-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SKSKkL7c7BLmxQNbCmP7HXhqnaboT53iVjDQYkXqXmWDg4vm5AwzyndTmvA068oF 6ktWEvSzUqSOjYFSHpXz9A== 0001017062-02-000490.txt : 20020415 0001017062-02-000490.hdr.sgml : 20020415 ACCESSION NUMBER: 0001017062-02-000490 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020326 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED PANAM FINANCIAL CORP CENTRAL INDEX KEY: 0001049231 STANDARD INDUSTRIAL CLASSIFICATION: MORTGAGE BANKERS & LOAN CORRESPONDENTS [6162] IRS NUMBER: 953211687 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-24051 FILM NUMBER: 02586620 BUSINESS ADDRESS: STREET 1: 1300 SOUTH EL CAMINO REAL CITY: SAN MATEO STATE: CA ZIP: 94402 BUSINESS PHONE: 6503451800 MAIL ADDRESS: STREET 1: 1300 SOUTH EL CAMINO REAL CITY: SAN MATEO STATE: CA ZIP: 94402 10-K 1 d10k.txt UNITED PANAM FINANCIAL CORP - 10-K FYE 12/31/2001 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark one) [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2001 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 94-3211687 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 3990 Westerly Place Newport Beach, California 92660 (Address of principal executive offices) (Zip Code) (949) 224-1917 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, No Par Value 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 [ ] - - Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in PART III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the Common Stock held by non-affiliates of the Registrant was approximately $24,302,000, based upon the closing sales price of the Common Stock as reported on the Nasdaq National Market on March 15, 2002. Shares of Common Stock held by each officer, director and holder of 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. Such determination of affiliate status is not necessarily a conclusive determination for other purposes. The number of shares outstanding of the Registrant's Common Stock as of March 15, 2002 was 15,571,400 shares. Documents Incorporated by Reference Portions of the Registrant's Definitive Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A in connection with the 2002 Annual Meeting of Shareholders to be held June 2002 are incorporated by reference in PART III hereof. Such Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2001. UNITED PANAM FINANCIAL CORP. 2001 ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS PART I Item 1. Business 1 General 1 Automobile Finance 2 Insurance Premium Finance 6 Pan American Bank, FSB 11 Discontinued Operations - Mortgage Finance 11 Industry Segments 12 Competition 12 Economic Conditions, Government Policies, Legislation and Regulation 12 Employees 13 Regulation 13 Taxation 24 Subsidiaries 24 Factors That May Affect Future Results of Operations 25 Item 2. Properties 28 Item 3. Legal Proceedings 28 Item 4. Submission of Matters to a Vote of Security Holders 28 PART II Item 5. Market For Registrant's Common Equity and Related Shareholder Matters 29 Item 6. Selected Financial Data 30 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 32 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 46 Item 8. Financial Statements and Supplementary Data 46 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures 47 PART III Item 10. Directors and Executive Officers of the Registrant 48 Item 11. Executive Compensation 48 Item 12. Security Ownership of Certain Beneficial Owners and Management 48 Item 13. Certain Relationships and Related Transactions 48 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 49 SIGNATURES 52
PART I Certain statements in this Annual Report on Form 10-K, 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; 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 our businesses; general economic conditions; impact of inflation and changing prices; and other risks, some of which may be identified from time to time in our filings with the Securities and Exchange Commission (the "SEC"). See "Item 1. Business - Factors That May Affect Future Results of Operations." Item 1. Business General UPFC was incorporated in California on April 19, 1998 for the purpose of reincorporating in California through the merger of United PanAm Financial Corp., a Delaware corporation, into UPFC. 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 ("RTC") on April 29, 1994. UPFC, PAFI and the Bank are considered by the Office of Thrift Supervision ("OTS") to be minority owned. PAFI is a wholly owned subsidiary of UPFC, and the Bank is a wholly owned subsidiary of PAFI. WorldCash Technologies, Inc. ("WorldCash") was incorporated in 1999 as a wholly owned subsidiary of UPFC. United Auto Credit Corp. ("UACC") was incorporated in 1996 as a wholly owned subsidiary of the Bank. For more information on subsidiaries see Item 1, Business Subdivisions. UPFC is a specialty finance company engaged primarily in originating and acquiring for investment retail automobile installment sales contracts and insurance premium contracts. We market to customers who generally cannot obtain financing from traditional lenders. These customers usually pay higher loan fees and 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 reverse repurchase agreements. All of our revenues are attributed to customers located in the United States of America. We commenced operations in 1994 by purchasing from the RTC certain assets and assuming certain liabilities of the Bank's predecessor, Pan American Federal Savings Bank. The Bank is the largest Hispanic-controlled savings association in California. We have used the Bank as a base for expansion into our current specialty finance businesses. In 1995, we commenced our insurance premium finance business through an agreement with BPN Corporation ("BPN") and in 1996 commenced our automobile finance business. In December 1999, we closed our subprime mortgage finance operations to focus on our 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 1. Business - Discontinued Operations - - Mortgage Finance." 1 Automobile Finance Business Overview UPFC entered the nonprime automobile finance business in February 1996 by establishing UACC as a subsidiary of the Bank. UACC purchases auto contracts primarily from dealers in used automobiles, approximately 75% from independent dealers and 25% from franchisees of automobile manufacturers. UACC's borrowers are classified as nonprime because they typically have limited credit histories or credit histories that preclude them from obtaining loans through traditional sources. UACC's business strategy includes controlled growth through a national retail branch network. At December 31, 2001, UACC had a total of 40 branches, of which four were opened in 1996, five in 1997, five in 1998, six in 1999, eight in 2000 and twelve in 2001. UACC maintains nine branch offices located in California, five branch offices located in Florida, three branch offices located in Texas, two branch offices located in each of North Carolina, Arizona, Georgia and Washington, and one each in Colorado, Maryland, Missouri, Oregon, Utah, Virginia, Kansas, Illinois, Kentucky, Tennessee, Ohio, Michigan, Indiana, New Jersey and Massachusetts. At December 31, 2001, UACC's portfolio contained 32,171 auto contracts in the aggregate gross amount of $232.9 million, including unearned finance charges of $18.9 million. Nonprime Automobile Finance Industry Automobile financing is one of the largest consumer finance markets in the United States. In general, the automobile finance industry can be divided into two principal segments: a prime credit market and a nonprime credit market. Traditional automobile finance companies, such as commercial banks, savings institutions, credit unions and captive finance companies of automobile manufacturers, generally lend to the most creditworthy, or so-called prime, borrowers. The nonprime automobile credit market, in which UACC operates, provides financing to borrowers who generally cannot obtain financing from traditional lenders. Historically, traditional lenders have not serviced the nonprime market or have done so only through programs that were not consistently available. Independent companies specializing in nonprime automobile financing and subsidiaries of larger financial services companies have entered this segment of the automobile finance market, but it remains highly fragmented, with no company having a significant share of the market. 2 Operating Summary The following table presents a summary of UACC's key operating and statistical results for the years ended December 31, 2001 and 2000.
At or For the Years Ended December 31, ------------------------------------------------- 2001 2000 -------- --------- (Dollars in thousands, except portfolio and other) Operating Data Gross contracts purchased $233,368 $174,645 Gross contracts outstanding 232,902 176,255 Unearned finance charges 18,881 20,737 Net contracts outstanding 214,021 155,518 Average purchase discount 7.89% 8.08% Annual percentage rate to customers 21.82% 21.72% Allowance for loan losses $ 16,756 $ 12,614 Loan Quality Data Allowance for loan losses (% of net contracts) 7.83% 8.11% Delinquencies (% of net contracts) 31-60 days 0.47% 0.31% 61-90 days 0.22% 0.08% 90+ days 0.11% 0.12% Net charge-offs (% of average net contracts) 5.23% 4.17% Repossessions (net) (% of net contracts) 0.82% 0.62% Portfolio Data Used vehicles 99.0% 99.0% Average vehicle age at time of contract (years) 5.5 5.7 Average original contract term (months) 45.7 44.2 Average gross amount financed as a percentage of KWBB(1) 115% 117% Average net amount financed as a percentage of KWBB (2) 107% 107% Average net amount financed per contract $ 8,530 $ 8,329 Average down payment 17% 19% Average monthly payment $ 278 $ 277 Other Data Number of branches 40 28
- ---------- (1) KWBB represents Kelly Wholesale Blue Book for used vehicles. (2) Net amount financed equals the gross amount financed less unearned finance charges or discounts. Products and Pricing UACC targets transactions which involve a used automobile with an average age of five to seven years and an average original contract term of 42 to 47 months. The target profile of a UACC borrower includes average time on the job of four to five years, average time at current residence of three to four years, an average ratio of total debt to total income of 33% to 35% and an average ratio of total monthly automobile payments to total monthly income of 12% to 15%. The application for an auto contract is taken by the dealer. UACC purchases the auto contract from the dealer at a discount, which increases the effective yield on such contract. At December 31, 2001, we were allocating 10.5% of the net contract amount of new contracts to the allowance for loan losses compared with 9.0% at December 31, 2000. Management periodically reviews the percentage of net contracts allocated to the allowance for loan losses. 3 Sales and Marketing UACC markets its financing program to both independent and franchised automobile dealers. UACC's marketing approach emphasizes scheduled calling programs, marketing materials and consistent follow-up. UACC uses facsimile software programs to send marketing materials to established dealers and potential dealers on a twice-weekly basis in each branch market. UACC's experienced local staff seeks to establish strong relationships with dealers in their vicinity. UACC solicits business from dealers through its branch managers who meet with dealers and provide information about UACC's programs, train dealer personnel in UACC's program requirements and assist dealers in identifying consumers who qualify for UACC's programs. In order to both promote asset growth and achieve required levels of credit quality, UACC compensates its branch managers on the basis of a salary with a bonus of up to 20% that recognizes the achievement of low delinquency ratios, low charge-off percentages, volume and return on average assets targets established for the branch, as well as satisfactory audit results. The bonus calculation stresses loan quality with only 17% based on volume and 83% based on quality and return. When a UACC branch decides to begin doing business with a dealer, a dealer profile and investigation worksheet are completed. UACC and the dealer enter into an agreement that provides UACC with recourse to the dealer in cases of dealer fraud or a breach of the dealer's representations and warranties. Branch management periodically monitors each dealer's overall performance and inventory to ensure a satisfactory quality level, and regional managers regularly conduct audits of the overall branch performance as well as individual dealer performance. The following table sets forth certain data for auto contracts purchased by UACC for the periods indicated. For the Years Ended ---------------------------- December 31, December 31, 2001 2000 ------------ ------------ (Dollars in thousands) Gross amount of contracts $ 233,368 $ 174,645 Average original term of contracts (months) 45.7 44.2 For the year ended December 31, 2001, 29% of UACC's auto contracts were written by its California branches, compared to 41% at December 31, 2000 and 68% at December 31, 1999. In addition to diversifying its geographic concentrations, UACC maintains a broad dealer base to avoid dependence on a limited number of dealers. At December 31, 2001, no dealer accounted for more than 1.5% of UACC's portfolio and the ten dealers from which UACC purchased the most contracts accounted for approximately 7.0% of its aggregate portfolio. Underwriting Standards and Purchase of Contracts Underwriting Standards and Purchase Criteria. Dealers submit credit applications directly to UACC's branches. UACC uses credit bureau reports in conjunction with information on the credit application to make a final credit decision or a decision to request additional information. Only credit bureau reports that have been obtained directly by UACC from the credit bureaus are acceptable. UACC's credit policy places specific accountability for credit decisions directly within the branches. The branch manager or assistant branch manager reviews all credit applications. In general, no branch manager will have credit approval authority for contracts greater than $15,000. Any transaction that exceeds a branch manager's approval limit must be approved by one of UACC's Regional Managers, Division Managers, the Vice President of Operations or the President. Verification. Upon approving or conditioning any application, all required stipulations are presented to the dealer and must be satisfied before funding. All dealers are required to provide UACC with written evidence of insurance in force on a vehicle being financed when submitting the contract for purchase. Prior to funding a contract, the branch must verify by telephone with the insurance agent the customer's insurance coverage with UACC as loss payee. If UACC receives notice of insurance cancellation or non-renewal, the branch will notify the customer of his or her contractual obligation to maintain insurance coverage at all times on the vehicle. However, UACC will not "force place" 4 insurance on an account if insurance lapses and, accordingly, UACC bears the risk of an uninsured loss in these circumstances. Post-Funding Quality Reviews. UACC's Regional Manager and Operations Manager complete quality control reviews of the newly originated auto contracts. These reviews focus on compliance with underwriting standards, the quality of the credit decision and the completeness of auto contract documentation. Additionally, UACC's Regional Managers complete regular branch audits that focus on compliance with UACC's policies and procedures and the overall quality of branch operations and credit decisions. Servicing and Collection UACC services at the branch level all of the auto contracts it purchases. Billing Process. UACC sends each borrower a coupon book. All payments are directed to the customer's respective UACC branch. UACC also accepts payments delivered to the branch by a customer in person. Collection Process. UACC's collection policy calls for the following sequence of actions to be taken with regard to all problem loans: call the borrower at one day past due; immediate follow-up on all broken promises to pay; branch management review of all accounts at ten days past due; and Regional Manager or Division Manager review of all accounts at 45 days past due. UACC will consider extensions or modifications in working a collection problem. All extensions and modifications require the approval of branch management and are monitored by the Regional Manager and Division Manager. Repossessions. It is UACC's policy to repossess the financed vehicle only when payments are substantially in default, the customer demonstrates an intention not to pay or the customer fails to comply with material provisions of the contract. All repossessions require the prior approval of the branch manager. In certain cases, the customer is able to pay the balance due or bring the account current, thereby redeeming the vehicle. When a vehicle is repossessed and sold at an automobile auction or through a private sale, the sale proceeds are subtracted from the net outstanding balance of the loan with any remaining amount recorded as a loss. UACC generally pursues all customer deficiencies. Allowance for Loan Losses. UACC's policy is to charge-off accounts delinquent in excess of 120 days or place them on nonaccrual. The remaining balance of accounts where the collateral has been repossessed and sold is charged-off by the end of the month in which the collateral is sold and the proceeds collected. When a loan is placed on nonaccrual, all previously accrued but unpaid interest on such accounts is reversed. Accounts are not returned to accrual status until they are brought current. Loss allowances based on expected losses over the life of the contract are established when each contract is purchased from the dealer. The allowance is provided from the dealer discount that is taken on each transaction. Loss allowance analyses are performed regularly to determine the adequacy of current allowance levels. At December 31, 2001, we allocated 10.5% of the net contract purchased to the allowance for loan losses. The loss allowances recorded at the time of purchase represent an estimate of expected losses for these loans. If actual experience exceeds estimates, an additional provision for losses is established as a charge against earnings. Management periodically reviews the percentage of net contracts allocated to the allowance for loan losses. 5 The following table reflects UACC's cumulative losses (i.e., net charge-offs as a percent of original net contract balances) for contract pools (defined as the total dollar amount of net contracts purchased in a six-month period) purchased from October 1996 through March 2001. Contract pools subsequent to March 2001 were not included in this table because the loan pools were not seasoned enough to provide a meaningful comparison with prior periods.
