------------------
1998 1997
-------------------- ---------------------
<S> <C> <C>
Earnings per share - basic:
Net income applicable to common stock $ 1,453 $ 233
==================== =====================
Average common shares outstanding 10,950 10,669
==================== =====================
Per share $ 0.13 $ 0.02
==================== =====================
Earnings per share - diluted:
Net income $ 1,453 $ 233
==================== =====================
Average common shares outstanding 10,950 10,669
Add: Stock options 926 458
-------------------- ---------------------
Average common shares outstanding - diluted 11,876 11,127
==================== =====================
Per share $ 0.12 $ 0.02
==================== =====================
</TABLE>
4. ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income" ("SFAS 130"), which establishes
standards for reporting and displaying comprehensive income and its components
in the consolidated financial statements. SFAS 130 does not, however, require a
specific format for presenting such information, but requires the Company to
display an amount representing total comprehensive income for the period in that
financial statement. For the periods ended March 31, 1998 and 1997, the Company
had no items of comprehensive income to report other than net income.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information" ("SFAS 131"), which establishes standards
for the way that public business enterprises are to report information about
operating segments in annual financial statements and requires those enterprises
to report selected information about operating segments in interim financial
reports issued to shareholders. SFAS 131 is effective for financial statements
for periods beginning after December 31, 1997, and the Company is in the process
of determining its preferred format for disclosure purposes.
6
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5. SUBSEQUENT EVENTS
On April 23, 1998, the Company's Registration Statement on Form S-1 for the
initial public offering of 5,500,000 shares of its common stock at a price of
$11.00 per share was declared effective by the Securities and Exchange
Commission. The Company received approximately $56 million from the sale of its
common stock after underwriting discount and expenses associated with the
offering. On May 22, 1998, the Underwriters' over-allotment option for 825,000
shares of common stock was exercised resulting in $8 million of additional
proceeds being received by the Company, after underwriting discount.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS.
----------------------
Certain statements in this Form 10-Q including statements regarding the
Company's strategies, plans, objectives, expectations and intentions, may
include forward-looking information within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. These forward-looking statements involve certain risks
and uncertainties that could cause actual results to differ materially from
those expressed or implied in such forward-looking statements. For discussion
of the factors that might cause such a difference, see "Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Factors That May Affect Future Results" and other risks identified from time to
time in the Company's filings with the Securities and Exchange Commission.
GENERAL
THE COMPANY
The Company is a diversified specialty finance company engaged primarily in
originating and acquiring for investment or sale residential mortgage loans,
personal automobile insurance premium finance contracts and retail automobile
installment sales contracts. The Company targets customers who generally cannot
obtain financing from traditional lenders. These customers usually pay higher
loan origination fees and interest rates than those charged by traditional
lenders to gain access to consumer financing. The Company believes that
management's experience in originating, assessing, pricing and managing credit
risk enables the Company to earn attractive risk-adjusted returns. The Company
has funded its operations to date principally through retail deposits, Federal
Home Loan Bank ("FHLB") advances, a mortgage warehouse line of credit, loan
securitizations, and whole loan sales at its federal savings bank subsidiary,
Pan American Bank, FSB (the "Bank").
The Company commenced operations in 1994 by purchasing from the Resolution
Trust Corporation (the "RTC") certain assets and assuming certain liabilities of
the Bank's predecessor, Pan American Federal Savings Bank. The Company has used
the Bank as a base for expansion into its current specialty finance businesses.
In 1995, the Company commenced its insurance premium finance business through a
joint venture with BPN Corporation ("BPN"). In 1996, the Company commenced its
current mortgage and automobile finance businesses. The Company was
incorporated in California on April 9, 1998 for the purpose of reincorporating
its business in that state, through the merger of United PanAm Financial Corp.,
a Delaware corporation (the "Predecessor"), into the Company. Unless the
context indicates otherwise, all references herein to the "Company" include the
Predecessor.
Finance companies generate income from a combination of (i) "spread" or
"net interest" income (i.e., the difference between the yield on loans, net of
loan losses, and the cost of funding) and (ii) "non-interest" income (i.e., the
fees paid for various services and gain on the sale of loans). Income is used
to cover operating expenses incurred (i.e., compensation and benefits, occupancy
and other expenses) in generating that income. Each of the Company's
businesses, as described below, reflects a combination of spread and non-
interest income.
MORTGAGE FINANCE
The Company originates and sells subprime mortgage loans secured primarily
by first mortgages on single family residences. The Company's targeted mortgage
finance customers are considered "subprime" because of factors such as impaired
credit history or high debt-to-income ratios compared to customers targeted by
traditional mortgage lenders. The Company has funded its mortgage finance
business to date primarily through the Bank's deposits, FHLB advances, a
mortgage finance warehouse line of credit, the
8
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sale of its mortgage loan originations to mortgage companies and investors
through whole loan packages offered for bid several times per month and, to a
lesser extent, from loan securitizations. The Company completed its first
securitization of mortgage loans in December 1997 and in March 1998 sold the
residual interests in this securitization for cash at a price in excess of its
carrying value.
The Company has sold or securitized a significant amount of its mortgage
loan originations to date. Therefore, its mortgage lending income has been
generated almost entirely from gain on sale of loans, with only a small spread
component resulting from loans held prior to sale. Income generated from this
mortgage finance business covers operating costs, including compensation,
occupancy, loan origination and administrative expenses.
INSURANCE PREMIUM FINANCE
In May 1995, the Bank entered into a joint venture with BPN under the name
"ClassicPlan" (such business, "IPF"). Under this joint venture, which commenced
operations in September 1995, the Bank underwrites and finances automobile
insurance premiums in California and BPN markets the financing program and
services the loans for the Bank. The Bank lends to individuals for the purchase
of single premium automobile insurance policies and the Bank's collateral is the
unearned insurance premium held by the insurance company. The unearned portion
of the insurance premium is refundable to IPF in the event the underlying
insurance policy is canceled. The Company does not sell or have the risk of
underwriting the underlying insurance policy.
As a result of BPN performing substantially all marketing and servicing
activities, the Company's role is primarily that of an underwriter and funder of
loans. Therefore, IPF's income is generated primarily on a spread basis,
supplemented by non-interest income generated from late payment and returned
check fees. The Bank uses this income to cover the costs of underwriting and
loan administration, including compensation, occupancy and data processing
expenses.
In January 1998, the Company and BPN purchased from Providian National Bank
and others for $450,000 the right to solicit new and renewal personal and
commercial insurance premium finance business from brokers who previously have
provided contracts to Commonwealth Premium Finance. The purchase price for the
agreement was provided 60% by the Company and 40% by BPN. The relationship
between the Company and BPN continues to be governed by the joint venture
agreement already in effect. The Company also acquired the Commonwealth name
and certain equipment and software. The agreement also provides that Providian
National Bank and the servicers of its insurance premium finance business may
not solicit or engage in the insurance premium finance business in California
for a period of three years.
