<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, 2000
Or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to ___________
Commission File Number 000-24051
UNITED PANAM FINANCIAL CORP.
(Exact name of Registrant as specified in its charter)
California 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
11, 2000 was 16,113,750 shares.
<PAGE>
UNITED PANAM FINANCIAL CORP.
FORM 10-Q
JUNE 30, 2000
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
----
<S> <C> <C>
Item 1. Financial Statements (unaudited)
Consolidated Statements of Financial Condition as of
June 30, 2000 and December 31, 1999 1
Consolidated Statements of Operations
for the three and six months ended June 30, 2000
and June 30, 1999 2
Consolidated Statements of Comprehensive Income
for the three and six months ended June 30, 2000
and June 30, 1999 3
Consolidated Statements of Cash Flows
for the three and six months ended June 30, 2000
and June 30, 1999 4
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 31
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 32
Item 2. Changes in Securities and Use of Proceeds 32
Item 3. Defaults Upon Senior Securities 32
Item 4. Submission of Matters to a Vote of Security Holders 32
Item 5. Other Information 32
Item 6. Exhibits and Reports on Form 8-K 32
</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) 2000 1999
---------------- -----------------
<S> <C> <C>
Assets
Cash and due from banks $ 4,507 $ 4,857
Short term investments 26,107 85,500
---------------- -----------------
Cash and cash equivalents 30,614 90,357
Securities available for sale, at fair value 140,562 9,918
Securities held to maturity, at cost 10,000 --
Residual interests in securitizations, at fair value 15,619 21,227
Loans, net 176,822 158,283
Loans held for sale 20,678 136,460
Premises and equipment, net 1,441 1,429
Federal Home Loan Bank stock, at cost 1,974 2,505
Accrued interest receivable 1,329 1,501
Real estate owned, net 2,711 2,590
Goodwill and other intangible assets 1,436 1,736
Other assets 15,384 12,284
---------------- -----------------
Total assets $418,570 $438,290
================ =================
Liabilities and Shareholders' Equity
Deposits $298,079 $291,944
Federal Home Loan Bank advances 35,000 --
Warehouse lines of credit -- 54,415
Accrued expenses and other liabilities 13,872 16,578
---------------- -----------------
Total liabilities 346,951 362,937
---------------- -----------------
Common stock (no par value):
Authorized, 30,000,000 shares
Issued and outstanding, 16,614,350 and 16,369,350 shares at
June 30, 2000 and December 31, 1999, respectively 65,668 65,249
Retained earnings 6,069 10,183
Unrealized loss on securities available for sale, net (118) (79)
---------------- -----------------
Total shareholders' equity 71,619 75,353
---------------- -----------------
Total liabilities and shareholders' equity $418,570 $438,290
================ =================
</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
(Dollars in thousands, except per share data) Ended June 30, Ended June 30,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Interest Income
Loans $ 8,380 $ 6,534 $16,055 $12,754
Securities 2,261 428 2,972 955
------------ ------------ ------------- ------------
Total interest income 10,641 6,962 19,027 13,709
------------ ------------ ------------- ------------
Interest Expense
Deposits 3,139 1,439 4,842 2,804
Federal Home Loan Bank advances 236 -- 236 --
Notes payable -- 74 -- 210
------------ ------------ ------------- ------------
Total interest expense 3,375 1,513 5,078 3,014
------------ ------------ ------------- ------------
Net interest income 7,266 5,449 13,949 10,695
Provision for loan losses 5 199 77 271
------------ ------------ ------------- ------------
Net interest income after provision for loan
losses 7,261 5,250 13,872 10,424
Non-interest Income
Loss on residual interests in securitizations (5,000) -- (5,000) --
Service charges and fees 154 183 307 379
Loan related charges and fees 50 40 104 80
Other income 32 31 64 75
------------ ------------ ------------- ------------
Total non-interest income (4,764) 254 (4,525) 534
------------ ------------ ------------- ------------
Non-interest Expense
Compensation and benefits 3,208 2,775 6,305 5,465
Occupancy 577 461 1,110 888
Other 1,695 1,334 3,221 2,643
------------ ------------ ------------- ------------
Total non-interest expense 5,480 4,570 10,636 8,996
------------ ------------ ------------- ------------
Income (loss) from continuing operations before
income taxes (2,983) 934 (1,289) 1,962
Income taxes (benefit) (1,158) 384 (466) 807
------------ ------------ ------------- ------------
Income (loss) from continuing operations (1,825) 550 (823) 1,155
------------ ------------ ------------- ------------
Income (loss) from discontinued operations, net of tax -- (55) -- 141
Loss on disposal of discontinued operations, net of tax (3,291) -- (3,291) --
------------ ------------ ------------- ------------
Net income (loss) $(5,116) $ 495 $(4,114) $ 1,296
============ ============ ============= ============
Earnings (loss) per share--basic:
Continuing operations $ (0.11) $ 0.03 $ (0.05) $ 0.07
============ ============ ============= ============
Discontinued operations $ (0.20) $ -- $ (0.20) $ 0.01
============ ============ ============= ============
Net income (loss) $ (0.31) $ 0.03 $ (0.25) $ 0.08
============ ============ ============= ============
Weighted average shares outstanding 16,614 16,979 16,572 17,095
============ ============ ============= ============
Earnings (loss) per share--diluted:
Continuing operations $ (0.11) $ 0.03 $ (0.05) $ 0.06
============ ============ ============= ============
Discontinued operations $ (0.20) $ -- $ (0.20) $ 0.01
============ ============ ============= ============
Net income (loss) $ (0.31) $ 0.03 $ (0.25) $ 0.07
============ ============ ============= ============
Weighted average shares outstanding 16,687 17,423 16,724 17,634
============ ============ ============= ============
</TABLE>
See notes to consolidated financial statements
2
<PAGE>
United PanAm Financial Corp. and Subsidiaries
Consolidated Statements of Comprehensive Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
(Dollars in thousands) Ended June 30, Ended June 30,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Net income (loss) $ (5,116) $ 495 $ (4,114) $ 1,296
Other comprehensive income, net of tax:
Unrealized loss on securities (6) - (39) -
------------ ------------ ------------- ------------
Comprehensive income (loss) $ (5,122) $ 495 $ (4,153) $ 1,296
============ ============ ============= ============
</TABLE>
See notes to consolidated financial statements
3
<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,
-------------------------------- --------------------------------
2000 1999 2000 1999
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities
Net income (loss) $ (5,116) $ 495 $ (4,114) $ 1,296
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Discontinued operations 3,291 54 3,291 (143)
Originations of loans held for sale (680) (258,316) (77,163) (472,808)
Sales of loans held for sale 31,272 188,112 178,434 439,202
Provision for loan losses 5 199 77 271
Accretion of discount on loans -- (58) -- (86)
Depreciation and amortization 328 307 646 610
FHLB stock dividend (52) (28) (86) (56)
Decrease (increase) in accrued interest receivable 232 (420) 172 317
Decrease (increase) in other assets 3,343 659 3,795 (781)
(Decrease) increase in accrued expenses and other
liabilities (988) (1,183) (4,093) 5,355
Amortization of discounts on securities (1,033) -- (1,033) --
Other, net (1) 54 35 265
--------------- --------------- --------------- ---------------
Net cash provided by (used in) operating activities 30,601 (70,125) 99,961 (26,558)
--------------- --------------- --------------- ---------------
Cash Flows from Investing Activities
Purchase of investment securities, net of maturities (98,100) -- (139,622) --
Repayments of mortgage loans 3,494 8,904 9,383 20,847
Originations, net of repayments, of non-mortgage loans (9,180) (5,222) (20,446) (13,235)
Purchase of premises and equipment (179) (82) (358) (676)
Purchase of treasury stock -- -- -- (2,362)
Purchase of FHLB stock, net 617 (264) 617 (264)
Proceeds from sales of real estate owned 1,014 2,121 3,640 2,591
Other, net 146 80 362 140
--------------- --------------- --------------- ---------------
Net cash (used in) provided by investing activities (102,188) 5,537 (146,424) 7,041
--------------- --------------- --------------- ---------------
Cash Flows from Financing Activities
Repayment of notes payable -- (6,930) -- (6,930)
Net increase (decrease) in deposits 2,863 (8,694) 6,135 (17,376)
Proceeds, net of repayments, from warehouse lines of credit (15,000) 10,597 (54,415) 10,597
Proceeds, net of repayments, from FHLB advances 35,000 -- 35,000 --
--------------- --------------- --------------- ---------------
Net cash provided by (used in) financing activities 22,863 (5,027) (13,280) (13,709)
--------------- --------------- --------------- ---------------
Net (decrease) increase in cash and cash equivalents (48,724) (69,615) (59,743) (33,226)
Cash and cash equivalents at beginning of period 79,338 88,600 90,357 52,211
--------------- --------------- --------------- ---------------
Cash and cash equivalents at end of period $ 30,614 $ 18,985 $ 30,614 $ 18,985
=============== =============== =============== ===============
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
United PanAm Financial Corp. and Subsidiaries
Consolidated Statements of Cash Flows, Continued
(Unaudited)
<TABLE>
<CAPTION>
(Dollars in thousands) Three Months Six Months
Ended June 30, Ended June 30,
------------------------------- -------------------------------
2000 1999 2000 1999
--------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Supplemental Disclosures of Cash Flow Information
Cash paid for:
Interest $4,172 $4,341 $8,163 $8,849
=============== =============== =============== ==============
Taxes $ 40 $ -- $ 206 $ --
=============== =============== =============== ==============
Supplemental Schedule of Non-cash Investing and Financing
Activities
Acquisition of real estate owned through
foreclosure of related mortgage loans $2,100 $1,997 $3,761 $2,838
=============== =============== =============== ==============
</TABLE>
See notes to consolidated financial statements
5
<PAGE>
United PanAm Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Three and Six Months Ended June 30, 2000 and 1999
(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. The
Company, PAFI and the Bank are considered to be Hispanic owned. PAFI is a
wholly-owned subsidiary of the Company, and the Bank is a wholly-owned
subsidiary of PAFI.
