<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 June 30, 1999
Or
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from _______ to ________
Commission File Number 000-24051
UNITED PANAM FINANCIAL CORP.
(Exact name of Registrant as specified in its charter)
California 95-3211687
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1300 South El Camino Real
San Mateo, California 94402
(Address of principal executive offices) (Zip Code)
(650) 345-1800
(Registrant's telephone number, including area code)
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 X No __
------
The number of shares outstanding of the Registrant's Common Stock as of August
6, 1999 was 16,979,250 shares.
<PAGE>
UNITED PANAM FINANCIAL CORP.
FORM 10-Q
JUNE 30, 1999
INDEX
<TABLE>
<CAPTION>
<S> <C>
PART I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements (unaudited)
Consolidated Statements of Financial Condition as of
June 30, 1999 and December 31, 1998 1
Consolidated Statements of Operations
for the three and six months ended June 30, 1999
and June 30, 1998 2
Consolidated Statements of Cash Flows
for the three and six months ended June 30, 1999
and June 30, 1998 3
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 33
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 34
Item 2. Changes in Securities and Use of Proceeds 34
Item 3. Defaults Upon Senior Securities 34
Item 4. Submission of Matters to a Vote of Security Holders 34
Item 5. Other Information 34
Item 6. Exhibits and Reports on Form 8-K 34
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
--------------------
United PanAm Financial Corp. and Subsidiaries
Consolidated Statements of Financial Condition
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
(Dollars in thousands, except per share data) 1999 1998
----------------- ----------------
<S> <C> <C>
Assets
Cash and due from banks $ 4,485 $ 5,211
Short term investments 14,500 47,000
----------------- ----------------
Cash and cash equivalents 18,985 52,211
Residual interests in securitizations, at fair value 12,191 --
Loans, net 156,594 133,718
Loans held for sale 203,319 214,406
Premises and equipment, net 4,404 4,803
Federal Home Loan Bank stock, at cost 2,440 2,120
Accrued interest receivable 1,717 2,034
Real estate owned, net 2,124 1,877
Goodwill and other intangible assets 2,048 2,349
Other assets 12,822 12,041
----------------- ----------------
Total assets $ 416,644 $ 425,559
================= ================
Liabilities and Shareholders' Equity
Deposits $ 304,292 $ 321,668
Notes payable 4,000 10,930
Warehouse lines of credit 10,597 --
Accrued expenses and other liabilities 15,503 10,048
----------------- ----------------
Total liabilities 334,392 342,646
----------------- ----------------
Common stock (no par value):
Authorized, 30,000,000 shares
Issued and outstanding, 16,979,250 and 17,375,000 shares at
June 30, 1999 and December 31, 1998, respectively 66,421 68,378
Retained earnings 15,831 14,535
----------------- ----------------
Total shareholders' equity 82,252 82,913
----------------- ----------------
Total liabilities and shareholders' equity $ 416,644 $ 425,559
================= ================
</TABLE>
See notes to consolidated financial statements
1
<PAGE>
United PanAm Financial Corp. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
(In thousands, except per share data) Ended June 30, Ended June 30,
---------------------------- -----------------------------
1999 1998 1999 1998
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Interest Income
Loans $ 11,641 $ 11,812 $ 23,193 $ 21,169
Short term investments 428 280 955 466
------------ ------------ ------------ -------------
Total interest income 12,069 12,092 24,148 21,635
------------ ------------ ------------ -------------
Interest Expense
Deposits 3,749 3,876 7,781 7,123
Warehouse lines of credit 431 907 781 1,466
Federal Home Loan Bank advances -- 244 -- 545
Notes payable 74 152 211 340
------------ ------------ ------------ -------------
Total interest expense 4,254 5,179 8,773 9,474
------------ ------------ ------------ -------------
Net interest income 7,815 6,913 15,375 12,161
Provision for loan losses 1,441 1,085 4,071 1,123
------------ ------------ ------------ -------------
Net interest income after provision for loan losses 6,374 5,828 11,304 11,038
------------ ------------ ------------ -------------
Non-interest Income
Gain on sale of loans, net 7,523 17,294 17,705 27,191
Loan related charges and fees 39 46 80 72
Service charges and fees 183 162 379 305
Other income 31 31 74 63
------------ ------------ ------------ -------------
Total non-interest income 7,776 17,533 18,238 27,631
------------ ------------ ------------ -------------
Non-interest Expense
Compensation and benefits 7,972 10,172 16,380 18,772
Occupancy 1,499 1,365 2,966 2,478
Other 3,841 4,430 7,993 7,514
------------ ------------ ------------ -------------
Total non-interest expense 13,312 15,967 27,339 28,764
------------ ------------ ------------ -------------
Income before income taxes 838 7,394 2,203 9,905
Income taxes 343 3,181 907 4,239
------------ ------------ ------------ -------------
Net income $ 495 $ 4,213 $ 1,296 $ 5,666
============ ============ ============ =============
Earnings per share-basic $ 0.03 $ 0.27 $ 0.08 $ 0.43
============ ============ ============ =============
Earnings per share-diluted $ 0.03 $ 0.26 $ 0.07 $ 0.40
============ ============ ============ =============
Weighted average shares outstanding-basic 16,979 15,469 17,095 13,210
============ ============ ============ =============
Weighted average shares outstanding-diluted 17,423 16,376 17,634 14,060
============ ============ ============ =============
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
United PanAm Financial Corp. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
(Dollars in thousands) Three Months Six Months
Ended June 30, Ended June 30,
--------------------- ----------------------
1999 1998 1999 1998
--------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities
Net income $ 495 $ 4,213 $ 1,296 $ 5,666
Adjustments to reconcile net income
to net cash (used in) provided by operating activities:
Gain on sale of loans (6,826) (17,294) (7,447) (27,191)
Origination of mortgage loans held for sale (259,013) (334,655) (472,923) (598,157)
Sales of mortgage loans held for sale 194,105 359,609 454,146 562,566
Non cash gain on securitization of mortgage loans -- -- (12,191) --
Net proceeds from sale of residual interests in securitizations -- -- -- 8,302
Provision for loan losses 1,441 1,085 4,071 1,123
Accretion of discount on loans (58) (204) (86) (542)
Depreciation and amortization 689 379 1,376 756
FHLB stock dividend (28) (29) (56) (56)
(Increase) decrease in accrued interest receivable (420) 348 317 (18)
Decrease (increase) in other assets 659 (3,178) (781) (4,442)
(Decrease) increase in accrued expenses and other liabilities (1,223) (1,624) 5,455 998
Other, net 54 -- 265 --
-------- -------- --------- ---------
Net cash (used in) provided by operating activities (70,125) 8,650 (26,558) (50,995)
-------- -------- --------- ---------
Cash Flows from Investing Activities
Proceeds from maturities of investment securities -- -- -- 1,002
Repayments of mortgage loans 8,904 11,731 20,847 19,141
Originations, net of repayments, of non-mortgage loans (5,222) (13,593) (13,235) (32,021)
Purchase of premises and equipment (82) (1,252) (676) (2,103)
Purchase of treasury stock -- -- (2,362) --
Purchase of FHLB stock, net (264) (58) (264) (58)
Proceeds from sale of real estate owned 2,121 -- 2,591 450
Other, net 80 5 140 (330)
-------- -------- --------- ---------
Net cash provided by (used in) investing activities 5,537 (3,167) 7,041 (13,919)
-------- -------- --------- ---------
Cash Flows from Financing Activities
Repayment of notes payable (6,930) (2,000) (6,930) (2,000)
Net (decrease) increase in deposits (8,694) 12,102 (17,376) 67,140
Proceeds from initial public offering of common stock, net -- 63,390 -- 63,390
Proceeds, net of repayments, from warehouse lines of credit 10,597 (53,888) 10,597 (6,237)
Proceeds, net of repayments, from FHLB advances -- (5,000) -- (28,000)
-------- -------- --------- ---------
Net cash (used in) provided by financing activities (5,027) 14,604 13,709 94,293
-------- -------- --------- ---------
Net (decrease) increase in cash and cash equivalents (69,615) 20,087 (33,226) 29,379
Cash and cash equivalents at beginning of period 88,600 28,318 52,211 19,026
-------- -------- --------- ---------
Cash and cash equivalents at end of period $ 18,985 $ 48,405 $ 18,985 $ 48,405
======== ======== ========= =========
</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 Six Months Ended
June 30, June 30,
----------------------------- ----------------------------
1999 1998 1999 1998
------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Supplemental Disclosures of Cash Flow Information
Cash paid for:
Interest $ 4,341 $ 5,669 $ 8,849 $ 9,578
------------- -------------- ------------- -------------
Taxes $ -- $ 925 $ -- $ 2,510
------------- -------------- ------------- -------------
Supplemental Schedule of Non-cash Investing and Financing
Activities
Acquisition of real estate owned through
foreclosure of related mortgage loans $ 1,997 $ 1,038 $ 2,838 $ 1,308
------------- -------------- ------------- -------------
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
United PanAm Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Three and Six Months Ended June 30, 1999 and 1998
(Unaudited)
1. Organization
United PanAm Financial Corp. (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 (the
"Predecessor"), into the Company. Unless the context indicates otherwise, all
references herein to the "Company" include the Predecessor. The Company was
originally organized as a holding company for Pan American Financial, Inc.
("PAFI") and Pan American Bank, FSB (the "Bank") to purchase certain assets and
assume certain liabilities of Pan American Federal Savings Bank from the
Resolution Trust Corporation (the "RTC") on April 29, 1994 pursuant to a whole
purchase and assumption agreement. The Company, PAFI and the Bank are considered
to be minority owned. PAFI is a wholly-owned subsidiary of the Company, and the
Bank is a wholly-owned subsidiary of PAFI. United PanAm Mortgage Corporation, a
California corporation, was organized in 1997 as a wholly-owned subsidiary of
the Company.
2. Basis of Presentation
Certain statements in this Quarterly Report on 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; pricing
of loans in the whole loan and securitization markets; risks in connection with
the securitization of mortgage loans; risks relating to Year 2000; general
economic conditions; and other risks identified from time to time in the
Company's filings with the Securities and Exchange Commission (the "SEC"). See
"Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Factors That May Affect Future Results."