AUTOMOBILE FINANCE
In 1996, the Bank commenced its automobile finance business through its
subsidiary, United Auto Credit Corporation (such business, "UACC"). UACC
acquires, holds for investment and services subprime retail automobile
installment sales contracts ("auto contracts") generated by franchised and
independent dealers of used automobiles. UACC's customers are considered
"subprime" because they typically have limited credit histories or credit
histories that preclude them from obtaining loans through traditional sources.
As UACC provides all marketing, origination, underwriting and servicing
activities for its loans, income is generated from a combination of spread and
non-interest income and is used to cover all operating costs, including
compensation, occupancy and systems expense.
THE BANK
The Company has funded its operations to date primarily through the Bank's
deposits, FHLB advances, a mortgage warehouse line of credit and loan sales and
securitizations. As of March 31, 1998, the Bank was a five-branch federal
savings bank with $288.2 million in deposits. The loans generated by the
Company's mortgage, insurance premium and automobile finance businesses
currently are funded and held by the Bank. In addition, the Bank holds a
portfolio of primarily traditional residential mortgage loans acquired from the
RTC in 1994 and 1995 at a discount from the unpaid principal balance of such
loans,
9
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which loans aggregated $77.6 million in principal amount (before unearned
discounts and premiums) at March 31, 1998.
The Bank generates spread income not only from loans originated or
purchased by each of the Company's principal businesses, but also from (i) loans
purchased from the RTC, (ii) its securities portfolio, and (iii) consumer loans
originated by its retail deposit branches. This income is supplemented by non-
interest income from its branch banking activities (e.g., deposit service
charges, safe deposit box fees), and is used to cover operating costs and other
expenses.
YEAR 2000 COMPLIANCE
Like most financial institutions, the Company's computer systems identify
dates using only the last two digits of the year. These systems may recognize a
date using "00" as the year 1900, rather than 2000.
The Company is using both internal and external resources to identify,
correct and test systems that may be affected by year 2000 dates. System
identification is scheduled for completion by the end of the second quarter of
1998, with testing and implementation scheduled for completion during the last
half of 1998 and in 1999. The Company believes that year 2000 compliance will
not pose significant operational issues for the Company. However, the failure to
implement timely year 2000 compliant systems could have a material adverse
effect on the operations of the Company.
Dependence on third party vendors could adversely affect the Company's
efforts to successfully complete year 2000 compliance for all systems in a
timely manner. The Company is requiring third party vendors to represent that
their products are year 2000 compliant and will implement a program to test for
compliance. Contingency plans are being developed in the event that a vendor is
not able to provide timely year 2000 compliance.
The Company has initiated formal communications with its customers and
vendors to determine the extent to which the Company may be affected by the
failure of these parties to correct their own year 2000 issues. No assurance can
be given that the systems of third parties on which the Company relies will be
corrected in a timely manner, or that a failure to correct the year 2000 issue
by another party, or a correction that is incompatible with the Company's
systems, will not have a material adverse effect on the Company.
The Company is assessing the expense of year 2000 compliance and the
potential effect on the Company's earnings. The Company does not believe that
the costs of year 2000 compliance will be material.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND
MARCH 31, 1997
GENERAL
Net income increased from $233,000 for the three months ended March 31,
1997 to $1.5 million for the three months ended March 31, 1998. This increase
was due primarily to the expansion of the Company's mortgage, insurance premium
and auto finance businesses, all of which showed improved operating results
during 1997 and 1998. Also contributing to the favorable operating results was
an increase of $7.5 million in gain on sales of loans from the Company's
mortgage finance operations and $2.5 million in net interest income offset by an
increase in non-interest expense of $8.0 million resulting primarily from the
expansion of mortgage finance and other lending operations.
As a result of the expansion of the Company's lending operations, mortgage
loan originations increased from $67.3 million for the three months ended March
31, 1997 to $263.8 million for the three months ended March 31, 1998, while
insurance premium financing originations increased from $43.3 million to $43.9
million, respectively, and auto contracts purchased increased from $7.7 million
to $17.8 million, respectively. Sales of mortgage loans were $193.8 million for
the three months ended March 31, 1998 and $40.3 million for the comparable
period in 1997.
10
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INTEREST INCOME
Interest income increased from $5.0 million for the three months ended
March 31, 1997 to $9.5 million for the three months ended March 31, 1998 due
primarily to a $173.4 million increase in earning assets and a 0.80% increase in
the average yield on earning assets. The largest components of growth in earning
assets were mortgage loans, insurance premium finance loans and auto contracts,
which increased $121.5 million, $5.6 million and $26.6 million, respectively.
The increase in the average yield on earning assets was attributable to an
increase in the origination or purchase of higher yielding loans principally
related to the expansion and growth of the mortgage, insurance premium and
automobile finance businesses. The increase in mortgage loan receivables was a
result of an increase in loans held for sale, which increased from $49.4 million
at March 31, 1997 to $185.1 million at March 31, 1998. Generally, these loans
are originated for sale in the secondary mortgage market. The increase in such
loans was primarily a result of growth in the Company's mortgage finance
business and the opening of 20 retail lending branches and three wholesale loan
centers during 1997. The growth in IPF loans was primarily a result of new loan
originations associated with changes in California's automobile insurance laws
effective January 1, 1997, much of which took place in 1997, and the purchase of
the rights to solicit new and renewal insurance premium finance business in
connection with the Commonwealth acquisition. The increase in auto contracts
principally resulted from the opening of six new branch offices in 1997 and the
purchasing of additional dealer contracts in these new markets.
INTEREST EXPENSE
Interest expense increased from $2.3 million for the three months ended
March 31, 1997 to $4.3 million for the three months ended March 31, 1998, due to
a $160.7 million increase in interest bearing liabilities and a 0.38% increase
in the weighted average interest rate on interest bearing liabilities. The
largest component of growth in interest bearing liabilities was deposits with
the Bank, which increased from $172.4 million at March 31, 1997 to $288.2
million at March 31, 1998. The average cost of deposits increased from 4.98% at
March 31, 1997 to 5.21% at March 31, 1998.
The increase in deposits resulted from the use of retail and wholesale
certificates of deposit ("CDs") to finance the Company's lending operations, and
the increase in the average yield on the Bank's deposits reflects the repricing
of accounts to higher rates.
The second largest component of growth in interest bearing liabilities was
from borrowings under the Bank's warehouse line of credit. In October 1997, the
Bank entered into a $100 million master repurchase agreement under which it may
sell and repurchase, at a set price, mortgage loans pending the sale or
securitization of these loans. Such borrowings increased to $53.9 million at
March 31, 1998 with a weighted average interest rate of 6.38%. Interest expense
was $559,000 during the quarter ended March 31, 1998. There were no warehouse
line of credit advances outstanding during the quarter ended March 31, 1997.
FHLB advances were $5.0 million at March 31, 1998 compared to $16.0 million at
March 31, 1997.
