<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 September 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 November
1, 2000 was 16,113,750 shares.
<PAGE>
UNITED PANAM FINANCIAL CORP.
FORM 10-Q
SEPTEMBER 30, 2000
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
----
<S> <C>
Item 1. Financial Statements (unaudited)
Consolidated Statements of Financial Condition as of
September 30, 2000 and December 31, 1999 1
Consolidated Statements of Operations
for the three and nine months ended September 30, 2000
and September 30, 1999 2
Consolidated Statements of Comprehensive Income
for the three and nine months ended September 30, 2000
and September 30, 1999 3
Consolidated Statements of Cash Flows
for the three and nine months ended September 30, 2000
and September 30, 1999 4
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 30
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 31
Item 2. Changes in Securities and Use of Proceeds 31
Item 3. Defaults Upon Senior Securities 31
Item 4. Other Information 31
Item 5. Exhibits and Reports on Form 8-K 31
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
--------------------
United PanAm Financial Corp. and Subsidiaries
Consolidated Statements of Financial Condition
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
(Dollars in thousands, except per share data) 2000 1999
----------------- ----------------
<S> <C> <C>
Assets
Cash and due from banks $ 5,539 $ 4,857
Short term investments 14,964 85,500
--------- ----------
Cash and cash equivalents 20,503 90,357
Securities available for sale, at fair value 172,673 9,918
Securities held to maturity (fair value: $10,000) 10,000 --
Residual interests in securitizations, at fair value 10,106 21,227
Loans, net 185,461 158,283
Loans held for sale 5,013 136,460
Premises and equipment, net 1,472 1,429
Federal Home Loan Bank stock, at cost 2,750 2,505
Accrued interest receivable 1,508 1,501
Real estate owned, net 1,909 2,590
Goodwill and other intangible assets 27 1,736
Other assets 15,739 12,284
--------- ----------
Total assets $427,161 $438,290
========= ==========
Liabilities and Shareholders' Equity
Deposits $302,507 $291,944
Federal Home Loan Bank advances 45,000 --
Warehouse lines of credit -- 54,415
Accrued expenses and other liabilities 11,746 16,578
--------- ----------
Total liabilities 359,253 362,937
--------- ----------
Common stock (no par value):
Authorized, 30,000,000 shares
Issued and outstanding, 16,113,750 and 16,369,350 shares at
September 30, 2000 and December 31, 1999, respectively 65,214 65,249
Retained earnings 2,758 10,183
Unrealized loss on securities available for sale, net (64) (79)
--------- ----------
Total shareholders' equity 67,908 75,353
--------- ----------
Total liabilities and shareholders' equity $427,161 $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 Nine Months
(Dollars in thousands, except per share data) Ended September 30, Ended September 30,
------------------------- ------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Interest Income
Loans $ 8,969 $ 7,004 $ 25,024 $19,758
Securities 3,103 269 6,075 1,224
-------- -------- -------- --------
Total interest income 12,072 7,273 31,099 20,982
-------- -------- -------- --------
Interest Expense
Deposits 3,763 1,335 8,605 4,138
Federal Home Loan Bank advances 654 1 890 1
Notes payable -- 36 -- 247
-------- -------- -------- --------
Total interest expense 4,417 1,372 9,495 4,386
-------- -------- -------- --------
Net interest income 7,655 5,901 21,604 16,596
Provision for loan losses 30 99 107 370
-------- -------- -------- --------
Net interest income after provision for loan losses 7,625 5,802 21,497 16,226
-------- -------- -------- --------
Non-interest Income
Loss on residual interests in securitizations (5,324) -- (10,324) --
Service charges and fees 153 174 460 553
Loan related charges and fees 51 2 155 82
Other income 33 31 97 106
-------- -------- -------- --------
Total non-interest income (5,087) 207 (9,612) 741
-------- -------- -------- --------
Non-interest Expense
Compensation and benefits 3,343 2,815 9,648 8,280
Occupancy 646 506 1,756 1,394
Other 3,830 1,589 7,051 4,232
-------- -------- -------- --------
Total non-interest expense 7,819 4,910 18,455 13,906
-------- -------- -------- --------
Income (loss) from continuing operations before income taxes (5,281) 1,099 (6,570) 3,061
Income taxes (benefit) (1,970) 452 (2,436) 1,259
-------- -------- -------- --------
Income (loss) from continuing operations (3,311) 647 (4,134) 1,802
-------- -------- -------- --------
Income (loss) from discontinued operations, net of tax -- (2,471) -- (2,330)
Loss on disposal of discontinued operations, net of tax -- -- (3,291) --
-------- -------- -------- --------
Net income (loss) $(3,311) $(1,824) $ (7,425) $ (528)
======== ======== ======== ========
Earnings (loss) per share-basic:
Continuing operations $ (0.20) $ 0.04 $ (0.25) $ 0.11
======== ======== ======== ========
Discontinued operations $ -- $ (0.15) $ (0.20) $ (0.14)
======== ======== ======== ========
Net income (loss) $ (0.20) $ (0.11) $ (0.45) $ (0.03)
======== ======== ======== ========
Weighted average shares outstanding 16,281 16,706 16,475 16,965
======== ======== ======== ========
Earnings (loss) per share-diluted:
Continuing operations $ (0.20) $ 0.04 $ (0.25) $ 0.10
======== ======== ======== ========
Discontinued operations $ -- $ (0.15) $ (0.20) $ (0.13)
======== ======== ======== ========
Net income (loss) $ (0.20) $ (0.11) $ (0.45) $ (0.03)
======== ======== ======== ========
Weighted average shares outstanding 16,348 17,080 16,602 17,356
======== ======== ======== ========
</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 Nine Months
(Dollars in thousands) Ended September 30, Ended September 30,
----------------------- -------------------
2000 1999 2000 1999
------------- --------- ---------- --------
<S> <C> <C> <C> <C>
Net income (loss) $(3,311) $(1,824) $(7,425) $(528)
Other comprehensive income, net of tax:
Unrealized loss on securities 54 -- 15 --
-------- -------- -------- -------
Comprehensive income (loss) $(3,257) $(1,824) $(7,410) $(528)
-------- -------- -------- -------
</TABLE>
3
<PAGE>
United PanAm Financial Corp. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
(Dollars in thousands) Three Months Nine Months
Ended September 30, Ended September 30,
------------------------ ---------------------
2000 1999 2000 1999
-------------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities
Net loss $ (3,311) $ (1,824) $ (7,425) $ (528)
Adjustments to reconcile net loss
to net cash provided by (used in) operating activities:
Discontinued operations -- 2,471 3,291 2,328
Originations of loans held for sale -- (249,382) (76,368) (718,187)
Sales of loans held for sale 16,256 125,121 193,895 560,320
Provision for loan losses 30 99 107 370
Accretion of discount on loans -- (76) -- (162)
Depreciation and amortization 339 301 985 911
FHLB stock dividend (39) (31) (125) (87)
Increase in accrued interest receivable (179) (1,654) (7) (1,337)
Decrease in other assets 6,416 2,385 10,211 1,644
(Decrease) increase in accrued expenses and other liabilities (2,126) (2,238) (6,219) 3,077
Amortization of discounts on securities (2,317) -- (3,350) --
Other, net (1) 54 34 319
-------- --------- --------- ---------
Net cash provided by (used in) operating activities 15,068 (124,774) 115,029 (151,332)
-------- --------- --------- ---------
Cash Flows from Investing Activities
Purchase of securities, net of maturities (29,700) -- (169,322) --
Repayments of mortgage loans 1,802 8,632 11,185 29,479
Originations, net of repayments, of non-mortgage loans (12,170) (4,721) (32,616) (17,956)
Purchase of premises and equipment (219) (186) (577) (862)
Purchase of treasury stock (454) (1,033) (454) (3,395)
Purchase of FHLB stock, net (737) -- (120) (264)
Proceeds from sales of real estate owned 1,911 1,871 5,551 4,462
Other, net (40) 52 322 192
-------- --------- --------- ---------
Net cash (used in) provided by investing activities (39,607) 4,615 (186,031) 11,656
-------- --------- --------- ---------
Cash Flows from Financing Activities
Repayment of notes payable -- (4,000) -- (10,930)
Net increase (decrease) in deposits 4,428 (6,404) 10,563 (23,780)
Proceeds, net of repayments, from warehouse lines of credit -- 148,745 (54,415) 159,342
Proceeds, net of repayments, from FHLB advances 10,000 -- 45,000 --
-------- --------- --------- ---------
Net cash provided by financing activities 14,428 138,341 1,148 124,632
-------- --------- --------- ---------
Net (decrease) increase in cash and cash equivalents (10,111) 18,182 (69,854) (15,044)
Cash and cash equivalents at beginning of period 30,614 18,985 90,357 52,211
-------- --------- --------- ---------
Cash and cash equivalents at end of period $ 20,503 $ 37,167 $ 20,503 $ 37,167
======== ========= ========= =========
</TABLE>
4
<PAGE>
United PanAm Financial Corp. and Subsidiaries
Consolidated Statements of Cash Flows, Continued
(Unaudited)
<TABLE>
<CAPTION>
(Dollars in thousands) Three Months Nine Months
Ended September 30, Ended September 30,
----------------------- -----------------------
2000 1999 2000 1999
---------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Supplemental Disclosures of Cash Flow Information
Cash paid for:
Interest $4,640 $4,267 $12,803 $13,116
========= ========= ========= =========
Taxes $ 27 $ -- $ 233 $ --
========= ========= ========= =========
Supplemental Schedule of Non-cash Investing and Financing
Activities
Acquisition of real estate owned through
foreclosure of related mortgage loans $1,109 $3,001 $ 3,209 $ 5,839
========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
United PanAm Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Three and Nine Months Ended September 30, 2000 and 1999
(Unaudited)
1. Organization
United PanAm Financial Corp. ("UFPC") was incorporated in California on
April 9, 1998 for the purpose of reincorporating its business in California,
through the merger of United PanAm Financial Corp., a Delaware corporation into
UFPC. Unless the context indicates otherwise, all references to UPFC include
the previous Delaware corporation. UPFC was originally organized as a holding
company for Pan American Financial, Inc. ("PAFI") and Pan American Bank, FSB
(the "Bank") to purchase certain assets and assume certain liabilities of Pan
American Federal Savings Bank from the Resolution Trust Corporation (the "RTC")
on April 29, 1994. 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. WorldCash Technologies, Inc. ("WorldCash") is
a wholly-owned subsidiary of UPFC and is in the process of developing a money
transfer business.