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; estimates involving discontinued operations; valuation of
residuals; interests in securitizations; reliance on operational systems and
controls and key employees; competitive pressure in the banking industry;
changes in the interest rate environment; rapid growth of the Company's
businesses; pricing of loans in the whole loan and securitization markets;
dependence on whole loan sale markets; 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. 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, 2000 and December
31, 1999. 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
6
<PAGE>
Report on Form 10-K for the year ended December 31, 1999.
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 From Continuing Operations
Basic EPS and diluted EPS are calculated as follows for the three and
six months ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
Three Months Six Months
(Dollars in thousands, except per share amounts) Ended June 30, Ended June 30,
-------------------------------- ------------------------------
2000 1999 2000 1999
--------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C>
Earnings (loss) per share from continuing operations -- basic:
Income (loss) from continuing operations $ (1,825) $ 550 $ (823) $ 1,155
=============== =============== ============= ===============
Average common shares outstanding 16,614 16,979 16,572 17,095
=============== =============== ============= ===============
Earnings (loss) per share $ (0.11) $ 0.03 $ (0.05) $ 0.07
=============== =============== ============= ===============
Earnings (loss) per share from continuing operations -- diluted:
Income (loss) from continuing operations $ (1,825) $ 550 $ (823) $ 1,155
=============== =============== ============= ===============
Average common shares outstanding 16,614 16,979 16,572 17,095
Add: Stock options 73 444 152 539
--------------- --------------- ------------- ---------------
Average common shares outstanding -- diluted 16,687 17,423 16,724 17,634
=============== =============== ============= ===============
Earnings (loss) per share $ (0.11) $ 0.03 $ (0.05) $ 0.06
=============== =============== ============= ===============
</TABLE>
4. Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (the "FASB")
issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"), which establishes accounting and reporting standards
for derivative instruments and for hedging activities. SFAS 133 requires that an
entity recognize all derivatives as either assets or liabilities in the
statements of financial condition and measure those instruments at fair value.
SFAS 133, as amended by SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133"
("SFAS 137") is effective for all fiscal quarters of fiscal years beginning
after June 15, 2000. 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 March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions involving Stock Compensation" ("Interpretation 44"), which
provides guidance only for certain issues arising from the application of APB
Opinion No. 25, "Accounting for Stock Issued to Employees" ("Opinion 25").
Interpretation 44 is effective July 1, 2000, except as noted in the
Interpretation, and is not expected to have a material impact on the results of
operations or financial condition of the Company.
7
<PAGE>
In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities" ("SFAS 138"), which
amends the accounting and reporting standards of SFAS 133 for certain derivative
instruments and certain hedging activities. SFAS 138 is effective concurrently
with SFAS 133 for all fiscal quarters of fiscal years beginning after June 15,
2000. SFAS 138 is not expected to have a material impact on the results of
operations or financial condition of the Company.
5. Operating Segments
The Company has three reportable segments: auto finance, insurance
premium finance and banking. The auto finance segment acquires, holds for
investment and services nonprime retail automobile installment sales contracts
generated by franchised and independent dealers of used automobiles. The
insurance premium finance segment, through a joint venture, underwrites and
finances automobile and commercial insurance premiums in California. The banking
segment operates a five-branch federal savings bank and is the principal funding
source for the Company's auto and insurance premium finance segments.
The accounting policies of the segments are the same as those of the
Company's except for funds provided by the banking segment to the other
operating segments which are accounted for at a predetermined transfer price
(including certain overhead costs).
8
<PAGE>
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, 2000
----------------------------------------------------------
Insurance
Auto Premium
Finance Finance Banking Total
------------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Net interest income $ 5,173 $ 611 $ 1,483 $ 7,266
Provision for loan losses -- 5 -- 5
Non-interest income (1) 55 89 (4,908) (4,764)
Non-interest expense 3,260 411 1,809 5,480
------------- ------------ ----------- -----------
Segment profit (loss), pre-tax $ 1,968 $ 284 $ (5,235) $ (2,983)
============= ============ =========== ===========
Total assets $122,226 $ 30,497 $237,220 $389,943
============= ============ =========== ===========
At or For Three Months Ended June 30, 1999
----------------------------------------------------------
Insurance
Auto Premium
Finance Finance Banking Total
------------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Net interest income $ 3,490 $ 609 $ 2,496 $ 6,595
Provision for loan losses -- 199 -- 199
Non-interest income 44 114 416 574
Non-interest expense 2,433 225 1,912 4,570
------------- ------------ ----------- -----------
Segment profit, pre-tax $ 1,101 $ 299 $ 1,000 $ 2,400
============= ============ =========== ===========
Total assets $ 82,417 $ 41,133 $ 78,753 $202,303
============= ============ =========== ===========
At or For Six Months Ended June 30, 2000
----------------------------------------------------------
Insurance
Auto Premium
Finance Finance Banking Total
------------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Net interest income $ 9,836 $ 1,193 $ 2,920 $ 13,949
Provision for loan losses -- 23 54 77
Non-interest income (1) 115 182 (4,822) (4,525)
Non-interest expense 6,282 688 3,666 10,636
------------- ------------ ----------- -----------
Segment profit (loss), pre-tax $ 3,669 $ 664 $ (5,622) $ (1,289)
============= ============ =========== ===========
Total assets $122,226 $ 30,497 $237,220 $389,943
============= ============ =========== ===========
At or For Six Months Ended June 30, 1999
----------------------------------------------------------
Insurance
Auto Premium
Finance Finance Banking Total
------------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Net interest income $ 6,540 $ 1,247 $ 5,217 $ 13,004
Provision for loan losses -- 271 -- 271
Non-interest income 85 240 979 1,304
Non-interest expense 4,599 447 3,850 8,896
------------- ------------ ----------- -----------
Segment profit, pre-tax $ 2,026 $ 769 $ 2,346 $ 5,141
============= ============ =========== ===========
Total assets $ 82,417 $ 41,133 $ 78,753 $202,303
============= ============ =========== ===========
</TABLE>
-----------------
(1) Non-interest income of the Banking segment includes a $5.0 million
writedown of the residual interests in securitizations arising from the
Company's subprime mortgage securitizations completed in 1999.