PROVISION FOR LOAN LOSSES
Provision for loan losses decreased from $94,000 for the three months ended
March 31, 1997 to $38,000 for the three months ended March 31, 1998. The total
allowance for loan losses was $5.5 million at March 31, 1997 compared to $6.9
million at March 31, 1998. The increase in the allowance for loan losses is
attributable to the additional provision for losses recorded during the twelve
months ended December 31, 1997 and acquisition discounts related to the
Company's purchase of auto contracts. The Company allocates the estimated amount
of acquisition discounts attributable to credit risk to the allowance for loan
losses. Net loan charge-offs were $236,000 in the three months ended March 31,
1997 compared to $394,000 in the three months ended March 31, 1998.
11
<PAGE>
A provision for loan losses is charged to operations based on the Company's
regular evaluation of its loans held for investment and the adequacy of its
allowance for loan losses. The Company reports its loans held for sale at the
lower of cost or market value, accordingly, loan loss provisions are not
established for this portfolio. While management believes it has adequately
provided for losses and does not expect any material loss on its loans in excess
of allowances already recorded, no assurance can be given that economic or real
estate market conditions or other circumstances will not result in increased
losses in the loan portfolio.
NON-INTEREST INCOME
Non-interest income increased $7.6 million, from $2.5 million for the three
months ended March 31, 1997 to $10.1 million for the three months ended March
31, 1998. This increase resulted from gain on sale of mortgage loans and is due
primarily to a substantial increase in the volume of mortgage loans sold by the
Company. During the three months ended March 31, 1997, the Company sold $40.3
million in mortgage loans on a whole loan non-recourse basis compared to $193.8
million in mortgage loans sold during the comparable period in 1998. Net gains
on sales of loans, as a percentage of loans sold, were 5.9% for the three months
ended March 31, 1997 compared to 5.1% for the three months ended March 31, 1998.
The decline reflects competitive pressure in the securitization and whole loan
sale markets resulting, in part, from higher industry-wide loan prepayment rates
in the later part of 1997 and early 1998 as compared to the first quarter of
1997.
Other components of non-interest income include fees and charges for Bank
services and miscellaneous other income. The total of all of these items
increased $58,000, from $143,000 for the three months ended March 31, 1997 to
$201,000 for the three months ended March 31, 1998.
NON-INTEREST EXPENSE
Non-interest expense increased $8.0 million, from $4.8 million for the
three months ended March 31, 1997 to $12.8 million for the three months ended
March 31, 1998. This increase primarily reflects an increase in salaries, loan
commissions, employee benefits and other personnel costs of $5.5 million
associated with the expansion of the Company's mortgage and automobile finance
operations. In addition, occupancy expense increased $655,000, reflecting an
increase in the number of mortgage and automobile lending offices. Marketing
expense was $837,000 for the three months ended March 31, 1998, compared to
$142,000 for the three months ended March 31, 1997. This increase is
attributable to the Company's retail mortgage lending operations which use
extensive direct mail and telemarketing campaigns to target prospective
borrowers. Also, as a result of growth in the Company's mortgage finance and
automobile lending operations, other operating expense, including stationery and
supplies, data processing, insurance, telephone and postage, increased $1.2
million during the three months ended March 31, 1998 compared to the same period
in 1997.
The Company significantly expanded its mortgage and automobile finance
operations, resulting in an increase from 147 employees in eight offices and 33
employees in five offices, respectively, as of March 31, 1997 to 508 employees
in 28 offices and 76 employees in 11 offices, respectively, as of March 31,
1998.
INCOME TAXES
Income taxes increased $897,000, from $162,000 for the three months ended
March 31, 1997 to $1.1 million for the three months ended March 31, 1998. This
increase occurred as a result of a $2.1 million increase in income before income
taxes between the two periods and an increase in the effective tax rate from
41.0% for the three months ended March 31, 1997 to 42.2% for the three months
ended March 31, 1998.
12
<PAGE>
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 1998 AND DECEMBER 31, 1997
Total assets increased $86.3 million, from $310.8 million at December 31,
1997 to $397.1 million at March 31, 1998. This increase occurred primarily as a
result of a $81.5 million increase in loans, from $268.5 million at December 31,
1997 to $350.0 million as of March 31, 1998. The increase in loans was comprised
of a $65.1 million increase in mortgage loans held for sale, a $8.2 million
increase (net of unearned finance charges) in auto contracts and a $10.6 million
increase in insurance premium finance loans, offset by a $4.4 million decrease
in loans purchased from the RTC as a result of scheduled principal amortization
and prepayments.
Cash and cash equivalents increased $9.3 million, from $19.0 million at
December 31, 1997 to $28.3 million at March 31, 1998, primarily as a result of
an increase in short-term borrowings.
Residual interests in securitizations were $8.2 million at December 31,
1997 which were entirely attributable to the Company's first securitization in
December 1997. In March 1998, the Company sold its residual interests from the
December securitization for $8.3 million in cash and recorded a gain on sale of
approximately $100,000. Accordingly, as of March 31, 1998, the Company had no
remaining residual interests in securitizations reflected on its balance sheet.
Premises and equipment increased from $3.1 million at December 31, 1997 to
$3.6 million at March 31, 1998 as a result of purchases of furniture and
equipment for the Company's new branch offices and the continued growth in
lending operations.
Deposits increased $55.0 million, from $233.2 million at December 31, 1997
to $288.2 million at March 31, 1998, due primarily to an increase in CDs of
$52.5 million, from $197.1 million at December 31, 1997 to $249.6 million at
March 31, 1998. Included in deposits at December 31, 1997 are $17.5 million in
brokered CDs compared to $30.0 million at March 31, 1998. The growth in deposits
reflects the continued financing of the Company's mortgage, insurance premium
finance and auto lending activities with retail and wholesale deposits though
the Bank's five-branch network.
Other interest bearing liabilities include the RTC notes payable which
remained unchanged at $10.9 million between the period ends, FHLB advances which
decreased from $28.0 million as of December 31, 1997 at a weighted average
interest rate of 7.07% to $5.0 million at March 31, 1998 at a weighted average
interest rate of 6.63%, notes payable from shareholders which was unchanged at
$2.0 million between period ends and a warehouse line of credit which increased
from $6.2 million at December 31, 1997 to $53.9 million at March 31, 1998.
Net deferred tax assets were $5.7 million at March 31, 1998 due principally
to temporary differences in the recognition of gain on sale of loans for federal
and state income tax reporting and financial statement reporting purposes. For
income tax purposes, loans held for sale are marked -to-market.
Shareholders' equity increased from $13.0 million at December 31, 1997 to
$14.5 million at March 31, 1998, solely as a result of the Company's first
quarter 1998 net income.
MANAGEMENT OF INTEREST RATE RISK
The principal objective of the Company's interest rate risk management
activities is to evaluate the interest rate risk inherent in the Company's
business activities, determine the level of appropriate risk given the Company's
operating environment, capital and liquidity requirements and performance
objectives and manage the risk consistent with guidelines approved by the Board
of Directors. Through such management, the Company seeks to reduce the exposure
of its operations to changes in interest rates. The Board of Directors reviews
on a quarterly basis the asset/liability position of the Company, including
simulation of the effect on capital of various interest rate scenarios.