Number of Oct. 1996 Apr. 1997 Oct. 1997 Apr. 1998 Oct. 1998 Apr. 1999 Oct. 1999 Apr. 2000 Oct. 2000 Months - - - - - - - - - Outstanding Mar. 1997 Sept. 1997 Mar. 1998 Sept. 1998 Mar. 1999 Sept. 1999 Mar. 2000 Sept.2000 Mar.2001 --------- ---------- --------- ---------- --------- ---------- --------- --------- --------- 1 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 4 0.0% 0.1% 0.0% 0.0% 0.0% 0.1% 0.1% 0.1% 0.0% 7 0.4% 0.5% 0.5% 0.5% 0.3% 0.5% 0.4% 0.5% 0.4% 10 1.4% 1.7% 1.6% 1.5% 0.9% 1.4% 1.3% 1.5% 1.4% 13 3.1% 3.3% 2.9% 2.7% 1.8% 2.3% 2.4% 2.4% 2.9% 16 4.4% 4.5% 4.0% 3.6% 2.9% 3.4% 3.3% 3.5% 19 5.4% 5.3% 4.7% 4.4% 3.8% 4.1% 4.2% 4.8% 22 6.0% 6.0% 5.4% 5.0% 4.5% 4.9% 5.0% 25 6.6% 6.8% 5.9% 5.6% 5.2% 5.7% 6.0% 28 7.5% 7.2% 6.4% 5.9% 5.8% 6.2% 31 7.9% 7.6% 6.7% 6.4% 6.3% 6.7% 34 8.2% 7.9% 6.9% 6.7% 6.6% 37 8.3% 8.0% 7.0% 6.9% 6.9% 40 8.6% 8.1% 7.2% 7.0% 43 8.8% 8.3% 7.2% 7.2% 46 8.8% 8.3% 7.3% 49 8.8% 8.4% 7.3% 52 8.8% 8.4% 55 8.8% 8.4% 58 8.8% 61 8.8% Original Pool ($000) $9,297 $15,575 $22,488 $30,271 $36,773 $42,115 $47,979 $57,528 $67,873 ========= ========== ========= ========== ========= ========== ========= ========= ========= Remaining Pool ($000) $ 20 $ 78 $ 508 $ 1,669 $ 3,401 $ 9,513 $17,276 $29,270 $46,850 ========= ========== ========= ========== ========= ========== ========= ========= ========= Remaining Pool (%) 0% 1% 2% 6% 9% 23% 36% 51% 69% ========= ========== ========= ========== ========= ========== ========= ========= =========
Insurance Premium Finance Business Overview In May 1995, we entered into an agreement with BPN relating to an insurance premium finance business under the name "ClassicPlan" (such business is referred to herein as "IPF"). Under this ongoing agreement, which commenced operations in September 1995, the Bank underwrites and finances private passenger automobile and small business ("commercial") insurance premiums in California. BPN markets this financing primarily to independent insurance agents and, thereafter, services such loans for the Bank. IPF markets its automobile insurance financing to drivers who are classified by insurance companies as non-standard or high risk for a variety of reasons, including age, driving record, a lapse in insurance coverage or ownership of high performance automobiles. Insurance companies that underwrite insurance for such drivers, including those participating in the assigned risk programs established by California law, generally either do not offer financing of insurance premiums or do not offer terms as flexible as those offered by IPF. IPF markets its commercial insurance financing to small businesses for property/casualty and specialty classes of insurance on an excess or surplus lines basis, including commercial multi-peril, other liability, commercial automobile liability/comprehensive, fire and product liability. Customers are directed to BPN through a non-exclusive network of insurance brokers and agents who sell automobile or commercial insurance and offer financing through programs like those offered by IPF. On a typical 6 twelve-month insurance policy, the borrower makes a cash down payment of 15% to 25% of the premium (plus certain fees) and the balance is financed under a contract that contains a payment period of shorter duration than the policy term. In the event that the insured defaults on the loan, the Bank has the right to obtain directly from the insurance company the unearned insurance premium held by the insurance company, which can then be applied to the outstanding loan balance (premiums are earned by the insurance company over the life of the insurance policy). Each contract is designed to ensure that, at any point during the term of the underlying policy, the unearned premium under the insurance policy exceeds the unpaid principal amount due under the contract. Under the terms of the contract, the insured grants IPF a power of attorney to cancel the policy in the event the insured defaults under the contract. Upon cancellation, the insurance company is required by California law to remit the unearned premium to IPF, which, in turn, offsets this amount against any amounts due from the insured. IPF does not sell or have the risk of underwriting the underlying insurance policy. IPF seeks to minimize its credit risk by perfecting a security interest in the unearned premium, avoiding concentrations of policies with insurance companies that are below certain industry ratings, and doing automobile premium financing to date only in California which maintains an insurance guaranty fund that protects consumers and insurance premium finance companies against losses from failed insurance companies. IPF seeks to minimize its credit risks in the financing of commercial insurance policies by perfecting a security interest in the unearned premium, obtaining premium verifications on policies over $5,000, avoiding concentrations of policies with insurance companies that are below certain ratings and limiting the amount of surplus lines business which is not covered by California's guaranty fund. At December 31, 2001, IPF had approximately 11% of its commercial loan balances with surplus line insurance companies doing business on a non-admitted basis in California. In addition to insurance premiums, IPF will also finance broker fees (i.e., fees paid by the insured to the agent). If a policy cancels, the agent repays any unearned broker fee financed by IPF. Broker fee financing represents approximately 3.4% of total loans outstanding. At December 31, 2001, approximately 20% of all broker fee financing was to a single insurance agency. When IPF agrees to finance an agent's broker fees, a credit limit is established for the agent. Agents are required to maintain deposits with the Bank to mitigate IPF's possible losses on broker fees financed. To date, the Bank has not charged-off a broker fee balance. At December 31, 2001, the aggregate gross amount of insurance premium finance contracts was $39.6 million with 57,651 contracts outstanding. Commercial loan balances represented 27.56% of these loan balances at December 31, 2001. During 2001, IPF originated 98,792 insurance premium finance contracts of which 12,937 or 13.0% were commercial loan contracts Relationship with BPN BPN is headquartered in Chino, California, and markets our insurance premium finance program under the trade name "ClassicPlan." At December 31, 2001, BPN had 26 employees. BPN solicits insurance agents and brokers to submit their clients' financing requests to IPF. BPN is responsible for monitoring the agents' performance and assisting with IPF's compliance with applicable consumer protection, disclosure and insurance laws, and providing customer service, data processing and collection services to IPF. IPF pays fees to BPN for these services. The amount of these fees is based on fixed charges, which include a loan service fee per contract and cancellation fees charged by IPF, and the earnings of the loan portfolio, which include 50% of the interest earned on portfolio loans after IPF subtracts a specified floating portfolio interest rate and 50% of late fees and returned check fees charged by IPF. Additionally, BPN and IPF share equally certain collection and legal expenses which may occur from time-to-time, all net loan losses experienced on the insurance premium loan portfolio and all net losses up to $375,000 experienced on the broker fees loan portfolio. BPN bears losses over $375,000 experienced on the broker fees loan portfolio. The shareholders of BPN have entered into certain guaranty agreements in favor of IPF whereby they agree to pay any sums owed to IPF and not paid by BPN. The total potential liability of the guarantors to IPF is limited to $2,000,000 plus any amounts by which BPN is obligated to indemnify IPF. Under these guaranties, all debts of BPN to the guarantors are subordinated to the full payment of all obligations of BPN to IPF. 7 UPFC has entered into an option agreement with BPN and its shareholders whereby we may purchase all of the issued and outstanding shares of BPN (the "Share Option") and all additional shares of any BPN affiliate which may be organized outside of California (the "Affiliate Share Option"). The option period expires March 31, 2005 and to exercise this option, the Bank must pay a $750,000 noncompete payment to certain shareholders and key employees of BPN plus the greater of $3,250,000 or four times BPN's pre-tax earnings for the twelve complete consecutive calendar months immediately preceding the date of exercise less the noncompete payment of $750,000. The Affiliate Share Option may not be exercised independently of the Share Option. The exercise price of the Affiliate Share Option will equal the sum of four times BPN Affiliate's pre-tax earnings for the twelve-month period prior to exercise. In connection with the purchase of the rights to solicit new and renewal business from a competitor, the Bank made loans to two shareholders of BPN in the aggregate amount of $1.2 million. The loans were fully paid during 2001. Automobile Insurance Premium Finance Industry Insurance Finance. Although reliable data concerning the size and composition of the personal lines premium finance market is not available, we believe that the industry is highly fragmented with no independent insurance premium finance company accounting for a significant share of the market. UPFC believes that the insurance premium finance industry in California is somewhat more concentrated than elsewhere in the nation, with several long-established competitors. In addition, insurance companies offering direct bill payment programs and direct sales of insurance policies to the consumer are providing significant competition to UPFC. California Insurance Laws. Under current law, automobiles in the state of California cannot be registered without providing proof of insurance or posting required bonds with the Department of Motor Vehicles. In California, as in most states, insurance companies fall into two categories, admitted or non-admitted. All insurance companies licensed to do business in California are required to be members of the California Insurance Guarantee Association ("CIGA"), and are classified as "admitted" companies. CIGA was established to protect insurance policyholders in the event the company that issued a policy fails financially, and to establish confidence in the insurance industry. Should an insurance company fail, CIGA is empowered to raise money by levying member companies. CIGA pays claims against insurance companies, which protects both the customer and the premium financiers should an admitted insurance company fail. In such event, CIGA will refund any unearned premiums. This provides protection to companies, such as IPF, that provide insurance premium financing. As a result, IPF's policy is to establish limits to the amount of financing of insurance policies issued by non-admitted carriers. Because insurance companies will not voluntarily insure drivers whom they consider to be excessively high risk, California has a program called the California Automobile Assigned Risk Program ("CAARP"), to which all admitted companies writing private passenger automobile insurance policies must belong. This 45-year-old program is an insurance plan for high risk, accident-prone drivers who are unable to purchase insurance coverage from regular insurance carriers. CAARP policies are distributed to the admitted companies in proportion to their share of California's private passenger automobile insurance market. The companies participating in CAARP do not have any discretion in choosing the customers they insure under the program. The customers are arbitrarily assigned to them by CAARP. Although CAARP offers financing of its policy premiums, its terms are not as competitive as those offered by the insurance premium finance companies and, therefore, many CAARP policies are financed by others. At December 31, 2001, approximately 6.6% of the insurance policies financed by IPF were issued under CAARP. 8 Operating Summary The following table presents a summary of IPF's key operating and statistical results for the years ended December 31, 2001 and 2000.