9
<PAGE>
For the reportable segment information presented, substantially all
expenses are recorded directly to each industry segment. For the three and six
months ended June 30, 1999, segment results differ from the consolidated results
because the Company used its internal transfer pricing to allocate certain
revenues or expenses from the mortgage segment to the banking segment. With the
discontinuance of the mortgage operations, the Company ceased this internal
allocation and, accordingly, there were no differences between segment results
and consolidated results during the three and six months ended June 30, 2000:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
----------------------------- -----------------------------
2000 1999 2000 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net interest income for reportable segments $ 7,266 $ 6,595 $ 13,949 $ 13,004
Net interest income allocated to discontinued operations -- (1,146) -- (2,309)
-------------- -------------- -------------- --------------
Consolidated net interest income $ 7,266 $ 5,449 $ 13,949 $ 10,695
============== ============== ============== ==============
Non-interest income for reportable segments $ (4,764) $ 574 $ (4,525) $ 1,304
Non-interest income allocated to discontinued operations -- (320) -- (770)
-------------- -------------- -------------- --------------
Consolidated non-interest income $ (4,764) $ 254 $ (4,525) $ 534
============== ============== ============== ==============
Non-interest expense for reportable segments $ 5,480 $ 4,570 $ 10,636 $ 8,896
Non-interest expense allocated to discontinued operations -- -- -- 100
-------------- -------------- -------------- --------------
Consolidated non-interest expense $ 5,480 $ 4,570 $ 10,636 $ 8,996
============== ============== ============== ==============
Segment profit for reportable segments $ (2,983) $ 2,400 $ (1,289) $ 5,141
Loss allocated to discontinued operations -- (1,466) -- (3,179)
-------------- -------------- -------------- --------------
Consolidated income from continuing operations before
income taxes $ (2,983) $ 934 $ (1,289) $ 1,962
============== ============== ============== ==============
Total assets of reportable segments $389,943 $202,303 $ 389,943 $202,303
Total assets allocated to discontinued operations 28,627 214,341 28,627 214,341
-------------- -------------- -------------- --------------
Consolidated total assets $418,570 $416,644 $ 418,570 $416,644
============== ============== ============== ==============
</TABLE>
6. Residual Interests in Securitizations
The Company classifies its residual interest in securitizations as
trading securities and records them at fair market value with any unrealized
gains or losses recorded in the results of operations. At June 30, 2000,
residual interests in securitizations were $15.6 million compared with $21.2
million at December 31, 1999.
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 commensurate with the risks involved. The Company
uses prepayment and default assumptions that market participants would use for
the similar instruments subject to prepayment, credit and interest rate risks.
The assumptions used by the Company for valuing the residual interests
included prepayment assumptions of 5% for the first year increasing to 30%-42%
thereafter, a discount rate of 15% and annual credit loss assumptions of 1.90%
and 0.95% for the 1999-1 and 1999-2 residual interests, respectively. For its
1999-1 residual interests, the Company increased the credit loss assumption from
0.95% to 1.90% during the second quarter of 2000.
10
<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 United PanAm Financial Corp.'s (the "Company") strategies,
plans, objectives, expectations and intentions, may include forward-looking
information within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
These forward-looking statements involve certain risks and uncertainties that
could cause actual results to differ materially from those expressed or implied
in such forward-looking statements. Such risks and uncertainties include, but
are not limited to, the following factors: limited operating history; loans made
to credit-impaired borrowers; need for additional sources of financing;
concentration of business in California; estimates involving discontinued
operations; valuation of residuals; interests in securitizations; reliance on
operational systems and controls and key employees; competitive pressure in the
banking industry; changes in the interest rate environment; rapid growth of the
Company's businesses; dependence on whole loan sale markets; general economic
conditions; and other risks, some of which may be identified from time to time
in the Company's filings with the Securities and Exchange Commission (the
"SEC").
General
The Company
The Company is a diversified specialty finance company engaged
primarily in originating and acquiring insurance premium finance contracts and
retail automobile installment sales contracts financed by retail bank deposits.
The Company markets to customers who generally cannot obtain financing from
traditional lenders. These customers usually pay higher loan origination fees
and interest rates than those charged by traditional lenders to gain access to
consumer financing. The Company has funded its operations to date principally
through retail deposits, 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") and in 1996, the Company commenced its automobile
finance business.
In December 1999, the Company decided to close its subprime mortgage
finance operations to focus on its auto lending and insurance premium finance
businesses. This business originated and sold or securitized subprime mortgage
loans secured primarily by first mortgages on single family residences. In
connection with the discontinuance of the mortgage finance division, all related
operating activity is treated as discontinued operations for financial statement
reporting purposes. See "Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Discontinued Operations --
Mortgage Finance."
The Company recently made an investment relating to the development of
a money transfer service through its new subsidiary, WorldCash Technologies,
Inc. ("WCT"). WCT's current plan is to develop an international money transfer
business initially dedicated to serving the Hispanic community. This investment
has yet to have a material impact on the Company's operations.
11
<PAGE>
Automobile Finance
In 1996, the Bank commenced its automobile finance business through its
subsidiary, United Auto Credit Corporation ("UACC"). UACC acquires, holds for
investment and services nonprime retail automobile installment sales contracts
("auto contracts") generated by franchised and independent dealers of used
automobiles. UACC's customers are considered "nonprime" 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.
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
private passenger automobile and small business insurance premiums in California
and BPN markets the financing program and services the loans for the Bank. The
Bank lends to individuals or small businesses for the purchase of single premium
insurance policies and the Bank's collateral is the unearned insurance premium
held by the insurance company. The unearned portion of the insurance premium is
refundable to IPF in the event the underlying insurance policy is canceled. The
Company does not sell or have the risk of underwriting the underlying insurance
policy.
As a result of BPN performing substantially all marketing and servicing
activities, the Company's role is primarily that of an underwriter and funder of
loans. Therefore, IPF's income is generated primarily on a spread basis,
supplemented by non-interest income generated from late payment and returned
check fees. The Bank uses this income to cover the costs of underwriting and
loan administration, including compensation, occupancy and data processing
expenses.
The Bank
The Company has funded its operations to date primarily through the
Bank's deposits, FHLB advances, mortgage warehouse lines of credit and loan
sales and securitizations. As of June 30, 2000, the Bank was a five-branch
federal savings Bank with $299.2 million in deposits. The loans generated by the
Company's insurance premium and automobile finance businesses currently are
funded and held by the Bank. In addition, the Bank holds a portfolio of
primarily traditional residential mortgage loans acquired from the RTC in 1994
and 1995 at a discount from the unpaid principal balance of such loans, which
loans aggregated $18.5 million in principal amount (before unearned discounts
and premiums) at June 30, 2000.
The Bank generates spread income not only from loans originated or
purchased by each of the Company's principal businesses, but also from loans
purchased from the RTC, its securities portfolio and consumer loans originated
by its retail deposit branches. This income is supplemented by non-interest
income from its branch banking activities (e.g., deposit service charges, safe
deposit box fees), and is used to cover operating costs and other expenses.
12
<PAGE>
Average Balance Sheets
The following table sets forth information relating to the Company for
the three and six months ended June 30, 2000 and 1999. The yields and costs are
derived by dividing income or expense by the average balance of assets or
liabilities allocated to continuing operations, respectively, for the periods
shown. The yields and costs include fees which are considered adjustments to
yields.
<TABLE>
<CAPTION>
Three Months Ended June 30,
-----------------------------------------------------------------------------------
2000 1999
----------------------------------------- -----------------------------------------
Average Average
(Dollars in thousands) Average Yield/ Average Yield/
Balance(1)(2) Interest(1) Cost Balance(1)(2) Interest(1) Cost
------------ ------------ ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest earning assets
Securities $137,769 $ 2,261 6.57% $ 42,037 $ 428 4.07%
Mortgage loans, net(3) 19,189 422 8.79% 27,164 572 8.42%
IPF loans, net(4) 29,875 1,169 15.64% 40,588 1,375 13.55%
Automobile installment
contracts, net(5) 117,092 6,789 23.19% 77,824 4,588 23.58%
------------ ------------ ------------- -------------
Total interest earning assets 303,924 10,641 14.01% 187,613 6,962 14.84%
------------ -------------
Non-interest earning assets 35,449 34,754
------------ -------------
Total assets $339,373 $222,367
============ =============
Liabilities and Equity
Interest bearing liabilities
Customer deposits $234,555 $ 3,139 5.38% $120,183 $1,439 4.80%
FHLB advances 14,284 236 6.63% 6,079 74 4.89%
------------ ------------ ------------- -------------
Total interest bearing
liabilities 248,839 3,375 5.46% 126,262 1,513 4.81%
------------ -------------
Non-interest bearing liabilities 14,272 14,840
------------ -------------
Total liabilities 263,111 141,102
Equity 76,262 81,265
------------ -------------
Total liabilities and equity $339,373 $222,367
============ =============
Net interest income before
provision for loan losses $ 7,266 $5,449
============ =============
Net interest rate spread(6) 8.55% 10.03%
Net interest margin(7) 9.62% 11.65%
Ratio of interest earning assets to
interest bearing liabilities 122% 149%
</TABLE>
--------------------
(1) The table above excludes average assets and liabilities of the Company's
mortgage operations, as interest income and interest expense associated
with the subprime mortgage finance business are reported as discontinued
operations in the unaudited consolidated statements of operations as
follows:
<TABLE>
<CAPTION>
Three Months Ended June 30,
----------------------------------
2000 1999
---------------- ---------------
<S> <C> <C>
Average assets of continuing operations $339,373 $222,367
Average mortgage loans of discontinued operations 62,248 222,138
---------------- ---------------
Total average assets $401,621 $444,505
================ ===============
Average liabilities and equity of continuing operations $339,373 $222,367
Average customer deposits allocated to discontinued operations 61,558 191,697
Average warehouse lines of credit of discontinued operations 690 30,441
---------------- ---------------
Total average liabilities and equity $401,621 $444,505
================ ===============
</TABLE>
(2) Average balances are measured on a month-end basis.
