<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 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 May 5,
2000 was 16,622,350 shares.
<PAGE>
UNITED PANAM FINANCIAL CORP.
FORM 10-Q
MARCH 31, 2000
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
----
<S> <C>
Item 1. Financial Statements (unaudited)
Consolidated Statements of Financial Condition as of
March 31, 2000 and December 31, 1999 1
Consolidated Statements of Operations
for the three months ended March 31, 2000
and March 31, 1999 2
Consolidated Statements of Cash Flows
for the three months ended March 31, 2000
and March 31, 1999 3
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 2. Changes in Securities and Use of Proceeds 26
Item 3. Defaults Upon Senior Securities 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 26
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
--------------------
United PanAm Financial Corp. and Subsidiaries
Consolidated Statements of Financial Condition
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
(Dollars in thousands) 2000 1999
--------------- ---------------
<S> <C> <C>
Assets
Cash and due from banks $ 4,839 $ 4,857
Short term investments 74,499 85,500
--------------- ---------------
Cash and cash equivalents 79,338 90,357
Securities available for sale, at fair value 41,440 9,918
Securities held to maturity, at cost 10,000 --
Residual interests in securitizations, at fair value 20,827 21,227
Loans, net 171,033 158,283
Loans held for sale 56,675 136,460
Premises and equipment, net 1,439 1,429
Federal Home Loan Bank stock, at cost 2,539 2,505
Accrued interest receivable 1,561 1,501
Real estate owned, net 1,625 2,590
Goodwill and other intangible assets 1,587 1,736
Other assets 12,232 12,284
--------------- ---------------
Total assets $400,296 $438,290
=============== ===============
Liabilities and Shareholders' Equity
Deposits $295,216 $291,944
Warehouse lines of credit 15,000 54,415
Accrued expenses and other liabilities 13,473 16,578
--------------- ---------------
Total liabilities 323,689 362,937
--------------- ---------------
Common stock (no par value):
Authorized, 30,000,000 shares
Issued and outstanding, 16,622,350 and 16,369,350 shares at
March 31, 2000 and December 31, 1999, respectively 65,534 65,249
Retained earnings 11,185 10,183
Unrealized loss on securities available for sale, net (112) (79)
--------------- ---------------
Total shareholders' equity 76,607 75,353
--------------- ---------------
Total liabilities and shareholders' equity $400,296 $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
(In thousands, except per share data) Ended March 31,
----------------------------------
2000 1999
-------------- --------------
<S> <C> <C>
Interest Income
Loans $ 7,675 $ 6,220
Short term investments 711 527
-------------- --------------
Total interest income 8,386 6,747
-------------- --------------
Interest Expense
Deposits 1,703 1,365
Notes payable -- 136
-------------- --------------
Total interest expense 1,703 1,501
-------------- --------------
Net interest income 6,683 5,246
Provision for loan losses 72 72
-------------- --------------
Net interest income after provision for loan losses 6,611 5,174
-------------- --------------
Non-interest Income
Service charges and fees 153 196
Loan related charges and fees 54 40
Other income 32 44
-------------- --------------
Total non-interest income 239 280
-------------- --------------
Non-interest Expense
Compensation and benefits 3,097 2,690
Occupancy 533 427
Other 1,526 1,309
-------------- --------------
Total non-interest expense 5,156 4,426
-------------- --------------
Income from continuing operations before income taxes 1,694 1,028
Income taxes 692 423
-------------- --------------
Income from continuing operations 1,002 605
-------------- --------------
Income from discontinued operations, net of tax -- 196
-------------- --------------
Net income $ 1,002 $ 801
============== ==============
Earnings per share-basic:
Continuing operations $ 0.06 $ 0.04
============== ==============
Discountinued operations -- $ 0.01
============== ==============
Net income $ 0.06 $ 0.05
============== ==============
Weighted average shares outstanding 16,533 17,210
============== ==============
Earnings per share-diluted:
Continuing operations $ 0.06 $ 0.03
============== ==============
Discontinued operations -- $ 0.01
============== ==============
Net income $ 0.06 $ 0.04
============== ==============
Weighted average shares outstanding 16,747 17,850
============== ==============
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
United PanAm Financial Corp. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
(Dollars in thousands) Three Months
Ended March 31,
------------------------------
2000 1999
-------------- --------------
<S> <C> <C>
Cash Flows from Operating Activities
Net income $ 1,002 $ 801
Adjustments to reconcile net income to net cash provided by operating
activities:
Discontinued operations -- (196)
Originations of loans held for sale (76,483) (214,493)
Sales of loans held for sale 147,162 251,090
Provision for loan losses 72 72
Accretion of discount on loans -- (28)
Depreciation and amortization 318 303
FHLB stock dividend (34) (28)
(Increase) decrease in accrued interest receivable (60) 737
Decrease (increase) in other assets 452 (1,440)
(Decrease) increase in accrued expenses and other liabilities (3,105) 6,538
Other, net 36 211
----------- ------------
Net cash provided by operating activities 69,360 43,567
----------- ------------
Cash Flows from Investing Activities
Purchase of investment securities (41,522) --
Repayments of mortgage loans 5,889 11,943
Originations, net of repayments, of non-mortgage loans (11,266) (8,013)
Purchase of premises and equipment (179) (594)
Purchase of treasury stock -- (2,362)
Proceeds from sales of real estate owned 2,626 470
Other, net 216 60
----------- ------------
Net cash (used in) provided by investing activities (44,236) 1,504
----------- ------------
Cash Flows from Financing Activities
Net increase (decrease) in deposits 3,272 (8,682)
Repayments of warehouse lines of credit (39,415) --