At or For the Years Ended December 31, (Dollars in thousands, except portfolio averages) ------------------------------------------------- 2001 2000 -------- -------- Operating Data Loan originations $104,771 $100,085 Loans outstanding at period end 39,631 34,185 Average gross yield (1) 19.96% 24.05% Average net yield (2) 14.72% 15.36% Allowance for loan losses $ 495 $ 346 Loan Quality Data Allowance for loan losses (% of loans outstanding) 1.25% 1.01% Net charge-offs (% of average loans outstanding) (3) 0.81% 0.89% Delinquencies (% of loans outstanding) (4) 1.11% 1.44% Portfolio Data Average monthly loan originations (number of loans) 8,233 8,353 Average loan size at origination $ 824 $ 998 Commercial insurance policies (% of loans outstanding) 27.56% 24.40% CAARP policies (% of loans outstanding) 6.58% 5.46% Cancellation rate (% of premiums financed) 41.5% 37.6%
- ---------- (1) Gross yield represents total rates and fees paid by the borrower. (2) Net yield represents the yield to IPF after interest and servicing fees made to BPN. (3) Includes only the Bank's 50% share of charge-offs. (4) This statistic measures delinquencies on canceled policy balances. Since IPF seeks recovery of unearned premiums from the insurance companies, which can take up to 90 days, loans are not considered delinquent until more than 90 days past due. Products and Pricing IPF generally charges from 16% to 23% annualized interest (depending on the amount financed) and a $40 processing fee for each consumer contract, which we believe is competitive in IPF's industry. In addition, contracts provide for the payment by the insured of a delinquency charge and, if the default results in cancellation of any insurance policy listed in the contract, for the payment of a cancellation charge. Certain of these finance charges and fees are shared with BPN. See "Relationship with BPN." The insured makes a minimum 15% down payment on an annual policy and pays the remainder in a maximum of ten monthly payments. IPF designs its programs so that the unearned premium is equal to or greater than the remaining principal amount due on the contract by requiring a down payment and having a contract term shorter than the underlying policy term. Sales and Marketing IPF currently markets its insurance premium finance program through a network of over 1300 agents, located throughout California. Relationships with agents are established by BPN's marketing representatives. IPF focuses on providing each agent with up-to-date information on its customers' accounts, which allows the agent to service customers' needs and minimize the number of policies that are canceled. Many of IPF's largest agents have computer terminals provided by BPN in their offices, which allow on-line access to customer information. Agents for IPF receive an average producer fee ($20, equal to 50% of the aforementioned $40 processing fee per contract), as collateral against early cancellations. IPF does not require return of this $20 producer fee for early policy cancellation unless the policy pays off in the first 30 days. 9 Underwriting Standards IPF is a secured lender, and upon default, relies on its security interest in the unearned premium held by the insurance company. IPF can, however, suffer a loss on an insurance premium finance contract for four reasons: loss of all or a portion of the unearned premium due to its failure to cancel the contract on a timely basis; an insolvency of the insurance company holding the unearned premium not otherwise covered by CIGA; inadequacy of the unearned premium to cover charges in excess of unpaid principal amount; and cost of collection and administration, including the time value of money, exceeding the unpaid principal and other charges due under the contract. Careful administration of contracts is critical to protecting IPF against loss. Credit applications are taken at the insurance agent's office. Given the secondary source of repayment on unearned premiums due from the insurance company on a canceled policy, and in most cases, access to CIGA, IPF does not carry out a credit investigation of a borrower. Servicing and Collection Billing Process. A customer's monthly payments are recorded in BPN's computer system on the date of receipt. BPN's computer system is designed to provide protection against principal loss by automatically canceling a defaulted policy no later than 18 days after the customer's latest payment due date. If a payment is not received within 6 days following its due date, BPN's computer system automatically prints a notice of intent to cancel and assesses a late fee which is mailed to the insured and his or her insurance agent stating that payment must be received within 18 days after the due date or IPF will cancel the insurance policy. If payment is received within the 18 day period, BPN's computer system returns the account to normal status. Collections Process. If IPF does not receive payment within the statutory period set forth in the notice of intent to cancel, BPN's computer system will automatically generate a cancellation notice on the next business day, instructing the insurance company to cancel the insured's insurance policy and refund any unearned premium directly to IPF for processing. Although California law requires the insurance company to refund unearned premiums within 30 days of the cancellation date, most insurance companies pay on more extended terms. After cancellation, IPF charges certain allowable fees. Although the gross return premium may not fully cover the fees and interest owed to IPF by the insured, principal generally is fully covered. Policies, which are canceled in the first two months, generally have a greater risk of loss of fees. IPF charges against income a general provision for possible losses on finance receivables in such amounts as management deems appropriate. Case-by-case direct write-offs, net of recoveries on finance receivables, are charged to IPF's allowance for possible losses. This allowance amount is reviewed periodically in light of economic conditions, the status of outstanding contracts and other factors. Insurance Company Failure. One of the principal risks involved in financing insurance premiums is the possible insolvency of an insurance company. Another risk is that an insurance company's financial circumstances cause it to delay its refunds of unearned premiums. Either event can adversely affect the yield to an insurance premium finance company on a contract. Despite the protection afforded by CIGA, IPF also reviews the insurance company financial statements or the ratings assigned to the insurance companies by A.M. Best, an insurance company rating agency. To minimize its exposure to risks resulting from the insolvency of an insurance company, IPF limits the number of policies financed that are issued by insurance companies rated "B" or lower by A.M. Best. 10 Pan American Bank, FSB Business Overview The Bank is a federally-chartered stock savings bank which was formed in 1994. It is the largest Hispanic-controlled savings association in California with four retail branch offices in the state and $357.4 million in deposits at December 31, 2001. The Bank has been the principal funding source to date for our insurance premium and automobile finance businesses primarily through its retail and wholesale deposits and FHLB advances. The Bank has focused its branch marketing efforts on building a middle-income customer base, including some efforts targeted at local Hispanic communities. In addition to operating its retail banking business through its branches, the Bank provides, subject to appropriate cost sharing arrangements, compliance, risk management, executive, financial, facilities and human resources management to other business units of UPFC. The business of the Bank is subject to substantial government supervision and regulatory requirement. See "Regulation - Regulation of the Bank." In December 2001 the Bank withdrew its application with the California Department of Financial Institutions (the "DFI") to convert to a California state-chartered commercial bank. The Bank had been seeking conversion so it would not be required to meet the tests of a "qualified thrift lender" (see Regulation - Regulation of the Bank - Qualified Thrift Lender Test") as well as certain lending limits under the Home Owners Loan Act ("HOLA"). The Bank has determined that it will be able to meet these requirements and maintain safety, adequate capital ratios and profitability. Therefore, it withdrew its application. Discontinued Operations - Mortgage Finance From 1996 to the end of 1999, one of our primary lending businesses was mortgage finance. We originated and sold or securitized subprime mortgage loans secured primarily by first mortgages on single-family residences through United PanAm Mortgage, a division of the Bank (such business is referred to as "UPAM"). The market for subprime mortgage lending deteriorated late in 1998 in response to disruptions in the global capital markets, causing a severe liquidity crisis in the mortgage securitization markets. As a result, the demand for subprime mortgage loans was negatively affected and whole loan prices dropped precipitously in the fourth quarter of 1998. To compensate for declining loan sale prices, we implemented a number of actions including consolidating loan branches, reducing overhead costs and improving loan quality. However, the mortgage finance division was unable to achieve targeted profitability levels. Consequently, we decided to discontinue this division to concentrate efforts on our other businesses. Accordingly, related operating activity for UPAM has been reclassified and reported as discontinued operations in the consolidated financial statements. A loss on disposal for UPAM of $6.2 million, net of tax, was included in the 1999 financial statements and provided for lease terminations, employment severance and benefits, write-off of fixed assets and leasehold improvements and an accrual for estimated future operating losses of UPAM. During 2000, UPFC recorded an additional loss of $3.3 million, net of tax, related to disposing of UPAM's remaining subprime mortgage loans. This loss reflected further price deterioration primarily in UPAM's non-performing mortgage portfolio. Loan Origination UPAM originated $76.0 million of mortgage loans in January and February 2000 when this operation was discontinued. No such loans were originated in 2001. Loan Sales and Securitizations Whole Loan Sales. In connection with the disposition of UPAM's remaining subprime loan portfolio, in 2001 UPAM sold, for cash paid in full at closing, $21.9 million of mortgage loans through whole loan sales at a weighted average sales price equal to 95% of the original principal balance of the loans sold. Whole loan sales were made on a non-recourse basis pursuant to purchase agreements containing customary representations and warranties by UPAM. In the event of a breach of such representations and warranties, UPAM may be required to repurchase certain loans. During 2001, UPAM repurchased from investors $284,000 of such 11 loans compared with $4.3 million in 2000. The Bank believes it has minimal exposure to loss from obligations to repurchase loans in the future. Securitizations. UPAM completed two securitizations in March and October of 1999 in the aggregate principal amount of approximately $458.0 million. As part of the 1999 securitizations, we recorded residual interests in securitizations consisting of beneficial interests in the form of an interest-only strip representing the subordinated right to receive cash flows from the pool of securitized loans after payment of required amounts to the holders of the securities and certain costs associated with the securitization. UPFC sold all of the residual interests arising from the 1999 securitizations in January 2001. Accordingly, as of December 31, 2000, these residual interests were valued based on the terms and conditions of the sales contract and the cash proceeds received at the settlement date in January 2001. Industry Segments Information regarding industry segments is set forth in Footnote Number 19 to the Consolidated Financial Statements included in Item 8 to this Annual Report on Form 10-K. Competition 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 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 nonprime 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 seek to expand into new geographic markets, we will face additional competition from lenders already established in these markets. Economic Conditions, Government Policies, Legislation, and Regulation UPFC's profitability, like most financial institutions, is primarily dependent on interest rate differentials. In general, the difference between the interest rates paid by the Bank on interest-bearing liabilities, such as deposits and other borrowings, and the interest rates received by the Bank on its interest-earning assets, such as loans extended to its clients and securities held in its investment portfolio, comprise the major portion of UPFC's earnings. These rates are highly sensitive to many factors that are beyond the control of UPFC and the Bank, such as inflation, recession and unemployment, and the impact which future changes in domestic and foreign economic conditions might have on UPFC and the Bank cannot be predicted. The business of the Bank is also influenced by the monetary and fiscal policies of the federal government and the policies of regulatory agencies, particularly the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"). The Federal Reserve Board implements national monetary policies (with objectives such as curbing inflation and combating recession) through its open-market operations in U.S. Government 12 securities by adjusting the required level of reserves for depository institutions subject to its reserve requirements, and by varying the target federal funds and discount rates applicable to borrowings by depository institutions. The actions of the Federal Reserve Board in these areas influence the growth of bank loans, investments, and deposits and also affect interest rates earned on interest-earning assets and paid on interest-bearing liabilities. The nature and impact on UPFC and the Bank of any future changes in monetary and fiscal policies cannot be predicted. From time to time, legislation, as well as regulations, are enacted which have the effect of increasing the cost of doing business, limiting or expanding permissible activities, or affecting the competitive balance between banks and other financial services providers. Proposals to change the laws and regulations governing the operations and taxation of banks, bank holding companies, and other financial institutions and financial services providers are frequently made in the U.S. Congress, in the state legislatures, and before various regulatory agencies. This legislation may change banking statutes and the operating environment of UPFC and its subsidiaries in substantial and unpredictable ways. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions. UPFC cannot predict whether any of this potential legislation will be enacted, and if enacted, the effect that it, or any implementing regulations, would have on the financial condition or results of operations of UPFC or any of its subsidiaries. See "Business - Regulation." Employees At December 31, 2001, UPFC had 335 full-time equivalent employees. We believe that we have been successful in attracting quality employees and that our employee relations are satisfactory. Regulation General The Bank is a federally-chartered savings association insured under the Savings Association Insurance Fund ("SAIF") and subject to extensive regulation by the Office of Thrift Supervision ("OTS") and the Federal Deposit Insurance Corporation ("FDIC"). Savings and loan holding companies and savings associations are extensively regulated under both federal and state law. This regulation is intended primarily for the protection of depositors and the SAIF and not for the benefit of shareholders of UPFC. The following information describes certain aspects of that regulation applicable to UPFC and the Bank, and does not purport to be complete. The discussion is qualified in its entirety by reference to all particular statutory or regulatory provisions. Regulation of the Company General. UPFC, as well as its subsidiary PAFI, is a unitary savings and loan holding company subject to regulatory oversight by the Office of Thrift Supervision. As such, UPFC is required to register and file reports with the OTS and is subject to regulation and examination by the OTS. In addition, the OTS has enforcement authority over UPFC and its subsidiaries, which also permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings association. Activities Restriction Test. As a unitary savings and loan holding company, UPFC generally is not subject to activity restrictions, provided the Bank satisfies the Qualified Thrift Lender ("QTL") test or meets the definition of a domestic building and loan association pursuant to the Internal Revenue Code of 1986, as amended (the "Code"). UPFC presently intends to continue to operate as a unitary savings and loan holding company. Recent legislation terminated the "unitary thrift holding company exemption" for all companies that apply to acquire savings associations after May 4, 1999. Since UPFC is grandfathered, its unitary holding company powers and authorities were not affected. See "Financial Services Modernization Legislation." However, if UPFC acquires control of another savings association as a separate subsidiary, it would become a multiple savings and loan holding company, and the activities of UPFC and any of its subsidiaries (other than the Bank or any other SAIF-insured 13 savings association) would become subject to restrictions applicable to bank holding companies unless such other associations each also qualify as a QTL or domestic building and loan association and were acquired in a supervisory acquisition. Furthermore, if UPFC were in the future to sell control of the Bank to any other company, such company would not succeed to UPFC grandfathered status under and would be subject to the same business activity restrictions. See "Regulation of the Bank - Qualified Thrift Lender Test." Restrictions on Acquisitions. UPFC must obtain approval from the OTS before acquiring control of any other SAIF-insured association. Such acquisitions are generally prohibited if they result in a multiple savings and loan holding company controlling savings associations in more than one state. However, such interstate acquisitions are permitted based on specific state authorization or in a supervisory acquisition of a failing savings association. Federal law generally provides that no "person," acting directly or indirectly or through or in concert with one or more other persons, may acquire "control," as that term is defined in OTS regulations, of a federally-insured savings association without giving at least 60 days prior written notice to the OTS and providing the OTS an opportunity to disapprove the proposed acquisition. In addition, no company may acquire control of such an institution without prior OTS approval. These provisions also prohibit, among other things, any director or officer of a savings and loan holding company, or any individual who owns or controls more than 25% of the voting shares of a savings and loan holding company, from acquiring control of any savings association not a subsidiary of the savings and loan holding company, unless the acquisition is approved by the OTS. For additional restrictions on the acquisition of a unitary thrift holding company, see "Financial Services Modernization Legislation." USA Patriot Act of 2001 On October 26, 2001, President Bush signed the USA Patriot Act of 2001. Enacted in response to the terrorist attacks in New York, Pennsylvania and Washington, D.C. on September 11, 2001, the Patriot Act is intended to strengthen U.S. law enforcement's and the intelligence communities' abilities to work cohesively to combat terrorism on a variety of fronts. The potential impact of the Patriot Act on financial institutions of all kinds is significant and wide ranging. The Patriot Act contains sweeping anti-money laundering and financial transparency laws and requires various regulations, including: . due diligence requirements for financial institutions that administer, maintain, or manage private banks accounts or correspondent accounts for non-US persons; . standards for verifying customer identification at account opening; . rules to promote cooperation among financial institutions, regulators, and law enforcement entities in identifying parties that may be involved in terrorism or money laundering; . reports by nonfinancial trades and businesses filed with the Treasury Department's Financial Crimes Enforcement Network for transactions exceeding $10,000; and . filing of suspicious activities reports of securities by brokers and dealers if they believe a customer may be violating U.S. laws and regulations. The Company is not able to predict the impact of the Patriot Act on its financial condition or results of operations at this time. Financial Services Modernization Legislation General. On November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley Act of 1999 (the "GLB"). The GLB repeals the two affiliation provisions of the Glass-Steagall Act: . Section 20, which restricted the affiliation of Federal Reserve Member Banks with firms "engaged principally" in specified securities activities; and . Section 32, which restricts officer, director, or employee interlocks between a member bank and any company or person "primarily engaged" in specified securities activities. 