2. Basis of Presentation
Certain statements in this Quarterly Report on Form 10-Q, including
statements regarding our strategies, plans, objectives, expectations and
intentions, may include forward-looking information within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These forward-looking statements
involve certain risks and uncertainties that could cause actual results to
differ materially from those expressed or implied in such forward-looking
statements. 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
residual 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 our 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 unaudited consolidated financial statements of UPFC include our
subsidiaries, Pan American Financial, Inc., Pan American Bank, FSB and WorldCash
Technologies, Inc. At this time, substantially all of our revenues are derived
from the operations of the Bank and the Bank represents substantially all of our
consolidated assets and liabilities as of September 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 our 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 our Annual
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.
6
<PAGE>
3. Earnings Per Share From Continuing Operations
Basic EPS and diluted EPS are calculated as follows for the three and nine
months ended September 30, 2000 and 1999:
<TABLE>
<CAPTION>
Three Months Nine Months
(Dollars in thousands, except per share amounts) Ended September 30, Ended September 30,
----------------------- ----------------------
2000 1999 2000 1999
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Earnings (loss) per share from continuing operations - basic:
Income (loss) from continuing operations $(3,311) $ 647 $(4,134) $ 1,802
Average common shares outstanding 16,281 16,706 16,475 16,965
========= ======== ======== ========
Earnings (loss) per share $ (0.20) $ 0.04 $ (0.25) $ 0.11
========= ======== ======== ========
Earnings (loss) per share from continuing operations - diluted:
Income (loss) from continuing operations $(3,311) $ 647 $(4,134) $ 1,802
========= ======== ======== ========
Average common shares outstanding 16,281 16,706 16,475 16,965
Add: Stock options 67 374 127 391
--------- -------- -------- --------
Average common shares outstanding - diluted 16,348 17,080 16,602 17,356
========= ======== ======== ========
Earnings (loss) per share $ (0.20) $ 0.04 $ (0.25) $ 0.10
========= ======== ======== ========
</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 UPFC.
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 UPFC.
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 UPFC.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS
140"), which replaces SFAS 125. It revises the standards for accounting for
securitizations and other transfers of financial assets and collateral and
requires certain disclosures, but it carries over most of SFAS 125's provisions
without change. SFAS 140 is effective for transfers occurring after March 31,
2001 and for disclosures relating to securitization transactions and collateral
for fiscal years ending after December 15, 2000. SFAS 140 is not expected to
have a material impact on the results of our operations or our financial
condition.
5. Operating Segments
UPFC has three reportable segments: auto finance, insurance premium finance
and banking. The auto finance segment acquires, holds for investment and
services nonprime retail automobile installment sales contracts generated by
franchised and independent dealers of used automobiles. The insurance
7
<PAGE>
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 our auto and insurance premium finance segments.
The accounting policies of the segments are the same as those of UPFC
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).
UPFC's reportable segments are strategic business units that offer
different products and services. They are managed and reported upon separately
within our operations.
<TABLE>
<CAPTION>
At or For Three Months Ended September 30, 2000
----------------------------------------------------------------------------
Insurance
Auto Premium
Finance Finance Banking Total
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net interest income $ 5,666 $ 647 $ 1,342 $ 7,655
Provision for loan losses -- 30 -- 30
Non-interest income (1) 61 94 (5,242) (5,087)
Non-interest expense (2) 3,526 353 3,940 7,819
--------------- --------------- --------------- ---------------
Segment profit (loss), pre-tax $ 2,201 $ 358 $ (7,840) $ (5,281)
=============== =============== =============== ===============
Total assets $133,455 $30,289 $262,920 $426,664
=============== =============== =============== ===============
At or For Three Months Ended September 30, 1999
----------------------------------------------------------------------------
Insurance
Auto Premium
Finance Finance Banking Total
--------------- --------------- --------------- ---------------
Net interest income $ 3,934 $ 616 $ 2,658 $ 7,208
Provision for loan losses -- 99 -- 99
Non-interest income 54 107 331 492
Non-interest expense 2,621 257 2,032 4,910
--------------- --------------- --------------- ---------------
Segment profit, pre-tax $ 1,367 $ 367 $ 957 $ 2,691
=============== =============== =============== ===============
Total assets $ 92,098 $35,927 $113,247 $241,272
=============== =============== =============== ===============
At or For Nine Months Ended September 30, 2000
----------------------------------------------------------------------------
Insurance
Auto Premium
Finance Finance Banking Total
--------------- --------------- --------------- ---------------
Net interest income $ 15,502 $ 1,840 $ 4,262 $ 21,604
Provision for loan losses -- 53 54 107
Non-interest income (1) 176 276 (10,064) (9,612)
Non-interest expense (2) 9,808 1,041 7,606 18,455
--------------- --------------- --------------- ---------------
Segment profit (loss), pre-tax $ 5,870 $ 1,022 $(13,462) $ (6,570)
=============== =============== =============== ===============
Total assets $133,455 $30,289 $262,920 $426,664
=============== =============== =============== ===============
At or For Nine Months Ended September 30, 1999
----------------------------------------------------------------------------
Insurance
Auto Premium
Finance Finance Banking Total
--------------- --------------- --------------- ---------------
Net interest income $ 10,474 $ 1,863 $ 7,875 $ 20,212
Provision for loan losses -- 370 -- 370
Non-interest income 139 347 1,310 1,796
Non-interest expense 7,220 704 5,882 13,806
--------------- --------------- --------------- ---------------
Segment profit, pre-tax $ 3,393 $ 1,136 $ 3,303 $ 7,832
=============== =============== =============== ===============
Total assets $ 92,098 $35,927 $113,247 $241,272
=============== =============== =============== ===============
</TABLE>
(1) For the three and nine months ended September 30, 2000, non-interest income
of the Banking segment includes write-downs of $5.3 million and $10.3
million, respectively, in residual interests in securitizations arising
from subprime mortgage securitizations completed in 1999.
(2) For the three and nine months ended September 30, 2000, non-interest
expense includes a write-down of $1.3 million in goodwill and a $700,000
provision for office relocation expenses.