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 they
represent substantially all of the Company's consolidated assets and liabilities
as of June 30, 1999 and December 31, 1998. 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 in this
Form 10-Q 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
Annual
5
<PAGE>
Report on Form 10-K for the year ended December 31, 1998.
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
Basic EPS and diluted EPS are calculated as follows for the three and six
months ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
Three Months Six Months
(Dollars in thousands, except per share amounts) Ended June 30, Ended June 30,
----------------------------- -----------------------------
1999 1998 1999 1998
------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Earnings per share - basic
Net income $ 495 $ 4,213 $ 1,296 $ 5,666
============= ============= ============ =============
Average common shares outstanding 16,979 15,469 17,095 13,210
============= ============= ============ =============
Earnings per share - basic $ 0.03 $ 0.27 $ 0.08 $ 0.43
============= ============= ============ =============
Earnings per share - diluted
Net income $ 495 $ 4,213 $ 1,296 $ 5,666
============= ============= ============ =============
Average common shares outstanding 16,979 15,469 17,095 13,210
Add: Stock options 444 907 539 850
------------- ------------- ------------ -------------
Average common shares outstanding - diluted 17,423 16,376 17,634 14,060
============= ============= ============ =============
Earnings per share - diluted $ 0.03 $ 0.26 $ 0.07 $ 0.40
============= ============= ============ =============
</TABLE>
4. Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (the "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 periods
presented in that financial statement. For the three and six months ended June
30, 1999 and 1998, the Company had no items of comprehensive income to report
other than net income.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), which establishes accounting
and reporting standards for derivative instruments and for hedging activities.
SFAS 133 requires that an entity recognize all derivatives as either assets or
liabilities in the statements of financial condition and measure those
instruments at fair value. SFAS 133, as amended by SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133 - an amendment of FASB No. 133" ("SFAS 137") is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
SFAS 133, as amended by SFAS 137, is not expected to have a material impact on
the results of operations or financial condition of the Company.
In October 1998, the FASB issued SFAS No. 134, "Accounting for Mortgage -
Backed Securities Retained After the Securitization of Mortgage Loans Held for
Sale by a Mortgage Banking Enterprise" ("SFAS 134"). Prior to issuance of SFAS
134, when a mortgage banking company securitized mortgage loans held for sale
but did not sell the security in the secondary market, the security was
classified as trading. SFAS 134 requires that the security be classified as
either trading, available for sale or held to maturity according to the
Company's intent unless the Company has already committed to sell the security
before or during the securitization process. This statement is not expected to
have a material impact on the results of operations or financial condition of
the Company.
6
<PAGE>
5. Initial Public Offering
On April 23, 1998, the Company's Registration Statement on Form S-1 for the
initial public offering of 5,500,000 shares of its common stock at a price of
$11.00 per share was declared effective by the SEC. The Company received
approximately $56 million from the sale of its common stock after underwriting
discount and expenses associated with the offering. On May 22, 1998, the
Underwriters' over-allotment option for 825,000 shares of common stock was
exercised resulting in $8 million of additional proceeds being received by the
Company, after underwriting discount.
6. Operating Segments
In June 1997, the FASB issued SFAS No. 131, "Disclosures 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. Effective January 1, 1998, the Company adopted
SFAS 131 and is reporting on its operating segments discussed below.
The Company has four reportable segments: (1) mortgage finance, (2) auto
finance, (3) insurance premium finance, and (4) banking. The mortgage finance
segment originates and sells or securitizes subprime mortgage loans
collateralized primarily by first mortgages on single family residences. The
auto finance segment acquires, holds for investment and services subprime retail
automobile installment sales contracts generated by franchised and independent
dealers of used automobiles. The insurance premium finance segment, through a
joint venture, underwrites and finances automobile and commercial insurance
premiums in California. The banking segment operates a five-branch federal
savings bank and is the principal funding source for the Company's mortgage,
auto and insurance premium finance segments.
The accounting policies of the segments are the same as those of the
Company's except for (1) funds provided by the banking segment to the other
operating segments which are accounted for at a predetermined transfer price
(including certain overhead costs) and (2) an allocation between the mortgage
finance and banking segment representing a cost reimbursement for services
provided by the banking segment to the mortgage finance segment.
The Company's reportable segments are strategic business units that offer
different products and services. They are managed and reported upon separately
within the Company.
<TABLE>
<CAPTION>
At or For Three Months Ended June 30, 1999
-------------------------------------------------------------------------------------
Insurance
Mortgage Auto Premium
Finance Finance Finance Banking Total
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net interest income $ 1,220 $ 3,490 $ 609 $ 2,496 $ 7,815
Provision for loan losses 1,243 -- 198 -- 1,441
Non-interest income 7,523 44 114 415 8,096
Non-interest expense 9,061 2,433 225 1,913 13,632
------------- ------------- ------------- ------------- -------------
Segment profit (loss), pre-tax $ (1,561) $ 1,101 $ 300 $ 998 $ 838
============= ============= ============= ============= =============
Loans $ 214,862 $ 80,731 $ 39,199 $ 25,121 $ 359,913
Allowance for loan losses $ 5,571 $ 6,058 $ 378 $ 534 $ 12,541
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
At or For Three Months Ended June 30, 1998
------------------------------------------------------------------------------------------------
Insurance
Mortgage Auto Premium
Finance Finance Finance Banking Total
--------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Net interest income $ 1,490 $ 1,930 $ 839 $ 2,654 $ 6,913
Provision for loan losses 1,050 -- 35 -- 1,085
Non-interest income 17,294 22 99 568 17,983
Non-interest expense 12,226 1,534 116 2,541 16,417
--------------- --------------- --------------- --------------- ---------------
Segment profit, pre-tax $ 5,508 $ 418 $ 787 $ 681 $ 7,394
=============== =============== =============== =============== ===============
Loans $ 176,950 $ 44,107 $ 55,799 $ 65,592 $ 342,448
Allowance for loan losses $ 2,123 $ 2,876 $ 409 $ 2,949 $ 8,357
At or For Six Months Ended June 30, 1999
------------------------------------------------------------------------------------------------
Insurance
Mortgage Auto Premium
Finance Finance Finance Banking Total
--------------- --------------- --------------- --------------- ---------------
Net interest income $ 2,371 $ 6,540 $ 1,247 $ 5,217 $ 15,375
Provision for loan losses 3,801 -- 270 -- 4,071
Non-interest income 17,705 85 240 978 19,008
Non-interest expense 19,213 4,599 447 3,850 28,109
--------------- --------------- --------------- --------------- ---------------
Segment profit (loss), pre-tax $ (2,938) $ 2,026 $ 770 $ 2,345 $ 2,203
=============== =============== =============== =============== ===============
Loans $ 214,862 $ 80,731 $ 39,199 $ 25,121 $ 359,913
Allowance for loan losses $ 5,571 $ 6,058 $ 378 $ 534 $ 12,541
At or For Six Months Ended June 30, 1998
------------------------------------------------------------------------------------------------
Insurance
Mortgage Auto Premium
Finance Finance Finance Banking Total
--------------- --------------- --------------- --------------- ---------------
Net interest income $ 2,570 $ 3,493 $ 1,548 $ 4,550 $ 12,161
Provision for loan losses 1,050 -- 73 -- 1,123
Non-interest income 27,191 43 178 1,119 28,531
Non-interest expense 22,602 2,867 212 3,983 29,664
--------------- --------------- --------------- --------------- ---------------
Segment profit, pre-tax $ 6,109 $ 669 $ 1,441 $ 1,686 $ 9,905
=============== =============== =============== =============== ===============
Loans $ 176,950 $ 44,107 $ 55,799 $ 65,592 $ 342,448
Allowance for loan losses $ 2,123 $ 2,876 $ 409 $ 2,949 $ 8,357
</TABLE>
For the reportable segment information presented, there are no reconciling
items between the Company's consolidated results and segment net interest
income, segment assets and segment profit. Substantially all expenses are
recorded directly to each industry segment. Segment non-interest income and non-
interest expense differ from the consolidated results due to an inter-segment
cost reimbursement in 1999 and 1998 as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
---------------------------------- ----------------------------------
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Non-interest income for reportable segments $ 8,096 $ 17,983 $ 9,008 $ 28,531
Inter-segment cost reimbursement (320) (450) (770) (900)
--------------- --------------- --------------- ---------------
Consolidated non-interest income $ 7,776 $ 17,533 $ 18,238 $ 27,631
=============== =============== =============== ===============
Non-interest expense for reportable segments $ 13,632 $ 16,417 $ 28,109 $ 29,664
Inter-segment cost reimbursement (320) (450) (770) (900)
--------------- --------------- --------------- ---------------
Consolidated non-interest expense $ 13,312 $ 15,967 $ 27,339 $ 28,764
=============== =============== =============== ===============
</TABLE>
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations.
---------------------
Certain statements in this Quarterly Report on 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; pricing
of loans in the whole loan and securitization markets; risks in connection with
the securitization of mortgage loans; risks relating to Year 2000; general
economic conditions; and other risks identified from time to time in the
Company's filings with the Securities and Exchange Commission (the "SEC"). 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 SEC.
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 markets to customers who generally
cannot obtain financing from traditional lenders. These customers usually pay
higher loan origination fees and interest rates than those charged by
traditional lenders to gain access to consumer financing. The Company 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, mortgage warehouse lines of credit,
loan securitizations, and whole loan sales.
The Company commenced operations in 1994 by purchasing from the RTC
certain assets and assuming certain liabilities of the Bank's predecessor, Pan
American Federal Savings Bank. The Company has used the Bank as a base for
expansion into its current specialty finance businesses. In 1995, the Company
commenced its insurance premium finance business through a joint venture with
BPN 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 the Predecessor into the Company.
Finance companies, such as the Company, generate income from a combination
of (1) "spread" or "net interest" income (i.e., the difference between the yield
on loans, net of loan losses, and the cost of funding) and (2) "non-interest"
income (i.e., the fees received 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, generates income from a
combination of spread and non-interest income.