14 In addition, the GLB also contains provisions that expressly preempt any state law restricting the establishment of financial affiliations, primarily related to insurance. The general effect of the law is to establish a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms, and other financial service providers by revising and expanding the Bank Holding Company Act framework to permit a holding company organization to engage in a full range of financial activities through a new entity known as a "Financial Holding Company." "Financial activities" is broadly defined to include not only banking, insurance, and securities activities, but also merchant banking and additional activities that the Federal Reserve Board, in consultation with the Secretary of the Treasury, determines to be financial in nature, incidental to such financial activities, or complementary activities that do not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally. The GLB provides that no company may acquire control of an insured savings association unless that company engages, and continues to engage, only in the financial activities permissible for a Financial Holding Company, unless grandfathered as a unitary savings and loan holding company. The GLB grandfathers any company that was a unitary savings and loan holding company on May 4, 1999 or became a unitary savings and loan holding company pursuant to an application pending on that date. Such a company may continue to operate under present law as long as the company continues to meet two tests: it controls only one savings institution, excluding supervisory acquisitions, and each such institution meets the QTL test. Such a grandfathered unitary savings and loan holding company also must continue to control at least one savings association, or a successor institution, that it controlled on May 4, 1999. The GLB also permits national banks to engage in expanded activities through the formation of financial subsidiaries. A national bank may have a subsidiary engaged in any activity authorized for national banks directly or any financial activity, except for insurance underwriting, insurance investments, real estate investment or development, or merchant banking, which may only be conducted through a subsidiary of a Financial Holding Company. Financial activities include all activities permitted under new sections of the Bank Holding Company Act or permitted by regulation. UPFC and the Bank do not believe that the GLB will have a material adverse effect on the operations of UPFC and the Bank in the near-term. However, to the extent that the act permits banks, securities firms, and insurance companies to affiliate, the financial services industry may experience further consolidation. The GLB is intended to grant to community banks certain powers as a matter of right that larger institutions have accumulated on an ad hoc basis and which unitary savings and loan holding companies already possess. Nevertheless, the GLB may have the result of increasing the amount of competition that UPFC and the Bank face from larger institutions and other types of companies offering financial products, many of which may have substantially more financial resources than UPFC and the Bank. In addition, because UPFC may only be acquired by other unitary savings and loan holding companies or Financial Holding Companies, the legislation may have an anti-takeover effect by limiting the number of potential acquirors or by increasing the costs of an acquisition transaction by a bank holding company that has not made the election to be a Financial Holding Company under the GLB. Privacy. Under the GLB, federal banking regulators adopted rules that limit the ability of banks and other financial institutions to disclose non-public information about consumers to nonaffiliated third parties. Pursuant to these rules, effective July 1, 2001, financial institutions must provide: . initial notices to customers about their privacy policies, describing the conditions under which they may disclose nonpublic personal information to nonaffiliated third parties and affiliates; . annual notices of their privacy policies to current customers; and . a reasonable method for customers to "opt out" of disclosures to nonaffiliated third parties. These privacy provisions affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors. 15 Regulation of Insurance Premium Finance Companies The insurance premium finance industry is subject to state regulations. The regulatory structure of each state places certain restrictions on the terms of loans made to finance insurance premiums. These restrictions, among other things, generally provide that the lender must provide certain cancellation notices to the insured and the insurer in order to exercise an assigned right to cancel an insurance policy in the event of a default under an insurance premium finance agreement and to obtain in connection therewith a return from the insurer of any unearned premiums that have been assigned by the insured to the lender. Such state laws also require that certain disclosures be delivered by the insurance agent or broker arranging for such credit to the insured regarding the amount of compensation to be received by such agent or broker from the lender. Regulation of Nonprime Automobile Lending UACC's automobile lending activities are subject to various federal and state consumer protection laws, including Truth in Lending, Equal Credit Opportunity Act, Fair Credit Reporting Act, the Federal Fair Debt Collection Practices Act, the Federal Trade Commission Act, the Federal Reserve Board's Regulations B and Z, and state motor vehicle retail installment sales acts. Retail installment sales acts and other similar laws regulate the origination and collection of consumer receivables and impact UACC's business. These laws, among other things, require UACC to obtain and maintain certain licenses and qualifications, limit the finance charges, fees and other charges on the contracts purchased, require UACC to provide specified disclosures to consumers, limit the terms of the contracts, regulate the credit application and evaluation process, regulate certain servicing and collection practices, and regulate the repossession and sale of collateral. These laws impose specific statutory liabilities upon creditors who fail to comply with their provisions and may give rise to a defense to payment of the consumer's obligation. In addition, certain of the laws make the assignee of a consumer installment contract liable for the violations of the assignor. Each dealer agreement contains representations and warranties by the dealer that, as of the date of assignment, the dealer has compiled with all applicable laws and regulations with respect to each contract. The dealer is obligated to indemnify UACC for any breach of any of the representations and warranties and to repurchase any non-conforming contracts. UACC generally verifies dealer compliance with usury laws, but does not audit a dealer's full compliance with applicable laws. There can be no assurance that UACC will detect all dealer violations or that individual dealers will have the financial ability and resources either to repurchase contracts or indemnify UACC against losses. Accordingly, failure by dealers to comply with applicable laws, or with their representations and warranties under the dealer agreement could have a material adverse affect on UACC. UACC believes it is currently in compliance in all material respects with applicable laws, but there can be no assurance that UACC will be able to maintain such compliance. The failure to comply with such laws, or a determination by a court that UACC's interpretation of any such law was erroneous, could have a material adverse effect upon UACC. Furthermore, the adoption of additional laws, changes in the interpretation and enforcement of current laws or the expansion of UACC's business into jurisdictions that have adopted more stringent regulatory requirements than those in which UACC currently conducts business, could have a material adverse affect upon UACC. If a borrower defaults on a contract, UACC, as the servicer of the contract, is entitled to exercise the remedies of a secured party under the Uniform Commercial Code as adopted in a particular state (the "UCC"), which typically includes the right to repossession by self-help unless such means would constitute a breach of the peace. The UCC and other state laws regulate repossession and sales of collateral by requiring reasonable notice to the borrower of the date, time and place of any public sale of collateral, the date after which any private sale of the collateral may be held and the borrower's right to redeem the financed vehicle prior to any such sale, and by providing that any such sale must be conducted in a commercially reasonable manner. Financed vehicles repossessed generally are resold by UACC through unaffiliated wholesale automobile networks or auctions, which are attended principally by used automobile dealers. 16 Regulation of the Bank General. As a federally chartered, SAIF-insured savings association, the Bank is subject to extensive regulation by the OTS and the FDIC. Lending activities and other investments of the Bank must comply with various statutory and regulatory requirements. The Bank is also subject to certain reserve requirements promulgated by the Federal Reserve Board. The OTS, in conjunction with the FDIC, regularly examines the Bank and prepares reports for the consideration of the Bank's Board of Directors on any deficiencies found in the operations of the Bank. The relationship between the Bank and depositors and borrowers is also regulated by federal and state laws, especially in such matters as the ownership of savings accounts and the form and content of documents utilized by the Bank. The Bank must file reports with the OTS and the FDIC concerning its activities and financial condition, in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers with or acquisitions of other financial institutions. This regulation and supervision establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of the SAIF and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such regulations, whether by the OTS, the FDIC, or the Congress could have a material adverse impact on the Company, the Bank, and their operations. Insurance of Deposit Accounts. The SAIF, as administered by the FDIC, insures the Bank's deposit accounts up to the maximum amount permitted by law. The FDIC may terminate insurance of deposits upon a finding that the institution: . has engaged in unsafe or unsound practices; . is in an unsafe or unsound condition to continue operations; or . has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or the institution's primary regulator. The FDIC charges an annual assessment for the insurance of deposits based on the risk a particular institution poses to its deposit insurance fund. Under this system as of December 31, 2001, SAIF members pay within a range of 0 cents to 27 cents per $100 of domestic deposits, depending upon the institution's risk classification. This risk classification is based on an institution's capital group and supervisory subgroup assignment. In addition, all FDIC-insured institutions are required to pay assessments to the FDIC at an annual rate for the fourth quarter of 2001 at approximately $0.0184 per $100 of assessable deposits to fund interest payments on bonds issued by the Financing Corporation ("FICO"), an agency of the Federal government established to recapitalize the predecessor to the SAIF. These assessments will continue until the FICO bonds mature in 2017. Proposed Legislation. From time to time, new laws are proposed that could have an effect on the financial institutions industry. For example, deposit insurance reform legislation has recently been introduced in the U.S. Senate and House of Representatives that would: . Merge the BIF and the SAIF. . Increase the current deposit insurance coverage limit for insured deposits to $130,000 and index future coverage limits to inflation. . Increase deposit insurance coverage limits for municipal deposits. . Double deposit insurance coverage limits for individual retirement accounts. 17 . Replace the current fixed 1.25 designated reserve ratio with a reserve ratio of 1-1.5%, giving the FDIC discretion in determining a level adequate within this range. While we cannot predict whether such proposals will eventually become law, they could have an effect on our operations and the way we conduct business. Regulatory Capital Requirements. OTS capital regulations require savings associations to meet three capital standards: . tangible capital equal to 1.5% of total adjusted assets; . leverage capital (core capital) equal to 3% of total adjusted assets; and . risk-based capital equal to 8.0% of total risk-based assets. The Bank must meet each of these standards in order to be deemed in compliance with OTS capital requirements. In addition, the OTS may require a savings association to maintain capital above the minimum capital levels. A savings association with a greater than "normal" level of interest rate exposure must deduct an interest rate risk ("IRR") component in calculating its total capital for purposes of determining whether it meets its risk-based capital requirement. Interest rate exposure is measured, generally, as the decline in an institution's net portfolio value that would result from a 200 basis point increase or decrease in market interest rates (whichever would result in lower net portfolio value), divided by the estimated economic value of the savings association's assets. The interest rate risk component to be deducted from total capital is equal to one-half of the difference between an institution's measured exposure and "normal" IRR exposure (which is defined as 2%), multiplied by the estimated economic value of the institution's assets. In August 1995, the OTS indefinitely delayed implementation of its IRR regulation. Based on information voluntarily supplied to the OTS, at December 31, 2001, the Bank would not have been required to deduct an IRR component in calculating total risk-based capital had the IRR component of the capital regulations been in effect. These capital requirements are viewed as minimum standards by the OTS, and most institutions are expected to maintain capital levels well above the minimum. In addition, the OTS regulations provide that minimum capital levels higher than those provided in the regulations may be established by the OTS for individual savings associations, upon a determination that the savings association's capital is or may become inadequate in view of its circumstances. The OTS regulations provide that higher individual minimum regulatory capital requirements may be appropriate in circumstances where, among others: . a savings association has a high degree of exposure to interest rate risk, prepayment risk, credit risk, concentration of credit risk, certain risks arising from nontraditional activities, or similar risks or a high proportion of off-balance sheet risk; . a savings association is growing, either internally or through acquisitions, at such a rate that supervisory problems are presented that are not dealt with adequately by OTS regulations; and . a savings association may be adversely affected by activities or condition of its holding company, affiliates, subsidiaries, or other persons, or savings associations with which it has significant business relationships. The Bank is not subject to any such individual minimum regulatory capital requirement. 18 As shown below, the Bank's regulatory capital exceeded all minimum regulatory capital requirements applicable to it as of December 31, 2001. Percent of Amount Adjusted Assets ------- --------------- (Dollars in Thousands) GAAP Capital ....................................... $51,565 7.48% Tangible Capital: (1) Regulatory requirement ............................. $10,301 1.50% Actual capital ..................................... 49,707 7.24 ------- ---- Excess .......................................... $39,406 5.74% Leverage (Core) Capital: (1) Regulatory requirement ............................. $20,602 3.00% Actual capital ..................................... 49,707 7.24 ------- ---- Excess .......................................... $29,105 4.24% Risk-Based Capital: (2) Regulatory requirement ............................. $27,076 8.00% Actual capital ..................................... 