8
<PAGE>
For the reportable segment information presented, substantially all
expenses are recorded directly to each industry segment. For the three and nine
months ended September 30, 1999, segment results differ from the consolidated
results because internal transfer pricing was used to allocate certain revenues
or expenses from the mortgage segment to the banking segment. With the
discontinuance of the mortgage operations, we ceased this internal allocation
and, accordingly, there were no differences between segment results and
consolidated results during the three and nine months ended September 30, 2000:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- -----------------------
2000 1999 2000 1999
------------- ------------- ------------ ----------
<S> <C> <C> <C> <C>
Net interest income for reportable segments $ 7,655 $ 7,208 $ 21,604 $ 20,212
Net interest income allocated to discontinued operations -- (1,307) -- (3,616)
------------- ------------- ------------ ----------
Consolidated net interest income $ 7,655 $ 5,901 $ 21,604 $ 16,596
============= ============= ============ ==========
Non-interest income for reportable segments $ (5,087) $ 492 $ (9,612) $ 1,796
Non-interest income allocated to discontinued operations -- (285) -- (1,055)
------------- ------------- ------------ ----------
Consolidated non-interest income $ (5,087) $ 207 $ (9,612) $ 741
============= ============= ============ ==========
Non-interest expense for reportable segments $ 7,819 $ 4,910 $ 18,455 $ 13,806
Non-interest expense allocated to discontinued operations -- -- -- 100
------------- ------------- ------------ ----------
Consolidated non-interest expense $ 7,819 $ 4,910 $ 18,455 $ 13,906
============= ============= ============ ==========
Segment profit for reportable segments $ (5,281) $ 2,691 $ (6,570) $ 7,832
Loss allocated to discontinued operations -- (1,592) -- (4,771)
------------- ------------- ------------ ----------
Consolidated income from continuing operations before income taxes $ (5,281) $ 1,099 $ (6,570) $ 3,061
============= ============= ============ ==========
Total assets of reportable segments $426,664 $241,272 $426,664 $241,272
Total assets allocated to discontinued operations 497 308,713 497 308,713
------------- ------------- ------------ ----------
Consolidated total assets $427,161 $549,985 $427,161 $549,985
============= ============= ============ ==========
</TABLE>
6. Residual Interests in Securitizations
UPFC 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 September 30, 2000, residual
interests in securitizations were $10.1 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. We use prepayment and
default assumptions that market participants would use for similar instruments
subject to prepayment, credit and interest rate risks.
The assumptions used valuing the residual interests include 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. The fair market value of
the 1999-1 residual interests also reflect an increase in the over-
collateralization requirements as specified in the related securitization
documents. Accordingly, all cashflows received in this securitization are being
remitted to the senior certificate holders rather than to UPFC as the holder of
the residual interests.
9
<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 ("UPFC") strategies, plans,
objectives, expectations and intentions, may include forward-looking information
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These forward-
looking statements involve certain risks and uncertainties that could cause
actual results to differ materially from those expressed or implied in such
forward-looking statements. Such risks and uncertainties include, but are not
limited to, the following factors: our limited operating history; loans we made
to credit-impaired borrowers; our need for additional sources of financing;
concentration of our business in California; estimates involving our
discontinued operations; valuation of our residual interests in securitizations;
reliance on operational systems and controls and key employees; competitive
pressure we face in the banking industry; changes in the interest rate
environment; rapid growth of UPFC's businesses; our dependence on whole loan
sale markets; general economic conditions; and other risks, some of which may be
identified from time to time in our filings with the Securities and Exchange
Commission (the "SEC").
General
The Company
UPFC is a diversified specialty finance company engaged primarily in
acquiring and originating retail automobile installment sales contracts and
insurance premium finance contracts financed by retail bank deposits. We market
to customers who generally cannot obtain financing from traditional lenders.
These customers usually pay higher interest rates than those charged by
traditional lenders to gain access to consumer financing. We fund our
operations principally through retail and wholesale deposits, Federal Home Loan
Bank ("FHLB") advances and whole loan sales.
UPFC 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. UPFC has used the Bank as a base for expansion into its current
specialty finance businesses. In 1995, we commenced our insurance premium
finance business through a joint venture with BPN Corporation ("BPN") and in
1996, we commenced our automobile finance business.
In December 1999, we closed our subprime mortgage finance operations to
focus on the auto lending and insurance premium finance businesses. The
subprime mortgage business originated and sold or securitized subprime mortgage
loans secured primarily by first mortgages on single family residences. In
connection with the discontinuance of the mortgage finance division, all related
operating activity is treated as discontinued operations for financial statement
reporting purposes. For more information, see "Item 2. Management's Discussion
and Analysis of Financial Condition and Results of Operations - Discontinued
Operations - Mortgage Finance."
During the second quarter of 2000, UPFC made an investment relating to the
development of a money transfer service through its subsidiary, WorldCash.
WorldCash's current plan is to develop a money transfer business initially
dedicated to serving the Hispanic community. This investment has yet to have a
material impact on our operations.
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
10
<PAGE>
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" (this is referred to as "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. UPFC 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, our 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
UPFC has funded its operations to date primarily through the Bank's
deposits, FHLB advances, mortgage warehouse lines of credit, loan sales and
mortgage loan securitizations. As of September 30, 2000, the Bank was a five-
branch federal savings Bank with $302.5 million in deposits. The loans generated
by our insurance premium and automobile finance businesses currently are funded
and held by the Bank.
The Bank generates spread income not only from loans originated or
purchased by each of the principal businesses, but also from loans purchased
from the RTC, from our remaining subprime mortgage loans, from the Bank's
securities portfolio and from consumer loans originated by the Bank's 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.
11
<PAGE>
Average Balance Sheets
The following table sets forth information for the three and nine months
ended September 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 September 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 $ 189,732 $ 3,103 6.54% $ 22,326 $ 269 4.82%
Mortgage loans, net(3) 17,846 363 8.15% 23,336 537 9.20%
IPF loans, net(4) 29,573 1,186 16.05% 36,042 1,301 14.43%
Automobile installment
Contracts, net(5) 127,576 7,420 23.26% 87,131 5,166 23.72%
----------- ---------- --------- ---------
Total interest earning assets 364,727 12,072 13.24% 168,835 7,273 17.23%
---------- ---------
Non-interest earnings assets 32,625 37,652
----------- ---------
Total assets $397,352 $206,487
=========== =========
Liabilities and Equity
Interest bearing liabilities
Customer deposits $272,440 $ 3,763 5.49% $108,437 $1,335 4.89%
FHLB advances 40,000 654 6.51% 25 1 5.79%
Notes payable -- -- -- 2,667 36 5.44%
----------- ---------- --------- ---------
Total interest bearing liabilities 312,440 4,417 5.62% 111,129 1,372 4.90%
---------- ---------
Non-interest bearing liabilities 13,617 13,908
----------- ---------
Total liabilities 326,057 125,037
Equity 71,295 81,450
----------- ---------
Total liabilities and equity $397,352 $206,487
=========== =========
Net interest income before provision
for loan losses $ 7,655 $5,901
========== =========
Net interest rate spread(6) 7.62% 12.33%
Net interest margin(7) 8.35% 13.87%
Ratio of interest earning assets to
Interest bearing liabilities 117% 152%
</TABLE>
____________________
(1) The table above excludes average assets and liabilities of our mortgage
operations, as interest income and interest expense associated with the
subprime mortgage finance business are reported as discontinued operations
in the unaudited consolidated statements of operations as follows:
<TABLE>
<CAPTION>
Three Months Ended September 30,
----------------------------------
2000 1999
---------------- --------------
<S> <C> <C>
Average assets of continuing operations $397,352 $206,487
Average mortgage loans of discontinued operations 27,110 269,820
---------------- --------------
Total average assets $424,462 $476,307
================ ==============
Average liabilities and equity of continuing operations $397,352 $206,487
Average customer deposits allocated to discontinued operations 27,110 193,208
Average warehouse lines of credit of discontinued operations -- 76,612
---------------- --------------
Total average liabilities and equity $424,462 $476,307
================ ==============
</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.