(3) Net of deferred loan origination fees, unamortized discounts, premiums and
allowance for estimated loan losses; includes non-performing loans.
(4) Net of allowance for estimated losses; includes non-performing loans.
(5) Net of unearned finance charges and allowance for estimated losses;
includes non-performing loans.
(6) Net interest rate spread represents the difference between the yield on
interest earning assets and the cost of interest bearing liabilities.
(7) Net interest margin represents net interest income divided by average
interest earning assets.
13
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended June 30,
-----------------------------------------------------------------------------------
2000 1999
----------------------------------------- -----------------------------------------
Average Average
(Dollars in thousands) Average Yield/ Average Yield/
Balance(1)(2) Interest(1) Cost Balance(1)(2) Interest(1) Cost
------------ ------------ ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest earning assets
Securities $91,848 $ 2,972 6.47% $ 41,924 $ 954 4.55%
Mortgage loans, net(3) 19,800 843 8.51% 32,152 1,370 8.52%
IPF loans, net(4) 29,987 2,297 15.32% 41,775 2,791 13.36%
Automobile installment
Contracts, net(5) 111,339 12,915 23.20% 73,034 8,594 23.53%
------------ ------------ ------------- -------------
Total interest earning assets 252,974 19,027 15.04% 188,885 13,709 14.52%
------------ -------------
Non-interest earnings assets 35,695 37,338
------------ -------------
Total assets $288,669 $226,223
============ =============
Liabilities and Equity
Interest bearing liabilities
Customer deposits $190,540 $ 4,842 5.11% $120,691 $ 2,804 4.69%
FHLB advances 7,142 236 6.63% 8,505 210 4.97%
------------ ------------ ------------- -------------
Total interest bearing
liabilities 197,682 5,078 5.17% 129,196 3,014 4.70%
------------ -------------
Non-interest bearing liabilities 14,583 15,567
------------ -------------
Total liabilities 212,535 144,763
Equity 76,134 81,460
------------ -------------
Total liabilities and equity $288,669 $226,223
============ =============
Net interest income before provision
for loan losses $13,949 $10,695
============ =============
Net interest rate spread(6) 9.87% 9.82%
Net interest margin(7) 11.09% 11.42%
Ratio of interest earning assets to
interest bearing liabilities 128% 146%
</TABLE>
--------------------
(1) The table above excludes average assets and liabilities of the Company's
mortgage operations, as interest income and interest expense associated
with the subprime mortgage finance business are reported as discontinued
operations in the unaudited consolidated statements of operations as
follows:
<TABLE>
<CAPTION>
Six Months Ended June 30,
----------------------------------
2000 1999
---------------- ---------------
<S> <C> <C>
Average assets of continuing operations $288,669 $226,223
Average mortgage loans of discontinued operations 105,230 227,035
---------------- ---------------
Total average assets $393,899 $453,258
================ ===============
Average liabilities and equity of continuing operations $288,669 $226,223
Average customer deposits allocated to discontinued operations 103,305 199,727
Average warehouse lines of credit of discontinued operations 1,925 27,308
---------------- ---------------
Total average liabilities and equity $393,899 $453,258
================ ===============
</TABLE>
(2) Average balances are measured on a month-end basis.
(3) Net of deferred loan origination fees, unamortized discounts, premiums and
allowance for estimated loan losses; includes non-performing loans.
(4) Net of allowance for estimated losses; includes non-performing loans.
(5) Net of unearned finance charges and allowance for estimated losses;
includes non-performing loans.
(6) Net interest rate spread represents the difference between the yield on
interest earning assets and the cost of interest bearing liabilities.
(7) Net interest margin represents net interest income divided by average
interest earning assets.
Comparison of Operating Results for the Three Months Ended June 30, 2000 and
June 30, 1999
General
For the quarter, the Company reported a loss from continuing operations
of $1.8 million, or $0.11 per diluted share, compared with income from
continuing operations of $550,000, or $0.03 per diluted share for the same
period a year ago. Including discontinued operations, the Company reported a net
loss of $5.1 million, or $0.31 per diluted share, compared with net income of
$495,000, or $0.03 per diluted share, for the same period a year ago.
14
<PAGE>
Contributing to the 2000 second quarter net loss were two charges
relating to the Company's subprime mortgage activities that were discontinued
during early 2000.
A pre-tax charge of $5.0 million, approximately $3.1 million on an
after-tax basis, was recorded during the 2000 second quarter to write-down the
value of the Company's residual interests arising from its 1999-1 subprime
mortgage securitization. The Company increased the prepayment and loss
assumptions related to this securitization as a result of actual experience that
was higher than previously estimated.
The Company also recorded a charge of $3.3 million, on an after-tax
basis, in the 2000 second quarter in connection with a write-down of the
Company's remaining subprime mortgage loan portfolio to estimated market value.
This write-down was a result of price deterioration primarily in the Company's
subprime non-performing mortgage portfolio and, to a lesser extent, from credit
losses associated with other performing subprime mortgage loans.
Auto contracts purchased increased from $30.4 million for the three
months ended June 30, 1999 to $42.7 million for the three months ended June 30,
2000, while insurance premium finance originations decreased from $27.3 million
for the three months ended June 30, 1999 to $21.8 million for the three months
ended June 30, 2000.
Interest Income
Interest income increased from $7.0 million for the three months ended
June 30, 1999 to $10.6 million for the three months ended June 30, 2000, due
primarily to a $116.3 million increase in average interest earning assets,
partially offset by a 0.83% 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 $39.3
million and investment securities, which increased $95.7 million. The increase
in auto contracts principally resulted from the purchase of additional dealer
contracts in existing and new markets consistent with the planned growth of this
business unit. The increase in investment securities was a result of an increase
in the Company's liquidity, reflecting the proceeds received from the sale of
loans of the discontinued mortgage business.
The decline in the average yield on interest earning assets was
principally due to the increase in securities, which have lower yields compared
to loans. Average securities, with an average yield of 6.57%, comprised 45.3% of
average interest earning assets at June 30, 2000 compared to 22.4% of average
interest earning assets at June 30, 1999.
Interest Expense
Interest expense increased from $1.5 million for the three months ended
June 30, 1999 to $3.4 million for the three months ended June 30, 2000, due to a
$122.6 million increase in average interest bearing liabilities and a 0.65%
increase in the weighted average interest rate on interest bearing liabilities.
The largest component of growth in average interest bearing liabilities was
deposits of the Bank, which increased from an average balance of $120.2 million
during the quarter ended June 30, 1999 to $234.6 million during the quarter
ended June 30, 2000. The increase in average deposits was due primarily to the
reallocation of average deposits to continuing operations compared to the year
ago quarter, as sales of subprime mortgage loans (discontinued operations)
reduced the average deposits allocated to these discontinued operations. The
average cost of deposits increased from 4.80% for the three months ended June
30, 1999 to 5.38% for the three months ended June 30, 2000, generally as a
result of an increase in market interest rates and the repricing of deposits to
these higher market rates.
15
<PAGE>
Provision for Loan Losses
Provision for loan losses was $5,000 for the three months ended June
30, 2000 compared to $199,000 for the three months ended June 30, 1999. The
provision for loan losses reflects estimated losses associated with the
Company's insurance premium finance business. The total allowance for loan
losses was $17.8 million at June 30, 2000 compared with $12.5 million at June
30, 1999, representing 10.07% of loans held for investment at June 30, 2000 and
8.01% at June 30, 1999. Annualized net charge-offs to average loans were 3.23%
for the three months ended June 30, 2000 compared with 2.24% for the three
months ended June 30, 1999.