53,181 15.71 ------- ----- Excess .......................................... $26,105 7.71% (1) Regulatory capital reflects modifications from GAAP capital due to a portion of deferred tax assets not permitted to be included in regulatory capital. (2) Based on risk-weighted assets of $349.9 million. The federal regulatory agencies have issued interagency guidelines providing examination guidance for the supervision of subprime lending activities. The term "subprime" refers to the credit characteristics of individual borrowers. Subprime borrowers typically have weakened credit histories that include payment delinquencies and possibly more severe problems such as charge-offs, judgments and bankruptcies. Subprime loans are loans to borrowers displaying one or more of these characteristics at the time of origination of the loan. Our auto lending activities constitute subprime lending which the interagency guidelines consider to be a high-risk activity unless the risks associated with such subprime lending are properly controlled. The interagency guidelines permit examiners to impose additional regulatory capital requirements of 1 1/2 to 3 times higher than that typically set aside for prime assets in any situation where an institution has subprime assets equal to or greater than 25% or more of its tier 1 capital or has subprime portfolios experiencing rapid growth or adverse performance trends or which are administered by inexperienced management or have inadequate or weak controls. Our subprime auto loan portfolio represented approximately 470% of our tier 1 capital as of December 31, 2001. We customarily seek to maintain regulatory capital ratios of 1 1/2 times that which is normally required with respect to our subprime portfolio. However, any requirement to maintain additional regulatory capital as a result of our subprime lending activities could have an adverse effect on our future prospects and operations and may restrict our ability to grow. Although management believes that it maintains appropriate controls and sufficient regulatory capital for its subprime lending activities, it cannot predict or determine whether or to what extent additional capital requirements will be imposed based upon regulatory supervision and examination. The HOLA permits savings associations not in compliance with the OTS capital standards to seek an exemption from certain penalties or sanctions for noncompliance. Such an exemption will be granted only if certain strict requirements are met, and must be denied under certain circumstances. If an exemption is granted by the OTS, the savings association still may be subject to enforcement actions for other violations of law or unsafe or unsound practices or conditions. Predatory Lending. The term "predatory lending," much like the terms "safety and soundness" and "unfair and deceptive practices," is far-reaching and covers a potentially broad range of behavior. As such, it does not lend itself to a concise or a comprehensive definition. But typically predatory lending involves at least one, and perhaps all three, of the following elements: . making unaffordable loans based on the assets of the borrower rather than on the borrower's ability to repay an obligation ("asset-based lending"); 19 . inducing a borrower to refinance a loan repeatedly in order to charge high points and fees each time the loan is refinanced ("loan flipping"); or . engaging in fraud or deception to conceal the true nature of the loan obligation from an unsuspecting or unsophisticated borrower. On December 14, 2001, Federal Reserve Board amended its regulations aimed at curbing such lending. Compliance is not mandatory until October 1, 2002. The rule significantly widens the pool of high-cost home-secured loans covered by the Home Ownership and Equity Protection Act of 1994, a federal law that requires extra disclosures and consumer protections to borrowers. The following circumstances trigger coverage under the act: . interest rates for first lien mortgage loans in excess of 8 percentage points above comparable Treasury securities, . subordinate-lien loans of 10 percentage points above Treasury securities;. or . fees such as optional insurance and similar debt protection costs paid in connection with the credit transaction, when combined with points and fees if deemed excessive. In addition, the regulation bars loan flipping by the same lender or loan servicer within a year. Lenders also will be presumed to have violated the law - -- which says loans shouldn't be made to people unable to repay them -- unless they document that the borrower has the ability to repay. Lenders that violate the rules face cancellation of loans and penalties equal to the finance charges paid. The Bank is believes these rule changes and potential state action in this area will not have a substantial effect on its financial condition or results of operation. Prompt Corrective Action. The prompt corrective action regulation of the OTS requires certain mandatory actions and authorizes certain other discretionary actions to be taken by the OTS against a savings association that falls within certain undercapitalized capital categories specified in the regulation. The regulation establishes five categories of capital classification: . "well capitalized;" . "adequately capitalized;" . "undercapitalized;" . "significantly undercapitalized;" and . "critically undercapitalized." Under the regulation, the risk-based capital, leverage capital, and tangible capital ratios are used to determine an institution's capital classification. At December 31, 2001, the Bank met the capital requirements of a "well capitalized" institution under applicable OTS regulations. In general, the prompt corrective action regulation prohibits an insured depository institution from declaring any dividends, making any other capital distribution, or paying a management fee to a controlling person if, following the distribution or payment, the institution would be within any of the three undercapitalized categories. In addition, adequately capitalized institutions may accept brokered deposits only with a waiver from the FDIC and are subject to restrictions on the interest rates that can be paid on such deposits. Undercapitalized institutions may not accept, renew, or roll-over brokered deposits. If the OTS determines that an institution is in an unsafe or unsound condition, or if the institution is deemed to be engaging in an unsafe and unsound practice, the OTS may, if the institution is well capitalized, reclassify it as adequately capitalized; if the institution is adequately capitalized but not well capitalized, require it to comply with restrictions applicable to undercapitalized institutions; and, if the institution is undercapitalized, require it to comply with certain restrictions applicable to significantly undercapitalized institutions. Finally, pursuant to an interagency agreement, the FDIC can examine any institution that has a substandard regulatory examination score or is considered undercapitalized , without the express permission of the institution's primary regulator. 20 Loans-to-One Borrower Limitations. Savings associations generally are subject to the lending limits applicable to national banks. With certain limited exceptions, the maximum amount that a savings association or a national bank may lend to any borrower (including certain related entities of the borrower) at one time may not exceed 15% of the unimpaired capital and surplus of the institution, plus an additional 10% of unimpaired capital and surplus for loans fully secured by readily marketable collateral. Savings associations are additionally authorized to make loans to one borrower, for any purpose, in an amount not to exceed $500,000 or, by order of the Director of OTS, in an amount not to exceed the lesser of $30,000,000 or 30% of unimpaired capital and surplus to develop residential housing, provided: . the purchase price of each single-family dwelling in the development does not exceed $500,000; . the savings association is in compliance with its fully phased-in capital requirements; . the loans comply with applicable loan-to-value requirements; and . the aggregate amount of loans made under this authority does not exceed 150% of unimpaired capital and surplus. At December 31, 2001, the Bank's loans-to-one-borrower limit was $7.6 million based upon the 150% of unimpaired capital and surplus measurement. Qualified Thrift Lender Test. Savings associations must meet the QTL test, which test may be met either by maintaining a specified level of assets in qualified thrift investments as specified in the HOLA or by meeting the definition of a "domestic building and loan association" in the Code. Qualified thrift investments are primarily residential mortgages and related investments, including certain mortgage-related securities. The required percentage of investments under the HOLA is 65% of assets while the Code requires investments of 60% of assets. Additionally, HOLA limits indirect consumer loans to 30% of total assets. As of December 31, 2001 PAB indirect consumer loans comprised 29% of total assets. An association must be in compliance with the QTL test or the definition of domestic building and loan association on a monthly basis in nine out of every 12 months. Associations that fail to meet the QTL test will generally be prohibited from engaging in any activity not permitted for both a national bank and a savings association. This requirement may adversely affect our ability to grow. For more information see the discussion of factors that may affect future results of operations on page 27. The Bank applied in 2000 for approval to convert from a federal thrift charter to become a California-chartered commercial bank. California-chartered commercial banks do not have to meet the QTL test. In December 2001, the Bank withdrew its application for approval to convert to a state-chartered bank and, consequently, will be required to meet the QTL test in the future. The Bank intends to adjust and manage its sources of funds and control the growth and mix of its assets to ensure that it meets the requirements of the QTL test going forward. As of December 31, 2001, the Bank was in compliance with its QTL requirements and met the definition of a domestic building and loan association. Affiliate Transactions. Transactions between a savings association and its "affiliates" are quantitatively and qualitatively restricted under the Federal Reserve Act. Affiliates of a savings association include, among other entities, the savings association's holding company and companies that are under common control with the savings association. In general, a savings association or its subsidiaries are limited in their ability to engage in "covered transactions" with affiliates: . to an amount equal to 10% of the association's capital and surplus, in the case of covered transactions with any one affiliate; and . to an amount equal to 20% of the association's capital and surplus, in the case of covered transactions with all affiliates. In addition, a savings association and its subsidiaries may engage in covered transactions and other specified transactions only on terms and under circumstances that are substantially the same, or at least as favorable to the savings association or its subsidiary, as those prevailing at the time for comparable transactions with nonaffiliated companies. A "covered transaction" includes: 21 . a loan or extension of credit to an affiliate; . a purchase of investment securities issued by an affiliate; . a purchase of assets from an affiliate, with some exceptions; . the acceptance of securities issued by an affiliate as collateral for a loan or extension of credit to any party; or . the issuance of a guarantee, acceptance or letter of credit on behalf of an affiliate. In addition, under the OTS regulations: . a savings association may not make a loan or extension of credit to an affiliate unless the affiliate is engaged only in activities permissible for bank holding companies; . a savings association may not purchase or invest in securities of an affiliate other than shares of a subsidiary; . a savings association and its subsidiaries may not purchase a low-quality asset from an affiliate; . covered transactions and other specified transactions between a savings association or its subsidiaries and an affiliate must be on terms and conditions that are consistent with safe and sound banking practices; and . with some exceptions, each loan or extension of credit by a savings association to an affiliate must be secured by collateral with a market value ranging from 100% to 130%, depending on the type of collateral, of the amount of the loan or extension of credit. The OTS regulations generally exclude all non-bank and non-savings association subsidiaries of savings associations from treatment as affiliates, except to the extent that the OTS or the Federal Reserve decides to treat these subsidiaries as affiliates. The regulation also requires savings associations to make and retain records that reflect affiliate transactions in reasonable detail and provides that specified classes of savings associations may be required to give the OTS prior notice of affiliate transactions. Capital Distribution Limitations. OTS regulations impose limitations upon all capital distributions by savings associations, like cash dividends, payments to repurchase or otherwise acquire its shares, payments to shareholders of another institution in a cash-out merger and other distributions charged against capital. The OTS recently adopted an amendment to these capital distribution limitations. Under the new rule, a savings association in some circumstances may: . be required to file an application and await approval from the OTS before it makes a capital distribution; . be required to file a notice 30 days before the capital distribution; or . be permitted to make the capital distribution without notice or application to the OTS. The OTS regulations require a savings association to file an application if: . it is not eligible for expedited treatment of its other applications under OTS regulations; . the total amount of all of capital distributions, including the proposed capital distribution, for the applicable calendar year exceeds its net income for that year-to-date plus retained net income for the preceding two years; . it would not be at least adequately capitalized, under the prompt corrective action regulations of the OTS following the distribution; or . the association's proposed capital distribution would violate a prohibition contained in any applicable statute, regulation, or agreement between the savings association and the OTS, or the FDIC, or violate a condition imposed on the savings association in an OTS-approved application or notice. In addition, a savings association must give the OTS notice of a capital distribution if the savings association is not required to file an application, but: 22 . would not be well capitalized under the prompt corrective action regulations of the OTS following the distribution; . the proposed capital distribution would reduce the amount of or retire any part of the savings association's common or preferred stock or retire any part of debt instruments like notes or debentures included in capital, other than regular payments required under a debt instrument approved by the OTS; or . the savings association is a subsidiary of a savings and loan holding company. If neither the savings association nor the proposed capital distribution meet any of the above listed criteria, the OTS does not require the savings association to submit an application or give notice when making the proposed capital distribution. The OTS may prohibit a proposed capital distribution that would otherwise be permitted if the OTS determines that the distribution would constitute an unsafe or unsound practice. Community Reinvestment Act and the Fair Lending Laws. Savings associations have a responsibility under the Community Reinvestment Act and related regulations of the OTS to help meet the credit needs of their communities, including low- and moderate-income neighborhoods. In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in their lending practices on the basis of characteristics specified in those statutes. An institution's failure to comply with the provisions of the Community Reinvestment Act could, at a minimum, result in regulatory restrictions on its activities and the denial of applications. In addition, an institution's failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in the OTS, other federal regulatory agencies as well as the Department of Justice taking enforcement actions. Based on an examination conducted November 5, 2001, the Bank received a satisfactory rating under both the Community Reinvestment Act and Fair Lending Laws. Effective January 1, 2002, the OTS raised the dollar amount limit in the definition of small business loans from $500,000 to $2.0 million, if used for commercial, corporate, business or agricultural purposes. Furthermore, the rule raises the aggregate level that a thrift can invest directly in community development funds, community centers and economic development initiatives in its communities from the greater of a quarter of one percent of total capital or $100,000 to one percent of total capital or $250,000. Federal Home Loan Bank System. The Bank is a member of the Federal Home Loan Bank ("FHLB") system. Among other benefits, each FHLB serves as a reserve or central bank for its members within its assigned region. Each FHLB is financed primarily from the sale of consolidated obligations of the FHLB system. Each FHLB makes available loans or advances to its members in compliance with the policies and procedures established by the Board of Directors of the individual FHLB. As an FHLB member, the Bank is required to own capital stock in an FHLB in an amount equal to the greater of: . 1% of its aggregate outstanding principal amount of its residential mortgage loans, home purchase contracts and similar obligations at the beginning of each calendar year; . 0.3% of total assets; or . 5% of its FHLB advances or borrowings. At December 31, 2001, the Bank had $6.5 million in FHLB stock, which was in compliance with this requirement. Federal Reserve System. The Federal Reserve Board requires all depository institutions to maintain non-interest bearing reserves at specified levels against their transaction accounts (primarily checking, NOW, and Super NOW checking accounts) and non-personal time deposits. At December 31, 2001, the Bank was in compliance with these requirements. Activities of Subsidiaries. A savings association seeking to establish a new subsidiary, acquire control of an existing company or conduct a new activity through a subsidiary must provide 30 days prior notice to the FDIC and the OTS and conduct any activities of the subsidiary in compliance with regulations and orders of the OTS. The OTS has the power to require a savings association to divest any subsidiary or terminate any activity conducted by a 23 subsidiary that the OTS determines to pose a serious threat to the financial safety, soundness or stability of the savings association or to be otherwise inconsistent with sound banking practices. Taxation Federal General. UPFC and the Bank report their income on a consolidated basis using the accrual method of accounting, and are subject to federal income taxation in the same manner as other corporations with some exceptions, including particularly the Bank's reserve for bad debts discussed below. The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to the Bank or UPFC. UPFC has not been audited by the Internal Revenue Service. For its 2001 taxable year, UPFC is subject to a maximum federal income tax rate of 34.0%. Bad Debt Reserves. For fiscal years beginning prior to December 31, 1995, thrift institutions, which qualified under certain definitional tests and other conditions of the Code, were permitted to use certain favorable provisions to calculate their deductions from taxable income for annual additions to their bad debt reserve. A reserve could be established for bad debts on qualifying real property loans (generally secured by interests in real property improved or to be improved) under the Percentage of Taxable Income Method or the Experience Method. The reserve for non-qualifying loans was computed using the Experience Method. The Small Business Job Protection Act of 1996 (the "1996 Act") requires savings institutions to recapture certain portions of their accumulated bad debt reserves. The 1996 Act repeals the reserve method of accounting for bad debts effective for tax years beginning after 1995. Thrift institutions that would be treated as small banks are allowed to utilize the Experience Method applicable to such institutions, while thrift institutions that are treated as large banks (those generally exceeding $500 million in assets) are required to use only the specific charge-off method. To the extent the allowable bad debt reserve balance using the thrift's historical computation method exceeds the allowable bad debt reserve method under the newly enacted provisions, such excess is required to be recaptured into income under the provisions of Code Section 481(a). Any Section 481(a) adjustment required to be taken into income with respect to such change generally will be taken into income ratably over a six-taxable year period. Under the 1996 Act, the Bank is permitted to use the Experience Method to compute its allowable addition to its reserve for bad debts for the current year. The Bank's bad debt reserve as of December 31, 1995 was computed using the permitted Experience Method computation and was therefore not subject to the recapture of any portion of its bad debt reserve as discussed above. State The California franchise tax applicable to the Bank is computed under a formula which results in a rate higher than the rate applicable to non-financial corporations because it reflects an amount "in lieu" of local personal property and business license taxes paid by such corporations (but not generally paid by banks or financial corporations such as the Bank). The marginal tax rate was 10.84% in 2001, 2000 and 1999. UPFC and its wholly owned subsidiaries file a California franchise tax return on a combined reporting basis. UPFC has not been audited by the Franchise Tax Board. UPFC does business in various other states with corporate rates that vary based on numerous factors including asset size, income or business operations. Subsidiaries PAFI, a wholly-owned subsidiary of UPFC, acts as the parent company of the Bank and was the obligor on loans obtained from the RTC in connection with the Minority Interim Capital Assistance Program provided under the Federal Home Loan Bank Act. These loans were paid-off in full during 1999. WorldCash is a wholly-owned subsidiary of UPFC. In February 2001, WorldCash terminated its money transfer activities, however, it still maintained an investment in a software technology company. In March 2001 this 24 investment in the software company was determined to be without value and subsequently charged against earnings. WorldCash is presently inactive. The Bank a wholly-owned subsidiary of PAFI, is the primary operating subsidiary of UPFC and is a federally-chartered savings bank. UACC, a wholly-owned subsidiary of the Bank, holds for investment and services nonprime retail automobile installment sales contracts. United PanAm Mortgage Corporation is a wholly-owned subsidiary of the Bank and is presently inactive. Pan American Service Corporation, a wholly-owned subsidiary of the Bank, acts as trustee under certain deeds of trust originated through the Bank's mortgage lending activities and is presently inactive. Factors That May Affect Future Results of Operations This Annual Report on Form 10-K contains forward-looking statements, including statements regarding UPFC's strategies, plans, objectives, expectations and intentions, which are subject to a variety of risks and uncertainties. UPFC's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in the "Factors That May Affect Results of Operations" and elsewhere in this Annual Report. The cautionary statements made in this Annual Report should be read as being applicable to all related forward-looking statements wherever they appear in this Annual Report. The following discusses certain factors which may affect our financial results and operations and should be considered in evaluating UPFC. Because we have a limited operating history, we cannot predict our future operating results. UPFC 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 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 7. 