Mortgage Finance
The Company originates and sells or securitizes subprime mortgage loans
collateralized primarily by first mortgages on single family residences. The
Company's mortgage finance customers are considered "subprime" because of
factors such as impaired credit history or high debt-to-income ratios compared
to customers of traditional mortgage lenders. The Company has funded its
mortgage finance business to date
9
<PAGE>
primarily through the Bank's deposits, FHLB advances, mortgage warehouse lines
of credit, the 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 completed its second securitization of mortgage
loans in March 1999 in the amount of $225 million.
As part of the March 1999 securitization, the Company also 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. The Company classifies its residual interests in securitizations
as trading securities and records them at fair market value with any unrealized
gains or losses recorded in the results of operations.
Valuations of the residual interests in securitizations at each reporting
period are based on discounted cash flow analyses. Cash flows are estimated as
the amount of the excess of the weighted-average coupon on the loans sold over
the sum of the interest pass-through on the senior certificates, a servicing
fee, an estimate of annual future credit losses and prepayment assumptions and
other expenses associated with the securitization, discounted at an interest
rate which the Company believes is commensurate with the risks involved. The
Company uses prepayment and default assumptions that market participants would
use for similar instruments subject to prepayment, credit and interest rate
risks.
To date, the Company's mortgage lending income is generated from gains on
securitizations of loans, cash gains on sales of loans and a 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 personal and, to
a lesser extent, commercial insurance premiums in California and BPN markets the
financing program and services the loans for the Bank. The Bank primarily 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 the right to solicit new and renewal personal and commercial
insurance premium finance business from brokers who previously had 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.
10
<PAGE>
During November 1998, the Company and BPN, purchased from Norwest
Financial Coast, Inc. ("Coast") for $3.0 million the right to solicit new and
renewal personal and commercial insurance premium finance business from brokers
who previously provided contracts to Coast. The purchase price for the agreement
was provided 60% by the Company and 40% by BPN. The Company also acquired the
"Coast" name, and certain furniture, equipment and software.
As a result of the Commonwealth and Coast acquisitions, IPF increased its
commercial insurance premium financing to approximately 16% of loans outstanding
at June 30, 1999.
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, mortgage warehouse lines of credit and loan sales and
securitizations. As of June 30, 1999, the Bank was a five-branch federal savings
bank with $304.3 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, which
loans aggregated $26.2 million in principal amount (before unearned discounts
and premiums) at June 30, 199
The Bank generates spread income not only from loans originated or
purchased by each of the Company's principal businesses, but also from (1) loans
purchased from the RTC, (2) its short term investments portfolio, and (3)
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
State of Readiness.
The Company is working to resolve the potential impact of the Year 2000 on
the ability of the Company's computerized information systems to accurately
process information that may be date-sensitive. Any of the Company's programs
that recognize a date using "00" as the Year 1900 rather than the Year 2000
could result in errors or system failures. The Company utilizes a number of
computer programs across its entire operations.
The Company established a Year 2000 project management team in 1997 to
ensure that its operating systems will be fully capable of processing its
transactions. The Company also adopted a Year 2000 operating plan in accordance
with the guidelines prescribed by the Office of Thrift Supervision and the
Federal Financial Institutions Examination Council ("FFIEC"). The assessment and
awareness phases of the plan have been completed and the Company completed the
testing of substantially all of its mission critical systems by June 30, 1999.
Management and the Board of Directors of the Company believe that its
11
<PAGE>
progress to date is in accordance with FFIEC guidelines and that adequate
resources are being devoted to achieve the remainder of its Year 2000 project
plan.
The Company relies upon third-party software vendors and service providers
for a substantial amount of its electronic data processing. Thus, one of the
Company's Year 2000 focuses is to monitor the progress of its primary software
vendors and service providers towards compliance with Year 2000 issues and
prepare to test actual data of the Company on simulated processing of future
sensitive dates. As of June 30, 1999, all critical systems provided by third-
party service providers have been substantially tested. The Company's present
evaluation of test results of mission critical systems provided by its third-
party software vendors and service providers is acceptable.
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. The Company's
borrowers and customers are generally consumers which mitigates much of the Year
2000 risk. As of this time, the Company has not identified any significant
issues with its major customers or vendors.
Costs to Address the Year 2000 Issue.
The Company has budgeted expenditures of approximately $600,000 in 1998
and 1999 to ensure that its systems are ready for processing information in the
Year 2000. The majority of these expenditures relate to the cost of fully
dedicated Year 2000 project management team resources, some of whom are third
party contractors. The Company estimates that it has incurred approximately
$425,000 of its Year 2000 budget expenditures through June 30, 1999 and will
incur an additional $150,000 by the end of 1999. In addition, the Company has
incurred, and will continue to incur, certain costs relating to the temporary
reallocation of its internal resources to address Year 2000 issues. The Company
does not track the cost and time that its own internal employee spend on
addressing Year 2000 issues.
Risks Presented by the Year 2000 Issue.
Should the Company and/or its third-party software vendors and service
providers upon whom the Company relies fail to timely identify, address and
correct material Year 2000 issues, such failure could have a material adverse
impact on the Company's ability to operate. The range of adverse impacts may
include the requirement to pay significant overtime to manually process certain
transactions and added costs to process certain financing activity through a
centralized administrative function. In addition, if corrections made by such
third-party software vendors and service providers to address Year 2000 issues
are incompatible with the Company's systems, the Year 2000 issue could have a
material adverse impact on the Company's operations.
Despite the Company's activities in regards to the Year 2000 issue, there
can be no assurance that partial or total systems interruptions or the costs
necessary to update hardware and software will not have a material adverse
effect on the Company's business, financial condition, results of operations and
business prospects.
Contingency Plans.
The Year 2000 project management team currently is developing contingency
plans in the event of an unanticipated business interruption as a result of a
Year 2000 systems failure. These plans define manual processes and resources
required to provide minimum service level support for the Company's critical
activities and customer support. Initial drafts of the plans were completed in
1998, and final plans were adopted in June 1999. Validation and testing of these
contingency plans is expected to be completed by September 30, 1999. There can
be no assurance, however, that such contingency plans will totally mitigate
risks associated with the occurrence of worst case scenarios.
12
<PAGE>
Average Balance Sheets
The following tables set forth information relating to the Company for the
three and six months ended June 30, 1999 and 1998. The yields and costs are
derived by dividing income or expense by the average balance of assets or
liabilities, respectively, for the periods shown. The yields and costs include
fees which are considered adjustments to yields.
<TABLE>
<CAPTION>
Three Months Ended June 30,
-------------------------------------------------------------------------------
1999 1998
-------------------------------------------------------------------------------
Average Average
(Dollars in thousands) Average Yield/ Average Yield/
Balance(1) Interest Cost Balance(1) Interest Cost
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest earning assets
Investment securities $ 42,037 $ 428 4.07% $ 20,243 $ 280 5.54%
Mortgage loans, net(2) 249,302 5,678 9.11% 299,672 7,501 10.01%
IPF loans, net(3) 40,588 1,375 13.55% 52,699 1,775 13.47%
Automobile installment
contracts, net(4) 77,824 4,588 23.58% 40,299 2,536 25.18%
------------- -------- -------- --------
Total interest earning assets 409,751 12,069 11.78% 412,913 12,092 11.71%
-------- --------
Non-interest earning assets 34,754 34,880
------------- --------
Total assets $ 444,505 $447,793
============= ========
Liabilities and Equity
Interest bearing liabilities
Customer deposits $ 311,880 $ 3,749 4.82% $296,423 $ 3,876 5.25%
Notes payable 6,079 74 4.89% 11,430 152 5.34%
FHLB advances -- -- -- 17,276 244 5.67%
Warehouse lines of credit 30,441 431 5.68% 56,971 907 6.38%
------------- -------- -------- --------
Total interest bearing
liabilities 348,400 4,254 4.90% 382,100 5,179 5.44%
-------- --------
Non-interest bearing liabilities 14,839 18,522
------------- --------
Total liabilities 363,239 400,622
Equity 81,266 47,171
------------- --------
Total liabilities and equity $ 444,505 $447,793
============= ========
Net interest income before provision
for loan losses $ 7,815 $ 6,913
======== ========
Net interest rate spread(5) 6.88% 6.27%
Net interest margin(6) 7.65% 6.70%
Ratio of interest earning assets to
interest bearing liabilities 117.6% 108.1%
</TABLE>
________________
(1) Average balances are measured on a month-end basis.
(2) Net of deferred loan origination fees, unamortized discounts, premiums and
allowance for estimated loan losses; includes loans held for sale and non-
performing loans.
(3) Net of allowance for estimated losses; includes non-performing loans.
(4) Net of unearned finance charges and allowance for estimated losses;
includes non-performing loans.
(5) Net interest rate spread represents the difference between the yield on
interest earning assets and the cost of interest bearing liabilities.
(6) Net interest margin represents net interest income divided by average
interest earning assets.
13
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------------------------------------------------------------
1999 1998
---------------------------------------- ------------------------------------
Average Average
(Dollars in thousands) Average Yield/ Average Yield/
Balance(1) Interest Cost Balance(1) Interest Cost
-------------- ------------ ---------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest earning assets
Investment securities $ 41,924 $ 954 4.55% $ 15,929 $ 466 5.85%
Mortgage loans, net(2) 259,187 11,809 9.11% 264,019 13,358 10.12%
IPF loans, net(3) 41,775 2,791 13.36% 48,011 3,236 13.48%
Automobile installment
contracts, net(4) 73,034 8,594 23.53% 36,307 4,575 25.20%
-------- ------- -------- -------
Total interest earning assets 415,920 24,148 11.61% 364,266 21,635 11.88%
------- -------
Non-interest earning assets 37,338 35,859
-------- --------
Total assets $453,258 $400,125
======== ========
Liabilities and Equity
Interest bearing liabilities
Customer deposits $320,419 $ 7,782 4.90% $274,196 $ 7,123 5.24%
Notes payable 8,504 210 4.97% 12,073 340 5.68%
FHLB advances -- -- -- 19,226 545 5.72%
Warehouse lines of credit 27,308 781 5.77% 46,227 1,466 6.40%
-------- ------- -------- -------
Total interest bearing liabilities 356,231 8,773 4.97% 351,722 9,474 5.43%
------- -------
Non-interest bearing liabilities 15,567 15,804
-------- --------
Total liabilities 371,798 367,526
Equity 81,460 32,599
-------- --------
Total liabilities and equity $453,258 $400,125
======== ========
Net interest income before provision
for loan losses $15,375 $12,161
======= =======
Net interest rate spread(5) 6.64% 6.45%
Net interest margin(6) 7.45% 6.73%
Ratio of interest earning assets to
interest bearing liabilities 116.8% 103.6%
</TABLE>
______________________
(1) Average balances are measured on a month-end basis.