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 $5.0 million from $254,000 for the three
months ended June 30, 1999 to a loss of $4.8 million for the three months ended
June 30, 2000 as a result a $5.0 million pre-tax write-down of the value of
residual interests in securitizations. The write-down principally resulted from
increasing the prepayment and loss assumptions related to the 1999-1 subprime
mortgage securitization as a result of actual experience that was higher than
previously estimated.
Non-interest Expense
Non-interest expense increased $910,000 from $4.6 million for the three
months ended June 30, 1999 to $5.5 million for the three months ended June 30,
2000. The increase in non-interest expense was driven primarily by an increase
in salaries, employee benefit costs and occupancy expenses associated with the
planned growth of the auto finance business segment. During the last 12 months,
the Company expanded its automobile finance operations, resulting in an increase
from 124 employees in 18 offices, as of June 30, 1999, to 172 employees in 24
offices, as of June 30, 2000.
Income Taxes
Income taxes decreased $1.5 million from $384,000 for the three months
ended June 30, 1999 to a benefit of $1.2 million for the three months ended June
30, 2000. This decrease occurred as a result of a $3.9 million decrease in
income from continuing operations before income taxes between the two periods
and a decrease in the effective tax rate from 41.1% for the three months ended
June 30, 1999 to 38.8% for the three months ended June 30, 2000. The decline in
the effective tax rate reflects the limitation on the use of taxable net
operating losses in California.
16
<PAGE>
Discontinued Operations -- Mortgage Finance
As announced on February 9, 2000, the Company discontinued its subprime
mortgage origination operations. All related operating activity of the mortgage
operations has been reclassified and reported as discontinued operations in the
Company's consolidated financial statements. In connection with the wind down of
these operations, the Company originated $189,000 in mortgage loans during the
second quarter of 2000 compared with $254.7 million during the comparable
quarter of 1999. Loan sales in the second quarter of 2000 were $32.3 million,
which contributed to the decline in loans held for sale from $56.7 million at
March 31, 2000 to $20.7 million at June 30, 2000.
A loss from discontinued operations, net of tax, of $54,000 was
recorded in the second quarter of 1999 reflecting the operating activity for
these operations during this period. All activities related to discontinued
operations in the second quarter of 2000 were charged to the Company's
discontinued operations reserve.
A $3.3 million, net of tax, charge for the estimated loss on disposal
of the Company's subprime mortgage finance business was recorded during the
quarter ended June 30, 2000. The estimated loss on disposal includes a write-
down of the Company's remaining subprime mortgage loan portfolio to estimated
market value as a result of price deterioration primarily in the subprime non-
performing mortgage portfolio and, to a lesser extent, from credit losses
associated with other performing subprime mortgage loans. No such charge was
recorded during the prior year quarter.
In determining net interest income charged to discontinued operations,
the Company included all interest income from its mortgage finance business less
an allocation for interest expense. The Company allocated average deposits of
$61.6 million and $191.7 million for the three months ended June 30, 2000 and
1999, respectively, and average warehouse lines of credit of $690,000 and $30.4
million for the three months ended June 30, 2000 and 1999, respectively, to the
discontinued mortgage operations in computing interest expense.
Comparison of Operating Results for the Six Months Ended June 30, 2000 and June
30, 1999
General
For the six months ended June 30, 2000, the Company reported a loss
from continuing operations of $823,000, or $0.05 per diluted share. This
compares with income from continuing operations of $1.2 million, or $0.06 per
diluted share, for the comparable period a year ago. Including discontinued
operations, the Company reported a net loss of $4.1 million, or $0.25 per
diluted share, for the six months ended June 30, 2000, compared with net income
of $1.3 million, or $0.07 per diluted share, for the same period a year ago.
Contributing to the six month period net loss were two charges relating
to the Company's subprime mortgage activities that were discontinued during
early 2000.
A pre-tax charge of $5.0 million, approximately $3.1 million on an
after-tax basis, was recorded during the 2000 second quarter to write-down the
value of the Company's residual interest arising from its 1999-1 subprime
mortgage securitization. The Company increased the prepayment and loss
assumptions related to this securitization as a result of actual experience that
was higher than previously estimated.
The Company also recorded a charge of $3.3 million, on an after-tax
basis, in the 2000 second quarter in connection with a write-down of the
Company's remaining subprime mortgage loan portfolio to
17
<PAGE>
estimated market value. This write-down was a result of further price
deterioration primarily in the Company's subprime non-performing mortgage
portfolio and, to a lesser extent, from credit losses associated with other
performing subprime mortgage loans.
Auto contracts purchased increased from $58.5 million for the six
months ended June 30, 1999 to $83.0 million for the six months ended June 30,
2000, while insurance premium finance originations decreased from $60.8 million
for the six months ended June 30, 1999 to $46.8 million for the six months ended
June 30, 2000.
Interest Income
Interest income increased from $13.7 million for the six months ended
June 30, 1999 to $19.0 million for the six months ended June 30, 2000, due
primarily to a $64.1 million increase in average interest earning assets and a
0.52% increase 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 $38.3 million and securities,
which increased $49.9 million. The increase in auto contracts principally
resulted from the purchase of additional dealer contracts in existing and new
markets consistent with the planned growth of this business unit. The increase
in securities was a result of an increase in the Company's liquidity, reflecting
the proceeds received from the sale of loans of the discontinued mortgage
business.
The improvement in the average yield on interest earning assets was
principally due to an increased concentration of higher yielding loans in the
six months ended June 30, 2000 compared to the six months ended June 30, 1999.
Average automobile installment contracts, with an average yield of 23.20%,
comprised 44.0% of average interest earning assets at June 30, 2000 compared to
38.7% of average interest earning assets at June 30, 1999. Also contributing to
the increase in the average yield was an increase in the yield on securities
from 4.55% during the six months ended June 30, 1999 to 6.47% during the six
months ended June 30, 2000.
Interest Expense
Interest expense increased from $3.0 million for the six months ended
June 30, 1999 to $5.1 million for the six months ended June 30, 2000, due to a
$68.5 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 $120.7 million during the six
months ended June 30, 1999 to $190.5 million during the six months ended June
30, 2000. The increase in average deposits was due primarily to the reallocation
of average deposits to continuing operations compared to the year ago period, as
sales of subprime mortgage loans (discontinued operations) reduced the average
deposits allocated to these discontinued operations. The average cost of
deposits increased for the six months ended June 30, 1999 from 4.69% to 5.11%
for the comparable period in 2000, generally as a result of an increase in
market interest rates and the repricing of deposits to these higher market
rates.
Provision for Loan Losses
Provision for loan losses was $77,000 for the six months ended June 30,
2000 compared to $271,000 for the six months ended June 30, 1999. The provision
for loan losses reflects estimated losses associated with the Company's
insurance premium finance business. The total allowance for loan losses was
$17.8 million at June 30, 2000 compared with $12.5 million at June 30, 1999,
representing 10.07% of loans held for investment at June 30, 2000 and 8.01% at
June 30, 1999. Annualized net charge-offs to average loans were 2.78% for the
six months ended June 30, 2000, compared with 2.68% for the six months ended
June 30, 1999.
18
<PAGE>
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 of 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 $5.1 million, from $534,000 for the six
months ended June 30, 1999 to a loss of $4.5 million for the six months ended
June 30, 2000 as a result of a $5.0 million pre-tax write-down of the value of
residual interests in securitizations. The write-down principally resulted from
increasing the prepayment and loss assumptions related to the 1999-1 subprime
mortgage securitization as a result of actual experience that was higher than
previously estimated.
Non-interest Expense
Non-interest expense increased $1.6 million, from $9.0 million for the
six months ended June 30, 1999 to $10.6 million for the six months ended June
30, 2000. The increase in non-interest expense was driven primarily by an
increase in salaries, employee benefit costs and occupancy expenses associated
with the planned growth of the auto finance business segment. During the last 12
months, the Company expanded its automobile finance operations, resulting in an
increase from 124 employees in 18 offices, as of June 30, 1999 to 172 employees
in 24 offices, as of June 30, 2000.
Income Taxes
Income taxes decreased $1.3 million, from $807,000 for the six months
ended June 30, 1999 to a benefit of $466,000 for the six months ended June 30,
2000. This decrease occurred as a result of a $3.3 million decrease in income
from continuing operations before income taxes between the two periods and a
decrease in the effective tax rate from 41.1% for the six months ended June 30,
1999 to 36.2% for the six months ended June 30, 2000. The decline in the
effective tax rate reflects the limitation on the use of taxable net operating
losses in California.