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 documentation of income, or higher debt-to-income ratios than are permitted by traditional lenders. If we experience 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 reverse repurchase agreements. 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 insurance premium and automobile finance businesses will depend to a significant extent on the availability of additional sources of financing. There can be no assurance that 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 25 unable to develop additional sources of financing, we may have to restrict our lending activities, which would materially and adversely affect our financial condition, results of operations and business prospects. For more information, see "Item 7. 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. UPFC has a concentration of lending in California. 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. 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. UPFC depends heavily upon its systems and controls, some of which have been designed specifically for a particular business, to support the evaluation, acquisition, monitoring, collection 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. UPFC is dependent upon the continued services of its key employees as well as the key employees of BPN. The loss of the services of any key employee, or the failure of UPFC 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 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 nonprime 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 UPFC faces. 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. 26 Changes in interest rates may adversely affect our performance. UPFC's results of operations depend to a large extent upon its net interest income, which is the difference between interest income on interest-earning assets, such as loans and investments, and interest expense on interest-bearing liabilities, such as deposits and other borrowings. When interest-bearing liabilities mature or reprice more quickly than interest-bearing assets in a given period, a significant increase in market rates of interest could have a material adverse effect on our net interest 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. Our liabilities generally have shorter terms and are more interest rate sensitive than our assets. Accordingly, changes in interest rates could have a material adverse effect on the profitability of our lending activities. For more information, see "Item 7. 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 growth in each of its businesses and intends to pursue growth for the foreseeable future, particularly in its automobile finance business. In addition, we may broaden our product offerings to include additional types of consumer or, in the case of IPF, commercial loans. Further, we may enter other specialty finance businesses. This growth strategy will require additional capital, systems development and human resources. The failure of UPFC to implement its planned growth strategy would have a material adverse effect on our financial condition, results of operations and business prospects. 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. Continuing qualification as a qualified thrift lender may adversely affect our growth and performance. The Bank filed an application in 2000 for approval to convert from a federally-chartered savings association to a state chartered commercial bank due, in principal part, to lending restrictions which apply to federally-chartered thrifts under the QTL test. As a result of the discontinuation of its subprime mortgage business, management considered it to be more difficult for the Bank to remain in compliance with the QTL test or certain other consumer lending restrictions going forward. HOLA limits indirect consumer loans to 30% of assets. As of December 31, 2001, PAB indirect consumer loans comprised 29% of total assets. In December 2001, the Bank withdrew its application for charter conversion. Although we believe the bank can meet the QTL test in the future by adjusting and managing its sources of funds and controlling the growth and mix of its assets, our current and projected lending activities and our ability to grow may be adversely affected as a result of the requirement that we meet the QTL test in the future. 27 Because we engage in a high level of "subprime" lending, we may be forced to meet higher capital requirements. The Bank engages in subprime lending, which is considered to be a high risk activity by the OTS unless there are sufficient controls. Although Management believes that its controls are sufficient, and customarily limits its subprime lending activities to ensure that additional regulatory capital exists with respect to such lending activities, the Bank may become subject to requirements that it maintain regulatory capital in an amount that could adversely affect its current lending activities or anticipated growth. Impact of inflation and changing prices may adversely affect our performance. The financial statements and notes thereto presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America ("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 the assets and liabilities of UPFC 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. Item 2. Properties In March 2001, our principal executive offices were moved from Irvine, California to premises consisting of approximately 13,300 square feet located at 3990 Westerly Place, Suite 200, Newport Beach, California 92660. As of December 31, 2001, UPFC maintained four branches for its banking business, 40 branches for its automobile finance business, one location for its insurance premium finance business and one office site for bank operations. All of our leased properties are leased for terms expiring on various dates to 2007, many with options to extend the lease term. The net investment in premises, equipment and leaseholds totaled $2.1 million at December 31, 2001 compared to $1.6 million at December 31, 2000. Item 3. Legal Proceedings UPFC is a party from time to time in legal proceedings incidental to the conduct of its businesses. Management of UPFC believes that the outcome of such proceedings will not have a material effect upon its financial condition. Item 4. Submission of Matters to a Vote of Security Holders There were no matters submitted to a vote of security holders during the fourth quarter of the year ended December 31, 2001. 28 PART II Item 5. Market For Registrant's Common Equity And Related Shareholder Matters The Common Stock has been traded on the Nasdaq National Market under the symbol "UPFC" since UPFC completed its initial public offering on April 23, 1998. As of March 15, 2002, we had approximately 400 shareholders of record and 15,571,400 outstanding shares of common stock. The following table sets forth the high and low sales prices per share of Common Stock as reported on the Nasdaq National Market for the periods indicated. Quarter Ended High Low - ------------- ------ ------ December 31, 2001 $ 5.35 $ 4.40 September 30, 2001 $ 6.21 $ 3.95 June 30, 2001 $ 4.06 $ 1.19 March 31, 2001 $ 1.69 $ .88 December 31, 2000 $ 1.94 $ 0.81 September 30, 2000 $ 1.25 $ 0.75 June 30, 2000 $ 1.63 $ 0.78 March 31, 2000 $ 2.31 $ 1.03 UPFC has never paid a cash dividend on its Common Stock and we do not anticipate paying cash dividends on the Common Stock in the foreseeable future. The payment of dividends is within the discretion of our Board of Directors and will depend upon, among other things, our earnings, financial condition, capital requirements, level of indebtedness, contractual restrictions on the payment of dividends and general business conditions. Federal regulations restrict the Bank's ability to declare or pay any dividends to UPFC. For more information, see "Item 1. Business - Regulation - Regulation of the Bank - Capital Distribution Limitations." 29 Item 6. Selected Financial Data The following table presents selected consolidated financial data for UPFC and is derived from and should be read in conjunction with the Consolidated Financial Statements of UPFC and the Notes thereto, which are included in this Annual Report on Form 10-K for the years ended December 31, 2001, 2000 and 1999. The selected consolidated financial data for the years ended December 31, 1998 and 1997 has been derived from our audited financial statements, which are not presented in this Annual Report. (In thousands, except per share amounts)
At or For the Year Ended December 31, --------------------------------------------------------- 2001 2000 1999 1998 1997 --------- --------- --------- --------- --------- Statement of Operations Data Interest income $ 58,152 $ 44,375 $ 28,803 $ 24,540 $ 19,809 Interest expense 19,522 14,563 6,033 7,839 8,793 --------- --------- --------- --------- --------- Net interest income 38,630 29,812 22,770 16,701 11,016 Provision for loan losses 615 201 432 293 507 --------- --------- --------- --------- --------- Net interest income after provision for loan losses 38,015 29,611 22,338 16,408 10,509 --------- --------- --------- --------- --------- Non-interest income Loss on residual interests in securitizations -- (11,374) -- -- -- Gains on sales of loans, net 1,607 -- -- 976 -- Other non-interest income 1,097 462 974 936 702 --------- --------- --------- --------- --------- Total non-interest income (loss) 2,704 (10,912) 974 1,912 702 --------- --------- --------- --------- --------- Non-interest expense Compensation and benefits 17,135 12,903 10,843 8,370 5,534 Other expense 10,857 11,258 7,800 6,031 4,570 --------- --------- --------- --------- --------- Total non-interest expense 27,992 24,161 18,643 14,401 10,104 --------- --------- --------- --------- --------- Income (loss) from continuing operations before income 12,727 (5,462) 4,669 3,919 1,107 taxes Income taxes (benefit) 4,964 (2,094) 1,908 1,645 466 --------- --------- --------- --------- --------- Income (loss) from continuing operations 7,763 (3,368) 2,761 2,274 641 --------- --------- --------- --------- --------- Income (loss) from discontinued operations, net of tax -- -- (941) 4,489 5,607 Loss on disposal of discontinued operations, net of tax -- (3,291) (6,172) -- -- --------- --------- --------- --------- --------- Net income (loss) $ 7,763 $ (6,659) $ (4,352) $ 6,763 $ 6,248 ========= ========= ========= ========= ========= Earnings (loss) per share-basic: (1) Continuing operations $ 0.48 $ (0.21) $ 0.16 $ 0.15 $ 0.06 Discontinued operations $ -- $ (0.20) $ (0.42) $ 0.29 $ 0.52 Net income (loss) $ 0.48 $ (0.41) $ (0.26) $ 0.44 $ 0.58 Weighted average shares outstanding 16,017 16,392 16,854 15,263 10,739 Earnings (loss) per share-diluted: (1) Continuing operations $ 0.46 $ (0.21) $ 0.16 $ 0.14 $ 0.05 Discontinued operations $ -- $ (0.20) $ (0.41) $ 0.28 $ 0.48 Net income (loss) $ 0.46 $ (0.41) $ (0.25) $ 0.42 $ 0.53 Weighted average shares outstanding 16,931 16,392 17,253 16,143 11,875 Balance Sheet Data Total assets $ 689,573 $ 489,978 $ 438,290 $ 425,559 $ 310,754 Loans 236,448 192,368 158,283 133,718 148,535 Loans held for sale 194 712 136,460 214,406 120,002 Allowance for loan losses (17,460) (15,156) (14,139) (10,183) (6,487) Deposits 357,350 348,230 291,944 321,668 233,194 Notes payable and repurchase agreements 114,776 -- -- 10,930 12,930 FHLB advances 130,000 60,000 -- -- 28,000 Warehouse lines of credit -- -- 54,415 -- 6,237 Shareholders' equity 75,666 69,317 75,353 82,913 13,009
30 (In thousands, except per share amounts)
At or For the Year Ended December 31, -------------------------------------------------------- 2001 2000 1999 1998 1997 -------- -------- -------- ---------- -------- Operating Data Return on average assets from continuing operations 1.61% (0.95)% 1.25% 1.04% 3.51% Return on average shareholders' equity from continuing 10.61% (4.61)% 3.39% 4.04% 7.37% operations Net interest margin 8.46% 9.39% 12.45% 9.13% 6.76% Shareholders' equity to assets 10.98% 14.15% 17.19% 19.48% 4.19% Tangible capital ratio of Bank 7.24% 8.52% 10.60% 6.94% 7.27% Core capital ratio of Bank 7.24% 8.52% 10.60% 6.94% 7.27% Risk-based capital ratio of Bank 15.71% 14.52% 10.24% 10.77% 12.34% Asset Quality Data Nonaccrual loans, net(2) $ 1,041 $ 3,067 $ 13,157 $ 18,632 $ 6,633 Real estate owned -- 871 2,590 1,877 562 Total non-performing assets 3,681 3,938 15,747 20,509 7,195 Non-performing assets to total assets 0.53% 0.80% 3.60% 4.82% 2.31% Allowance for credit losses to loans held for investment 7.38% 7.88% 8.93% 7.62% 4.37% Automobile Finance Data Gross contracts purchased $233,368 $174,645 $124,896 $ 86,098 $ 44,056 Average discount on contracts purchased 7.89% 8.08% 8.79% 9.12% 9.79% Net charge-offs to average contracts 5.23% 4.17% 4.05% 4.56% 4.94% Number of branches 40 28 20 15 10 Insurance Premium Finance Data Loans originated $104,771 $100,085 $107,212 $ 152,998 $145,167 Loans outstanding at period end $ 39,631 $ 34,185 $ 30,334 $ 44,709 $ 39,990 Average net yield on loans originated 14.72% 15.36% 12.73% 13.90% 14.01% Average loan size at origination $ 824 $ 998 $ 990 $ 1,110 $ 1,160 Net charge-offs to average loans 0.81% 0.89% 1.41% 0.78% 0.35% Subprime Mortgage Finance Data(3) Loan origination activities Wholesale originations -- $ 73,652 $789,327 $ 807,382 $359,236 Retail originations -- 2,345 173,389 382,359 219,386 -------- -------- -------- ---------- -------- Total loan originations -- $ 75,997 $962,716 $1,189,741 $578,622 Percent of loans secured by first mortgages -- 96% 97% 96% 96% Weighted average initial loan-to-value ratio -- 76% 76% 75% 75% Originations by product type -- Adjustable-rate mortgages -- 86% 76% 71% 82% Fixed-rate mortgages -- 14% 24% 29% 18% Average balance per loan -- $ 104 $ 109 $ 99 $ 104 Loans sold through whole loan transactions $215,133 $552,200 $1,084,701 $360,210 Loan securitizations -- -- $458,011 -- $114,904
- ---------- (1) Earnings (loss) per share is based on the weighted average shares of Common Stock outstanding during the period adjusted for the 1,875-for-1 stock split effective in November 1997 (2) Nonaccrual loans are net of specific loss allowances. (3) The subprime mortgage finance data presented is related to our discontinued mortgage operations. 31 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Certain statements in this Annual Report on Form 10-K 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. For discussion of the factors that might cause such a difference, see "Item 1. Business - Factors That May Affect Future Results of Operations" and other risks identified from time to time in our filings with the SEC. Critical Accounting Policies The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions. Accounting for the allowance for loan losses involves significant judgments and assumptions by management, which has a material impact on the carrying value of net loans; management considers this accounting policy to be a critical accounting policy. The judgments and assumptions used by management are based on historical data and management's view of the current economic environment as described in "Allowance for Loan Losses". Comparison of Operating Results for the Years Ended December 31, 2001 and December 31, 2000 General In 2001 UPFC reported income from continuing operations of $7.8 million, or $0.46 per diluted share, compared with a loss from continuing operations of $3.4 million, or $0.21 per diluted share for the same period a year ago. Including discontinued operations, we reported income of $7.8 million, or $0.46 per diluted share in 2001, compared with a net loss of $6.7 million, or $0.41 per diluted share in 2000. Contributing to our 2000 loss from continuing operations were charges as described below. We recorded a pre-tax charge of $11.4 million during 2000 to reflect a write-down in the value of residual interests arising from our 1999 subprime mortgage securitizations. The residual interests were sold in January 2001 and were valued at December 31, 2000 according to the sale price and terms of this contract. A pre-tax charge of $1.3 million, which was included in other expenses in the statement of operations, was also recorded during 2000, relating to a write-down of our goodwill arising from the 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 as a result of a change in market conditions. Interest income for the year ended December 31, 2001 increased to $58.2 million compared with $44.4 million in 2000 while net interest income increased to $38.6 million for the year ended December 31, 2001 from $29.8 million in the same period a year ago. Gross automobile receivables increased from $176.3 million at December 31, 2000 to $232.9 million at December 31, 2001 accounting for much of the increase in interest income and net interest income. 32 Interest Income Interest income increased from $44.4 million for the twelve months ended December 31, 2000 to $58.2 million for the twelve months ended December 31, 2001 due primarily to a $139.0 million increase in average interest earning assets, partially offset by a 123 basis point 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 $50.1 million, and securities, which increased $98.4 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 securities was primarily a result of the reinvestment of proceeds received from the sale of discontinued mortgage assets and the increase in assets required for the Bank to meet the QTL test of the OTS. 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, and to a general decline in market interest rates. Securities, with an average yield of 5.11%, comprised 54% of our average interest earning assets at December 31, 2001 compared with 46% of our average interest earning assets at December 31, 2000. Interest Expense Interest expense increased from $14.6 million for the twelve months ended December 31, 2000 to $19.5 million for the twelve months ended December 31, 2001, due to a $134.0 million increase in average interest bearing liabilities, partially offset by a 61 basis point decrease in the weighted average interest rate on interest bearing liabilities. The largest component of the increase in interest bearing liabilities was deposits of the Bank, which increased from an average balance of $241.0 million in 2000 to $362.5 million in 2001. The increase in average deposits was due primarily to the reallocation of deposits to continuing operations compared to a year ago. There were no deposits allocated to discontinued operations in 2001. The average cost of deposits decreased from 5.42% for 2000 to 5.00% for 2001, generally as a result of a decrease in market interest rates and the repricing of deposits to these lower market rates. Average Balance Sheets The following tables set forth information relating to our continuing operations for the years ended December 31, 2001, 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.