(2) Net of deferred loan origination fees, unamortized discounts, premiums and
allowance for estimated loan losses; includes loans held for sale and non-
performing loans.
(3) Net of allowance for estimated losses; includes non-performing loans.
(4) Net of unearned finance charges and allowance for estimated losses;
includes non-performing loans.
(5) Net interest rate spread represents the difference between the yield on
interest earning assets and the cost of interest bearing liabilities.
(6) Net interest margin represents net interest income divided by average
interest earning assets.
Comparison of Operating Results for the Three Months Ended June 30, 1999 and
June 30, 1998
General
Net income decreased from $4.2 million for the three months ended June 30,
1998 to $495,000 for the three months ended June 30, 1999. The Company's
automobile finance division reported operating income of $1.1 million for the
second quarter of 1999, compared with $418,000 for the second quarter of 1998,
representing an increase of 163%. The growth in automobile finance receivables
from the Company's existing retail branches as well as new branches opened in
1998 and 1999 contributed significantly to the growth in automobile finance
operating income. Also showing improved results was the Company's banking
operations, which reported operating income of $998,000 for the second quarter
of 1999, compared with $681,000 for the same quarter in the prior year. The
banking operations benefited from a decline in the average rate paid on deposits
and other borrowings, an increase in spread income from the Company's other
businesses, as well as using the cash proceeds from the Company's initial public
offering to provide additional financing for its business units.
14
<PAGE>
The Company's mortgage finance business reported an operating loss of $1.6
million for the second quarter of 1999, compared with an operating profit of
$5.5 million in the same period of 1998. The mortgage finance business continues
to be negatively impacted by lower loan origination volume, lower loan sale
volume and market pricing. While net gains on the sale of loans were 4.02%
during the second quarter of 1999, an improvement over the first quarter of 1999
level of 3.89%, they were less than the 5.02% reported in the second quarter of
1998. In addition, sales of mortgage loans of $187.3 million for the three
months ended June 30, 1999 were significantly lower than the $344.6 million for
the comparable period in 1998.
Operating income for the Company's insurance premium finance business
declined to $300,000 in the second quarter of 1999, compared with $787,000 for
the same period in 1998. Additional competition in this business from insurance
companies' direct bill and sale programs as well as lower average balances per
loan were the primary reasons for the decline in operating income. Lower average
balances per loan generally resulted from lower insurance premiums available to
the public.
Mortgage loan originations decreased from $335.0 million for the three
months ended June 30, 1998 to $254.7 million for the three months ended June 30
1999 and insurance premium finance originations decreased from $43.9 million for
the three months ended June 30, 1998 to $27.3 million for the three months ended
June 30, 1999, while auto contracts purchased increased from $19.9 million for
the three months ended June 30, 1998 to $30.4 million for the three months ended
June 30, 1999.
Interest Income
Interest income was $12.1 million for the three months ended June 30, 1999,
unchanged from the three months ended June 30, 1998. A slight decrease in
average interest earning assets of $3.2 million for the quarter ended June 30,
1998 compared with the same period in 1999 was offset by an increase of seven
basis points in the average yield on interest earning assets.
The majority of the decline in average interest earning assets was due to a
decrease in mortgage and IPF loans resulting from slower growth in both of these
business units. The average balance of automobile installment contracts
continues to increase reflecting overall growth in this business unit.
The improvement in the average yield on interest earning assets was
principally due to an increased concentration of higher yielding loans in the
three months ended June 30, 1999 compared to the three months ended June 30,
1998. Average automobile installment contracts, with an average yield of 23.6%,
comprised 19.0% of average interest earning assets at June 30, 1999 compared to
9.8% of average interest earning assets at June 30, 1998.
Interest Expense
Interest expense decreased from $5.2 million for the three months ended
June 30, 1998 to $4.3 million for the three months ended June 30, 1999 due to a
$33.7 million decrease in average interest bearing liabilities and a 0.54%
decrease in the weighted average interest rate on interest bearing liabilities.
The largest component of average interest bearing liabilities was deposits of
the Bank, which increased from an average balance of $296.4 million during the
quarter ended June 30, 1998 to $311.9 million during the quarter ended June 30,
1999. Offsetting the increase in deposits, was a $17.3 million decrease in
average FHLB advances and a $26.5 million decrease in average warehouse lines of
credit which contributed significantly to the overall decline in average
interest bearing liabilities. During the three months ended June 30, 1999 lower-
cost deposits were used to finance the Company's lending activities rather than
higher-cost warehouse lines of credit and FHLB advances.
15
<PAGE>
The average cost of deposits decreased from 5.25% for the three months
ended June 30, 1998 to 4.82% for the comparable period in 1999, generally as a
result of declining interest rates, a decrease in the Bank's higher-cost
wholesale deposits and an increase in the Bank's lower-cost retail deposits.
The decrease in the average cost of interest bearing liabilities was
primarily due to the decline in the average cost of deposits as well as the
increase in deposits as a percentage of total interest bearing liabilities for
the three months ended June 30, 1999 compared to the three months ended June 30,
1998. At June 30, 1999, deposits accounted for 89.5% of interest bearing
liabilities compared to 77.6% at June 30, 1998.
Provision for Loan Losses
Provision for loan losses was $1.4 million for the three months ended June
30, 1999 compared with $1.1 million for the same period in 1998. The provision
for loan losses reflects the Company's loan growth over the past 12 months as
well as an increase in specific loss allowances related to non-performing
mortgage loans originated primarily during the first three quarters of 1998.
Non-performing mortgage loans were $19.0 million at June 30, 1999 compared to
$8.8 million at June 30, 1998. Of the non-performing mortgage loans at June 30,
1999, 92% were originated prior to changes implemented in the Company's
underwriting criteria and practices in October 1998. The total allowance for
loan losses was $12.5 million at June 30, 1999 compared with $8.4 million at
June 30, 1998, representing 8.01% of loans held for investment at June 30, 1999
and 4.61% at June 30, 1998. Annualized net charge-offs to average loans were
2.24% for the three months ended June 30, 1999 compared with 0.73% for the three
months ended June 30, 1998.
In addition to its provision for losses, the Company's allowance for loan
losses is also increased by its allocation of acquisition discounts related to
the purchase of automobile installment contracts. The Company allocates the
estimated amount of its acquisition discounts attributable to credit risk to the
allowance for loan losses.
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 decreased $9.7 million, from $17.5 million for the
three months ended June 30, 1998 to $7.8 million for the three months ended June
30, 1999. The decline reflects lower loan sale prices for subprime mortgages in
response to disruptions in the global capital markets during the later part of
1998 and an 84.0% decrease in the volume of loans sold during the quarter ended
June 30, 1999 compared with the same quarter in 1998.
During the three months ended June 30, 1999, the Company sold $187.3
million in mortgage loans on a whole loan basis compared with whole loan sales
of $344.6 million during the comparable period in 1998. The percentage of loans
sold or securitized to loans originated was 74% for the quarter ended June 30,
1999 compared to 103% for the same period in 1998. Net gains on sales of loans,
as a percentage of loans sold, were 4.02% for the three months ended June 30,
1999 compared with 5.02% for the three months ended June 30, 1998.
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 $14,000, from $239,000 for the three
16
<PAGE>
months ended June 30, 1998 to $253,000 for the three months ended June 30, 1999.
Non-interest Expense
Non-interest expense decreased $2.7 million, from $16.0 million for the
three months ended June 30, 1998 to $13.3 million for the three months ended
June 30, 1999. Compared to the second quarter of 1998, non-interest expense for
the mortgage finance segment decreased $3.2 million and the banking segment
decreased $628,000, while non-interest expense for the automobile finance
division increased $899,000 and for insurance premium finance increased
$109,000.
The decrease in non-interest expense for the mortgage finance division was
primarily attributed to a decrease in compensation expense as a result of lower
loan origination volume in the second quarter of 1999 compared with the same
quarter in 1998. The decrease in the banking segment was primarily due to lower
overhead costs related to supporting the Company's other business segments. The
increase in the automobile finance division was driven primarily by higher
compensation and occupancy expenses associated with the planned growth of this
business segment. The increase in the insurance premium finance division was due
to amortization expense related to the Coast acquisition in December 1998.
During the last 12 months, the Company expanded its automobile finance
operations, resulting in an increase from 84 employees in 13 offices, as of June
30, 1998, to 124 employees in 18 offices, as of June 30, 1999. During the same
time, the Company consolidated its mortgage finance operations, resulting in a
decrease from 541 employees in 28 offices, as of June 30, 1998, to 382 employees
in 16 offices, as of June 30, 1999.
Income Taxes
Income taxes decreased $2.8 million, from $3.2 million for the three months
ended June 30, 1998 to $343,000 for the three months ended June 30, 1999. This
decrease occurred as a result of a $6.6 million decrease in income before income
taxes between the two periods and a decrease in the effective tax rate from
43.0% for the three months ended June 30, 1998 to 40.9% for the three months
ended June 30, 1999. The decline in the Company's effective tax rate is largely
due to current year expenses recorded for financial statement purposes, which
are not taxable.
Comparison of Operating Results for the Six Months Ended June 30, 1999 and June
30, 1998
General
Net income decreased from $5.7 million for the six months ended June 30,
1998 to $1.3 million for the six months ended June 30, 1999. The Company's
automobile finance division reported operating income of $2.0 million for the
six months ended June 30, 1999, compared with $669,000 for the corresponding
period of 1998, representing an increase of 203%. The growth in automobile
finance receivables from the Company's existing retail branches as well as new
branches opened in 1998 and 1999 contributed significantly to the growth in
automobile finance operating income. Also showing improved results was the
Company's banking operations, which reported operating income of $2.3 million
for the six months ended June 30, 1999, compared with $1.7 million for the same
period in the prior year. The banking operations benefited from a decline in the
average rate paid on deposits and other borrowings, spread income from the
Company's other businesses, as well as using the cash proceeds from the
Company's initial public offering to provide additional financing for its
business units.