----------- ------------
Net cash used in financing activities (36,143) (8,682)
----------- ------------
Net (decrease) increase in cash and cash equivalents (11,019) 36,389
Cash and cash equivalents at beginning of period 90,357 52,211
----------- ------------
Cash and cash equivalents at end of period $ 79,338 $ 88,600
=========== ============
</TABLE>
See notes to consolidated financial statements. 3
<PAGE>
United PanAm Financial Corp. and Subsidiaries
Consolidated Statements of Cash Flows, Continued
(Unaudited)
<TABLE>
<CAPTION>
(Dollars in thousands) Three Months Ended
March 31,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
Supplemental Disclosures of Cash Flow Information
Cash paid for:
Interest $ 3,991 $4,376
============ ============
Taxes $ 166 $ --
============ ============
Supplemental Schedule of Non-cash Investing and Financing
Activities
Acquisition of real estate owned through
foreclosure of related mortgage loans $ 1,661 $ 841
============ ============
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
United PanAm Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Three Months Ended March 31, 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
that state, through the merger of United PanAm Financial Corp., a Delaware
corporation (the "Predecessor"), into the Company. Unless the context indicates
otherwise, all references herein to the "Company" include the Predecessor. 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 March 31, 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 Report on Form 10-K for the year ended December 31, 1999.
5
<PAGE>
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
months ended March 31, 2000 and 1999:
<TABLE>
<CAPTION>
Three Months
(Dollars in thousands, except per share amounts) Ended March 31,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
Earnings per share from continuing operations - basic:
Income from continuing operations $ 1,002 $ 605
============ ============
Average common shares outstanding 16,533 17,210
============ ============
Per share $ 0.06 $ 0.04
============ ============
Earnings per share from continuing operations - diluted:
Income from continuing operations $ 1,002 $ 605
============ ============
Average common shares outstanding 16,533 17,210
Add: Stock options 214 640
------------ ------------
Average common shares outstanding - diluted 16,747 17,850
============ ============
Per share $ 0.06 $ 0.03
============ ============
</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.
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 subprime retail automobile installment sales contracts
generated by franchised and independent dealers of used automobiles. The
insurance premium finance segment, through a joint venture, underwrites and
finances automobile and commercial insurance premiums in California. The banking
segment operates a five-branch federal savings bank and is the principal funding
source for the Company's 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).
6
<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 March 31, 2000
----------------------------------------------------------
Insurance
Auto Premium
Finance Finance Banking Total
------------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Net interest income $ 4,663 $ 582 $ 1,438 $ 6,683
Provision for loan losses -- 18 54 72
Non-interest income 60 93 86 239
Non-interest expense 3,022 277 1,857 5,156
------------- ------------ ----------- -----------
Segment profit (loss), pre-tax $ 1,701 $ 380 $ (387) $ 1,694
============= ============ =========== ===========
Total assets $111,185 $ 32,237 $189,652 $333,074
============= ============ =========== ===========
At or For Three Months Ended March 31, 1999
----------------------------------------------------------
Insurance
Auto Premium
Finance Finance Banking Total
------------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Net interest income $ 3,050 $ 638 $ 2,721 $ 6,409
Provision for loan losses -- 72 -- 72
Non-interest income 41 126 563 730
Non-interest expense 2,166 222 1,937 4,325
------------- ------------ ----------- -----------
Segment profit, pre-tax $ 925 $ 470 $ 1,347 $ 2,742
============= ============ =========== ===========
Total assets $ 72,943 $ 45,333 $151,425 $269,701
============= ============ =========== ===========
</TABLE>
For the reportable segment information presented, substantially all
expenses are recorded directly to each industry segment. For the three months
ended March 31, 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 months ended March 31, 2000:
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------------
2000 1999
------------- -------------
<S> <C> <C>
Net interest income for reportable segments $ 6,683 $ 6,409
Net interest income allocated to discontinued operations -- (1,163)
------------- -------------
Consolidated net interest income $ 6,683 $ 5,246
============= =============
Non-interest income for reportable segments $ 239 $ 730
Non-interest income allocated to discontinued operations -- (450)
------------- -------------
Consolidated non-interest income $ 239 $ 280
============= =============
Non-interest expense for reportable segments $ 5,156 $ 4,325
Non-interest expense allocated to discontinued operations -- 101
------------- -------------
Consolidated non-interest expense $ 5,156 $ 4,426
============= =============
Segment profit for reportable segments $ 1,694 $ 2,742
Loss allocated to discontinued operations -- (1,714)
------------- -------------
Consolidated income from continuing operations before income taxes $ 1,694 $ 1,028
============= =============
Total assets of reportable segments $333,074 $269,701
Total assets allocated to discontinued operations 67,222 152,565
------------- -------------
Consolidated total assets $400,296 $422,266
============= =============
</TABLE>
7
<PAGE>
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 March 31, 2000,
residual interests in securitizations were $20.8 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.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations.