Year Ended December 31, ------------------------------------------------------------------------------------- 2001 2000 --------------------------------------- ------------------------------------------- Average Average Average Yield/ Average Yield/ Balance /(2)/ Interest/(1)/ Cost Balance/(1)//(2)/ Interest/(1)/ Cost ------------- ------------- ------- ----------------- ------------- ------- (Dollars in thousands) Assets Interest earnings assets Securities $244,479 $12,504 5.11% $146,129 $9,561 6.54% Mortgage loans, net/(3)/ 3,938 429 10.89% 18,546 1,630 8.79% IPF loans, net/(4)/ 35,757 5,265 14.72% 30,647 4,791 15.63% Automobile installment contracts, net/(5)/ 172,424 39,954 23.17% 122,280 28,393 23.22% -------- ------- -------- ------ Total interest earning assets 456,598 58,152 12.74% 317,602 44,375 13.97% ------- ------ Non-interest earning assets 26,141 33,410 -------- -------- Total assets $482,739 $351,012 ======== ======== Liabilities and Equity Interest bearing liabilities Customer deposits 362,503 18,119 5.00% 240,974 13,057 5.42% Notes payable 4,503 157 3.46% -- -- -- FHLB advances 30,830 1,246 4.04% 22,877 1,506 6.58% -------- ------- -------- ------ Total interest bearing liabilities 397,836 19,522 4.91% 263,851 14,563 5.52% ------- ------ Non-interest bearing liabilities 11,724 14,102 -------- -------- Total liabilities 409,560 277,953 Equity 73,179 73,059 -------- Year Ended December 31, ------------------------------------------- 1999 ------------------------------------------- Average Average Yield/ Balance/(1)//(2)/ Interest/(1)/ Cost ----------------- ------------- ------- Assets Interest earnings assets Securities $ 37,682 $1,800 4.78% Mortgage loans, net/(3)/ 25,229 2,316 9.18% IPF loans, net/(4)/ 37,681 5,271 13.99% Automobile installment contracts, net/(5)/ 82,294 19,416 23.59% -------- ------ Total interest earning assets 182,886 28,803 15.75% ------ Non-interest earning assets 37,450 -------- Total assets $220,336 ======== Liabilities and Equity Interest bearing liabilities Customer deposits 119,049 5,787 4.86% Notes payable 4,919 246 5.01% FHLB advances 6 -- 5.84% -------- ------ Total interest bearing liabilities 123,974 6,033 4.87% ------ Non-interest bearing liabilities 15,029 -------- Total liabilities 139,003 Equity 81,333 --------
33
Year Ended December 31, ------------------------------------------------------------------------------------- 2001 2000 --------------------------------------- ------------------------------------------- Average Average Average Yield/ Average Yield/ Balance /(2)/ Interest/ / Cost Balance/(1)//(2)/ Interest/(1)/ Cost ------------- ------------- ------- ----------------- ------------- ------- Total liabilities and -------- equity $482,739 $351,012 ======== ======== Net interest income before provision for loan losses $38,630 $29,812 ======= ======= Net interest rate spread/(6)/ 7.83% 8.45% Net interest margin/(7)/ 8.46% 9.39% Ratio of interest earning assets to interest bearing liabilities 114.77% 120.37% Year Ended December 31, ------------------------------------------- 1999 ------------------------------------------- Average Average Yield/ Balance/(1)//(2)/ Interest/(1)/ Cost ----------------- ------------- ------- Total liabilities and equity $220,336 ======== Net interest income before provision for loan losses $22,770 ======= Net interest rate spread/(6)/ 10.88% Net interest margin/(7)/ 12.45% Ratio of interest earning assets to interest bearing liabilities 147.50%
- ---------- /(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 consolidated statements of operations. Allocated assets and liabilities for 2000 and 1999 are shown below. There were no such allocations in 2001.
Year Ended December 31, 2000 1999 --------- --------- Average assets of continuing operations $351,012 $220,336 Average mortgage loans of discontinued operations 63,264 235,124 -------- -------- Total average assets $414,276 $455,460 ======== ======== Average liabilities and equity of continuing operations $351,012 $220,336 Average customer deposits allocated to discontinued operations 61,468 189,720 Average warehouse lines of credit of discontinued operations 1,796 45,404 -------- -------- Total average liabilities and equity $414,276 $455,460 ======== ========
/(2)/ Average balances are measured on a month-end basis. /(3)/ Net of deferred loan origination fees, unamortized discounts and premiums; includes non-performing loans. /(4)/ Includes non-performing loans. /(5)/ Net of unearned finance charges; 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. Rate and Volume Analysis The following table presents the extent to which changes in interest rates and changes in the volume of interest earning assets and interest bearing liabilities have affected our interest income and interest expense from continuing operations during the periods indicated. Information is provided in each category with respect to changes attributable to changes in volume (changes in volume multiplied by prior rate), changes attributable to changes in rate (changes in rate multiplied by prior volume) and the net change. The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.
Year Ended Year Ended December 31, 2000 December 31, 1999 Compared to Compared to Year Ended Year Ended December 31, 2001 December 31, 2000 ----------------------------- ----------------------------- (Dollars in thousands) Increase (Decrease) Increase (Decrease) Due to Due to ----------------------------- ----------------------------- Volume Rate Net Volume Rate Net/(1)/ ------- ------- ------- ------- ------ -------- Interest earning assets Securities $ 4,356 $(1,413) $ 2,943 $ 6,878 $ 883 $ 7,761 Mortgage loans, net (1,728) 527 (1,201) (591) (95) (686) IPF loans, net 727 (253) 474 (1,296) 816 (480) Automobile installment contracts, net 11,620 (59) 11,561 9,280 (303) 8,977 ------- ------- ------- ------- ------ -------- Total interest earning assets 14,975 (1,198) 13,777 14,271 1,301 15,572 ------- ------- ------- ------- ------ -------- Interest bearing liabilities Customer deposits 5,981 (919) 5,062 6,540 730 7,270 Notes payable 157 0 157 (123) (123) (246) FHLB advances 2,341 (2,601) (260) 1,505 1 1,506 ------- ------- ------- ------- ------ -------- Total interest bearing liabilities 8,479 (3,520) 4,959 7,922 608 8,530 ------- ------- ------- ------- ------ -------- Change in net interest income $ 6,496 $ 2,322 $ 8,818 $ 6,349 $ 693 $ 7,042 ======= ======= ======= ======= ====== ========
- ---------- /(1)/ The table excludes interest income and interest expense from our mortgage operations as these items are reported as discontinued operations in the consolidated statements of operations. 34 Provision for Loan Losses Total provision for loan losses was $615,000 for the year ended December 31, 2001. Of this, $365,000 was the provision for loan losses reflecting estimated credit losses associated with our insurance premium finance business, compared with $201,000 for the year ended December 31, 2000. This increase resulted from the growth in the insurance premium finance loan portfolio as well as an increase in the allocation percentage from 1% of loans in 2000 to 1.25% in 2001. Also, after review of loss experience, an additional $250,000 provision for loan losses was recognized in connection with the existing auto loan portfolio. No comparable provision for the auto loan portfolio was recognized in 2000. In addition to the provision for loan 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. At December 31, 2001, we allocated 10.5% of the net contract purchased to provision for loan losses compared to 9.0% at December 31, 2000. Our total allowance for losses was $17.5 million at December 31, 2001 compared with $15.2 million at December 31, 2000, representing 7.4% of loans held for investment at December 31, 2001 and 7.9% at December 31, 2000. Net charge-offs to average loans were 4.9% for the year ended December 31, 2001 compared with 5.0% in 2000. A provision for loan losses is charged to operations based on our regular evaluation of loans held for investment and the adequacy of the allowance for loan losses. 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 other market conditions or other circumstances will not result in increased losses in the loan portfolio. Non-interest Income Non-interest income increased $13.6 million, from a loss of $10.9 million in 2000 to $2.7 million in 2001. The increase resulted from an $11.4 million pre-tax write-down of the value of residual interests in securitizations in 2000 and a $1.6 million gain on sales of loans in 2001. We sold our residual interests in securitizations in January 2001 and this sale was used to determine the fair value of these assets at December 31, 2000. Other components of non-interest income include fees and charges for Bank services and miscellaneous other items. The total of all of these items increased $635,000 from $462,000 for the twelve months ended December 31, 2000 to $1.1 million for the twelve months ended December 31, 2001. Included in non-interest income is a charge of $500,000 in both 2000 and 2001 in connection with the write-off of UPFC's investment in AirTime Technology, related to the discontinued World Cash subsidiary. Non-interest Expense Non-interest expense increased $3.8 million, from $24.2 million for the twelve months ended December 31, 2000 to $28.0 million for the twelve months ended December 31, 2001. This increase primarily reflects an increase in salaries, employee benefits and other personnel costs of approximately $4.2 million associated with the expansion of our automobile finance operations. In addition, occupancy expense increased $602,000, reflecting the costs associated with maintaining and expanding the branch offices in the auto finance lending area. Overall, other expenses decreased $1.0 million during 2001 compared to 2000. This decrease resulted from a $1.3 million pretax charge in 2000 in connection with the write-down of goodwill arising from the 1998 purchase of Northwest Financial Corp's insurance premium operations and a $700,000 pre-tax provision in 2000 for the relocation of certain offices with no comparable expenses in 2001. These reductions were partially offset by a $1.0 million increase during 2001 compared to 2000 in other operating expense, including professional fees, supplies, data processing, telephone and postage, as a result of growth in our automobile lending operation. 35 Income Taxes (Benefit) Income taxes (benefit) increased $7.1 million, from a benefit of $2.1 million for the twelve months ended December 31, 2000 to $5.0 million for the twelve months ended December 31, 2001. This increase occurred as a result of an $18.2 million increase in income from continuing operations before income taxes between the two periods. 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, sales of subprime mortgage loans in 2001 were $21.9 million, compared with $215.1 million in 2000. We originated no new sub prime mortgage loans during 2001 compared with $76.0 million during the year ended December 31, 2000. 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. Included in our statement of financial condition as of December 31, 2001, is a reserve of $1.0 million consisting primarily of lease and other contractual obligations 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. 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 $61.5 million for the year ended December 31, 2000 and average warehouse lines of credit of $1.8 million for the year ended December 31, 2000. No such allocation was required in 2001. Comparison of Financial Condition at December 31, 2001 and December 31, 2000 Total assets increased $199.6 million, from $490.0 million at December 31, 2000 to $689.6 million at December 31, 2001. The increase occurred primarily as a result of a $98.1 million increase in cash and cash equivalents, from $42.6 million at December 31,2000 to a $140.7 million at December 31, 2001, a $61.6 million increase in securities available for sale, from $223.3 million at December 31, 2000 to $284.8 million at December 31, 2001, and a $44.0 million increase in loans from $192.4 at December 31, 2000 to $236.4 at December 31, 2001. Loans increased as a result of planned increases in our auto loan portfolio and securities available for sale and cash and cash equivalents increased as a result of the reinvestment of proceeds of increased borrowings from FHLB and reverse repurchase agreements. The increase in assets is required in order for UPFC to meet the 30% limitation on our auto loans as required by the QTL. Residual interests in securitizations consisted 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. Our residual interests were $8.9 million at December 31, 2000. UPFC sold all of the residual interests arising from the 1999 securitizations in January 2001. Accordingly, as of December 31, 2000, these residual interests were valued based on the terms and conditions of the sales contract and the net cash proceeds received at the settlement date in January 2001. Premises and equipment increased from $1.6 million at December 31, 2000 to $2.1 million at December 31, 2001 primarily as a result of the continuing growth of our auto finance business. Deposit accounts increased $9.1 million, from $348.2 million at December 31, 2000 to $357.3 million at December 31, 2001. This increase was primarily due to an increase in brokered CD's from $28.6 million at 36 December 31, 2000 to $51.5 million at December 31, 2001. Retail deposits decreased $21.1 million, from $299.1 million at December 31, 2000 to $278.0 million at December 31, 2001. Other interest bearing liabilities include FHLB advances and repurchase agreements. FHLB advances were $130.0 million at December 31, 2001 compared with $60.0 million at December 31, 2000. Reverse repurchase agreements were $114.8 as of December 31 2001. There were no outstanding repurchase agreements at December 31, 2000. The increase in FHLB advances and repurchase agreements was primarily due to our use of wholesale borrowings as an alternative to deposits as a funding source for asset growth. Net deferred tax assets were $6.9 million at December 31, 2001 due principally to temporary differences in the recognition of reserves for loan losses and discontinued operations for federal and state income tax reporting and financial statement reporting purposes. Shareholders' equity increased from $69.3 million at December 31, 2000 to $75.7 million at December 31, 2001, as a result of our 2001 profit of $7.8 million, $247,000 of unrealized gain on securities and a $1.4 million increase as a result of stock options in the second quarter of 2001, partially offset by a $3.1 million repurchase of UPFC stock. 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. 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. We review a market value model (the "OTS NPV model") prepared quarterly by 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. At December 31, 2001, the Bank's sensitivity measure resulting from a 100 basis point decrease in interest rates was 25 basis points and would result in a $2.5 million increase in the NPV of the Bank and a 200 basis point increase in interest rates was 126 basis points and would result in a $11.1 million decrease in the NPV of the Bank. At December 31, 2001, 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 tables show the NPV and projected change in the NPV of the Bank at December 31, 2001 and December 31, 2000 assuming an instantaneous and sustained change in market interest rates of 100, 200 and 300 basis points ("bp"). The increase in sensitivity for December 31, 2001, as compared to December 31, 2000 is a result of the Bank's purchase of securities, which are more sensitive to movements in market interest rates. The Bank acquired these securities in order to manage its sources of funds and the mix of its assets to ensure it meets the QTL test. The December 31, 2001 table does not include data for -200 bp or -300 bp because these changes in rates would infer negative interest rates and are therefore not relevant. 37
Interest Rate Sensitivity of Net Portfolio Value December 31, 2001 Net Portfolio Value NPV as % of Portfolio Value of Assets ------------------------------------------------------ ------------------------------------- Change in Rates $ Amount $ Change % Change NPV Ratio Change - --------------- -------- -------- -------- -------------- --------------- (Dollars in thousands) +300 bp $75,034 $(19,212) -20% 10.59% -223 bp +200 bp 83,139 (11,107) -12% 11.57% -126 bp +100 bp 89,713 (4,533) -5% 12.33% -50 bp 0 bp 94,246 -- --% 12.83% -- bp -100 bp 96,738 2,492 3% 13.08% +25 bp -200 bp -- -- -- -- -- -300 bp -- -- -- -- --
December 31, 2001 Net Portfolio Value NPV as % of Portfolio Value of Assets ------------------------------------------------------ ------------------------------------- Change in Rates $ Amount $ Change % Change NPV Ratio Change - --------------- -------- -------- -------- -------------- --------------- (Dollars in thousands) +300 bp $57,293 $ (3,042) -5% 11.64% -43 bp +200 bp 58,616 (1,719) -3% 11.84% -23 bp +100 bp 59,635 (700) -1% 11.98% -09 bp 0 bp 60,335 -- --% 12.07% -- bp -100 bp 60,830 495 +1% 12.12% +05 bp -200 bp 62,308 1,973 +3% 12.34% +27 bp -300 bp 64,358 4,023 +7% 12.65% +58 bp
38 Liquidity and Capital Resources General UPFC's primary sources of funds are retail and wholesale deposits, FHLB advances, reverse repurchase agreements, principal and interest payments on 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. We have continued to maintain the required levels of liquid assets as defined by OTS regulations. 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. A major source of funds consists of deposits obtained through the Bank's retail branches in California. The Bank offers checking accounts, various money market accounts, regular passbook accounts and 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 December 31, 2001, such retail deposits were $278.0 million or 77.8% of total deposits. The Bank uses wholesale and broker-originated deposits to supplement its retail deposits and, at December 31, 2001, wholesale deposits were $79.4 million or 22.2% 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. Brokered deposits are originated through major dealers specializing in such products. Included in wholesale deposits at December 31, 2001 are $51.5 million of broker-originated deposits. The following table sets forth the average balances and rates paid on each category of deposits for the dates indicated.