12
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended September 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 $124,476 $ 6,075 6.51% $ 35,391 $ 1,224 4.61%
Mortgage loans, net(3) 19,149 1,206 8.40% 29,213 1,907 8.70%
IPF loans, net(4) 29,849 3,484 15.56% 39,864 4,091 13.69%
Automobile installment
Contracts, net(5) 116,751 20,334 23.22% 77,733 13,760 23.60%
------------- --------- --------- ----------
Total interest earning assets 290,225 31,099 14.29% 182,201 20,982 15.35%
--------- ----------
Non-interest earnings assets 34,673 37,443
------------- ---------
Total assets $324,898 $219,644
============= =========
Liabilities and Equity
Interest bearing liabilities
Customer deposits $217,840 $ 8,605 5.28% $116,607 $ 4,138 4.75%
FHLB advances 18,095 890 6.57% 8 1 5.85%
Notes payable -- -- -- 6,558 247 5.02%
------------- --------- --------- ----------
Total interest bearing liabilities 235,935 9,495 5.38% 123,173 4,386 4.76%
--------- ----------
Non-interest bearing liabilities 14,442 15,014
------------- ---------
Total liabilities 250,377 138,187
Equity 74,521 81,457
------------- ---------
Total liabilities and equity $324,898 $219,644
============= =========
Net interest income before provision
for loan losses $21,604 $16,596
========= ==========
Net interest rate spread(6) 8.91% 10.59%
Net interest margin(7) 9.94% 12.18%
Ratio of interest earning assets to
Interest bearing liabilities 123% 148%
</TABLE>
___________________
(1) The table above excludes average assets and liabilities of our mortgage
operations, as interest income and interest expense associated with the
subprime mortgage finance business are reported as discontinued operations
in the unaudited consolidated statements of operations as follows:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
---------------------------------
2000 1999
---------------- --------------
<S> <C> <C>
Average assets of continuing operations $324,898 $219,644
Average mortgage loans of discontinued operations 81,584 241,297
---------------- --------------
Total average assets $406,482 $460,941
================ ==============
Average liabilities and equity of continuing operations $324,898 $219,644
Average customer deposits allocated to discontinued operations 79,190 197,554
Average warehouse lines of credit of discontinued operations 2,394 43,743
---------------- --------------
Total average liabilities and equity $406,482 $460,941
=============== ===============
</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 September 30, 2000
and September 30, 1999
General
For the quarter, we reported a loss from continuing operations of $3.3
million, or $0.20 per diluted share, compared with income from continuing
operations of $647,000, or $0.04 per diluted share for the same period a year
ago. Including discontinued operations, we reported a net loss of $3.3 million,
or $0.20 per diluted share, compared with a net loss of $1.8 million, or $0.11
per diluted share, for the same period a year ago. Auto contracts purchased
increased from $33.7 million for the three months ended September 30, 1999 to
$45.3 million for the three months ended September 30, 2000, while insurance
premium finance originations decreased from $24.5 million for the three months
ended September 30, 1999 to $24.3 million for the three months ended September
30, 2000.
13
<PAGE>
Contributing to our 2000 third quarter net loss were three charges totaling
$7.3 million described below.
We recorded a pre-tax charge of $5.3 million during the 2000 third quarter
to write-down the value of our residual interests arising from our 1999 subprime
mortgage securitizations. This write-down resulted from a number of factors
including; continued high levels of delinquent loans and charge-offs; increases
in the over-collateralization requirements, as specified in the securitization
documents; and interest rate increases passed-through to the senior certificate
holders. In accordance with our policy, residual interests in securitizations
are classified as trading securities and recorded at fair market value.
We also recorded a pre-tax charge of $1.3 million, in the 2000 third
quarter, in connection with a write-down of goodwill arising from our 1998
purchase of Norwest Financial Coast's insurance premium finance operations. The
write-down reflects impairment in the value of this goodwill as a result of a
decline in future benefits expected to be received from this acquisition and a
change in market conditions involving a decline in loans outstanding. Most of
this decline is a result of lower insurance premiums in California and
significant competition from direct bill payment programs utilized by insurance
companies, which has reduced the amount of premiums available for financing.
During the 2000 third quarter, we also recorded a pre-tax provision of
$700,000 for the relocation of our corporate and executive offices from San
Mateo, California to Orange County, California. This provision includes
primarily severance costs for those individuals not expected to relocate. UPFC
is relocating its executive offices, as our existing lease is expiring and this
move will enable us to eliminate some redundant operations by combining the
corporate offices with those of our auto lending business.
Interest Income
Our interest income increased from $7.3 million for the three months ended
September 30, 1999 to $12.1 million for the three months ended September 30,
2000, due primarily to a $195.9 million increase in average interest earning
assets, partially offset by a 3.99% decrease in the weighted average interest
rate on interest earning assets. The largest components of growth in our
average interest earning assets were automobile installment contracts, which
increased $40.4 million and investment securities, which increased $167.4
million. The increase in auto contracts principally resulted from the purchase
of additional dealer contracts in existing and new markets consistent with the
planned growth of this business unit. The increase in investment securities was
a result of an increase in our 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 6.54%, comprised 52.0% of our
average interest earning assets at September 30, 2000 compared to 13.2% of our
average interest earning assets at September 30, 1999.
Interest Expense
Our interest expense increased from $1.4 million for the three months ended
September 30, 1999 to $4.4 million for the three months ended September 30,
2000, due to a $201.3 million increase in average interest bearing liabilities
and a 0.72% increase in the weighted average interest rate on interest bearing
liabilities. The largest component of growth in our average interest bearing
liabilities was deposits of the Bank, which increased from an average balance of
$108.4 million during the quarter ended September 30, 1999 to $272.4 million
during the quarter ended September 30, 2000. The increase in average deposits
was due primarily to the reallocation of 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 4.89% for
the three months ended September 30, 1999 to 5.49% for the three months ended
September 30, 2000, generally as a result of an increase in market interest
rates and the repricing of deposits to these higher market rates.
14
<PAGE>
Provision for Loan Losses
Our provision for loan losses was $30,000 for the three months ended
September 30, 2000 compared to $99,000 for the three months ended September 30,
1999. The provision for loan losses reflects estimated losses associated with
our insurance premium finance business. The total allowance for loan losses was
$16.8 million at September 30, 2000 compared with $13.5 million at September 30,
1999, representing 9.07% of loans held for investment at September 30, 2000 and
8.46% at September 30, 1999. Annualized net charge-offs to average loans were
6.94% for the three months ended September 30, 2000 compared with 2.57% for the
three months ended September 30, 1999. The increase is due to higher charge-offs
from subprime mortgage loan sales in connection with the wind-down of our
discontinued mortgage operations.
In addition to provision for losses, our allowance for loan losses is also
increased by an allocation of acquisition discounts related to the purchase of
automobile installment contracts. We allocate the estimated amount of
acquisition discounts attributable to credit risk to the allowance for loan
losses.
A provision for loan losses is charged to operations based on our regular
evaluation of loans held for investment and the adequacy of allowance for loan
losses. We report 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 $5.3 million from $207,000 for the three
months ended September 30, 1999 to a loss of $5.1 million for the three months
ended September 30, 2000 as a result of a $5.3 million pre-tax write-down of the
value of residual interests in securitizations. The write-down resulted from a
number of factors including; continued high levels of delinquent loans and
charge-offs; increases in the over-collateralization requirements, as specified
in the securitization documents; interest rate increases passed-through to the
senior certificate holders.
Non-interest Expense
Non-interest expense increased $2.9 million from $4.9 million for the three
months ended September 30, 1999 to $7.8 million for the three months ended
September 30, 2000. The increase in non-interest expense was driven primarily
by a pre-tax charge of $1.3 million in connection with the write-down of
goodwill arising from the 1998 purchase of Norwest Financial Coast's insurance
premium finance operations and a $700,000 pre-tax provision for the relocation
of certain of our offices. The goodwill write-down reflects impairment as a
result of a decline in expected future benefits due to a change in market
conditions involving a decline in loans outstanding. Most of this decline is a
result of lower insurance premiums in California and significant competition
from direct bill payment programs utilized by insurance companies, which has
reduced the amount of premiums available for financing. The provision for office
relocation expenses (consisting primarily of severance costs) is attributable to
the move of the corporate and executive offices from San Mateo, California to
Orange County, California. In addition, there was an increase in salaries,
employee benefit costs and occupancy expenses of approximately $900,000
associated with the planned growth of the auto finance business segment. During
the last 12 months, we expanded our automobile finance operations, resulting in
an increase from 131 employees in 18 offices, as of September 30, 1999, to 182
employees in 27 offices, as of September 30, 2000.