Discontinued Operations -- Mortgage Finance
As announced on February 9, 2000, the Company discontinued its subprime
mortgage origination operations. In connection with the wind down of these
operations, the Company originated $76.4 million in mortgage loans during the
first six months of 2000 compared with $462.4 million during the comparable
period of 1999. Loan sales in the first six months of 2000 were $181.1 million,
which contributed to the decline in loans held for sale from $136.5 million at
December 31, 1999 to $20.7 million at June 30, 2000.
Income from discontinued operations, net of tax, was $141,000 in the
first six months of 1999 reflecting the operating activity for these operations
during this period. All activities related to discontinued operations in the
first six months of 2000 were charged to the Company's discontinued operations
reserve.
19
<PAGE>
A $3.3 million, net of tax, charge for the estimated loss on disposal
of the Company's subprime mortgage origination business was recorded during the
six months ended June 30, 2000. The estimated loss on disposal includes a write-
down of the Company's remaining subprime mortgage loan portfolio to estimated
market value as a result of price deterioration primarily in the subprime non-
performing mortgage portfolio and, to a lesser extent, from credit losses
associated with other performing subprime mortgage loans. No such charge was
recorded during the prior year period.
In determining net interest income charged to discontinued operations,
the Company included all interest income from its mortgage finance business less
an allocation for interest expense. The Company allocated average deposits of
$103.3 million and $199.7 million for the six months ended June 30, 2000 and
1999, respectively, and average warehouse lines of credit of $1.9 million and
$27.3 million for the six months ended June 30, 2000 and 1999, respectively, to
the discontinued mortgage operations in computing interest expense.
Comparison of Financial Condition at June 30, 2000 and December 31, 1999
Total assets decreased $19.7 million, from $438.3 million at December
31, 1999 to $418.6 million at June 30, 2000. This decrease occurred primarily as
a result of a $97.2 million decrease in loans, from $294.7 million at December
31, 1999 to $197.5 million at June 30, 2000, partially offset by an $80.9
million increase in cash and securities, from $100.3 million at December 31,
1999 to $181.2 million at June 30, 2000. The decrease in loans was comprised of
a $115.8 million decrease in subprime mortgage loans as a result of the
Company's closure of its subprime mortgage origination operations and a $2.5
million decrease in loans purchased from the RTC as a result of scheduled
principal amortization and prepayments, offset by an $23.9 million increase (net
of unearned finance charges) in auto contracts.
Cash and cash equivalents decreased $59.8 million, from $90.4 million
at December 31, 1999 to $30.6 million at June 30, 2000. Securities available for
sale increased from $9.9 million at December 31, 1999 to $140.6 million at June
30, 2000. Securities held to maturity were $10.0 million at June 30, 2000. There
were no securities held to maturity at December 31, 1999. These increases
reflected the reinvestment of the proceeds received from sales of loans of the
discontinued mortgage business.
Residual interests in securitizations consist of beneficial interests
in the form of an interest-only strip representing the subordinated right to
receive cash flows from a pool of securitized loans after payment of required
amounts to the holders of the securities and certain costs associated with the
securitization. The Company's residual interests were $15.6 million at June 30,
2000 compared to $21.2 million at December 31, 1999. These residual interests
were recorded in connection with two mortgage loan securitizations completed in
1999. Valuations of the residual interests are based on discounted cash flow
analyses using prepayment and default assumptions that market participants would
use for similar instruments subject to prepayment, credit and interest rate
risks. A $5.0 million pre-tax write-down of the value of residual interests in
securitizations was recorded during the second quarter of 2000. The write-down
reflects an increase in the prepayment and loss assumptions related to the 1999-
1 securitization as a result of actual experience that was higher than
previously estimated.
Deposits increased $6.2 million, from $291.9 million at December 31,
1999 to $298.1 million at June 30, 2000. Retail deposits increased $7.5 million,
from $276.2 million at December 31, 1999 to $283.7 million at June 30, 2000,
reflecting the continued financing of the Company's automobile and insurance
premium finance business segments through the Bank's five-branch network.
Wholesale deposits decreased $1.3 million, from $15.8 million at December 31,
1999 to $14.5 million at June 30, 2000.
20
<PAGE>
Other interest bearing liabilities include warehouse lines of credit
and Federal Home Loan Bank advances. Warehouse lines of credit were $54.4
million at December 31, 1999. There were no outstanding balances at June 30,
2000 as proceeds from sales of subprime mortgage loans were used to paydown
outstanding balances. Outstanding Federal Home Loan Bank advances were $35
million at June 30, 2000. There were no outstanding Federal Home Loan Bank
advances at December 31, 1999.
Shareholders' equity decreased from $75.4 million at December 31, 1999
to $71.6 million at June 30, 2000, primarily as a result of a net loss of $4.1
million during the six months ended June 30, 2000.
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 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, 2000, the most recent date for which the relevant OTS NPV
model is available, the Bank's sensitivity measure resulting from a 200 basis
point decrease in interest rates was 7 basis points and would result in a
$823,000 increase in the NPV of the Bank and a 200 basis point increase in
interest rates was 40 basis points and would result in a $2.4 million decrease
in the NPV of the Bank. At March 31, 2000, the Bank's sensitivity measure was
below the threshold at which the Bank could be required to hold additional risk-
based capital under OTS regulations.
Although the NPV measurement provides an indication of the Bank's
interest rate risk exposure at a particular point in time, such measurement is
not intended to and does not provide a precise forecast of the effect of changes
in market interest rates on the Bank's net interest income and will differ from
actual
21
<PAGE>
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, 2000 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
------------------- ------------ ------------ ------------ -------------- ---------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
+300 bp $52,758 $ (4,350) -8% 13.23% -78 bp
+200 bp 54,728 (2,380) -4% 13.61% -40 bp
+100 bp 56,229 (879) -2% 13.88% -13 bp
0 bp 57,108 -- -- 14.01% --
-100 bp 57,427 319 +1% 14.03% +2 bp
-200 bp 57,931 823 +1% 14.08% +7 bp
-300 bp 59,899 2,791 +5% 14.43% +42 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 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, monitors rates and terms of competing sources of funds to
use the most cost-effective source of funds wherever possible.
Sales and securitizations of loans were one of the primary sources of
funds for the Company's subprime mortgage operations. Cash flows from sales and
securitizations of loans were $178.4 million during the six months ended June
30, 2000 and $439.2 million during the six months ended June 30, 1999.
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, 2000, such retail deposits were $283.7 million or 95.2%
of total deposits.
The Bank uses wholesale and broker-originated deposits to supplement
its retail deposits and, at June 30, 2000, wholesale deposits were $14.5 million
or 4.8% of total deposits. The Bank solicits wholesale deposits by posting its
interest rates on a national on-line service which advertises the Bank's
wholesale products to investors. Generally, most of the wholesale deposit
account holders are institutional investors,
22
<PAGE>
commercial businesses or public sector entities. Broker deposits are originated
through major dealers specializing in such products.
The following table sets forth the balances and rates paid on each
category of deposits for the dates indicated.
<TABLE>
<CAPTION>
December 31,
June 30, --------------------------------------------------------------
2000 1999 1998
------------------------------ -------------------------------- -----------------------------
Weighted Weighted Weighted
Average Average Average
Balance Rate Balance Rate Balance Rate
---------------- -------------- --------------- ---------------- --------------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Passbook accounts $ 46,816 4.28% $ 47,151 4.35% $ 37,348 4.05%
Checking accounts 15,202 2.33% 16,764 2.02% 12,171 1.37%
Certificates of deposit
Under $100,000 167,036 5.97% 163,874 5.35% 194,396 5.40%
$100,000 and over 69,025 6.18% 64,155 5.51% 77,753 5.32%
--------------- --------------- ---------------
Total $298,079 5.57% $291,944 5.03% $321,668 5.07%
=============== =============== ===============
</TABLE>
The following table sets forth the time remaining until maturity for
all CDs at June 30, 2000, December 31, 1999 and 1998.