-------------------------
Certain statements in this Quarterly Report on Form 10-Q, including
statements regarding 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."
Automobile Finance
In 1996, the Bank commenced its automobile finance business through its
subsidiary, United Auto Credit Corporation (such business, "UACC"). UACC
acquires, holds for investment and services subprime retail automobile
installment sales contracts ("auto contracts") generated by franchised and
independent dealers of used automobiles. UACC's customers are considered
"subprime" because they typically have limited credit histories or credit
histories that preclude them from obtaining loans through traditional sources.
As UACC provides all marketing, origination, underwriting and servicing
activities for its loans, income is generated from a combination of spread and
non-interest income and is used to cover all operating costs, including
compensation, occupancy and systems expense.
9
<PAGE>
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 March 31, 2000, the Bank was a five-branch
federal savings bank with $295.2 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 $20.7 million in principal amount (before unearned discounts
and premiums) at March 31, 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.
10
<PAGE>
Average Balance Sheets
The following table sets forth information relating to the Company for
the three months ended March 31, 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 March 31,
-----------------------------------------------------------------------------------
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
Investment securities $ 44,927 $ 711 6.32% $ 35,811 $ 527 5.88%
Mortgage loans, net(3) 19,411 421 8.67% 36,139 798 8.84%
IPF loans, net(4) 30,099 1,128 15.01% 42,962 1,416 13.19%
Automobile installment
contracts, net(5) 105,585 6,126 23.21% 68,245 4,006 23.48%
------------ ------------ ------------- -------------
Total interest earning assets 200,022 8,386 16.77% 183,157 6,747 14.73%
------------ -------------
Non-interest earnings assets 30,945 39,922
------------ -------------
Total assets $230,967 $223,079
============ =============
Liabilities and Equity
Interest bearing liabilities
Customer deposits $138,526 $1,703 4.94% $114,199 $1,365 4.85%
Notes payable -- -- -- 10,930 136 5.03%
------------ ------------ ------------- -------------
Total interest bearing liabilities 138,526 1,703 4.94% 125,129 1,501 4.86%
------------ -------------
Non-interest bearing liabilities 16,433 16,294
------------ -------------
Total liabilities 154,959 141,423
Equity 76,008 81,656
------------ -------------
Total liabilities and equity $230,967 $223,079
============ =============
Net interest income before provision
for loan losses $6,683 $5,246
============ =============
Net interest rate spread(6) 11.83% 9.87%
Net interest margin(7) 13.44% 11.62%
Ratio of interest earning assets to
interest bearing liabilities 144% 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>
Three Months Ended March 31,
----------------------------------
2000 1999
---------------- ---------------
<S> <C> <C>
Average assets of continuing operations $230,967 $223,079
Average mortgage loans of discontinued operations 148,213 238,933
---------------- ---------------
Total average assets 379,180 462,012
================ ===============
Average liabilities and equity of continuing operations 230,967 223,079
Average customer deposits allocated to discontinued operations 141,720 214,759
Average warehouse lines of credit of discontinued operations 6,493 24,174
---------------- ---------------
Total average liabilities and equity $379,180 $462,012
================ ===============
</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 March 31, 2000 and
March 31, 1999
General
Net income increased from $801,000 for the three months ended March 31,
1999 to $1.0 million for the three months ended March 31, 2000. Included in
these results is income of $196,000 for the three months ended March 31, 1999,
from discontinued operations of the Company's subprime mortgage finance
11
<PAGE>
business. Income from continuing operations was $1.0 million, or $0.06 per
diluted share, for the quarter ending March 31, 2000 compared with income from
continuing operations of $605,000, or $0.03 per diluted share, for the quarter
ending March 31, 1999.
The increase in income from continuing operations and net income was
due primarily to an increase in net interest income from $5.2 million in the
first quarter of 1999 to $6.7 million during the same quarter of 2000. Net
interest income was favorably impacted by the continued expansion and growth of
the Company's automobile finance business.
Auto contracts purchased increased from $28.1 million for the three
months ended March 31, 1999 to $40.3 million for the three months ended March
31, 2000, while insurance premium finance originations decreased from $33.6
million for the three months ended March 31, 1999 to $25.0 million for the three
months ended March 31, 2000.
Interest Income
Interest income increased from $6.7 million for the three months ended
March 31, 1999 to $8.4 million for the three months ended March 31, 2000 due
primarily to a $16.9 million increase in average interest earning assets and a
2.04% 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 $37.3 million and investment
securities, which increased $9.1 million. The increase in auto contracts
principally resulted from the purchasing of additional dealer contracts in
existing and new markets consistent with the planned growth of this business
unit. The increase in investment securities was a result of an increase in the
Company's liquidity, reflecting 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
three months ended March 31, 2000 compared to the three months ended March 31,
1999. Average automobile installment contracts, with an average yield of 23.21%,
comprised 52.8% of average interest earning assets at March 31, 2000 compared to
37.3% of average interest earning assets at March 31, 1999.