Income Taxes
Income taxes decreased $2.4 million from $452,000 for the three months
ended September 30, 1999 to a benefit of $2.0 million for the three months ended
September 30, 2000. This decrease occurred as a
15
<PAGE>
result of a $6.4 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 September 30, 1999 to 37.3% for the three
months ended September 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, we discontinued our subprime mortgage
origination operations. All related operating activity of the mortgage
operations has been reclassified and reported as discontinued operations in our
consolidated financial statements. In connection with the wind-down of these
operations, loan sales in the third quarter of 2000 were $19.5 million, compared
with $130.6 million during the comparable quarter of 1999. We did not originate
subprime mortgage loans during the quarter ended September 30, 2000 as compared
with the same quarter a year ago in which $249.4 million of subprime mortgage
loans were originated.
A loss from discontinued operations, net of tax, of $2.5 million was
recorded in the third quarter of 1999 reflecting the operating activity for
these operations during this period. During the second quarter of 2000, a charge
of $3.3 million, net of tax, was recorded related to loss on disposal of our
subprime mortgage finance business. This was in addition to a charge of $6.2
million, net of tax, included in our 1999 results of operations. Included in our
statement of financial condition as of September 30, 2000, is a reserve of $4.5
million related to the estimated remaining costs of discontinuing the subprime
mortgage operations. If actual costs of disposal are higher than anticipated,
additional charges may be required in subsequent periods' results of operations.
All activities related to discontinued operations in the third quarter of 2000
were charged to the discontinued operations reserve.
In determining net interest income charged to discontinued operations, we
included all interest income from our mortgage finance business less an
allocation for interest expense. We allocated average deposits of $27.1 million
for the three months ended September 30, 2000 and $193.2 million for the three
months ended September 30, 1999, and average warehouse lines of credit of $76.6
million for the three months ended September 30, 1999, to the discontinued
mortgage operations in computing interest expense.
Comparison of Operating Results for the Nine Months Ended September 30, 2000 and
September 30, 1999
General
For the nine months ended September 30, 2000, we reported a loss from
continuing operations of $4.1 million, or $0.25 per diluted share. This
compares with income from continuing operations of $1.8 million, or $0.10 per
diluted share, for the comparable period a year ago. Including discontinued
operations, we reported a net loss of $7.4 million, or $0.45 per diluted share,
for the nine months ended September 30, 2000, compared with a net loss of
$528,000, or $0.03 per diluted share, for the same period a year ago. Auto
contracts purchased increased from $92.2 million for the nine months ended
September 30, 1999 to $128.3 million for the nine months ended September 30,
2000, while insurance premium finance originations decreased from $85.4 million
for the nine months ended September 30, 1999 to $71.2 million for the nine
months ended September 30, 2000.
Contributing to our nine-month period net loss in 2000 were four charges
described below.
We recorded pre-tax charges totaling $10.3 million during the 2000 second
and third quarters to write-down the value of our residual interests arising
from our subprime mortgage securitizations. These write-downs resulted from a
number of factors including; continued high levels of delinquent loans and
charge-offs; increases in the over-collateralization requirements, as specified
in the securitization documents; interest rate increases passed-through to the
senior certificate holders; and a change in prepayment assumptions as a result
of actual experience that was different than previous estimates. In accordance
with
16
<PAGE>
our policy, residual interests in securitizations are classified as trading
securities and recorded at fair market value.
We also recorded a pre-tax charge of $1.3 million, in the 2000 third
quarter, in connection with a write-down of the goodwill arising from our 1998
purchase of Norwest Financial Coast's insurance premium finance operations. The
write-down reflects impairment in the value of this goodwill and a decline in
future benefits expected to be received from this acquisition as a result of a
change in market conditions involving a decline in loans outstanding. Most of
this decline is a result of lower insurance premiums in California and
significant competition from direct bill programs utilized by insurance
companies.
During the 2000 third quarter, we also recorded a pre-tax provision of
$700,000 for the relocation of our corporate and executive offices from San
Mateo, California to Orange County, California. This provision includes
primarily severance costs for those individuals not expected to relocate.
In the 2000 second quarter, we recorded a charge of $3.3 million on an
after-tax basis in connection with a write-down of our remaining subprime
mortgage loan portfolio to estimated market value. This write-down was a result
of further price deterioration primarily in our subprime non-performing mortgage
portfolio and, to a lesser extent, from credit losses associated with other
performing subprime mortgage loans.
Interest Income
Our interest income increased from $21.0 million for the nine months ended
September 30, 1999 to $31.1 million for the nine months ended September 30,
2000, due primarily to a $108.0 million increase in average interest earning
assets partially offset by a 1.06% decrease in the weighted average interest
rate on interest earning assets. The largest components of growth in our
average interest earning assets were automobile installment contracts, which
increased $39.0 million and securities, which increased $89.1 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 our 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 6.51%, comprised 42.9% of our
average interest earning assets at September 30, 2000 compared to 19.4% of our
average interest earning assets at September 30, 1999.
Interest Expense
Our interest expense increased from $4.4 million for the nine months ended
September 30, 1999 to $9.5 million for the nine months ended September 30, 2000,
due primarily to a $112.8 million increase in average interest bearing
liabilities. The largest component of growth in our average interest bearing
liabilities was deposits of the Bank, which increased from an average balance of
$116.6 million during the nine months ended September 30, 1999 to $217.8 million
during the nine months ended September 30, 2000. The increase in average
deposits was due primarily to the reallocation of 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 nine
months ended September 30, 1999 from 4.75% to 5.28% 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.
17
<PAGE>
Provision for Loan Losses
Our provision for loan losses was $107,000 for the nine months ended
September 30, 2000 compared to $370,000 for the nine months ended September 30,
1999. The provision for loan losses reflects estimated losses associated with
the insurance premium finance business. The total allowance for loan losses was
$16.8 million at September 30, 2000 compared with $13.5 million at September 30,
1999, representing 9.07% of loans held for investment at September 30, 2000 and
8.46% at September 30, 1999. Annualized net charge-offs to average loans were
3.95% for the nine months ended September 30, 2000, compared with 2.64% for the
nine months ended September 30, 1999.
In addition to provision for losses, our allowance for loan losses is also
increased by an allocation of acquisition discounts related to the purchase of
automobile installment contracts. We allocate the estimated amount of
acquisition discounts attributable to credit risk to the allowance for loan
losses.
A provision for loan losses is charged to operations based on our regular
evaluation of loans held for investment and the adequacy of allowance for loan
losses. We report 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 $10.4 million, from $741,000 for the nine
months ended September 30, 1999 to a loss of $9.6 million for the nine months
ended September 30, 2000 as a result of a $10.3 million pre-tax write-down of
the value of residual interests in securitizations. The write-down resulted from
a number of factors including; continued high levels of delinquent loans and
charge-offs; increases in the over-collateralization requirements, as specified
in the securitization documents; interest rate increases passed-through to the
senior certificate holders; and a change in prepayment assumptions as a result
of actual experience that was different than previous estimates.
Non-interest Expense
Non-interest expense increased $4.6 million, from $13.9 million for the
nine months ended September 30, 1999 to $18.5 million for the nine months ended
September 30, 2000. The increase in non-interest expense was driven primarily by
a pre-tax charge of $1.3 million in connection with the write-down of goodwill
arising from the 1998 purchase of Norwest Financial Coast's insurance premium
finance operations and a $700,000 pre-tax provision for the relocation of
certain of our offices. The goodwill write-down reflects the impairment in the
value of this goodwill because of a decline in expected future benefits due to a
change in market conditions involving a decline in loans outstanding. Most of
this decline is a result of lower insurance premiums in California and
significant competition from direct bill payment programs utilized by insurance
companies. The provision for office relocation expenses (consisting primarily of
severance costs) is attributable to the move of the corporate and executive
offices from San Mateo, California to Orange County, California. In addition,
there was an increase in salaries, employee benefit costs and occupancy expenses
of approximately $2.6 million associated with the planned growth of the auto
finance business segment. During the last 12 months, the automobile finance
operations were expanded, resulting in an increase from 131 employees in 18
offices, as of September 30, 1999 to 182 employees in 27 offices, as of
September 30, 2000.