The Company's mortgage finance business reported an operating loss of $2.9
million for the first six months of 1999, compared with an operating profit of
$6.1 million in the same period of 1998. The mortgage finance business
continued to be negatively impacted by lower loan origination volumes, lower
loan sale pricing and higher provision for loan losses. While the net gains on
the sale of loans were 3.94%
17
<PAGE>
during the six months ended June 30, 1999, an improvement over the fourth
quarter of 1998 level of 2.96%, they were less than the 5.05% reported for the
six months ended June 30, 1998. In addition, the provision for loan losses in
the mortgage finance business was $3.8 million for the six months ended June 30,
1999, compared with $1.1 million for the six months ended June 30, 1998. The
increase in provision for loan losses was a direct result of an increase in non-
accrual loans from $9.3 million at June 30, 1998 to $19.9 million at June 30,
1999.
Operating income for the Company's insurance premium finance business
declined to $770,000 in the first six months of 1999, compared with $1.4 million
for the same period in 1998. Additional competition in this business from
insurance companies' direct bill and sale programs as well as lower average
balances per loan were the primary reasons for the decline in operating income.
Lower average balances per loan generally resulted from lower insurance premiums
available to the public.
Mortgage loan originations decreased from $598.8 million for the six months
ended June 30, 1998 to $462.4 million for the six months ended June 30, 1999 and
insurance premium finance originations decreased from $87.8 million for the six
months ended June 30, 1998 to $43.9 million for the six months ended June 30,
1999, while auto contracts purchased increased from $37.7 million for the six
months ended June 30, 1998 to $58.5 million for the six months ended June 30,
1999. Sales of mortgage loans were $449.2 million for the six months ended June
30, 1999 and $538.4 million for the comparable period in 1998.
Interest Income
Interest income increased from $21.6 million for the six months ended June
30, 1998 to $24.1 million for the six months ended June 30, 1999 due primarily
to a $51.7 million increase in average interest earning assets, offset by a
0.27% decrease in the weighted average interest rate on interest earning assets.
The largest components of growth in average interest earning assets were
automobile installment contracts, which increased $36.7 million and investment
securities, which increased $26.0 million. The increase in auto contracts
principally resulted from the purchasing of additional dealer contracts in
existing and new markets consistent with the planned growth of this business
unit. The increase in investment securities was a result of an increase in the
Company's liquidity, reflecting primarily the proceeds received from the initial
public offering.
The decline in the average yield on interest earning assets was principally
due to a decrease in the average yield on average mortgage loans. The average
yield on average mortgage loans was 9.11% for the six months ended June 30, 1999
compared to 10.12% for the corresponding period last year.
Interest Expense
Interest expense decreased from $9.5 million for the six months ended June
30, 1998 to $8.8 million for the six months ended June 30, 1999 due to a 0.46%
decrease in the weighted average interest rate on interest bearing liabilities
partially offset by a $4.5 million increase in average interest bearing
liabilities. The largest component of growth in average interest bearing
liabilities was deposits of the Bank, which increased from an average balance of
$274.2 million during the six months ended June 30, 1998 to $320.4 million
during the six months ended June 30, 1999. Offsetting the increase in deposits,
was a $19.2 million decrease in average FHLB advances and an $18.0 million
decrease in average warehouse lines of credit. During the six months ended June
30, 1999 lower-cost deposits were used to finance the Company's lending
activities rather than higher-cost warehouse lines of credit and FHLB advances.
The average cost of deposits decreased from 5.24% for the six months ended
June 30, 1998 to 4.90% for the comparable period in 1999, generally as a result
of declining interest rates, a decrease in the Bank's higher-cost wholesale
deposits and an increase in the Bank's lower-cost retail deposits.
18
<PAGE>
The decrease in the average cost of interest bearing liabilities was
primarily due to the decline in the average cost of deposits as well as the
increase in deposits as a percentage of total interest bearing liabilities for
the six months ended June 30, 1999 compared to the six months ended June 30,
1998. At June 30, 1999, deposits accounted for 89.9% of interest bearing
liabilities compared to 78.0% at June 30, 1998.
Provision for Loan Losses
Provision for loan losses was $4.1 million for the six months ended June
30, 1999 compared with $1.1 million for the same period in 1998. The provision
for loan losses reflects the Company's loan growth over the past 12 months as
well as an increase in specific loss allowances related to non-performing
mortgage loans originated primarily during the first three quarters of 1998.
Non-performing mortgage loans were $19.0 million at June 30, 1999 compared to
$8.8 million at June 30, 1998. Of the non-performing mortgage loans at June 30,
1999, 92% were originated prior to changes implemented in the Company's
underwriting criteria and practices in October 1998. The total allowance for
loan losses was $12.5 million at June 30, 1999 compared with $8.4 million at
June 30, 1998, representing 8.01% of loans held for investment at June 30, 1999
and 4.61% at June 30, 1998. Annualized net charge-offs to average loans were
2.68% for the six months ended June 30, 1999 compared with 0.68% for the six
months ended June 30, 1998.
In addition to its provision for losses, the Company's allowance for loan
losses is also increased by its allocation of acquisition discounts related to
the purchase of automobile installment contracts. The Company allocates the
estimated amount of its acquisition discounts attributable to credit risk to the
allowance for loan losses.
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 decreased $9.4 million, from $27.6 million for the six
months ended June 30, 1998 to $18.2 million for the six months ended June 30,
1999. The decline reflects lower loan sale prices for subprime mortgages in
response to disruptions in the global capital markets during the later part of
1998 and a 19.9% decrease in the volume of loans sold during the six months
ended June 30, 1999 compared with the same period in 1998.
During the six months ended June 30, 1999, the Company securitized $225
million and sold $224.2 million in mortgage loans on a whole loan basis compared
with whole loan sales of $538.4 million during the comparable period in 1998.
The percentage of loans sold or securitized to loans originated was 97% for the
six months ended June 30, 1999, compared to 90% for the same period in 1998.
Net gains on sales of loans, as a percentage of loans securitized and sold, were
3.94% for the six months ended June 30, 1999 compared with 5.05% for the six
months ended June 30, 1998.
As part of its March 1999 securitization, the Company recorded a net gain
on sale of $10.1 million and recorded residual interests in securitizations of
$12.2 million 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.
19
<PAGE>
The Company classifies its residual interests in securitizations as trading
securities and records them at fair market value with any unrealized gains or
losses recorded in the results of operations.
Valuations of the residual interests in securitizations at each reporting
period are based on discounted cash flow analyses. Cash flows are estimated as
the amount of the excess of the weighted-average coupon on the loans sold over
the sum of the pass-through on the senior certificates, a servicing fee, an
estimate of annual future credit losses and prepayment assumptions and other
expenses associated with the securitization, discounted at an interest rate
which the Company believes is commensurate with the risks involved. The Company
uses prepayment and default assumptions that market participants would use for
similar instruments subject to prepayment, credit and interest rate risks. The
assumptions used by the Company for valuing the residual interests in
securitizations arising from its March 1999 securitization included prepayment
assumptions of 5% for the first year increasing to 30%-42% thereafter, an annual
credit loss assumption of 0.95% and a discount rate of 15%. These assumptions
remain unchanged at June 30, 1999. The Company used the "cash-out" method for
valuing the residual interests in securitizations.
In connection with its securitization transaction, an overcollateralization
amount is required to be maintained which serves as credit enhancement to the
senior certificate holders. The overcollateralization is required to be
maintained at a specific target level of the principal balance of the
certificates and can be increased as specified in the related securitization
documents. Cash flows received in excess of the obligations to the senior
certificate holders and certain costs of the securitization are deposited into a
trust account until the overcollateralization target is reached. Once this
target is reached, which is expected to be 15 to 18 months after the date of the
securitization, distribution of excess cash from the trust account are remitted
to the Company.
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 $93,000, from $440,000 for the six months ended June 30, 1998 to
$533,000 for the six months ended June 30, 1999.
Non-interest Expense
Non-interest expense decreased $1.4 million, from $28.8 million for the six
months ended June 30, 1998 to $27.4 million for the six months ended June 30,
1999. Compared to the first six months of 1998, non-interest expense for the
mortgage finance division decreased $3.4 million and the banking division
decreased $133,000, while non-interest expense for automobile finance increased
$1.7 million and for insurance premium finance increased $235,000.
The decrease in non-interest expense for the mortgage finance division was
primarily attributed to a decrease in compensation expense as a result of lower
loan origination volume in the first six months of 1999 compared with the same
period during 1998. The decrease in the banking segment was primarily due to
lower overhead costs related to supporting the Company's other business
segments. The increase in the automobile finance division was driven primarily
by higher compensation and occupancy expenses associated with the planned growth
of this business segment. The increase in the insurance premium finance division
was due to amortization expense related to the Coast acquisition in December
1998.
Income Taxes
Income taxes decreased $3.3 million, from $4.2 million for the six months
ended June 30, 1998 to $907,000 for the six months ended June 30, 1999. This
decrease occurred as a result of a $7.7 million decrease in income before income
taxes between the two periods and a decrease in the effective tax rate from
42.8% for the six months ended June 30, 1998 to 41.2% for the six months ended
June 30, 1999. The decline in the Company's effective tax rate is largely due to
current year expenses recorded for financial statement purposes, which are not
taxable.
20
<PAGE>
Comparison of Financial Condition at June 30, 1999 and December 31, 1998
Total assets decreased $9.0 million, from $425.6 million at December 31,
1998 to $416.6 million at June 30, 1999. Loans increased $11.8 million, from
$348.1 million at December 31, 1998 to $359.9 million as of June 30, 1999. The
increase in loans was comprised of a $20.1 million increase (net of unearned
finance charges) in auto contracts and a $6.2 million increase in subprime
mortgage loans, offset by a $6.1 million decrease in loans purchased from the
RTC, and a $5.1 million decrease in insurance premium finance loans.