Interest Expense
Interest expense increased from $1.5 million for the three months ended
March 31, 1999 to $1.7 million for the three months ended March 31, 2000 due to
a $13.4 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 $114.2 million during the
quarter ended March 31, 1999 to $138.5 million during the quarter ended March
31, 2000. The increase in deposits resulted from the use of retail and wholesale
certificates of deposit ("CDs") to finance the Company's lending growth. The
average cost of deposits increased from 4.85% for the three months ended March
31, 1999 to 4.94% for the comparable period in 2000 generally as a result of an
increase in market interest rates.
Provision for Loan Losses
Provision for loan losses was $72,000 for the three months ended March
31, 2000 and 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 $14.8 million at March 31, 2000 compared with
$11.4 million at March 31, 1999, representing 8.63% of loans held for investment
at March 31, 2000 and 6.89% at March 31, 1999. Annualized net charge-offs to
average loans were 2.87% for the three months ended March 31, 2000 compared with
3.11% for the three months ended March 31, 1999.
12
<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 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 $41,000, from $280,000 for the three
months ended March 31, 1999 to $239,000 for the three months ended March 31,
2000 as a result of lower service charges and fee income.
Non-interest Expense
Non-interest expense increased $730,000, from $4.4 million for the
three months ended March 31, 1999 to $5.2 million for the three months ended
March 31, 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 109 employees in 15 offices, as of March 31, 1999, to 162
employees in 22 offices, as of March 31, 2000.
Income Taxes
Income taxes increased $269,000, from $423,000 for the three months
ended March 31, 1999 to $692,000 for the three months ended March 31, 2000. This
increase occurred as a result of a $666,000 increase in income from continuing
operations before income taxes between the two periods partially offset by a
decrease in the effective tax rate from 41.1% for the three months ended March
31, 1999 to 40.9% for the three months ended March 31, 2000.
Discontinued Operations - Mortgage Finance
As announced on February 9, 2000, the Company discontinued its subprime
mortgage origination operations and recorded the estimated loss from
discontinuing these activities in its 1999 financial statements. In connection
with the wind down of these operations, the Company originated $76.2 million in
mortgage loans during the first quarter of 2000 compared with $207.7 million
during the comparable quarter of 1999. Loan sales in the first quarter of 2000
were $148.8 million, which contributed to the decline in loans held for sale
from $136.5 million at December 31, 1999 to $56.7 million at March 31, 2000.
Income from discontinued operations, net of tax was $196,000 in the
first quarter of 1999 reflecting the operating activity for these operations
during this period. All activities related to discontinued operations in the
first quarter of 2000 (including gains on the sales of loans and net interest
income relative to loans held for sale) were charged to the discontinued
operations accrual established in 1999.
In determining net interest income charged to discontinued operations,
the Company included all interest income from its mortgage finance business less
an allocation for interest expense. The Company
13
<PAGE>
allocated average deposits of $141.7 million and $214.8 million for the three
months ended March 31, 2000 and 1999, respectively, and average warehouse lines
of credit of $6.5 million and $24.2 million for the three months ended March 31,
2000 and 1999, respectively, to the discontinued mortgage operations in
computing interest expense.
Comparison of Financial Condition at March 31, 2000 and December 31, 1999
Total assets decreased $38.0 million, from $438.3 million at December
31, 1999 to $400.3 million at March 31, 2000. This decrease occurred primarily
as a result of a $67.0 million decrease in loans, from $294.7 million at
December 31, 1999 to $227.7 million at March 31, 2000. The decrease in loans was
comprised of a $79.8 million decrease in subprime mortgage loans as a result of
the Company's closure of its subprime mortgage origination operations and a $1.0
million decrease in loans purchased from the RTC as a result of scheduled
principal amortization and prepayments, offset by an $11.8 million increase (net
of unearned finance charges) in auto contracts and a $742,000 increase in
insurance premium finance loans.
Cash and cash equivalents decreased $11.1 million, from $90.4 million
at December 31, 1999 to $79.3 million at March 31, 2000. Securities available
for sale increased from $9.9 million at December 31, 1999 to $41.4 million at
March 31, 2000. Securities held to maturity were $10.0 million at March 31,
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 $20.8 million at March 31,
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.
Deposits increased $3.2 million, from $291.9 million at December 31,
1999 to $295.2 million at March 31, 2000. Retail deposits increased $2.2 million
from $276.2 million at December 31, 1999 to $278.4 million at March 31, 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 increased $1.0 million from $15.8 million at December 31,
1999 to $16.8 million at March 31, 2000.
Other interest bearing liabilities include warehouse lines of credit,
which decreased from $54.4 million at December 31, 1999 to $15.0 million as
proceeds from sales of subprime mortgage loans were used to paydown outstanding
balances.