Income Taxes
Income taxes decreased $3.7 million, from $1.3 million for the nine months
ended September 30, 1999 to a benefit of $2.4 million for the nine months ended
September 30, 2000. This decrease occurred as a result of a $9.6 million
decrease in income from continuing operations before income taxes between the
18
<PAGE>
two periods and a decrease in the effective tax rate from 41.1% for the nine
months ended September 30, 1999 to 37.1% for the nine months ended September 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, we discontinued our subprime mortgage
origination operations. In connection with the wind-down of these operations, we
originated $76.4 million in mortgage loans during the first nine months of 2000
compared with $711.8 million during the comparable period of 1999. Loan sales in
the first nine months of 2000 were $200.6 million, which contributed to the
decline in loans held for sale from $136.5 million at December 31, 1999 to $5.0
million at September 30, 2000.
A loss from discontinued operations, net of tax, was $2.3 million in the
first nine months of 1999 reflecting the operating activity for these operations
during this period. During the second quarter of 2000, a charge of $3.3 million,
net of tax, was recorded related to loss on disposal of our subprime mortgage
finance business. This was in addition to a charge of $6.2 million, net of tax,
included in our 1999 results of operations. Included in our statement of
financial condition as of September 30, 2000, is a reserve of $4.5 million
related to the estimated remaining costs of discontinuing the subprime mortgage
operations. If actual costs of disposal are higher than anticipated, additional
charges may be required in subsequent periods' results of operations. All
activities related to discontinued operations in the first nine months of 2000
were charged to the discontinued operations reserve.
In determining net interest income charged to discontinued operations, we
included all interest income from our mortgage finance business less an
allocation for interest expense. We allocated average deposits of $79.2 million
for the nine months ended September 30, 2000 and $197.6 million for the nine
months ended September 30, 1999, and average warehouse lines of credit of $2.4
million for the nine months ended September 30, 2000 and $43.7 million for the
nine months ended September 30, 1999, to the discontinued mortgage operations in
computing interest expense.
Comparison of Financial Condition at September 30, 2000 and December 31, 1999
Our total assets decreased $11.1 million, from $438.3 million at December
31, 1999 to $427.2 million at September 30, 2000. This decrease occurred
primarily as a result of a $104.2 million decrease in loans, from $294.7 million
at December 31, 1999 to $190.5 million at September 30, 2000, partially offset
by a $102.9 million increase in cash and securities, from $100.3 million at
December 31, 1999 to $203.2 million at September 30, 2000. The decrease in loans
was comprised of a $134.3 million decrease in subprime mortgage loans as a
result of the closure of the subprime mortgage origination operations and a $3.5
million decrease in loans purchased from the RTC as a result of scheduled
principal amortization and prepayments, offset by a $36.1 million increase (net
of unearned finance charges) in auto contracts.
Cash and cash equivalents decreased $69.9 million, from $90.4 million at
December 31, 1999 to $20.5 million at September 30, 2000. Securities available
for sale increased from $9.9 million at December 31, 1999 to $172.7 million at
September 30, 2000. Securities held to maturity were $10.0 million at September
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. Residual interests were $10.1 million at September 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
19
<PAGE>
prepayment, credit and interest rate risks. Pre-tax write-downs of the value of
residual interests in securitizations totaling $10.3 million were recorded
during the second and third quarters of 2000. The write-downs resulted primarily
from continued high levels of delinquent loans and charge-offs and changes in
prepayment and interest rate assumptions.
Deposits increased $10.6 million, from $291.9 million at December 31, 1999
to $302.5 million at September 30, 2000. Retail deposits increased $13.4
million, from $276.2 million at December 31, 1999 to $289.6 million at September
30, 2000, reflecting the continued financing of the automobile and insurance
premium finance business segments. Wholesale deposits decreased $2.9 million,
from $15.8 million at December 31, 1999 to $12.9 million at September 30, 2000.
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 September 30, 2000
as proceeds from sales of subprime mortgage loans were used to paydown
outstanding balances. Outstanding Federal Home Loan Bank advances were $45
million at September 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
$67.9 million at September 30, 2000, primarily as a result of a net loss of $7.4
million during the nine months ended September 30, 2000.
Management of Interest Rate Risk
The principal objective of our interest rate risk management program is to
evaluate the interest rate risk inherent in our business activities, determine
the level of appropriate risk given our operating environment, capital and
liquidity requirements and performance objectives and manage the risk consistent
with guidelines approved by the Board of Directors. Through such management, we
seek to reduce the exposure of our operations to changes in interest rates. The
Board of Directors reviews on a quarterly basis the asset/liability position of
UPFC, including simulation of the effect on capital of various interest rate
scenarios. UPFC's profits depend, in part, on the difference, or "spread,"
between the effective rate of interest received on the loans it originates and
the interest rates paid on deposits and other financing facilities which can be
adversely affected by movements in interest rates. In addition, between the
time we originate loans and investors' sales commitments are received, we 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 June 30, 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 2 basis points and would result in a $423,000
increase in the NPV of the Bank and a 200 basis point increase in interest rates
was 25 basis points and would result in a $1.7 million decrease in the NPV of
the Bank. At June 30, 2000,
20
<PAGE>
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 June 30, 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. UPFC makes no representation as to the accuracy of
this data.
Interest Rate Sensitivity of Net Portfolio Value
NPV as % of Portfolio
Net Portfolio Value Value of Assets
----------------------------- ----------------------
Change in Rates $ Amount $ Change % Change NPV Ratio % Change
--------------- -------- -------- -------- --------- --------
(Dollars in thousands)
+300 bp 57,711 $(2,984) -5% 13.54% -45 bp
+200 bp 58,964 (1,731) -3% 13.74% -25 bp
+100 bp 59,916 (779) -1% 13.88% -11 bp
0 bp 60,695 -- -- 13.99% --
-100 bp 60,743 48 0% 13.95% -4 bp
-200 bp 61,118 423 +1% 13.97% -2 bp
-300 bp 62,814 2,119 +3% 14.25% +26 bp
Liquidity and Capital Resources
General
Our 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, UPFC 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 we have 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 subprime mortgage operations. Cash flows from sales and securitizations
of loans were $196.7 million during the nine months ended September 30, 2000 and
$566.8 million during the nine months ended September 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 September 30, 2000, such retail deposits were $289.6 million or
95.7% of total deposits.
21
<PAGE>
The Bank uses wholesale and broker-originated deposits to supplement its
retail deposits and, at September 30, 2000, wholesale deposits were $12.9
million or 4.3% of total deposits. The Bank solicits wholesale deposits by
posting its interest rates on a national on-line service which advertises the
Bank's wholesale products to investors. Generally, most of the wholesale
deposit account holders are institutional investors, commercial businesses or
public sector entities. Broker deposits are originated through major dealers
specializing in such products.
The following table sets forth the balances and rates paid on each category
of deposits for the dates indicated.
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
----------------------- -------------------------
Weighted Weighted
Average Average
Balance Rate Balance Rate
--------- ------ --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Passbook accounts $ 45,283 4.31% $ 47,151 4.35%
Checking accounts 13,533 2.16% 16,764 2.02%
Certificates of deposit
Under $100,000 170,103 6.05% 163,874 5.35%
$100,000 and over 73,588 6.28% 64,155 5.51%
-------- --------
Total $302,507 5.67% $291,944 5.03%
======== =========
</TABLE>
The following table sets forth the time remaining until maturity for all
CDs at September 30, 2000 and December 31, 1999.
September 30, December 31,
2000 1999
---------- ------------
(Dollars in thousands)
Maturity within one year $236,574 $199,110
Maturity within two years 7,017 28,770
Maturity within three years 100 149
-------- --------
Total certificates of deposit $243,691 $228,029
======== ========
Although the Bank has a significant amount of deposits maturing in less
than one year, we believe that the Bank's current pricing strategy will enable
it to retain a significant portion of these accounts at maturity and that it
will continue to have access to sufficient amounts of CDs which, together with
other funding sources, will provide the necessary level of liquidity to finance
its lending businesses. However, as a result of these shorter-term deposits, the
rates on these accounts may be more sensitive to movements in market interest
rates which may result in a higher cost of funds.