13
<PAGE>
The Company's profits depend, in part, on the difference, or "spread,"
between the effective rate of interest received on the loans it originates and
the interest rates paid on deposits and other financing facilities which can be
adversely affected by movements in interest rates. In addition, between the time
the Company originates loans and investors' sales commitments are received, the
Company may be exposed to interest rate risk to the extent that interest rates
move upward or downward during the time the loans are held for sale. The Company
mitigates these risks somewhat by purchasing or originating ARMs that reprice
frequently in an increasing or declining interest rate environment. Also, the
Company sells substantially all of its loans held for sale on a regular basis,
thereby reducing significantly the amount of time these loans are held by the
Company.
The Bank's interest rate sensitivity is monitored by the Board of Directors
and management through the use of a model which estimates the change in the
Bank's net portfolio value ("NPV") over a range of interest rate scenarios. NPV
is the present value of expected cash flows from assets, liabilities and off-
balance sheet instruments, and NPV Ratio is defined as the NPV in that scenario
divided by the market value of assets in the same scenario. The Company reviews
a market value model prepared quarterly by the OTS (the "OTS NPV model"), 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 400 basis point increase to a 400
basis point decrease in market interest rates. The interest rate risk policy of
the Company provides that the maximum permissible change at a 400 basis point
increase or decrease in market interest rates is a 30% change in NPV. The OTS
has incorporated an interest rate risk component into its regulatory capital
rule for thrifts. Under the rule, an institution whose sensitivity measure, as
defined by the OTS, in the event of a 200 basis point increase or decrease in
interest rates exceeds 20% would be required to deduct an interest rate risk
component in calculating its total capital for purposes of the risk-based
capital requirement.
At December 31, 1997, the most recent date for which the relevant OTS NPV
model is available, the Bank's sensitivity measure resulting from (i) a 200
basis point decrease in interest rates was 45 basis points and would result in a
$1.8 million increase in the NPV of the Bank and (ii) a 200 basis point increase
in interest rates was 48 basis points and would result in a $1.8 million
decrease in the NPV of the Bank. At December 31, 1997, 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 table shows the NPV and projected change in the NPV of the
Bank at December 31, 1997 assuming an instantaneous and sustained change in
market interest rates of 100, 200, 300 and 400 basis points ("bp"). This table
is based on data prepared by the OTS. The Company makes no representation as to
the accuracy of this data.
INTEREST RATE SENSITIVITY OF NET PORTFOLIO VALUE
<TABLE>
<CAPTION>
NPV as % of Portfolio
Net Portfolio Value Value of Assets
------------------------------------------------ -----------------------------
Change in Rates $ Amount $ Change % Change NPV Ratio % Change
--------------- -------------- -------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands)
+400 bp $28,286 $(9,268) -25% 9.13% -262 bp
+300 bp $32,636 $(4,918) -13% 10.40% -135 bp
+200 bp $35,712 $(1,842) -5% 11.27% -48 bp
+100 bp $37,297 $ (257) -1% 11.70% -5 bp
0 bp $37,554 -- -- 11.75% --
- -100 bp $37,880 $ 326 +1% 11.82% +7 bp
- -200 bp $39,327 $ 1,773 +5% 12.20% +45 bp
- -300 bp $41,439 $ 3,885 +10% 12.75% +100 bp
- -400 bp $44,450 $ 6,896 +18% 13.55% +180 bp
</TABLE>
14
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
The Company's primary sources of funds are deposits at the Bank, FHLB
advances, financing under a secured warehouse line of credit, principal and
interest payments on loans, cash proceeds from the sale or securitization of
loans and, to a lesser extent, interest payments on securities 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. However, the Company has continued to maintain the required minimum
levels of liquid assets as defined by OTS regulations. This requirement, which
may be varied at the direction of the OTS depending upon economic conditions and
deposit flows, is based upon a percentage of deposits and short-term borrowings.
The required ratio is currently 4%, and the Company has always met or exceeded
this requirement. Management, through its Asset and Liability Committee, which
meets monthly or more frequently if necessary, monitors rates and terms of
competing sources of funds to use the most cost-effective source of funds
wherever possible.
Sales and securitizations of loans have been one of the primary sources of
funds for the Company. During the three months ended March 31, 1998 and 1997,
cash flows from sales of loans were $203.0 million and $42.6 million,
respectively.
Another source of funds consists of deposits obtained through the Bank's
five retail branches in California. The Bank offers checking accounts, various
money market accounts, regular passbook accounts, 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 March 31, 1998, such retail deposits were $198.8 million or
69.0% of total deposits.
The Bank uses wholesale and broker-originated deposits to supplement its
retail deposits and, at March 31, 1998, wholesale deposits were $59.4 million or
20.6% of total deposits while broker-originated deposits were $30.0 million or
10.4% of total deposits. The Bank solicits wholesale deposits by posting its
interest rates on a national on-line service which advertises the Bank's
wholesale products to investors. Generally, most of the wholesale deposit
account holders are institutional investors, commercial businesses or public
sector entities. Broker deposits are originated through major dealers
specializing in such products.
The following table sets forth the balances and rates paid on each category
of deposits for the dates indicated.
<TABLE>
<CAPTION>
March 31, December 31,
----------------------------------------------------------
1998 1997 1996
---------------------------- ---------------------------- ----------------------------
Weighted Weighted Weighted
Average Average Average
Balance Rate Balance Rate Balance Rate
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Passbook accounts $ 27,759 3.79% $ 26,095 3.76% $ 17,054 2.84%
Checking accounts 10,922 1.39% 9,959 1.33% 10,642 1.32%
Certificates of deposit
Under $100,000 159,288 5.55% 144,926 5.56% 123,914 5.47%
$100,000 and over 90,263 5.75% 52,214 5.89% 7,451 5.89%
-------- -------- --------
Total $288,232 5.28% $233,194 5.25% $159,061 4.68%
======== ======== ========
</TABLE>
15
<PAGE>
The following table sets forth the time remaining until maturity for all CDs
at March 31, 1998, December 31, 1997 and 1996.
<TABLE>
<CAPTION>
March 31, December 31, December 31,
1998 1997 1996
-------------------- ----------------- -------------------
(In thousands)
<S> <C> <C> <C>
Maturity within one year $187,531 $181,858 $103,369
Maturity within two years 61,613 14,984 26,819
Maturity within three years 403 298 1,177
Maturity within four years 4 -- --
-------- -------- --------
Total certificates of deposit $249,551 $197,140 $131,365
======== ======== ========
</TABLE>
Although the Bank has a significant amount of deposits maturing in less
than one year, the Company believes that the Bank's current pricing strategy
will enable it to retain a significant portion of these accounts at maturity and
that it will continue to have access to sufficient amounts of CDs which,
together with other funding sources, will provide the necessary level of
liquidity to finance its lending businesses. However, as a result of these
shorter-term deposits, the rates on these accounts may be more sensitive to
movements in market interest rates which may result in a higher cost of funds.