<TABLE>
<CAPTION>
June 30, December 31, December 31,
2000 1999 1998
--------------------- ------------------ ---------------------
(Dollars in thousands)
<S> <C> <C> <C>
Maturity within one year $230,976 $199,110 $242,447
Maturity within two years 4,972 28,770 29,548
Maturity within three years 113 149 154
--------------------- ------------------ ---------------------
Total certificates of deposit $236,061 $228,029 $272,149
===================== ================== =====================
</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, 2000, the Bank exceeded all of its regulatory capital
requirements with tangible capital of $41.7 million, or 10.03% of total adjusted
assets, which is above the required level of $6.2 million, or 1.5%; core capital
of $41.7 million, or 10.03% of total adjusted assets, which is above the
required level of $12.5 million, or 3.0%; and risk-based capital of $29.3
million, or 12.22% of risk-weighted assets, which is above the required level of
$19.2 million, or 8.0%.
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 the Federal Deposit
Insurance Corporation Act of 1991 ("FDICIA"), the Bank is deemed to be "well
capitalized" as of June 30, 2000.
The Company has other sources of liquidity, including FHLB advances and
its liquidity and securities portfolio. Through the Bank, the Company can obtain
advances from the FHLB, collateralized by its securities, mortgage loans
purchased from the RTC and the Bank's FHLB stock. The FHLB functions as a
central reserve bank providing credit for thrifts and certain other member
financial institutions. Advances
23
<PAGE>
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, 2000, the Bank's available
borrowing capacity under this credit facility was $62.8 million.
The following table sets forth certain information regarding the
Company's short-term borrowed funds (consisting of FHLB advances and its
warehouse lines of credit) at or for the periods ended on the dates indicated.
<TABLE>
<CAPTION>
December 31,
June 30, -------------------------------------
2000 1999 1998
------------------ ---------------- ----------------
(Dollars in thousands)
<S> <C> <C> <C>
FHLB advances
Maximum month-end balance $35,000 $ 2,300 $ 34,500
Balance at end of period 35,000 -- --
Average balance for period 7,142 6 13,057
Weighted average interest rate on balance at end of
period 6.68% --% --%
Weighted average interest rate on average balance for
period 6.63% 5.84% 5.10%
Warehouse lines of credit
Maximum month-end balance $26,623 $159,342 $ 95,000
Balance at end of period -- 54,415 --
Average balance for period 3,591 45,404 43,759
Weighted average interest rate on balance at end of
period --% 5.78% --%
Weighted average interest rate on average balance for
period 6.53% 5.84% 6.01%
</TABLE>
The Company had no material contractual obligations or commitments for
capital expenditures at June 30, 2000. At June 30, 2000, the Company had no
outstanding commitments to originate loans, compared to $26.8 million at
December 31, 1999.
RTC Notes Payable
In connection with its acquisition of certain assets from the RTC, the
Bank obtained loans (the "RTC Notes Payable") from the RTC in the aggregate
amount of $10.9 million under the RTC's Minority Interim Capital Assistance
Program provided for in Section 21A(u) of the Federal Home Loan Bank Act, as
amended (the "FHLBA"). The FHLBA gives the RTC authority to provide interim
capital assistance to minority-owned institutions, defined in the FHLBA as more
than fifty percent (50%) owned or controlled by one or more minorities. The
Bank, PAFI and the RTC entered into an Interim Capital Assistance Agreement on
April 29, 1994 with respect to a loan of $6,930,000 and a second Interim Capital
Assistance Agreement on September 9, 1994 with respect to a loan of $4,000,000
(together, the "RTC Agreements"). The RTC Agreements were repaid in single lump
sum installments on April 28, 1999 and September 8, 1999.
Lending Activities
Summary of Loan Portfolio. At June 30, 2000, the Company's loan
portfolio constituted $197.5 million, or 47.2% of the Company's total assets, of
which $176.8 million, or 89.5%, were held for investment and $20.7 million, or
10.5%, 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. Subprime mortgage loans
included in the table below are part of the Company's discontinued mortgage
operations.
24
<PAGE>
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,
2000 1999 1998
------------------ ------------------- ------------------
<S> <C> <C> <C>
Mortgage Loans
Mortgage loans (purchased primarily from RTC)
Held for sale $ -- $ -- $ 18,289
Held for investment 19,303 21,835 14,039
------------------ ------------------- ------------------
Total mortgage loans 19,303 21,835 $ 32,328
------------------ ------------------- ------------------
Subprime mortgage loans
Held for sale 20,678 136,460 196,117
Held for investment 15,183 13,416 17,570
------------------ ------------------- ------------------
Total subprime mortgage loans 35,861 149,876 213,687
------------------ ------------------- ------------------
Total mortgage loans 55,164 171,711 246,015
------------------ ------------------- ------------------
Consumer Loans
Automobile installment contracts 152,207 128,093 83,921
Insurance premium financing 29,447 30,334 44,709
Other consumer loans 743 879 1,245
------------------ ------------------- ------------------
Total consumer loans 182,397 159,306 129,875
------------------ ------------------- ------------------
Total loans 237,561 331,017 375,890
Unearned discounts and premiums (829) (954) (212)
Unearned finance charges (21,430) (21,181) (17,371)
Allowance for loan losses (17,802) (14,139) (10,183)
------------------ ------------------- ------------------
Total loans, net $197,500 $294,743 $348,124
================== =================== ==================
</TABLE>
Loan Maturities. The following table sets forth the dollar amount of
loans maturing in the Company's loan portfolio at June 30, 2000 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, 2000
-------------------------------------------------------------------------------------------------
More Than 1 More Than 3 More Than 5 More Than
One Year Year to Years to Years to 10 Years More Than Total
or Less 3 Years 5 Years 10 Years to 20 Years 20 Years Loans
------------ ------------- ------------- ------------- ------------ ------------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans held
for investment $ 56 $ 595 $ 393 $ 2,607 $13,266 $17,569 $ 34,486
Mortgage loans held
for sale -- -- 38 -- 2,449 18,191 20,678
Consumer loans 34,229 67,106 80,869 193 -- -- 182,397
------------ ------------- ------------- ------------- ------------ ------------- ----------
Total $ 34,285 $ 67,701 $ 81,300 $ 2,800 $15,715 $35,760 $237,561
============ ============= ============= ============= ============ ============= ==========
</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 that do have weaknesses but do not currently
have
25
<PAGE>
sufficient risk to warrant classification in one of the categories described
above are designated as "special mention."
At June 30, 2000, the Company had $648,000 in assets classified as
special mention, $18.1 million of assets classified as substandard, $95,000 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, 2000, December 31, 1999 and 1998.
<TABLE>
<CAPTION>
Loan June 30, % of Total December 31, % of Total December 31, % of Total
Delinquencies 2000 Loans 1999 Loans 1998 Loans
-------------- ---------------- --------------- ------------------ ---------------- ---------------- ---------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
30 to 59 days $ 2,088 1.1% $ 3,071 1.0% $ 9,743 2.8%
60 to 89 days 1,508 0.8% 2,443 0.8% 8,161 2.3%
90+ days 15,511 7.9% 13,307 4.6% 11,424 3.3%
---------------- --------------- ------------------ ---------------- ---------------- ---------------
Total $19,107 9.8% $18,821 6.4% $29,328 8.4%
================ =============== ================== ================ ================ ===============
</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 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, 2000 had no troubled debt restructured
loans.
The following table sets forth the aggregate amount of nonaccrual loans
(net of unearned discounts, premiums, unearned finance charges and specific loss
reserves) at June 30, 2000, December 31, 1999 and 1998.
<TABLE>
<CAPTION>
December 31,
June 30, -------------------------------------
2000 1999 1998
------------------ ------------------ -----------------
(Dollars in thousands)
<S> <C> <C> <C>
Nonaccrual loans
Single-family residential $13,224 $15,825 $19,242
Multi-family residential and commercial -- 100 214
Consumer and other loans 645 1,060 1,168
----------------- ------------------ ------------------
Total $13,869 $16,985 $20,624
================= ================== ==================
Nonaccrual loans as a percentage of
Total loans held for investment 7.84% 10.73% 15.42%
Total assets 3.31% 3.88% 4.85%
Allowance for loan losses as a percentage of
Total loans held for investment 10.07% 8.93% 7.62%
Nonaccrual loans 128.36% 83.24% 49.37%
</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 $2.7 million at June
30, 2000, $2.6 million at December 31, 1999 and $1.9 million at December 31,
1998, and consisted entirely of one to four family residential properties.
26
<PAGE>
Allowance for Loan Losses. The following is a summary of the changes
in the consolidated allowance for loan losses of the Company for the periods
indicated.