At September 30, 2000, the Bank exceeded all of its regulatory capital
requirements with tangible capital of $40.1 million, or 9.63% of total adjusted
assets, which is above the required level of $6.2 million, or 1.5%; core capital
of $40.1 million, or 9.63% of total adjusted assets, which is above the required
level of $12.5 million, or 3.0%; and risk-based capital of $33.0 million, or
14.54% of risk-weighted assets, which is above the required level of $18.1
million, or 8.0%.
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 September 30,
2000.
UPFC has other sources of liquidity, including FHLB advances and its cash
and securities portfolio. Through the Bank, we 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
22
<PAGE>
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 September 30,
2000, the Bank's available borrowing capacity under this credit facility was
$63.9 million.
The following table sets forth certain information regarding our short-term
borrowed funds at or for the periods ended on the dates indicated.
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---------------------- ---------------------
(Dollars in thousands)
<S> <C> <C>
FHLB advances
Maximum month-end balance $45,000 $ 2,300
Balance at end of period 45,000 --
Average balance for period 18,095 6
Weighted average interest rate on balance at end of period 6.59% --%
Weighted average interest rate on average balance for period 6.57% 5.84%
Warehouse lines of credit
Maximum month-end balance $26,623 $159,342
Balance at end of period -- 54,415
Average balance for period 2,394 45,404
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%
</TABLE>
We had no material contractual obligations or commitments for capital
expenditures at September 30, 2000. At September 30, 2000, we had no
outstanding commitments to originate loans, compared to $26.8 million at
December 31, 1999.
Lending Activities
Summary of Loan Portfolio. At September 30, 2000, our loan portfolio
constituted $190.5 million, or 44.6% of our total assets, of which $185.5
million, or 97.4%, were held for investment and $5.0 million, or 2.6%, 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 discontinued mortgage operations.
The following table sets forth the composition of our loan portfolio at the
dates indicated.
<TABLE>
September 30, December 31,
2000 1999
----------------------- -----------------------
<S> <C> <C>
Consumer Loans
Automobile installment contracts $164,411 $128,093
Insurance premium finance 22,998 23,846
Other consumer loans 628 864
---------- -----------
Total consumer loans 188,037 152,803
---------- -----------
Mortgage Loans
Mortgage loans (purchased primarily from RTC) 18,310 21,835
Subprime mortgage loans 15,565 149,876
---------- -----------
Total mortgage loans 33,875 171,711
---------- -----------
Commercial Loans
Insurance premium finance 7,509 6,488
Other commercial loans 58 15
---------- -----------
Total commercial loans 7,567 6,503
---------- -----------
Total loans 229,479 331,017
Unearned discounts and premiums (788) (954)
Unearned finance charges (21,393) (21,181)
Allowance for loan losses (16,824) (14,139)
---------- -----------
Total loans, net $190,474 $294,743
========== ===========
</TABLE>
23
<PAGE>
Loan Maturities. The following table sets forth the dollar amount of loans
maturing in our loan portfolio at September 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>
September 30, 2000
---------------------------------------------------------------------------------------------------------------
More Than More Than More Than More Than
One Year 1 Year to 3 Years to 5 Years to 10 Years to More Than
or less 3 Years 5 Years 10 Years 20 Years 20 Years Total
------------ ---------- ----------- ----------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Consumer loans $28,226 $71,465 $88,064 $ 282 $ -- $ -- $188,037
Mortgage loans 98 929 475 3,874 18,896 9,603 33,875
Commercial loans 7,522 45 -- -- -- -- 7,567
------------ ---------- ----------- ----------- ---------- ---------- ----------
Total $35,846 $72,439 $88,539 $4,156 $18,896 $9,603 $229,479
============ ========== =========== =========== ========== ========= ==========
</TABLE>
Classified Assets and Allowance for Loan Losses
We maintain an asset review and classification process for purposes of
assessing loan portfolio quality and the adequacy of its loan loss allowances.
Our 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. We have 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 sufficient risk to warrant
classification in one of the categories described above are designated as
"special mention."
At September 30, 2000, we had $1.2 million in assets classified as special
mention, $14.0 million of assets classified as substandard, $150,000 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
September 30, 2000 and December 31, 1999.
<TABLE>
<CAPTION>
Loan September 30, % of Total December 31, % of Total
Delinquencies 2000 Loans 1999 Loans
------------- ------------------ ------------------ --------------------- ---------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
30 to 59 days $ 2,028 1.1% $ 3,071 1.0%
60 to 89 days 1,215 0.6% 2,443 0.8%
90+ days 10,836 5.7% 13,307 4.6%
--------- ---------- ---------- ----------
Total $14,079 7.4% $18,821 6.4%
========= ========== ========== ==========
</TABLE>
Nonaccrual and Past Due Loans. Our 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. We do not generally modify or rewrite loans and at
September 30, 2000 had no troubled debt restructured loans.
24
<PAGE>
The following table sets forth the aggregate amount of nonaccrual loans (net
of unearned discounts, premiums, unearned finance charges and specific loss
reserves) at September 30, 2000 and December 31, 1999.
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
--------------- -----------------
<S> <C> <C>
Nonaccrual loans
Single-family residential $ 9,281 $15,825
Multi-family residential and commercial -- 100
Consumer and other loans 570 1,060
--------- ---------
Total $ 9,851 $16,985
========= =========
Nonaccrual loans as a percentage of
Total loans held for investment 5.31% 10.73%
Total assets 2.31% 3.88%
Allowance for loan losses as a percentage of
Total loans held for investment 9.07% 8.93%
Nonaccrual loans 170.78% 83.24%
</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 $1.9 million at
September 30, 2000 and $2.6 million at December 31, 1999, and consisted entirely
of one to four family residential properties.
Allowance for Loan Losses. The following is a summary of the changes in the
consolidated allowance for loan losses of UPFC for the periods indicated.
<TABLE>
<CAPTION>
At or For the Nine At or For the
Months Ended Year Ended
September 30, December 31,
2000 1999
---------------------- --------------------
(Dollars in thousands)
<S> <C> <C>
Allowance for Loan Losses
Balance at beginning of period $14,139 $ 10,183
Provision for loan losses - continuing operations 107 432
Provision for loan losses - discontinued operations 2,396 7,376
Charge-offs
Mortgage loans (3,573) (7,525)
Consumer and other loans (4,243) (4,395)
----------- --------
(7,816) (11,920)
Recoveries
Mortgage loans 223 296
Consumer and other loans 237 414
----------- --------
460 710
----------- --------
Net charge-offs (7,356) (11,210)
Acquisition discounts allocated to loss allowance 7,538 7,358
----------- --------
Balance at end of period $16,824 $ 14,139
=========== ========
Annualized net charge-offs to average loans 3.95% 2.89%
Ending allowance to period end loans, net 9.07% 8.93%
</TABLE>
Our policy is to maintain an allowance for loan losses to absorb future losses
which may be realized on UPFC's 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 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
25
<PAGE>
trends of non-performing loans, the concentration of credit, current and
prospective economic conditions and other factors.
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
Our cash equivalents and securities portfolios are used primarily for
liquidity and investment income purposes. Cash equivalents and securities
satisfy regulatory requirements for liquidity.
The following is a summary of our cash equivalents and securities
portfolios as of the dates indicated.
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---------------- ---------------
(Dollars in thousands)
<S> <C> <C>
Balance at end of period
Overnight deposits $ 14,964 $85,500
U.S. agency securities 141,479 9,918
Mortgage-backed securities 31,194 --
Mutual funds (mortgage-backed securities) 10,000 --
Total $197,637 $95,418
========== ==========
Weighted average yield at end of period
Overnight deposits 6.27% 3.25%
U.S. agency securities 6.61% 7.11%
Mortgage-backed securities 7.10% --%
Mutual funds (mortgage-backed securities) 6.58% --%
Weighted average maturity at end of period
Overnight deposits 1 day 1 day
U.S. agency securities 7 months 62 months
Mortgage-backed securities 263 months --
Mutual funds (mortgage-backed securities) 1 day --
</TABLE>
Factors That May Affect Future Results
Because we have a limited operating history, we cannot predict our future
operating results.