Shareholders' equity increased from $75.4 million at December 31, 1999
to $76.6 million at March 31, 2000, primarily as a result of net income of $1.0
million during the three months ended March 31, 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.
14
<PAGE>
The Company's profits depend, in part, on the difference, or "spread,"
between the effective rate of interest received on the loans it originates and
the interest rates paid on deposits and other financing facilities which can be
adversely affected by movements in interest rates. In addition, between the time
the Company originates loans and investors' sales commitments are received, the
Company may be exposed to interest rate risk to the extent that interest rates
move upward or downward during the time the loans are held for sale.
The 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 December 31, 1999, 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 92 basis points and would result in a
$5.0 million increase in the NPV of the Bank and a 200 basis point increase in
interest rates was 138 basis points and would result in a $7.0 million decrease
in the NPV of the Bank. At December 31, 1999, the Bank's sensitivity measure was
below the threshold at which the Bank could be required to hold additional
risk-based capital under OTS regulations.
Although the NPV measurement provides an indication of the Bank's
interest rate risk exposure at a particular point in time, such measurement is
not intended to and does not provide a precise forecast of the effect of changes
in market interest rates on the Bank's net interest income and will differ from
actual results. Management monitors the results of this modeling, which are
presented to the Board of Directors on a quarterly basis.
The following table shows the NPV and projected change in the NPV of
the Bank at December 31, 1999 assuming an instantaneous and sustained change in
market interest rates of 100, 200 and 300 basis points ("bp"). This table is
based on data prepared by the OTS. The Company makes no representation as to the
accuracy of this data.
Interest Rate Sensitivity of Net Portfolio Value
<TABLE>
<CAPTION>
NPV as % of Portfolio
Net Portfolio Value Value of Assets
-------------------------------------------- ----------------------------------
Change in Rates $ Amount $ Change % Change NPV Ratio % Change
--------------- ------------ ------------ ------------ -------------- ---------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
+300 bp $ 43,715 $ (12,030) -22% 10.16% -239 bp
+200 bp 48,704 (7,041) -13% 11.17% -138 bp
+100 bp 52,857 (2,888) -5% 12.00% -55 bp
0 bp 55,745 -- -- 12.55% --
-100 bp 57,571 1,826 +3% 12.88% +33 bp
-200 bp 60,782 5,037 +9% 13.47% +92 bp
-300 bp 64,917 9,172 +16% 14.23% +168 bp
</TABLE>
15
<PAGE>
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, which meets monthly or more frequently if necessary,
monitors rates and terms of competing sources of funds to use the most
cost-effective source of funds wherever possible.
On April 23, 1998, the Company's Registration Statement on Form S-1 for
the initial public offering of 5,500,000 shares of its Common Stock at a price
of $11.00 per share was declared effective by the SEC. The Company received
approximately $56 million from the sale of its common stock after underwriting
discount and expenses associated with the offering. On May 22, 1998, the
Underwriters' over-allotment option for 825,000 shares of Common Stock was
exercised resulting in $8 million of additional proceeds being received by the
Company, after underwriting discount. The net proceeds from the initial public
offering were used for general corporate purposes, including financing the
growth of the Company's mortgage and automobile operations, and to repay $2.0
million in indebtedness to certain shareholders.
Sales and securitizations of loans were one of the primary sources of
funds for the Company's subprime mortgage operations. Cash flows from sales and
securitizations of loans were $147.2 million during the three months ended March
31, 2000 and $251.1 million during the three months ended March 31, 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 March 31, 2000, such retail deposits were $278.4 million or
94.3% of total deposits.
The Bank uses wholesale and broker-originated deposits to supplement
its retail deposits and, at March 31, 2000, wholesale deposits were $16.8
million or 5.7% of total deposits. The Bank solicits wholesale deposits by
posting its interest rates on a national on-line service which advertises the
Bank's wholesale products to investors. Generally, most of the wholesale deposit
account holders are institutional investors, commercial businesses or public
sector entities. Broker deposits are originated through major dealers
specializing in such products.
16
<PAGE>
The following table sets forth the balances and rates paid on each
category of deposits for the dates indicated.
<TABLE>
<CAPTION>
March 31, December 31,
--------------------------------------------------------------
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 $ 48,217 4.19% $ 47,151 4.35% $ 37,348 4.05%
Checking accounts 15,415 2.00% 16,764 2.02% 12,171 1.37%
Certificates of deposit
Under $100,000 166,145 5.66% 163,874 5.35% 194,396 5.40%
$100,000 and over 65,439 5.86% 64,155 5.51% 77,753 5.32%
------------- ------------- -----------
Total $ 295,216 5.27% $ 291,944 5.03% $ 321,668 5.07%
============= ============= ===========
</TABLE>
The following table sets forth the time remaining until maturity for
all CDs at March 31, 2000, December 31, 1999 and 1998.