<TABLE>
<CAPTION>
At or For the
At or For the Year Ended
Six Months Ended December 31,
June 30, -------------------------------------
2000 1999 1998
------------------ ----------------- ------------------
(Dollars in thousands)
<S> <C> <C> <C>
Allowance for Loan Losses
Balance at beginning of period $14,139 $ 10,183 $ 6,487
Provision for loan losses - continuing operations 77 432 293
Provision for loan losses - discontinued operations 2,396 7,376 5,560
Charge-offs
Mortgage loans (1,287) (7,525) (4,536)
Consumer loans (2,672) (4,395) (3,793)
------------------ ----------------- ------------------
(3,959) (11,920) (8,329)
Recoveries
Mortgage loans 81 296 452
Consumer loans 169 414 1,138
------------------ ----------------- ------------------
250 710 1,590
------------------ ----------------- ------------------
Net charge-offs (3,709) (11,210) (6,739)
Acquisition discounts allocated to loss allowance 4,899 7,358 4,582
------------------ ----------------- ------------------
Balance at end of period $17,802 $ 14,139 $ 10,183
================== ================= ==================
Annualized net charge-offs to average loans 2.78% 2.89% 1.73%
Ending allowance to period end loans, net 10.07% 8.93% 7.62%
</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. No loss provision is made for
loans held for sale.
The determination of the adequacy of the allowance for loan losses is
based on a variety of factors, including an assessment of the credit risk
inherent in the portfolio, prior loss experience, the levels and trends of non-
performing loans, the concentration of credit, current and prospective economic
conditions and other factors.
The Company's management uses its best judgment in providing for
possible loan losses and establishing allowances for loan losses. However, the
allowance is an estimate, which is inherently uncertain and depends on the
outcome of future events. In addition, regulatory agencies, as an integral part
of their examination 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 January 2000 and no adjustment 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 and investment income purposes. Cash equivalents and
securities satisfy regulatory requirements for liquidity.
27
<PAGE>
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, ------------------------------------------
2000 1999 1998
------------------ ------------------ -------------------
(Dollars in thousands)
<S> <C> <C> <C>
Balance at end of period
Overnight deposits $ 26,107 $ 85,500 $ 47,000
U.S. agency securities 140,562 9,918 --
Mutual funds 10,000 -- --
------------------ ------------------ -------------------
Total $176,669 $ 95,418 $ 47,000
================== ================== ===================
Weighted average yield at end of period
Overnight deposits 6.67% 3.25% 3.00%
U.S. agency securities 6.61% 7.11% --%
Mutual funds 6.29% --% --%
Weighted average maturity at end of period
Overnight deposits 1 day 1 day 1 day
U.S. agency securities 8 months 62 months --
Mutual funds 1 day -- --
</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 auto loans are made to individuals with impaired or limited credit
histories, limited documentation of income or higher debt-to-income ratios than
are permitted by traditional lenders. If the Company experiences higher losses
than anticipated, the Company's financial condition, results of operations and
business prospects would be materially and adversely affected.
Need for Additional Financing
The Company's ability to maintain or expand its current level of
lending activity will depend on the availability and terms of its sources of
financing. The Company has funded its operations to date principally through
deposits, FHLB advances, mortgage warehouse lines of credit, loan
securitizations, and whole loan sales. 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 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
28
<PAGE>
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.
Discontinued Operations
The Company discontinued its mortgage origination operations in
December 1999 and recorded a loss on disposal of $6.2 million, net of tax, in
its 1999 financial statements and $3.3 million, net of tax, during the second
quarter of 2000. The loss was estimated based on the Company's plans for
discontinuing these operations during the remainder of 2000. If the estimated
loss on discontinued operations is higher than anticipated, additional charges
may be required in subsequent periods' results of operations. If these charges
are significant, they could have a material adverse effect on the Company's
financial condition, results of operations and business prospects.
Residual Interests in Securitizations
The Company completed two securitizations during 1999, and as part of
these securitizations has residual interests of $15.6 million at June 30, 2000.
The residual interests are comprised of beneficial interests in the form of an
interest-only strip representing the subordinated right to receive cash flows
from the pool of securitized loans after payment of required amounts to the
holders of the securities and certain costs associated with the securitization.
Valuation of the retained interests in securitizations at each reporting period
are based on discounted cash flow analyses using prepayment, default and
interest rate assumptions that market participants would use for similar
instruments. If actual prepayments and defaults in the securitizations are
different than estimates used by the Company for valuing its retained interests,
it could have a material adverse effect on the Company's financial conditions,
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.
29
<PAGE>
Competition
Each of the Company's businesses is highly competitive. Competition in
the Company's markets can take many forms, including convenience in obtaining a
loan, customer service, marketing and distribution channels, amount and terms of
the loan, loan origination fees and interest rates. Many of the Company's
competitors are substantially larger and have considerably greater financial,
technical and marketing resources than the Company. The Company competes in the
insurance premium finance business with other specialty finance companies,
independent insurance agents who offer premium finance services, captive premium
finance affiliates of insurance companies and direct bill plans established by
insurance companies. The Company competes in the automobile finance industry
with commercial banks, the captive finance affiliates of automobile
manufacturers, savings associations and companies specializing in nonprime
automobile finance, many of which have established relationships with automobile
dealerships and may offer dealerships or their customers other forms of
financing, including dealer floor plan financing and lending, which are not
offered by 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 its automobile finance
business. In addition, the Company may 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.
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The failure of the Company to implement its planned growth strategy would have a
material adverse effect on the Company's financial condition, results of
operations and business prospects.
Dependence on Loan Sale Market
The Company is expected to sell its remaining portfolio of subprime
mortgage loans in the whole loan sale market. There can be no assurance that
whole loan purchasers will continue to purchase the Company's loans, or that
they will continue to purchase loans at present prices, and failure to do so
could have a material adverse effect on the Company's financial condition,
results of operations and business prospects. Further, adverse conditions in the
asset-backed securitization market could adversely affect the Company's ability
to sell loans at present prices.
Change in General Economic Conditions
Each of the Company's businesses is affected directly by changes in
general economic conditions, including changes in employment rates, prevailing
interest rates and real wages. During periods of economic slowdown or recession,
the Company may experience a decrease in demand for its financial products and
services, an increase in its servicing costs, a decline in collateral values and
an increase in delinquencies and defaults. A decline in collateral values and an
increase in delinquencies and defaults increase the possibility and severity of
losses. Although the Company believes that its underwriting criteria and
collection methods enable it to manage the higher risks inherent in loans made
to such borrowers, no assurance can be given that such criteria or methods will
afford adequate protection against such risks. Any sustained period of increased
delinquencies, defaults or losses would materially and adversely affect the
Company's financial condition, results of operations and business prospects.
Impact of Inflation and Changing Prices
The financial statements and notes thereto presented herein have been
prepared in accordance with Generally Accepted Accounting Principles ("GAAP"),
which require the measurement of financial position and operating results in
terms of historical dollar amounts without considering the changes in the
relative purchasing power of money over time due to inflation. The impact of
inflation is reflected in the increased cost of the Company's operations. Unlike
industrial companies, nearly all of the assets and liabilities of the Company
are monetary in nature. As a result, interest rates have a greater impact on the
Company's performance than do the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or to the same
extent as the price of goods and services.
Other Risks
From time to time, the Company details other risks with respect to its
business and financial results in its filings with the 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."
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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 June 20,
2000, the shareholders considered the following proposals:
I. The election of four directors to serve terms of one year;
II. The ratification of the selection of KPMG, LLP as the Company's
independent auditors for 2000.
Messrs. Ron Duncanson, John French, Edmund Kaufman and Daniel
Villanueva were elected as directors of the Company with terms
expiring in 2001. Messrs. Duncanson, French, Kaufman and Villanueva
received approximately 16,284,000 shares For, no shares Against and
67,000 shares Abstained. Messrs. Guillermo Bron, Lawrence Grill and
Luis Maizel continue to serve as directors with terms expiring in
2001.
The approximate vote on the election of proposal II was 16,343,000
shares For, 3,000 shares Against and 5,000 shares Abstained.
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
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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 11, 2000 By: /s/ Lawrence J. Grill
----------------------------------
Lawrence J. Grill
President and Chief Executive Officer
(Principal Executive Officer)
August 11, 2000 By: /s/ Carol M. Bucci
----------------------------------
Carol M. Bucci
Senior Vice President
and Chief Financial Officer
(Principal Financial and Accounting
Officer)
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