Cash and cash equivalents decreased $33.2 million, from $52.2 million at
December 31, 1998 to $19.0 million at June 30, 1999, primarily as a result of
using mortgage loan securitization and whole loan sales proceeds to paydown
outstanding warehouse lines of credit and wholesale deposits.
Residual interests in securitizations were $12.2 million at June 30, 1999,
which were entirely attributable to the Company's $225 million securitization in
March 1999. There were no residual interests in securitizations at December 31,
1998.
Deposits decreased $17.4 million, from $321.7 million at December 31, 1998
to $304.3 million at June 30, 1999, due primarily to the maturity of $10.3
million in brokered CDs during the quarter ended March 31, 1999 and the run-off
of higher-rate wholesale deposits. Retail deposits increased $18.7 million from
$248.3 million at December 31, 1998 to $267.0 million at June 30, 1999,
reflecting the continued financing of the Company's mortgage, automobile and
insurance premium finance business segments through the Bank's five-branch
network. Wholesale deposits decreased $36.1 million from $73.4 million at
December 31, 1998 to $37.3 million at June 30, 1999 as a result of run-off of
higher-rate certificates of deposit.
Other interest bearing liabilities include the RTC notes payable, which
decreased to $4.0 million at June 30, 1999, and warehouse lines of credit, which
increased to $10.6 million at June 30, 1999. At December 31, 1998 and June 30,
1999, there were no FHLB advances.
Shareholders' equity decreased from $82.9 million at December 31, 1998 to
$82.3 million at June 30, 1999, primarily as a result of the Company's first
quarter buyback of 700,000 shares of its common stock for $2.4 million, offset
by net income of $1.3 million during the six months ended June 30, 1999.
Management of Interest Rate Risk
The principal objective of the Company's interest rate risk management
program is to evaluate the interest rate risk inherent in the Company's business
activities, determine the level of appropriate risk given the Company's
operating environment, capital and liquidity requirements and performance
objectives and manage the risk consistent with guidelines approved by the Board
of Directors. Through such management, the Company seeks to reduce the exposure
of its operations to changes in interest rates. The Board of Directors reviews
on a quarterly basis the asset/liability position of the Company, including
simulation of the effect on capital of various interest rate scenarios.
The Company's profits depend, in part, on the difference, or "spread,"
between the effective rate of interest received on the loans it originates and
the interest rates paid on deposits and other financing facilities which can be
adversely affected by movements in interest rates. In addition, between the time
the Company originates loans and investors' sales commitments are received, the
Company may be exposed to interest rate risk to the extent that interest rates
move upward or downward during the time the loans are held for sale. The Company
mitigates these risks somewhat by purchasing or originating adjustable rate
mortgages that reprice frequently in an increasing or declining interest rate
environment. Also, the Company 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.
21
<PAGE>
The Bank's interest rate sensitivity is monitored by the Board of Directors
and management through the use of a model which estimates the change in the
Bank's net portfolio value ("NPV") over a range of interest rate scenarios. NPV
is the present value of expected cash flows from assets, liabilities and off-
balance sheet instruments, and "NPV Ratio" is defined as the NPV in that
scenario divided by the market value of assets in the same scenario. The Company
reviews a market value model (the "OTS NPV model") prepared quarterly by the
Office of Thrift Supervision (the "OTS"), based on the Bank's quarterly Thrift
Financial Reports filed with the OTS. The OTS NPV model measures the Bank's
interest rate risk by approximating the Bank's NPV under various scenarios which
range from a 300 basis point increase to a 300 basis point decrease in market
interest rates. The OTS has incorporated an interest rate risk component into
its regulatory capital rule for thrifts. Under the rule, an institution whose
sensitivity measure, as defined by the OTS, in the event of a 200 basis point
increase or decrease in interest rates exceeds 20% would be required to deduct
an interest rate risk component in calculating its total capital for purposes of
the risk-based capital requirement.
At March 31, 1999, the most recent date for which the relevant OTS NPV
model is available, the Bank's sensitivity measure resulting from (1) a 200
basis point decrease in interest rates was 105 basis points and would result in
a $5.4 million increase in the NPV of the Bank and (2) a 200 basis point
increase in interest rates was 44 basis points and would result in a $2.3
million decrease in the NPV of the Bank. At March 31, 1999, the Bank's
sensitivity measure was below the threshold at which the Bank could be required
to hold additional risk-based capital under OTS regulations.
Although the NPV measurement provides an indication of the Bank's interest
rate risk exposure at a particular point in time, such measurement is not
intended to and does not provide a precise forecast of the effect of changes in
market interest rates on the Bank's net interest income and will differ from
actual results. Management monitors the results of this modeling, which are
presented to the board of directors on a quarterly basis.
The following table shows the NPV and projected change in the NPV of the
Bank at March 31, 1999 assuming an instantaneous and sustained change in market
interest rates of 100, 200 and 300 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)
+300 bp $43,488 $(5,027) -10.0% 10.33% -100 bp
+200 bp 46,186 (2,329) -5% 10.89% -44 bp
+100 bp 47,658 (857) -2% 11.17% -15 bp
0 bp 48,514 -- -- 11.33% -- bp
-100 bp 50,915 2,401 +5% 11.79% +47 bp
-200 bp 53,921 5,407 +11% 12.38% +105 bp
-300 bp 57,639 9,124 +19% 13.09% +176 bp
</TABLE>
Liquidity and Capital Resources
General
The Company's primary sources of funds have been deposits at the Bank, FHLB
advances, financing under secured warehouse lines of credit, principal and
interest payments on loans, cash proceeds from the sale or securitization of
loans and, to a lesser extent, interest payments on short-term investments and
proceeds from the maturation of securities. While maturities and scheduled
amortization of loans are a
22
<PAGE>
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.
On April 23, 1998, the Company's Registration Statement on Form S-1 for the
initial public offering of 5,500,000 shares of its Common Stock at a price of
$11.00 per share was declared effective by the SEC. The Company received
approximately $56 million from the sale of its common stock after underwriting
discount and expenses associated with the offering. On May 22, 1998, the
Underwriters' over-allotment option for 825,000 shares of Common Stock was
exercised resulting in $8 million of additional proceeds being received by the
Company, after underwriting discount. The net proceeds from the initial public
offering were used for general corporate purposes, including financing the
growth of the Company's mortgage and automobile operations, and to repay $2.0
million in indebtedness to certain shareholders.
Sales and securitizations of loans have been one of the primary sources of
funds for the Company. Cash flows from sales and securitizations of loans were
$454.0 million during the six months ended June 30, 1999 compared to $562.6
million during the six months ended June 30, 1998.
Another source of funds consists of deposits obtained through the Bank's
five retail branches in California. The Bank offers checking accounts, various
money market accounts, regular passbook accounts, 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 June 30, 1999, such retail deposits were $267.0 million or 87.7%
of total deposits.
The Bank uses wholesale and broker-originated deposits to supplement its
retail deposits and, at June 30, 1999, wholesale deposits were $37.3 million or
12.3% of total deposits. The Bank had no broker-originated deposits at June 30,
1999. 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.
The following table sets forth the balances and rates paid on each category
of deposits for the dates indicated.
<TABLE>
<CAPTION>
June 30, December 31,
-------------------------------------------------------
1999 1998 1997
--------------------- --------------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
Balance Rate Balance Rate Balance Rate
---------- ---------- ------------- -------------- ------------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Passbook accounts $ 56,963 4.25% $ 37,348 4.05% $ 26,095 3.76%
Checking accounts 11,366 2.03% 12,171 1.37% 9,959 1.33%
Certificates of deposit
Under $100,000 169,981 5.09% 194,396 5.40% 144,926 5.56%
$100,000 and over 65,982 5.24% 77,753 5.32% 52,214 5.89%
-------- -------- --------
Total $304,292 4.85% $321,668 5.07% $233,194 5.25%
======== ======== ========
</TABLE>
23
<PAGE>
The following table sets forth the time remaining until maturity for all
CDs at June 30, 1999, December 31, 1998 and 1997.
<TABLE>
<CAPTION>
June 30, December 31, December 31,
1999 1998 1997
------------ -------------- ----------------
(Dollars in thousands)
<S> <C> <C> <C>
Maturity within one year $232,155 $242,447 $181,858
Maturity within two years 3,798 29,548 14,984
Maturity within three years 10 154 298
------------ -------------- ----------------
Total certificates of deposit $235,963 $272,149 $197,140
============ ============== ================
</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 June 30, 1999, the Bank exceeded all of its regulatory capital
requirements with (1) tangible capital of $42.3 million, or 10.25% of total
adjusted assets, (2) core capital of $42.3 million, or 10.25% of total adjusted
assets, and (3) risk-based capital of $34.1 million, or 11.02% of risk-weighted
assets.
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: (1) well
capitalized, (2) adequately capitalized, (3) undercapitalized, (4) significantly
undercapitalized, and (5) 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 June 30, 1999.
The Company has other sources of liquidity, including FHLB advances,
warehouse lines of credit and its liquidity and short-term investments
portfolio. Through the Bank, the Company can obtain advances from the FHLB,
collateralized by a portion of 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 June 30, 1999, the Bank's available
borrowing capacity under this credit facility was $2.7 million.
The Bank has $300 million in master repurchase agreements under which it
may sell and repurchase at a set price mortgage loans pending the sale or
securitization of such loans. These agreements may be terminated at any time at
the option of either party. At June 30, 1999, there was $10.6 million
outstanding under these warehouse lines of credit.
24
<PAGE>
Other borrowings of the Company at June 30, 1999 consist of the RTC Notes
Payable (as defined below) which mature in 1999.
The following table sets forth certain information regarding the Company's
short-term borrowed funds (consisting of FHLB advances, notes payable and its
warehouse lines of credit) at or for the periods ended on the dates indicated.