<TABLE>
<CAPTION>
March 31, December 31, December 31,
2000 1999 1998
--------------------- ------------------ ---------------------
(Dollars in thousands)
<S> <C> <C> <C>
Maturity within one year $ 204,345 $ 199,110 $ 242,447
Maturity within two years 27,117 28,770 29,548
Maturity within three years 122 149 154
-------------------- ------------------ ---------------------
Total certificates of deposit $ 231,584 $ 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 March 31, 2000, the Bank exceeded all of its regulatory capital
requirements with tangible capital of $46.8 million, or 11.76% of total adjusted
assets, which is above the required level of $5.9 million, or 1.5%; core capital
of $46.8 million, or 11.76% of total adjusted assets, which is above the
required level of $11.9 million, or 3.0%; and risk-based capital of $29.2
million, or 11.96% of risk-weighted assets, which is above the required level of
$19.5 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" at March 31, 2000.
The Company has other sources of liquidity, including FHLB advances and
its liquidity and investments 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 are made pursuant to several programs, each of
which has its own interest rate and range of maturities. Limitations on the
amount of advances are based generally on a fixed percentage of net worth or on
the FHLB's assessment of an institution's credit-worthiness. As of March 31,
2000, the Bank's available borrowing capacity under this credit facility was
$7.7 million.
17
<PAGE>
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>
March 31, December 31,
-------------------------------------
2000 1999 1998
------------------ ---------------- ----------------
(Dollars in thousands)
<S> <C> <C> <C>
FHLB advances
Maximum month-end balance $ -- $ 2,300 $ 34,500
Balance at end of period -- -- --
Average balance for period -- 6 13,057
Weighted average interest rate on balance at end of --% --% --%
Weighted average interest rate on average balance for --% 5.84% 5.10%
Warehouse lines of credit
Maximum month-end balance $ 26,623 $ 159,342 $ 95,000
Balance at end of period 15,000 54,415 --
Average balance for period 6,493 45,404 43,759
Weighted average interest rate on balance at end of period 7.01% 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 March 31, 2000. At March 31, 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
To date, the Company has sold most of its loan originations to mortgage
companies and other investors through whole loan packages on a primarily
non-recourse, servicing released basis. As a result, upon sale, risks and
rewards of ownership transfer to the buyer. In December 1997, the Company
completed its first securitization of mortgage loans and in March 1998 sold its
residual interests in this securitization to a third-party. In March 1999, the
Company completed its second mortgage loan securitization for $225 million. A
third securitization in the amount of $233 million was completed by the Company
in October 1999.
Summary of Loan Portfolio. At March 31, 2000, the Company's loan
portfolio constituted $227.7 million, or 56.9% of the Company's total assets, of
which $171.0 million, or 75.1%, were held for investment and $56.7 million, or
24.9%, were held for sale. Loans held for investment are reported at cost, net
of unamortized discounts or premiums and allowance for losses. Loans held for
sale are reported at the lower of cost or market value. Subprime mortgage loans
included in the table below are part of the Company's discontinued mortgage
operations.
18
<PAGE>
The following table sets forth the composition of the Company's loan
portfolio at the dates indicated.
<TABLE>
<CAPTION>
March 31, December 31, December 31,
2000 1999 1998
------------------ ------------------- ------------------
<S> <C> <C> <C>
Mortgage Loans
Mortgage Loans (purchased primarily from RTC)
Held for sale $ -- $ -- $ 18,289
Held for investment 20,740 21,835 14,039
------------------ ------------------- ------------------
Total mortgage loans 20,740 21,835 $ 32,328
------------------ ------------------- ------------------
Subprime mortgage loans
Held for sale 56,675 136,460 196,117
Held for investment 15,382 13,416 17,570
------------------ ------------------- ------------------
Total subprime mortgage loans 72,057 149,876 213,687
------------------ ------------------- ------------------
Total mortgage loans 92,797 171,711 246,015
------------------ ------------------- ------------------
Consumer Loans
Automobile installment contracts 140,050 128,093 83,921
Insurance premium financing 31,076 30,334 44,709
Other consumer loans 805 879 1,245
------------------ ------------------- ------------------
Total consumer loans 171,931 159,306 129,875
------------------ ------------------- ------------------
Total loans 264,728 331,017 375,890
Unearned discounts and premiums (903) (954) (212)
Unearned finance charges (21,357) (21,181) (17,371)
Allowance for loan losses (14,760) (14,139) (10,183)
------------------ ------------------- ------------------
Total loans, net $ 227,708 $ 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 March 31, 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>
March 31, 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 $ 73 $ 589 $ 618 $ 2,680 $ 12,982 $ 19,180 $ 36,122
Mortgage loans held
for sale -- -- 55 -- 4,103 52,517 56,675
Consumer loans 35,449 63,951 72,276 255 -- -- 171,931
------------ ------------- ------------- ------------- ------------ ------------- ----------
Total $ 35,522 $ 64,540 $ 72,949 $ 2,935 $ 17,085 $ 71,697 $ 264,728
============ ============= ============= ============= ============ ============= ==========
</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
19
<PAGE>
sufficient risk to warrant classification in one of the categories described
above are designated as "special mention."