At March 31, 1998, the Bank exceeded all of its regulatory capital
requirements with (i) tangible capital of $24.0 million, or 6.14% of total
adjusted assets, which is above the required level of $5.9 million, or 1.50%;
(ii) core capital of $24.0 million, or 6.14% of total adjusted assets, which is
above the required level of $15.6 million, or 3.00%; and (iii) risk-based
capital of $27.5 million, or 9.85% of risk-weighted assets, which is above the
required level of $22.4 million, or 8.00%.
Under the Federal Deposit Insurance Corporation Act of 1991 ("FDICIA"), the
Bank is deemed to be "adequately capitalized" at March 31, 1998.
At December 31, 1997, the Bank was considered "well capitalized" under the
FDICIA capital standards, however, as a result of a significant increase in
loans held for sale during the first quarter of 1998, the Bank's total risk-
based capital ratio declined to 9.85%, which is below the 10% requirement for
"well capitalized." The Bank continues to exceed the two other capital levels
included in the "well capitalized" designation. During the second quarter of
1998, sufficient capital was contributed to the Bank by its parent company to
meet the "well capitalized" requirement.
The Company has other sources of liquidity, including FHLB advances, a
warehouse line of credit and securities maturing within one year. Through the
Bank, the Company obtains advances from the FHLB, collateralized by its
portfolio of mortgage loans purchased from the RTC and the Bank's FHLB stock.
The FHLB functions as a central reserve bank providing credit for thrifts and
certain other member financial institutions. Advances are made pursuant to
several programs, each of which has its own interest rate and range of
maturities. Limitations on the amount of advances are based generally on a
fixed percentage of net worth or on the FHLB's assessment of an institution's
credit-worthiness. As of March 31, 1998, the Bank's available borrowing
capacity under this credit facility was $34.5 million.
Other borrowings of the Company consist of the RTC Notes Payable (as
defined below) which mature in 1999, notes payable from shareholders which
mature in 1999 and a warehouse line of credit.
In October 1997, the Bank entered into a $100 million master repurchase
agreement under which it may sell and repurchase at a set price mortgage loans
pending the sale or securitization of such loans. The arrangement provides for
an advance rate approximating 100% of the outstanding principal balance of
qualifying mortgage loans and a rate of interest to be determined by the parties
upon each such sale of mortgage loans, but which shall not exceed LIBOR plus
0.70%. Qualifying mortgage loans consist of first and second mortgage loans with
an LTV that does not exceed 90%, subject to certain restrictions. This agreement
may be terminated at any time at the option of either party.
16
<PAGE>
The following table sets forth certain information regarding the Company's
short-term borrowed funds (consisting of FHLB advances and its warehouse line of
credit) at or for the periods ended on the dates indicated.
<TABLE>
<CAPTION>
March 31, December 31,
---------------------------------------
1998 1997 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
(Dollars in thousands)
FHLB advances
Maximum month-end balance $28,000 $40,900 $4,000
Balance at end of period 5,000 28,000 4,000
Average balance for period 21,167 18,526 1,170
Weighted average interest rate on
Balance at end of period 6.63% 7.07% 5.70%
Average balance for period 5.83% 5.95% 6.15%
Warehouse line of credit
Maximum month-end balance $83,441 $64,359 $ --
Balance at end of period 53,888 6,237 --
Average balance for period 34,141 8,914 --
Weighted average interest rate on
Balance at end of period 6.38% 6.70% --%
Average balance for period 6.71% 6.10% --%
</TABLE>
The Company had no material contractual obligations or commitments for
capital expenditures at March 31, 1998. However, the Company is in the process
of expanding its mortgage and auto finance operations, which will entail lease
commitments and expenditures for leasehold improvements and furniture, fixtures
and equipment. At March 31, 1998, the Company had outstanding commitments to
originate loans of $267.4 million, compared to $117.4 million at December 31,
1997. The Company anticipates that it will have sufficient funds available to
meet its current origination commitments.
RTC NOTES PAYABLE
In connection with its acquisition of certain assets from the RTC, the Bank
obtained loans (the "RTC Notes Payable") from the RTC in the aggregate amount of
$10.9 million under the RTC's Minority Interim Capital Assistance Program
provided for in Section 21A(u) of the Federal Home Loan Bank Act, as amended
(the "FHLBA"). The FHLBA gives the RTC authority to provide interim capital
assistance to minority-owned institutions, defined in the FHLBA as more than
fifty percent (50%) owned or controlled by one or more minorities. The Bank,
PAFI and the RTC entered into an Interim Capital Assistance Agreement on April
29, 1994 with respect to a loan of $6,930,000 and a second Interim Capital
Assistance Agreement on September 9, 1994 with respect to a loan of $4,000,000
(together, the "RTC Agreements"). The RTC Agreements provide for repayment of
the entire principal amount, plus any accrued, previously unpaid interest
thereon, in a single lump sum installment on April 28, 1999 and September 8,
1999, respectively. The RTC Notes Payable may be prepaid at the option of the
Bank and must be prepaid in the event that PAFI obtains all or any material
portion of its permanent financing prior to maturity of the RTC Notes Payable.
The RTC is entitled to declare the entire principal amount of the RTC Notes
Payable, plus all interest accrued and unpaid thereon, immediately due and
payable upon the occurrence of certain events of default.
The rate at which interest accrues on the RTC Notes Payable is based on the
RTC's "Cost of Funds," defined in the RTC Agreements at the end of the calendar
quarter Monday auction yield price for 13 week United States Treasury Bills plus
12.5 basis points, and adjusts annually, in the case of the $6.9 million loan
due April 1999, and quarterly, in the case of the $4 million loan due September
1999. Interest accrues on any amount of principal or interest not paid when due
at the rate of the RTC's Cost of Funds plus 300 basis points, beginning on the
date such unpaid amount became due.
17
<PAGE>
In connection with the RTC Agreements, PAFI and the RTC have entered into
Stock Pledge Agreements pursuant to which PAFI has pledged to the RTC all of the
issued and outstanding shares of the capital stock of the Bank as security for
the repayment of the RTC Notes Payable.
LENDING ACTIVITIES
To date, the Company has sold most of its loan originations to mortgage
companies and other investors through whole loan packages on a non-recourse,
servicing released basis. As a result, upon sale, all risks and rewards of
ownership, including those associated with loan payments and prepayments,
transfer to the buyer. In December 1997, the Company completed its first
securitization of mortgage loans and in March 1998 sold its residual interests
in this securitization to a third party. Accordingly, to date, prepayments have
not had a significant effect on the Company's operations.
Summary of Loan Portfolio. At March 31, 1998, the Company's loan portfolio
constituted $350.0 million, or 88.1% of the Company's total assets, of which
$164.9 million, or 47.1%, were held for investment and $185.1 million, or 52.9%,
were held for sale. Loans held for investment are reported at cost, net of
unamortized discounts or premiums and allowance for losses. Loans held for sale
are reported at the lower of cost or market value.
The following table sets forth the composition of the Company's loan
portfolio at the dates indicated.