<TABLE>
<CAPTION>
June 30, December 31,
---------------------------------------------
1999 1998 1997
--------------------- --------------------- ---------------------
(Dollars in thousands)
<S> <C> <C> <C>
FHLB advances
Maximum month-end balance $ -- $ 34,500 $ 40,900
Balance at end of period -- -- 28,000
Average balance for period -- 13,057 18,526
Weighted average interest rate on
Balance at end of period --% --% 7.07%
Average balance for period --% 5.10% 5.95%
Notes payable
Maximum month-end balance $ 10,930 $ -- $ --
Balance at end of period 4,000 -- --
Average balance for period 8,504 -- --
Weighted average interest rate on
Balance at end of period 4.62% --% --%
Average balance for period 4.97% --% --%
Warehouse lines of credit
Maximum month-end balance $ 70,000 $ 95,000 $ 64,359
Balance at end of period 10,597 -- 6,237
Average balance for period 27,308 43,759 8,914
Weighted average interest rate on
Balance at end of period 5.89% --% 6.70%
Average balance for period 5.77% 6.01% 6.10%
</TABLE>
The Company had no material contractual obligations or commitments for
capital expenditures at June 30, 1999. However, the Company continues to expand
its auto finance operations, which will entail lease commitments and
expenditures for leasehold improvements and furniture, fixtures and equipment.
In addition, the Company may expand its mortgage operations. At June 30, 1999,
the Company had outstanding commitments to originate loans of $26.7 million,
compared to $23.3 million at December 31, 1998. The Company anticipates that it
will have sufficient funds available to meet its current origination
commitments.
RTC Notes Payable
In connection with its acquisition of certain assets from the RTC, the Bank
obtained loans (the "RTC Notes Payable") from the RTC in the aggregate amount of
$10.9 million under the RTC's Minority Interim Capital Assistance Program
provided for in Section 21A(u) of the Federal Home Loan Bank Act, as amended
(the "FHLBA"). The FHLBA gives the RTC authority to provide interim capital
assistance to minority-owned institutions, defined in the FHLBA as more than
fifty percent (50%) owned or controlled by one or more minorities. The Bank,
PAFI and the RTC entered into an Interim Capital Assistance Agreement on April
29, 1994 with respect to a loan of $6,930,000 and a second Interim Capital
Assistance Agreement on September 9, 1994 with respect to a loan of $4,000,000
(together, the "RTC Agreements"). The RTC Agreements 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.
25
<PAGE>
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.
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.
The $6,930,000 loan under the first Interim Capital Assistance Agreement
dated April 29, 1994 was repaid on April 28, 1999.
Lending Activities
To date, the Company has sold most of its loan originations to mortgage
companies and other investors through whole loan packages on a primarily non-
recourse, servicing released basis. As a result, upon sale, risks and rewards
of ownership transfer to the buyer. In December 1997, the Company completed its
first securitization of mortgage loans and in March 1998 sold its residual
interests in this securitization to a third-party. In March 1999, the
Company completed its second mortgage loan securitization for $225 million.
Summary of Loan Portfolio. At June 30, 1999, the Company's loan portfolio
constituted $359.9 million, or 86.4% of the Company's total assets, of which
$156.6 million, or 43.5%, were held for investment and $203.3 million, or 56.5%,
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>
June 30, December 31, December 31,
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Mortgage Loans
Mortgage loans (purchased primarily from RTC)
Held for sale $ -- $ 18,289 $ --
Held for investment 26,260 14,039 81,995
------------- ------------- -------------
Total mortgage loans $ 26,260 $ 32,328 $ 81,995
------------- ------------- -------------
Subprime mortgage loans
Held for sale 203,319 196,117 120,002
Held for investment 16,595 17,570 5,375
------------- ------------- -------------
Total subprime mortgage loans 219,914 213,687 125,377
------------- ------------- -------------
Total mortgage loans 246,174 246,015 207,372
------------- ------------- -------------
Consumer Loans
Automobile installment contracts 107,361 83,921 40,877
Insurance premium financing 39,577 44,709 39,990
Other consumer loans 1,046 1,245 267
------------- ------------- -------------
Total consumer loans 147,984 129,875 81,134
------------- ------------- -------------
Total loans 394,158 375,890 288,506
Unearned discounts and premiums (1,132 (212 (2,901)
Unearned finance charges (20,572 (17,371 (10,581)
Allowance for loan losses (12,541 (10,183 (6,487)
------------- ------------- -------------
Total loans, net $ 359,913 $ 348,124 $ 268,537
============= ============= =============
</TABLE>
26
<PAGE>
Loan Maturities. The following table sets forth the dollar amount of loans
maturing in the Company's loan portfolio at June 30, 1999 based on scheduled
contractual amortization. Loan balances are reflected before unearned discounts
and premiums, unearned finance charges and allowance for loan losses.
<TABLE>
<CAPTION>
June 30, 1999
-------------------------------------------------------------------------------------------------------
More Than 1 More Than 3 More Than 5 More Than 10
One Year or Year to Years to Years to Years to 20 More Than 20
Less 3 Years 5 Years 10 Years Years Years
----------- ----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Mortgage loans held
for investment $ 18 $ 719 $ 969 $ 3,592 $ 13,969 $ 23,588
Mortgage loans held
for sale -- -- 127 -- 12,392 190,800
Consumer loans 42,230 49,355 54,586 1,813 -- --
----------- ----------- ----------- ----------- ------------ ------------
Total $ 42,248 $ 50,074 $ 55,682 $ 5,405 $ 26,361 $ 214,388
=========== =========== =========== =========== ============ ============
<CAPTION>
-------------
Total
Loans
-------------
<C>
Mortgage loans held
for investment $ 42,855
Mortgage loans held
for sale 203,319
Consumer loans 147,984
-------------
Total $ 394,158
=============
</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 June 30, 1999, the Company had $5.0 million in assets classified as
special mention, $17.5 million of assets classified as substandard, $61,000 in
assets classified as doubtful and no assets classified as loss.
The following table sets forth the remaining balances of all loans (before
specific reserves for losses) that were more than 30 days delinquent at June 30,
1999, December 31, 1998 and 1997.
<TABLE>
<CAPTION>
Loan
- ---- June 30, % of Total December 31, % of Total December 31, % of Total
Delinquencies 1999 Loans 1998 Loans 1997 Loans
- ------------- ---------------- ---------------- ------------------ ---------------- ----------------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
30 to 59 days $ 3,969 1.1% $ 9,743 2.8% $ 356 0.1%
60 to 89 days 2,641 0.7% 8,161 2.3% 994 0.4%
90+ days 16,433 4.6% 11,424 3.3% 7,101 2.6%
---------------- ---------------- ------------------ ---------------- ----------------- --------------
Total $23,043 6.4% $29,328 8.4% $8,451 3.1%
================ ================ ================== ================ ================= ==============
</TABLE>
Nonaccrual and Past Due Loans. The Company's general policy is to
discontinue accrual of interest on a mortgage loan when it is two payments or
more delinquent. Accordingly, loans are placed on non-accrual status generally
when they are 60-89 days delinquent. A non-mortgage loan is placed on nonaccrual
status when it is delinquent for 120 days or more. When a loan is reclassified
from accrual to nonaccrual status, all previously accrued interest is reversed.
Interest income on nonaccrual loans is subsequently recognized only to the
extent that cash payments are received or the borrower's ability to make
periodic interest and principal payments is in accordance with the loan terms,
at which time the loan is returned to
27
<PAGE>
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 June 30, 1999 had no troubled debt restructured loans. The following table
sets forth the aggregate amount of nonaccrual loans (net of unearned discounts
and premiums and unearned finance charges) at June 30, 1999, December 31, 1998
and 1997.
<TABLE>
<CAPTION>
December 31,
June 30, --------------------
1999 1998 1997
---------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C>
Non-accrual loans
Single-family residential $18,955 $19,242 $5,766
Multi-family residential and commercial -- 214 605
Consumer and other loans 949 1,168 1,426
---------- -------- ---------
Total $19,904 $20,624 $7,797
========== ======== =========
Non-accrual loans as a percentage of
Total loans held for investment 12.71% 15.42% 5.25%
Total assets 4.78% 4.85% 2.51%
Allowance for loan losses as a percentage of
Total loans held for investment 8.01% 7.62% 4.37%
Non-accrual loans 63.01% 49.37% 83.20%
</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. Real estate owned was $2.1 million at June
30, 1999, $1.9 million at December 31, 1998 and $562,000 at December 31, 1997,
and consisted entirely of one to four family residential properties.
Allowance for Loan Losses. The following is a summary of the changes in the
consolidated allowance for loan losses of the Company for the periods indicated.
<TABLE>
<CAPTION>
At or For the
At or For the Six Year Ended
Months Ended December 31,
June 30, --------------------
1999 1998 1997
---------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C>
Allowance for Loan Losses
Balance at beginning of period $10,183 $ 6,487 $ 5,356
Provision for loan losses 4,071 5,853 507
Automobile finance discounts allocated to loss allowance 3,489 4,582 1,953
Charge-offs
Mortgage loans (3,653) (4,536) (373)
Consumer loans (2,053) (3,793) (2,101)
---------- -------- ---------
(5,706) (8,329) (2,474)
Recoveries
Mortgage loans 267 452 77
Consumer loans 237 1,138 1,068
---------- -------- ---------
504 1,590 1,145
---------- -------- ---------
Net charge-offs (5,202) (6,739) (1,329)
---------- -------- ---------
Balance at end of period $12,541 $10,183 $ 6,487
========== ======== =========
Annualized net charge-offs to average loans 2.68% 1.73% 0.60%
Ending allowance to period end loans, net 8.01% 7.62% 4.37%
</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. In addition, the Company's allowance for loan losses is also
increased by its allocation of acquisition discounts related to the purchase of
automobile installment contracts.
28
<PAGE>
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.
The Bank's most recent examination by its regulatory agencies was completed in
October 1998 and no adjustments to the Bank's allowance for loan losses was
required.
Cash Equivalents and Securities Portfolio
The Company's cash equivalents and securities portfolios are used primarily
for liquidity purposes and secondarily for investment income. Cash equivalents
and securities, which generally have maturities of less than 90 days, satisfy
regulatory requirements for liquidity.
The following is a summary of the Company's cash equivalents and securities
portfolios as of the dates indicated.