At March 31, 2000, the Company had $1.1 million in assets classified as
special mention, $18.2 million of assets classified as substandard, $112,000 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
March 31, 2000, December 31, 1999 and 1998.
<TABLE>
<CAPTION>
Loan March 31, % 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 $ 2,506 1.1% $ 3,071 1.0% $ 9,743 2.8%
60 to 89 days 2,815 1.2% 2,443 0.8% 8,161 2.3%
90+ days 14,758 6.5% 13,307 4.6% 11,424 3.3%
-------------- --------- ------------- ---------- ----------- ---------
Total $20,079 8.8% $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 March 31, 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 March 31, 2000, December 31, 1999 and 1998.
<TABLE>
<CAPTION>
March 31, December 31,
-------------------------------------
2000 1999 1998
------------------ ------------------ -----------------
(Dollars in thousands)
<S> <C> <C> <C>
Nonaccrual loans
Single-family residential $13,538 $15,825 $19,242
Multi-family residential and commercial 100 100 214
Consumer and other loans 762 1,060 1,168
------------- -------------- --------------
Total $14,400 $16,985 $20,624
============= ============== ==============
Nonaccrual loans as a percentage of
Total loans held for investment 8.42% 10.73% 15.42%
Total assets 3.60% 3.88% 4.85%
Allowance for loan losses as a percentage of
Total loans held for investment 8.63% 8.93% 7.62%
Nonaccrual loans 102.50% 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 $1.6 million at March
31, 2000, $2.6 million at December 31, 1999 and $1.9 million at December 31,
1998, and consisted entirely of one to four family residential properties.
20
<PAGE>
Allowance for Loan Losses. The following is a summary of the changes in
the consolidated allowance for loan losses of the Company for the periods
indicated.
<TABLE>
<CAPTION>
At or For the At or For the
Three Months Year Ended
Ended March 31, December 31,
-------------------------------------
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 72 432 293
Provision for loan losses - discontinued operations -- 7,376 5,560
Charge-offs
Mortgage loans (673) (7,525) (4,536)
Consumer loans (1,269) (4,395) (3,793)
-------------- ------------- --------------
(1,942) (11,920) (8,329)
Recoveries
Mortgage loans 38 296 452
Consumer loans 83 414 1,138
-------------- ------------- --------------
121 710 1,590
-------------- ------------- --------------
Net charge-offs (1,821) (11,210) (6,739)
Acquisition discounts allocated to loss allowance 2,370 7,358 4,582
-------------- ------------- --------------
Balance at end of period $ 14,760 $ 14,139 $ 10,183
============== ============= ==============
Annualized net charge-offs to average loans 2.87% 2.89% 1.73%
Ending allowance to period end loans, net 8.63% 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 purposes and secondarily for investment income. Cash
equivalents and securities satisfy regulatory requirements for liquidity.
21
<PAGE>
The following is a summary of the Company's cash equivalents and
securities portfolios as of the dates indicated.
<TABLE>
<CAPTION>
March 31, December 31,
------------------ --- -------------------
2000 1999 1998
------------------ ------------------ -------------------
(Dollars in thousands)
<S> <C> <C> <C>
Balance at end of period
Overnight deposits $ 67,499 $ 85,500 $ 47,000
U.S. agency securities 41,440 9,918 --
Mutual funds 17,000 -- --
------------------ ------------------ -------------------
Total $125,939 $ 95,418 $ 47,000
================== ================== ===================
Weighted average yield at end of period
Overnight deposits 5.71% 3.25% 3.00%
U.S. agency securities 6.24% 7.11% --%
Mutual funds 5.88% --% --%
Weighted average maturity at end of period
Overnight deposits 1 day 1 day 1 day
U.S. agency securities 19 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 insurance premium and automobile finance businesses will
depend to a significant extent on the availability of additional sources of
financing. There can be no assurance that the Company will be able to develop
additional financing sources on acceptable terms or at all. To the extent the
Bank is unable to maintain its deposits and the Company is unable to develop
additional sources of financing, the Company will have to restrict its lending
activities which would materially and adversely affect the Company's financial
condition, results of operations and business prospects. See "Item 2.
Management's
22
<PAGE>
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 included the estimated loss from discontinuing these
operations in its 1999 financial statements. The loss was estimated based on the
Company's plans for discontinuing these operations during the first six months
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 recorded residual interests of $22.3 million. 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.
23
<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 subprime automobile finance
industry with commercial banks, the captive finance affiliates of automobile
manufacturers, savings associations and companies specializing in subprime
automobile finance, many of which have established relationships with automobile
dealerships and may offer dealerships or their customers other forms of
financing, including dealer floor plan financing and lending, which are not
offered by the Company. In attracting deposits, the Bank competes primarily with
other savings institutions, commercial banks, brokerage firms, mutual funds,
credit unions and other types of investment companies.
Fluctuations in interest rates and general and localized economic
conditions also may affect the competition the Company faces. Competitors with
lower costs of capital have a competitive advantage over the Company. During
periods of declining interest rates, competitors may solicit the Company's
customers to refinance their loans. In addition, during periods of economic
slowdown or recession, the Company's borrowers may face financial difficulties
and be more receptive to offers of the Company's competitors to refinance their
loans.