We purchased certain assets and assumed certain liabilities of Pan American
Federal Savings Bank from the RTC in 1994. In 1995, we commenced our insurance
premium finance business through a joint venture with BPN, and in 1996 we
commenced our subprime mortgage and automobile finance businesses. Accordingly,
we have only a limited operating history upon which an evaluation of UPFC and
its prospects can be based. For more information, see "Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Because we loan money to credit-impaired borrowers, we may have a higher
risk of delinquency and default.
Loans made to borrowers who cannot obtain financing from traditional
lenders generally entail a higher risk of delinquency and default and higher
losses than loans made to borrowers with better credit. Substantially all of our
auto loans are made to individuals with impaired or limited credit histories,
limited
26
<PAGE>
documentation of income or higher debt-to-income ratios than are permitted by
traditional lenders. If UPFC experiences higher losses than anticipated, our
financial condition, results of operations and business prospects would be
materially and adversely affected.
We may have to restrict our lending activities, if we are unable to maintain
or expand our sources of financing.
Our ability to maintain or expand our current level of lending activity
will depend on the availability and terms of our sources of financing. We fund
our operations principally through deposits, FHLB advances, and 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 our automobile finance
business will depend to a significant extent on the availability of additional
sources of financing. There can be no assurance that we will be able to develop
additional financing sources on acceptable terms or at all. To the extent the
Bank is unable to maintain its deposits and we are unable to develop additional
sources of financing, we may have to restrict its lending activities which would
materially and adversely affect our financial condition, results of operations
and business prospects. For more information, see "Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources."
Our California business focus and economic conditions in California could
adversely affect our operations.
Our lending activities are concentrated primarily in California and are
likely to remain so for the foreseeable future. The performance of our loans may
be affected by changes in California's economic and business conditions. The
occurrence of adverse economic conditions or natural disasters in California
could have a material adverse effect on our financial condition, results of
operations and business prospects.
If we have a higher loss on our discontinued operations than we previously
estimated, additional charges could adversely affect our financial condition.
We discontinued our mortgage origination operations in December 1999 and
recorded a loss on disposal of $6.2 million, net of tax, in our 1999 financial
statements and $3.3 million, net of tax, during the second quarter of 2000. The
loss was estimated based on our 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 our financial condition, results of operations
and business prospects.
If we incorrectly value our residual interests in securitizations, our
financial condition could be adversely affected.
We completed two securitizations during 1999, and as part of these
securitizations have residual interests of $10.1 million at September 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, defaults and interest rates in the
securitizations are different than estimates used by UPFC for valuing its
retained interests, it could have a material adverse effect on our financial
conditions, results of operations and business prospects.
27
<PAGE>
Our systems and controls may not be adequate to support our growth, and if
they are not adequate, it could have a material adverse effect on our
business.
We depend heavily upon our 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 UPFC, are adequate or will continue to be adequate to
support our growth. A failure of our automated systems, including a failure of
data integrity or accuracy, could have a material adverse effect upon our
financial condition, results of operations and business prospects.
If we do not retain our key employees and we fail to attract new employees,
our business will be impaired.
We are dependent upon the continued services of our key employees as well
as the key employees of BPN. The loss of the services of any key employee, or
our failure to attract and retain other qualified personnel, could have a
material adverse effect on our financial condition, results of operations and
business prospects.
Competition may adversely affect our performance.
Each of our businesses is highly competitive. Competition in our markets
can take many forms, including convenience in obtaining a loan, customer
service, marketing and distribution channels, amount and terms of the loan, loan
origination fees and interest rates. Many of our competitors are substantially
larger and have considerably greater financial, technical and marketing
resources than UPFC. We compete in the insurance premium finance business with
other specialty finance companies, independent insurance agents who offer
premium finance services, captive premium finance affiliates of insurance
companies and direct bill plans established by insurance companies. We compete
in the automobile finance industry with commercial banks, the captive finance
affiliates of automobile manufacturers, savings associations and companies
specializing in nonprime automobile finance, many of which have established
relationships with automobile dealerships and may offer dealerships or their
customers other forms of financing, including dealer floor plan financing and
lending, which are not offered by UPFC. In attracting deposits, the Bank
competes primarily with other savings institutions, commercial banks, brokerage
firms, mutual funds, credit unions and other types of investment companies.
Fluctuations in interest rates and general and localized economic
conditions also may affect the competition we face. Competitors with lower costs
of capital have a competitive advantage over UPFC. During periods of declining
interest rates, competitors may solicit our customers to refinance their loans.
In addition, during periods of economic slowdown or recession, our borrowers may
face financial difficulties and be more receptive to offers of our competitors
to refinance their loans.
As we expand into new geographic markets, we will face additional
competition from lenders already established in these markets. There can be no
assurance that we will be able to compete successfully with these lenders.
Changes in interest rates may adversely affect our performance.
Our results of operations depend to a large extent upon our net interest
income, which is the difference between interest income on interest-earning
assets, such as loans and investments, and interest expense on interest-bearing
liabilities, such as deposits and other borrowings. When interest-bearing
liabilities mature or reprice more quickly than interest-bearing assets in a
given period, a significant increase in market rates of interest could have a
material adverse effect on our net income. Further, a significant increase in
market rates of interest could adversely affect demand for our financial
products and services. Interest rates are highly sensitive to many factors,
including governmental monetary policies and domestic and international economic
and political conditions, which are beyond our control. UPFC's liabilities
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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 our lending activities. For more information,
see "Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Management of Interest Rate Risk."
We may be unable to manage our growth, and if we cannot do so, it could have a
material adverse effect on our business.
UPFC has experienced rapid growth in its automobile finance business. In
addition, we may broaden our product offerings to include additional types of
consumer or, in the case of insurance premium finance, commercial loans.
Further, we may enter other specialty finance businesses. This growth strategy
will require additional capital, systems development and human resources. Our
failure to implement a planned growth strategy would have a material adverse
effect on our financial condition, results of operations and business prospects.
Dependence on loan sale markets could adversely affect our performance.
We expect to sell the 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 our loans, or that they will continue to purchase
loans at present prices, and failure to do so could have a material adverse
effect on our financial condition, results of operations and business prospects.
Further, adverse conditions in the asset-backed securitization market could
adversely affect our ability to sell loans at present prices.
Changes in general economic conditions may adversely affect our performance.
Each of our businesses is affected directly by changes in general economic
conditions, including changes in employment rates, prevailing interest rates and
real wages. During periods of economic slowdown or recession, we may experience
a decrease in demand for our financial products and services, an increase in our
servicing costs, a decline in collateral values and an increase in delinquencies
and defaults. A decline in collateral values and an increase in delinquencies
and defaults increase the possibility and severity of losses. Although we
believe that our underwriting criteria and collection methods enable us to
manage the higher risks inherent in loans made to such borrowers, no assurance
can be given that such criteria or methods will afford adequate protection
against such risks. Any sustained period of increased delinquencies, defaults
or losses would materially and adversely affect our financial condition, results
of operations and business prospects.
Impact of inflation and changing prices may adversely affect our performance.
The financial statements and notes 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 our operations. Unlike industrial companies, nearly all of
our assets and liabilities are monetary in nature. As a result, interest rates
have a greater impact on our performance than do the effects of general levels
of inflation. Interest rates do not necessarily move in the same direction or
to the same extent as the price of goods and services.
We may face other risks.
From time to time, UPFC details other risks with respect to its business
and financial results in its filings with the SEC.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
----------------------------------------------------------
For a discussion about market risks, 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 Markets"
30
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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.
-------------------------------
No applicable
Item 4 Other Information.
-----------------
UPFC's President and Chief Executive Officer, Mr. Lawrence J. Grill, has
announced his retirement effective December 31, 2000. Mr. Grill served in this
capacity since April 1994. Mr. Grill will remain a director of UPFC and a
consultant to the company during 2001. Mr. Guillermo Bron will assume Mr.
Grill's responsibilities as Chief Executive Officer in addition to his role as
Chairman of the Board. Mr. Ray C. Thousand has been named President and Chief
Operating Officer of UPFC and Chief Executive Officer of Pan American Bank,
effective January 1, 2001. Mr. Thousand is presently the President of United
Auto Credit Corporation, UPFC's automobile lending subsidiary.
Item 5. 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: November 10, 2000 By: /s/ Lawrence J. Grill
-------------------------------------
Lawrence J. Grill
President and Chief Executive Officer
(Principal Executive Officer)
November 10, 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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