<TABLE>
<CAPTION>
December 31,
June 30, ---------------------
1999 1998 1997
---------- ------- ---------
(Dollars in thousands)
<S> <C> <C> <C>
Balance at end of period
Overnight deposits $14,500 $47,000 $4,000
U.S. agency securities -- -- 1,002
========== ======= =========
Total $14,500 $47,000 $5,002
========== ======= =========
Weighted average yield at end of period
Overnight deposits 4.62% 3.00% 3.50%
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.
See "Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Credit-Impaired Borrowers
Loans made to borrowers who cannot obtain financing from traditional
lenders generally entail a higher risk of delinquency and default and higher
losses than loans made to borrowers with better credit. Substantially all of the
Company's 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.
29
<PAGE>
Need for Additional Financing
The Company's ability to maintain or expand its current level of lending
activity will depend on the availability and terms of its sources of financing.
The Company has funded its operations to date principally through deposits, FHLB
advances, mortgage warehouse lines of credit, loan securitizations, and whole
loan sales. 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."
Concentration of Business in California
The Company's lending activities are concentrated primarily in California
and are likely to remain so for the foreseeable future. The performance of the
Company's loans may be affected by changes in California's economic and business
conditions, including its residential real estate market. The occurrence of
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, mortgage
banking companies, commercial banks, credit unions, savings associations and
insurance companies. The Company competes in the insurance premium finance
business
30
<PAGE>
with other specialty finance companies, independent insurance agents who offer
premium finance services, captive premium finance affiliates of insurance
companies and direct bill plans established by insurance companies. The Company
competes in the subprime automobile finance industry with commercial banks, the
captive finance affiliates of automobile manufacturers, savings associations and
companies specializing in subprime automobile finance, many of which have
established relationships with automobile dealerships and may offer dealerships
or their customers other forms of financing, including dealer floor plan
financing and lending, which are not offered by the Company. In attracting
deposits, the Bank competes primarily with other savings institutions,
commercial banks, brokerage firms, mutual funds, credit unions and other types
of investment companies.
Fluctuations in interest rates and general and localized economic
conditions also may affect the competition the Company faces. Competitors with
lower costs of capital have a competitive advantage over the Company. During
periods of declining interest rates, competitors may solicit the Company's
customers to refinance their loans. In addition, during periods of economic
slowdown or recession, the Company's borrowers may face financial difficulties
and be more receptive to offers of the Company's competitors to refinance their
loans.
As the Company expands into new geographic markets, it will face additional
competition from lenders already established in these markets. There can be no
assurance that the Company will be able to compete successfully with these
lenders.
Changes in Interest Rates
The Company's results of operations depend to a large extent upon its net
interest income, which is the difference between interest income on interest-
earning assets, such as loans and investments, and interest expense on interest-
bearing liabilities, such as deposits and other borrowings. When interest-
bearing liabilities mature or reprice more quickly than interest-bearing assets
in a given period, a significant increase in market rates of interest could have
a material adverse effect on the Company's net income. Further, a significant
increase in market rates of interest could adversely affect demand for the
Company's financial products and services. Interest rates are highly sensitive
to many factors, including governmental monetary policies and domestic and
international economic and political conditions, which are beyond the Company's
control. The Company's liabilities generally have shorter terms and are more
interest rate sensitive than its assets. Accordingly, changes in interest rates
could have a material adverse effect on the profitability of the Company's
lending activities. See "Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Management of Interest Rate
Risk."
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 insurance premium finance, 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 could have a material adverse
effect on the Company's financial condition, results of operations and business
prospects.
Dependence on Loan Sale and Securitization Markets
The Company generates substantial revenues from whole loan sales and
securitizations. There can be no assurance that whole loan purchasers will
continue to purchase the Company's loans, or that they will continue to purchase
loans at present prices, and failure to do so could have a material adverse
effect on the Company's financial condition, results of operations and business
prospects. Further, adverse conditions in
31
<PAGE>
the asset-backed securitization market could adversely affect the Company's
ability to sell or securitize loans at present prices.
Securitizations
The Company completed its first securitization of mortgage loans in
December 1997 and its second in March 1999, and may securitize mortgage loans on
a periodic basis in the future. The Company may, in the future, consider the
securitization of other financial assets. In March 1998, the Company sold its
residual interests from its first securitization for cash in the amount of $8.3
million which exceeded the carrying value of approximately $8.2 million at the
date of sale. The Company continues to report the residual interests from its
second securitization in its balance sheet. 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 securitizations represented a significant portion of the Company's
revenues and net income and 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 sustained period of increased
delinquencies, defaults or losses could 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
32
<PAGE>
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.
Year 2000 Compliance
Most of the Company's operations are dependent on the efficient functioning
of the Company's computer systems and software. Computer system failures or
disruption could have a material adverse effect on the Company's business,
financial condition and results of operations.
Many computer programs were designed and developed utilizing only two
digits in date fields, thereby creating the inability to recognize the year 2000
or years thereafter. Beginning in the year 2000, these date codes will need to
accept four digit entries to distinguish 21st century dates from 20th century
dates. This year 2000 issue creates risks for the Company from unforeseen or
unanticipated problems in its internal computer systems as well as from computer
systems of the Federal Reserve Bank, correspondent banks, customers and
suppliers. Failures of these systems or untimely corrections could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company's computer systems and programs are designed and supported by
companies specifically in the business of providing such products and services.
The Company's Year 2000 plan includes evaluating existing hardware, software,
vaults, alarm systems, both internally and externally, establishing a
contingency plan and upgrading hardware and software as necessary. The initial
phase of the project was to assess and identify all internal business processes
requiring modification and to develop comprehensive renovation plans as needed.
This phase was largely completed in 1998. The second phase was to execute those
renovation plans and begin testing systems by simulating Year 2000 data
conditions. This phase was also largely completed in 1998. Testing and
implementation was completed during the first half of 1999. Failure to be Year
2000 compliant or incurrence of significant costs to render the Company Year
2000 compliant could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company is evaluating its major customers and suppliers to determine if
they are Year 2000 compliant. Failure of any material customer or supplier to
be year 2000 compliant could have a material adverse effect on the Company.
Other Risks
From time to time, the Company details other risks with respect to its
business and financial results in its filings with the SEC.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
----------------------------------------------------------
See "Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations - Management of Interest Rate Risk; and Factors That
May Affect Future Results - Dependence on Loan Sale and Securitization Markets"
33
<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.
---------------------------------------------------
At the Annual Meeting of the Company's shareholders, held on April 27,
1999, the shareholders considered the following proposals:
I. The election of seven directors to serve terms of one or two years;
II. The approval of an amendment to the Company's Articles of
Incorporation to increase the authorized number of shares of common
stock;
III. The approval of an amendment to the Company's 1997 Stock Incentive
Plan; and
IV. The ratification of the selection of KPMG, LLP as the Company's
independent auditors for 1999.
Messrs. Guillermo Bron, Lawrence Grill and Luis Maizel were elected as
directors of the Company with terms expiring in 2001. Messrs. John French,
Edmund Kaufman and Daniel Villanueva were elected as directors of the Company
with terms expiring in 2000. Messrs. Bron and Kaufman received approximately
16,921,000 shares For, no shares Against and 5,000 shares Abstained. Messrs.
Grill, French, Maizel and Villanueva received approximately 16,903,000 shares
For, no shares Against and 23,000 shares Abstained.
The approximate vote on the election of proposals II, III and IV were as
follows:
For Against Abstained
--- ------- ---------
Proposal II 16,886,000 39,000 1,000
Proposal III 16,773,000 150,000 3,000
Proposal IV 16,902,000 20,000 4,000
Item 5. Other Information.
------------------
Not applicable
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) List of Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
34
<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: August 6, 1999 By: /s/ Lawrence J. Grill
-----------------------------------
Lawrence J. Grill
President and Chief Executive Officer
(Principal Executive Officer)
August 6, 1999 By: /s/ Carol M. Bucci
-----------------------------------
Carol M. Bucci
Senior Vice President
and Chief Financial Officer
(Principal Financial and Accounting
Officer)
35
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> JUN-30-1999 DEC-31-1998
<CASH> 4,485,000 5,211,000
<INT-BEARING-DEPOSITS> 14,500,000 47,000,000
<FED-FUNDS-SOLD> 0 0
<TRADING-ASSETS> 12,191,000 0
<INVESTMENTS-HELD-FOR-SALE> 0 0
<INVESTMENTS-CARRYING> 0 0
<INVESTMENTS-MARKET> 0 0
<LOANS> 359,913,000 348,124,000
<ALLOWANCE> 12,541,000 10,183,000
<TOTAL-ASSETS> 416,644,000 425,559,000
<DEPOSITS> 304,292,000 321,668,000
<SHORT-TERM> 14,597,000 10,930,000
<LIABILITIES-OTHER> 15,503,000 10,048,000
<LONG-TERM> 0 0
0 0
0 0
<COMMON> 66,421,000 68,378,000
<OTHER-SE> 15,831,000 14,535,000
<TOTAL-LIABILITIES-AND-EQUITY> 416,644,000 425,559,000
<INTEREST-LOAN> 23,193,000 43,999,000
<INTEREST-INVEST> 955,000 1,346,000
<INTEREST-OTHER> 0 0
<INTEREST-TOTAL> 24,148,000 45,345,000
<INTEREST-DEPOSIT> 7,781,000 15,329,000
<INTEREST-EXPENSE> 8,773,000 19,246,000
<INTEREST-INCOME-NET> 15,375,000 26,099,000
<LOAN-LOSSES> 4,071,000 5,853,000
<SECURITIES-GAINS> 0 0
<EXPENSE-OTHER> 0 1,208,000
<INCOME-PRETAX> 2,203,000 11,754,000
<INCOME-PRE-EXTRAORDINARY> 2,203,000 11,754,000
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,296,000 6,763,000
<EPS-BASIC> 0.08 0.44
<EPS-DILUTED> 0.07 0.42
<YIELD-ACTUAL> 7.45 6.57
<LOANS-NON> 15,908,000 18,632,000
<LOANS-PAST> 0 0
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 10,183,000 6,487,000
<CHARGE-OFFS> 5,706,000 8,329,000
<RECOVERIES> 504,000 1,590,000
<ALLOWANCE-CLOSE> 12,541,000 10,183,000
<ALLOWANCE-DOMESTIC> 12,541,000 10,183,000
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