As the Company expands into new geographic markets, it will face
additional competition from lenders already established in these markets. There
can be no assurance that the Company will be able to compete successfully with
these lenders.
Changes in Interest Rates
The Company's results of operations depend to a large extent upon its
net interest income, which is the difference between interest income on
interest-earning assets, such as loans and investments, and interest expense on
interest-bearing liabilities, such as deposits and other borrowings. When
interest-bearing liabilities mature or reprice more quickly than
interest-bearing assets in a given period, a significant increase in market
rates of interest could have a material adverse effect on the Company's net
income. Further, a significant increase in market rates of interest could
adversely affect demand for the Company's financial products and services.
Interest rates are highly sensitive to many factors, including governmental
monetary policies and domestic and international economic and political
conditions, which are beyond the Company's control. The Company's liabilities
generally have shorter terms and are more interest rate sensitive than its
assets. Accordingly, changes in interest rates could have a material adverse
effect on the profitability of the Company's lending activities. See "Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Management of Interest Rate Risk."
Management of Growth
The Company has experienced rapid growth in its automobile finance
business. In addition, the Company intends to broaden its product offerings to
include additional types of consumer or, in the case of insurance premium
finance, commercial loans. Further, the Company may enter other specialty
finance businesses. This growth strategy will require additional capital,
systems development and human resources. The failure of the Company to implement
its planned growth strategy would have a material adverse effect on the
Company's financial condition, results of operations and business prospects.
24
<PAGE>
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"
25
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
-----------------
Not applicable
Item 2. Changes in Securities and Use of Proceeds.
-----------------------------------------
Not applicable
Item 3. Defaults Upon Senior Securities.
-------------------------------
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
Not applicable
Item 5. Other Information.
-----------------
Not applicable
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) List of Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
On March 13, 2000, the Company filed a report on Form 8-K
dated February 18, 2000 regarding the discontinuance of its
subprime mortgage operations in February 2000.
26
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
United PanAm Financial Corp.
Date: May 10, 2000 By: /s/ Lawrence J. Grill
------------------------------
Lawrence J. Grill
President and Chief Executive Officer
(Principal Executive Officer)
May 10, 2000 By: /s/ Carol M. Bucci
-----------------------------
Carol M. Bucci
Senior Vice President
and Chief Financial Officer
(Principal Financial and Accounting
Officer)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-2000 DEC-31-1999
<PERIOD-START> JAN-01-2000 JAN-01-1999
<PERIOD-END> MAR-31-2000 DEC-31-1999
<CASH> 4,839,000 4,857,000
<INT-BEARING-DEPOSITS> 74,499,000 85,500,000
<FED-FUNDS-SOLD> 0 0
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 62,267,000 31,145,000
<INVESTMENTS-CARRYING> 10,000,000 0
<INVESTMENTS-MARKET> 0 0
<LOANS> 227,708,000 294,743,000
<ALLOWANCE> 14,760,000 14,139,000
<TOTAL-ASSETS> 400,296,000 438,290,000
<DEPOSITS> 295,216,000 291,944,000
<SHORT-TERM> 15,000,000 54,415,000
<LIABILITIES-OTHER> 13,473,000 16,578,000
<LONG-TERM> 0 0
0 0
0 0
<COMMON> 65,534,000 65,249,000
<OTHER-SE> 11,185,000 10,183,000
<TOTAL-LIABILITIES-AND-EQUITY> 400,296,000 438,290,000
<INTEREST-LOAN> 7,675,000 27,003,000
<INTEREST-INVEST> 711,000 1,800,000
<INTEREST-OTHER> 0 0
<INTEREST-TOTAL> 8,386,000 28,803,000
<INTEREST-DEPOSIT> 1,703,000 5,787,000
<INTEREST-EXPENSE> 1,703,000 6,033,000
<INTEREST-INCOME-NET> 6,683,000 22,770,000
<LOAN-LOSSES> 72,000 432,000
<SECURITIES-GAINS> 0 0
<EXPENSE-OTHER> 5,156,000 18,643,000
<INCOME-PRETAX> 1,694,000 4,669,000
<INCOME-PRE-EXTRAORDINARY> 1,002,000 2,761,000
<EXTRAORDINARY> 0 (7,113,000)
<CHANGES> 0 0
<NET-INCOME> 1,002,000 (4,352,000)
<EPS-BASIC> 0.06 (0.26)
<EPS-DILUTED> 0.06 (0.25)
<YIELD-ACTUAL> 13.44 12.45
<LOANS-NON> 14,400,000 13,157,000
<LOANS-PAST> 32,000 30,000
<LOANS-TROUBLED> 2,435,000 3,096,000
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 14,139,000 10,183,000
<CHARGE-OFFS> 1,942,000 11,920,000
<RECOVERIES> 121,000 710,000
<ALLOWANCE-CLOSE> 14,760,000 14,139,000
<ALLOWANCE-DOMESTIC> 14,760,000 14,139,000
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