<TABLE>
<CAPTION>
March 31, December 31, December 31,
1998 1997 1996
-------------------- -------------------- -----------------------
(In thousands)
MORTGAGE LOANS
<S> <C> <C> <C>
Mortgage loans (purchased primarily from RTC) $ 77,625 $ 81,995 $102,733
-------------------- -------------------- -----------------------
Subprime mortgage loans
Held for sale 185,100 120,002 20,766
Held for investment 7,009 5,375 1,294
-------------------- -------------------- -----------------------
Total subprime mortgage loans 192,109 125,377 22,060
-------------------- -------------------- -----------------------
Total mortgage loans 269,734 207,372 124,793
-------------------- -------------------- -----------------------
CONSUMER LOANS
Automobile installment contracts 50,953 40,877 10,830
Insurance premium financing 50,580 39,990 32,058
Other consumer loans 378 267 230
-------------------- -------------------- -----------------------
Total consumer loans 101,911 81,134 43,118
-------------------- -------------------- -----------------------
Total loans 371,645 288,506 167,911
Unearned discounts and premiums (2,238) (2,901) (3,697)
Unearned finance charges (12,480) (10,581) (3,271)
Allowance for loan losses (6,932) (6,487) (5,356)
-------------------- -------------------- -----------------------
Total loans, net $349,995 $268,537 $155,587
==================== ==================== =======================
</TABLE>
18
<PAGE>
Loan Maturities. The following table sets forth the dollar amount of loans
maturing in the Company's loan portfolio at March 31, 1998 based on scheduled
contractual amortization. Loan balances are reflected before unearned discounts
and premiums, unearned finance charges and allowance for losses.
<TABLE>
<CAPTION>
March 31, 1998
------------------------------------------------------------------------------------------------------------
More Than 1 More Than 3 More Than 5 More Than
One Year Year to Year to Years to 10 Years to More Than 20 Total Loans
or Less 3 Years 5 Years 10 Years 20 Years Years
------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
(In thousands)
Mortgage loans held
for investment $ 50 $ 540 $ 2,019 $7,107 $24,191 $ 50,727 $ 84,634
Mortgage loans held
for sale -- -- -- -- 13,180 171,920 185,100
Consumer loans 51,511 25,178 25,222 -- -- -- 101,911
------- ------- ------- ------ ------- -------- --------
Total $51,561 $25,718 $27,241 $7,107 $37,371 $222,647 $371,645
======= ======= ======= ====== ======= ======== ========
</TABLE>
CLASSIFIED ASSETS AND ALLOWANCE FOR LOAN LOSSES
The Company maintains an asset review and classification process for
purposes of assessing loan portfolio quality and the adequacy of its loan loss
allowances. The Company's Asset Review Committee reviews for classification all
problem and potential problem assets and reports the results of its review to
the Board of Directors quarterly. The Company has incorporated the OTS internal
asset classifications as a part of its credit monitoring systems and in order of
increasing weakness, these designations are "substandard," "doubtful" and
"loss." Substandard assets have one or more defined weaknesses and are
characterized by the distinct possibility that some loss will be sustained if
the deficiencies are not corrected. Doubtful assets have the weaknesses of
substandard assets with the additional characteristic that the weaknesses make
collection or liquidation in full, on the basis of currently existing facts,
condition and values, questionable and there is a high possibility of loss. Loss
assets are considered uncollectible and of such little value that continuance as
an asset is not warranted. Assets which do have weaknesses but do not currently
have sufficient risk to warrant classification in one of the categories
described above are designated as "special mention."
At March 31, 1998, the Company had $2.0 million in assets classified as
special mention, $8.7 million of assets classified as substandard, $66,000 in
assets classified as doubtful and no assets classified as loss.
The following table sets forth the remaining balances of all loans in the
Bank's held for investment portfolio (before specific reserves for losses) that
were more than 30 days delinquent at March 31, 1998, December 31, 1997 and 1996.
<TABLE>
<CAPTION>
Loan March 31, % of Total December 31, % of Total December 31, % of Total
- ----
Delinquencies 1998 Loans 1997 Loans 1996 Loans
- ------------- -------------- -------------- -------------- -------------- -------------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
30 to 59 days $ 636 0.4% $ 416 0.3% $1,866 1.3%
60 to 89 days 1,140 0.7% 641 0.4% 109 0.1%
90+ days 6,069 3.5% 7,130 4.6% 6,422 4.6%
-------------- -------------- -------------- -------------- -------------- --------------
Total $7,845 4.6% $8,187 5.3% $8,397 6.0%
============== ============== ============== ============== ============== ==============
</TABLE>
19
<PAGE>
Nonaccrual and Past Due Loans. The Company's general policy is to discontinue
accrual of interest on a mortgage loan when it is delinquent 90 days or more,
and on a non-mortgage loan when it is delinquent for 120 days or more. When a
loan is reclassified from accrual to nonaccrual status, all previously accrued
interest is reversed. Interest income on nonaccrual loans is subsequently
recognized only to the extent that cash payments are received or the borrower's
ability to make periodic interest and principal payments is in accordance with
the loan terms, at which time the loan is returned to accrual status. Accounts
which are deemed fully or partially uncollectible by management are generally
fully reserved or charged off for the amount that exceeds the estimated fair
value (net of selling costs) of the underlying collateral. The Company does not
generally modify, extend or rewrite loans and at March 31, 1998 had no troubled
debt restructured loans. The following table sets forth the aggregate amount of
nonaccrual loans (net of unearned discounts and premiums, unearned finance
charges and specific allowances) at March 31, 1998, December 31, 1997 and 1996.
<TABLE>
<CAPTION>
December 31,
March 31, --------------------------------------
1998 1997 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
(Dollars in thousands)
Nonaccrual loans
Single-family residential $7,919 $5,219 $5,044
Multi-family residential 80 81 81
Consumer and other loans 1,075 1,333 710
------ ------ ------
Total $9,074 $6,633 $5,835
====== ====== ======
Nonaccrual loans as a percentage of
Total loans held for investment 5.32% 4.31% 4.19%
Total assets 2.28% 2.13% 3.09%
General allowance for loan losses as a percentage of
Total loans held for investment 3.28% 3.54% 3.14%
Nonaccrual loans 61.71% 82.33% 74.90%
</TABLE>
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. At March 31, 1998, December 31, 1997 and
1996, real estate owned was $346,000, $562,000 and $988,000, respectively, and
consisted entirely of one to four family residential properties.
20
<PAGE>
Allowance for Loan Losses. The following is a summary of the changes in the
consolidated allowance for loan losses of the Company for the periods indicated.
<TABLE>
<CAPTION>
At or For the At or For the Year Ended
Three Months December 31,
Ended March 31, ------------------------------------------
1998 1997 1996
------------------- ------------------- -------------------
(Dollars in thousands)
<S> <C> <C> <C>
ALLOWANCE FOR LOAN LOSSES
Balance at beginning of period $6,487 $ 5,356 $5,250
Provision for loan losses 38 507 194
Charge-offs
Mortgage loans held for investment (42) (373) (285)
Mortgage loans held for sale -- -- --
Consumer loans (720) (2,101) (433)
------------------- ------------------- -------------------
(762) (2,474) (718)
Recoveries
Mortgage loans held for investment -- 77 --
Mortgage loans held for sale -- -- --
Consumer loans 368 1,068 274
------------------- ------------------- -------------------
368 1,145 274
------------------- ------------------- -------------------
Net charge-offs (394) (1,329) (444)
Acquisition discounts allocated to loss allowance 801 1,953 356
------------------- ------------------- -------------------
Balance at end of period $6,932 $ 6,487 $5,356
=================== =================== ===================
Annualized net charge-offs to average loans 1.00% 0.60% 0.30%
Ending allowance to period end loans, net 4.20% 4.37% 3.97%
</TABLE>
The Company's policy is to maintain an allowance for loan losses to absorb
future losses which may be realized on its loan portfolio. These allowances
include specific reserves for identifiable impairments of individual loans and
general valuation allowances for estimates of probable losses not specifically
identified.
The determination of the adequacy of the allowance for loan losses is based
on a variety of factors, including an assessment of the credit risk inherent in
the portfolio, prior loss experience, the levels and trends of non-performing
loans, the concentration of credit, current and prospective economic conditions
and other factors.
The Company's management uses its best judgment in providing for possible
loan losses and establishing allowances for loan losses. However, the allowance
is an estimate which is inherently uncertain and depends on the outcome of
future events. In addition, regulatory agencies, as an integral part of their
examinations process, periodically review the Bank's allowance for loan losses.
Such agencies may require the 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
The Company's cash equivalents and securities portfolios are used primarily
for liquidity purposes and secondarily for investment income. Cash equivalents
and securities, which generally have maturities of less than 90 days, satisfy
regulatory requirements for liquidity.
21
<PAGE>
The following is a summary of the Company's cash equivalents and securities
portfolios as of the dates indicated.
<TABLE>
<CAPTION>
March 31, December 31,
------------------------------------------
1998 1997 1996
------------------- ------------------- -------------------
<S> <C> <C> <C>
(Dollars in thousands)
Balance at end of period
Overnight deposits $18,000 $4,000 $21,000
U.S. agency securities -- 1,002 --
------------------- ------------------- -------------------
Total $18,000 $5,002 $21,000
=================== =================== ===================
Weighted average yield at end of period
Overnight deposits 5.50% 3.50% 5.02%
U.S. agency securities -- 6.54% --
Weighted average maturity at end of period
Overnight deposits 1 day 1 day 1 day
U.S. agency securities -- 24 months --
</TABLE>
FACTORS THAT MAY AFFECT FUTURE RESULTS
LIMITED OPERATING HISTORY
The Company purchased certain assets and assumed certain liabilities of Pan
American Federal Savings Bank from the RTC in 1994. In 1995, the Company
commenced its insurance premium finance business through a joint venture with
BPN, and in 1996 the Company commenced its subprime mortgage and automobile
finance businesses. Accordingly, the Company has only a limited operating
history upon which an evaluation of the Company and its prospects can be based.
CREDIT-IMPAIRED BORROWERS
Loans made to borrowers who cannot obtain financing from traditional
lenders generally entail a higher risk of delinquency and default and higher
losses than loans made to borrowers with better credit. Substantially all of the
Company's mortgage and auto loans are made to individuals with impaired or
limited credit histories, limited documentation of income or higher debt-to-
income ratios than are permitted by traditional lenders. If the Company
experiences higher losses than anticipated, the Company's financial condition,
results of operations and business prospects would be materially and adversely
affected.
NEED FOR ADDITIONAL FINANCING
The Company's ability to maintain or expand its current level of lending
activity will depend on the availability and terms of its sources of financing.
The Company has funded its operations to date principally through deposits, FHLB
advances, a mortgage warehouse line of credit, loan securitizations, and whole
loan sales at the Bank. The Bank competes for deposits primarily on the basis
of interest rates and, accordingly, the Bank could experience difficulty in
attracting deposits if it does not continue to offer rates that are competitive
with other financial institutions. Federal regulations restrict the Bank's
ability to lend to affiliated companies and limit the amount of non-mortgage
consumer loans that may be held by the Bank. Accordingly, the growth of the
Company's mortgage, insurance premium and automobile finance businesses will
depend to a significant extent on the availability of additional sources of
financing. There can be no assurance that the Company will be able to develop
additional financing sources on acceptable terms or at all. To the extent the
Bank is unable to maintain its deposits and the Company is unable to develop
additional sources of financing, the Company will have to restrict its lending
activities which would materially and adversely affect the Company's financial
condition, results of operations and business prospects. See "Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
22
<PAGE>
CONCENTRATION OF BUSINESS IN CALIFORNIA
The Company's lending activities are concentrated primarily in California
and are likely to remain so for the foreseeable future. The occurrence of
adverse economic conditions or natural disasters in California could have a
material adverse effect on the Company's financial condition, results of
operations and business prospects.
RELIANCE ON SYSTEMS AND CONTROLS
The Company depends heavily upon its systems and controls, some of which
have been designed specifically for a particular business, to support the
evaluation, acquisition, monitoring, collections and administration of that
business. There can be no assurance that these systems and controls, including
those specially designed and built for the Company, are adequate or will
continue to be adequate to support the Company's growth. A failure of the
Company's automated systems, including a failure of data integrity or accuracy,
could have a material adverse effect upon the Company's financial condition,
results of operations and business prospects.
RELIANCE ON KEY EMPLOYEES AND OTHERS
The Company is dependent upon the continued services of its key employees
as well as the key employees of BPN. The loss of the services of any key
employee, or the failure of the Company to attract and retain other qualified
personnel, could have a material adverse effect on the Company's financial
condition, results of operations and business prospects.
COMPETITION
Each of the Company's businesses is highly competitive. Competition in the
Company's markets can take many forms, including convenience in obtaining a
loan, customer service, marketing and distribution channels, amount and terms of
the loan, loan origination fees and interest rates. Many of the Company's
competitors are substantially larger and have considerably greater financial,
technical and marketing resources than the Company. The Company's competitors
in subprime mortgage finance include other consumer finance companies. The
Company competes in the insurance premium finance business with other specialty
finance companies, independent insurance agents who offer premium finance
services, captive premium finance affiliates of insurance companies and direct
bill plans established by insurance companies. The Company competes in the
subprime automobile finance industry with commercial banks, the captive finance
affiliates of automobile manufacturers, savings associations and companies
specializing in subprime automobile finance, many of which have established
relationships with automobile dealerships and may offer dealerships or their
customers other forms of financing, including dealer floor plan financing and
lending, which are not offered by the Company. In attracting deposits, the Bank
competes primarily with other savings institutions, commercial banks, brokerage
firms, mutual funds, credit unions and other types of investment companies.
CHANGES IN INTEREST RATES
The Company's results of operations depend to a large extent upon its net
interest income, which is the difference between interest income on interest-
earning assets, such as loans and investments, and interest expense on interest-
bearing liabilities, such as deposits and other borrowings. When interest-
bearing liabilities mature or reprice more quickly than interest-bearing assets
in a given period, a significant increase in market rates of interest could have
a material adverse effect on the Company's net income. Further, a significant
increase in market rates of interest could adversely affect demand for the
Company's financial products and services. Interest rates are highly sensitive
to many factors, including governmental monetary policies and domestic and
international economic and political conditions, which are beyond the Company's
control. The Company's liabilities generally have shorter terms and are more
interest rate sensitive than its
23
<PAGE>
assets. Accordingly, changes in interest rates could have a material adverse
effect on the profitability of the Company's lending activities.
MANAGEMENT OF GROWTH
The Company has experienced rapid growth in each of its businesses and
intends to pursue growth for the foreseeable future, particularly in its
mortgage and automobile finance businesses. In addition, the Company intends to
broaden its product offerings to include additional types of consumer or, in the
case of IPF, commercial loans. Further, the Company may enter other specialty
finance businesses. This growth strategy will require additional capital,
systems development and human resources. The failure of the Company to implement
its planned growth strategy would have a material adverse effect on the
Company's financial condition, results of operations and business prospects.
SECURITIZATIONS
The Company completed its first securitization of mortgage loans in
December 1997 and expects to sell or securitize mortgage loans on a periodic
basis in the future. The Company will, in the future, consider the
securitization of other financial assets. In March 1998, the Company sold its
residual interests in this securitization for cash in the amount of $8.3 million
which exceeds the carrying value of approximately $8.2 million at the date of
sale. The Company believes that the gain on sale from such securitizations could
represent a significant portion of the Company's future revenues and net income.
The Company's ability to complete securitizations will depend on a number of
factors, including conditions in the securities markets generally, conditions in
the asset-backed securities market specifically, the performance of the
Company's portfolio of securitized loans and the Company's ability to obtain
credit enhancement for its securitized loans. If the Company were unable to
securitize profitably a sufficient number of loans in a particular quarter, then
the Company's revenues for the quarter could decline, which could result in
lower earnings or a loss reported for the quarter. In addition, delays in
closing a securitization could require the Company to seek additional
alternative funding under current and future credit facilities in order to
finance additional loan originations and purchases and could increase the
Company's interest rate risk by increasing the period during which newly
originated loans are held prior to sale and could increase the Company's
interest expense.
The Company may rely on credit enhancements to guarantee or otherwise
support senior certificates issued in securitizations. If the Company is unable
to obtain credit enhancement in connection with the senior certificates, the
Company might be unable to securitize its loans, which could have a material
adverse effect on the Company's results of operations, financial condition and
business prospects. Although alternative structures to securitizations may be
available, there can be no assurance that the Company will be able to use these
structures or that these structures will be economically viable for the Company.
The Company's ability to obtain credit enhancement for its securitizations also
may be adversely affected by poor performance of the Company's securitizations
or the securitizations of others. The inability of the Company to complete
securitizations for any reason could have a material adverse effect on the
Company's results of operations, financial condition and business prospects.
CHANGE IN GENERAL ECONOMIC CONDITIONS
Each of the Company's businesses is affected directly by changes in general
economic conditions, including changes in employment rates, prevailing interest
rates and real wages. During periods of economic slowdown or recession, the
Company may experience a decrease in demand for its financial products and
services, an increase in its servicing costs, a decline in collateral values and
an increase in delinquencies and defaults. A decline in collateral values and
an increase in delinquencies and defaults increase the possibility and severity
of losses. Although the Company believes that its underwriting criteria and
collection methods enable it to manage the higher risks inherent in loans made
to such borrowers, no assurance can be given that such criteria or methods will
afford adequate protection against such risks. Any
24
<PAGE>
sustained period of increased delinquencies, defaults or losses would materially
and adversely affect the Company's financial condition, results of operations
and business prospects.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and notes thereto presented herein have been
prepared in accordance with Generally Accepted Accounting Principles ("GAAP"),
which require the measurement of financial position and operating results in
terms of historical dollar amounts without considering the changes in the
relative purchasing power of money over time due to inflation. The impact of
inflation is reflected in the increased cost of the Company's operations. Unlike
industrial companies, nearly all of the assets and liabilities of the Company
are monetary in nature. As a result, interest rates have a greater impact on the
Company's performance than do the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or to the same
extent as the price of goods and services.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
----------------------------------------------------------
Not applicable
25
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
-----------------
Not Applicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
-----------------------------------------
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
-------------------------------
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
---------------------------------------------------
Not Applicable
ITEM 5. OTHER INFORMATION.
-----------------
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
--------------------------------
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
26
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
UNITED PANAM FINANCIAL CORP.
DATE: June 4, 1998 By: /s/ LAWRENCE J. GRILL
-------------------------------------
Lawrence J. Grill
President and Chief Executive Officer
June 4, 1998 By: /s/ CAROL M. BUCCI
-------------------------------------
Carol M. Bucci
Senior Vice President
and Chief Financial Officer
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> MAR-31-1998 DEC-31-1997
<CASH> 10,318,000 15,026,000
<INT-BEARING-DEPOSITS> 18,000,000 4,000,000
<FED-FUNDS-SOLD> 0 0
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 0 0
<INVESTMENTS-CARRYING> 0 0
<INVESTMENTS-MARKET> 0 0
<LOANS> 349,995,000 268,537,000
<ALLOWANCE> 6,932,000 6,487,000
<TOTAL-ASSETS> 397,145,000 310,842,000
<DEPOSITS> 288,232,000 233,194,000
<SHORT-TERM> 58,888,000 34,237,000
<LIABILITIES-OTHER> 22,634,000 17,472,000
<LONG-TERM> 12,930,000 12,930,000
0 0
0 0
<COMMON> 110,000 110,000
<OTHER-SE> 14,351,000 12,899,000
<TOTAL-LIABILITIES-AND-EQUITY> 397,145,000 310,842,000
<INTEREST-LOAN> 9,358,000 25,872,000
<INTEREST-INVEST> 186,000 639,000
<INTEREST-OTHER> 0 0
<INTEREST-TOTAL> 9,544,000 26,511,000
<INTEREST-DEPOSIT> 3,247,000 10,095,000
<INTEREST-EXPENSE> 4,295,000 12,411,000
<INTEREST-INCOME-NET> 5,249,000 14,100,00
<LOAN-LOSSES> 38,000 507,000
<SECURITIES-GAINS> 0 0
<EXPENSE-OTHER> 3,085,000 946,000
<INCOME-PRETAX> 2,512,000 10,739,000
<INCOME-PRE-EXTRAORDINARY> 2,512,000 10,739,000
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,453,000 6,248,000
<EPS-PRIMARY> 0.13 0.58
<EPS-DILUTED> 0.12 0.53
<YIELD-ACTUAL> 11.43 11.41
<LOANS-NON> 9,074,000 6,633,000
<LOANS-PAST> 0 0
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 6,487,000 5,356,000
<CHARGE-OFFS> 762,000 2,474,000
<RECOVERIES> 368,000 1,145,000
<ALLOWANCE-CLOSE> 6,932,000 6,487,000
<ALLOWANCE-DOMESTIC> 6,932,000 6,487,000
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 490,000 593,000
</TABLE>