2001 2000 1999 ------------------- ---------------------- ------------------- Weighted Weighted Weighted Average Average Average Balance Rate Balance Rate Balance Rate -------- -------- -------- -------- -------- -------- (Dollars in thousands) Passbook accounts $ 41,690 2.42% $ 45,811 4.26% $ 50,672 4.24% Checking accounts 14,662 1.46% 14,394 2.10% 13,064 1.84% Certificates of deposit Under $100,000 226,368 5.47% 171,975 5.94% 176,983 5.20% $100,000 and over 79,783 5.65% 70,262 6.16% 68,050 5.45% -------- -------- -------- Total $362,503 5.00% $302,442 5.55% $308,769 4.96% ======== ======== ========
The following table sets forth the time remaining until maturity for all CDs at December 31, 2001, 2000 and 1999.
December 31, December 31, December 31, 2001 2000 1999 ------------- ---------------------- ------------ (Dollars in thousands) Maturity within one year $237,683 $257,710 $199,110 Maturity within two years 46,170 36,440 28,770 Maturity within three years 7,657 100 149 Maturity over three years 4,117 -------- -------- -------- Total certificates of deposit $295,624 $294,250 $228,029 ======== ======== ========
39 The following table sets forth the time remaining until maturity for CD's with balances of $100,000 and over at December 31, 2001, 2000 and 1999. December 31, December 31, December 31, 2001 2000 1999 ------------- ---------------------- ------------ (Dollars in thousands) Maturity in: Less than 3 months $31,993 $24,859 $21,342 3-6 months 19,560 24,872 14,767 6-12 months 20,663 21,257 19,696 Over 12 months 10,427 11,835 8,350 ------- ------- ------- $82,643 $82,823 $64,155 ======= ======= ======= 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 December 31, 2001, the Bank exceeded all of its regulatory capital requirements with tangible capital of $49.7 million, or 7.24% of total adjusted assets, which is above the required level of $10.3 million, or 1.50%; core capital of $49.7 million, or 7.24% of total adjusted assets, which is above the required level of $20.6 million, or 3.00% and risk-based capital of $53.2 million, or 15.71% of risk-weighted assets, which is above the required level of $27.1 million, or 8.00% Under the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), the Bank is deemed to be "well capitalized" at December 31, 2001. UPFC has other sources of liquidity, including FHLB advances, repurchase agreements and the liquidity and short-term securities portfolio. Through the Bank, we may obtain advances from the FHLB collateralized by securities. The FHLB functions as a central reserve bank providing credit for thrifts and certain other member financial institutions. Advances are made pursuant to several programs each of which has its own interest rate and range of maturities. Limitations on the amount of advances are based generally on a fixed percentage of net worth or on the FHLB's assessment of an institution's credit-worthiness. As of December 31, 2001, the Bank's borrowing capacity under this credit facility was $137.9 million with $7.9 million unused. The following table sets forth certain information regarding our short-term borrowed funds (consisting of FHLB advances and warehouse lines of credit) at or for the periods ended on the dates indicated. At or For Years Ended December 31, ------------------------------------- 2001 2000 1999 --------- ------- --------- (Dollars in thousands) FHLB advances Maximum month-end balance $130,000 $60,000 $ 2,300 Balance at end of period 130,000 60,000 -- Average balance for period 30,830 22,877 6 Weighted average interest rate on balance at end of period 1.97% 6.81% --% Weighted average interest rate on average balance for period 4.04% 6.58% 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 -- 1,796 45,404 Weighted average interest rate on balance at end of period -- --% 5.78% Weighted average interest rate on average balance for period -- 6.27% 5.84% Repurchase agreements -- -- Maximum month-end balance $114,776 -- -- Balance at end of period 114,776 -- -- Average balance for period 4,503 -- -- Weighted average interest rate on balance at end of period 2.37% -- -- Weighted average interest rate on average balance for period 3.46% -- -- 40 UPFC had no material contractual obligations or commitments for capital expenditures at December 31, 2001. Lending Activities Summary of Loan Portfolio. At December 31, 2001 our loan portfolio constituted $236.6 million, or 34.3% of our total assets. The following table sets forth the composition of our loan portfolio at the dates indicated.
December 31, ------------------------------------------------------------- (Dollars in thousands) 2001 2000 1999 1998 1997 --------- --------- --------- --------- --------- Consumer Loans Automobile installment contracts $ 232,902 $ 176,255 $ 128,093 $ 83,921 $ 40,877 Insurance premium finance 28,710 25,843 23,846 40,440 39,990 Other consumer loans 98 577 864 1,209 267 --------- --------- --------- --------- --------- Total consumer loans 261,710 202,675 152,803 125,570 81,134 --------- --------- --------- --------- --------- Mortgage Loans Mortgage loans (purchased primarily from RTC) -- 16,784 21,835 32,328 81,995 Subprime mortgage loans 352 1,845 149,876 213,687 125,377 --------- --------- --------- --------- --------- Total mortgage loans 352 18,629 171,711 246,015 207,372 --------- --------- --------- --------- --------- Commercial Loans Insurance premium finance 10,921 8,342 6,488 4,269 -- Other commercial loans -- 55 15 36 -- --------- --------- --------- --------- --------- Total commercial loans 10,921 8,397 6,503 4,305 -- --------- --------- --------- --------- --------- Total loans 272,983 229,701 331,017 375,890 288,506 Unearned discounts and premiums -- (728) (954) (212) (2,901) Unearned finance charges (18,881) (20,737) (21,181) (17,371) (10,581) Allowance for loan losses (17,460) (15,156) (14,139) (10,183) (6,487) --------- --------- --------- --------- --------- Total loans, net $ 236,642 $ 193,080 $ 294,743 $ 348,124 $ 268,537 ========= ========= ========= ========= =========
Loan Maturities. The following table sets forth the dollar amount of loans maturing in our loan portfolio at December 31, 2001 based on final maturity. Loan balances are reflected before unearned discounts and premiums, unearned finance charges and allowance for losses.
At December 31, 2001 ------------------------------------------------------------------------------------------- More Than 1 More Than 3 More Than 5 More Than 10 One Year Year to Years to Years to Years to 20 More Than 20 Total or Less 3 Years 5 Years 10 Years Years Years Loans -------- ----------- ----------- ----------- ------------ ------------ -------- (Dollars in thousands) Consumer loans $ 35,625 $ 95,415 $ 130,395 $ 275 $ -- $-- $261,710 Mortgage loans -- -- -- -- 352 -- 352 Commercial loans 10,921 -- -- -- -- -- 10,921 -------- --------- --------- ----- ------ --- -------- Total $46,546 $ 95,415 $ 130,395 $275 $352 $-- $272,983 ======== ========= ========= ====== ====== === ========
The following table sets forth, at December 31, 2001, the dollar amount of loans receivable that were contractually due after one year and indicates whether such loans have fixed or adjustable interest rates. Due After December 31, 2002 --------------------------------------- Fixed Adjustable Total -------- ---------- -------- (In thousands) Consumer loans $226,085 $ 0 $226,085 Mortgage loans -- 352 352 Commercial loans -- -- -- -------- ---- -------- Total $226,085 $352 $226,437 ======== ==== ======== 41 Classified Assets and Allowance for Loan Losses UPFC monitors levels and trends of loan delinquencies to assure the allowance for loan losses remains adequate. For UACC loans a percentage of each new loan, currently 10.5% of net contract amount, is allocated to the allowance for loan losses. This percentage is established by reviewing historical trends and levels of delinquencies and charge offs. This percentage reflects the level of losses expected over the life of the loans. Periodically thereafter, management reviews the level of allowance for loan losses in light of any major changes in delinquencies and charge offs to assure the balance remains adequate to protect UPFC from unexpected loss. If this review reflects possible weakness, management will allocate an additional provision for loan loss, charged against current earnings, to maintain appropriate levels of allowance for loan losses. For IPF loans, management establishes a level of allowance for loan losses based on recent trends in delinquencies and historical charge offs, currently 1.25% of loans, that it feels is adequate for the risk in the portfolio. Each month an amount necessary to reach that level is charged against current earnings and added to allowance for loan losses. The following table sets forth the remaining balances of all loans (before specific reserves for losses) that were more than 30 days delinquent at December 31, 2001, 2000 and 1999.
Loan - ----- December 31, % of Total December 31, % of Total December 31, % of Total Delinquencies 2001 Loans 2000 Loans 1999 Loans - ------------- ------------ ---------- ------------ ---------- ------------ ---------- (Dollars in thousands) 30 to 59 days $1,368 0.6% $ 953 0.5% $ 3,071 1.0% 60 to 89 days 776 0.3% 494 0.3% 2,443 0.8% 90+ days 942 0.4% 2,374 1.2% 13,307 4.6% ------ --- ------ --- ------- --- Total $3,086 1.3% $3,821 2.0% $18,821 6.4% ====== === ====== === ======= ===
Nonaccrual and Past Due Loans. UPFC's general policy is to discontinue accrual of interest on a mortgage loan when it is two payments or more delinquent and, accordingly, loans are placed on non-accrual status generally when they are 60-89 days delinquent. A non-mortgage loan is charged-off or 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, extend or rewrite loans. The following table sets forth the aggregate amount of nonaccrual loans (net of unearned discounts and premiums and unearned finance charges) at December 31, 2001, 2000, 1999, 1998 and 1997
December 31, ------------------------------------------------------------ 2001 2000 1999 1998 1997 --------- --------- ---------- ---------- --------- Nonaccrual loans Single-family residential $ 352 $ 2,281 $ 15,825 $ 19,242 $ 5,766 Multi-family residential and commercial -- -- 100 214 605 Consumer and other loans 688 1,323 1,060 1,168 1,426 --------- --------- ---------- ---------- --------- Total $ 1,040 $ 3,604 $ 16,985 $ 20,624 $ 7,797 ========= ========= ========== ========== ========= Nonaccrual loans as a percentage of Total loans held for investment 0.44% 1.87% 10.73% 15.42% 5.25% Total assets 0.15% 0.74% 3.88% 4.85% 2.51% Allowance for loan losses as a percentage of Total loans held for investment 7.38% 7.88% 8.93% 7.62% 4.37% Nonaccrual loans 1678.84% 420.53% 83.24% 49.37% 83.20%
The amount of interest income that would have been recognized on nonaccrual loans if such loans had continued to perform in accordance with their contractual terms was $21,000 for the year December 31, 2001, $176,000 for the year ended December 31, 2000, and $1.4 million for the year ended December 31, 1999. The 42 total amount of interest income recognized on nonaccrual loans was $0, $698,000 and $1.4 million for the years ended December 31, 2001, 2000 and 1999, respectively. 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 $0 at December 31, 2001, $871,000 at December 31, 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.
At or For the Year Ended December 31, --------------------------------------------------- 2001 2000 1999 1998 1997 -------- -------- -------- -------- ------- (Dollars in thousands) Allowance for Loan Losses Balance at beginning of year $ 15,156 $ 14,139 $ 10,183 $ 6,487 $ 5,356 Provision for loan losses - continuing operations 615 201 432 293 507 Provision for loan losses - discontinued -- 2,396 7,376 5,560 -- operations Charge-offs Mortgage loans (1,713) (6,402) (7,525) (4,536) (373) Consumer loans (9,173) (6,025) (4,395) (3,793) (2,101) -------- -------- -------- -------- ------- Total charge-offs (10,886) (12,427) (11,920) (8,329) (2,474) Recoveries Mortgage loans 140 327 296 452 77 Consumer loans 266 286 414 1,138 1,068 -------- -------- -------- -------- ------- Total recoveries 406 613 710 1,590 1,145 -------- -------- -------- -------- ------- Net charge-offs (10,480) (11,814) (11,210) (6,739) (1,329) Acquisition discounts allocated to loss allowance 12,169 10,234 7,358 4,582 1,953 -------- -------- ------- Balance at end of year $ 17,460 $ 15,156 $ 14,139 $ 10,183 $ 6,487 ======== ======== ======== ======== ======= Annualized net charge-offs to average loans 4.94% 5.03% 2.95% 1.73% 0.60% Ending allowance to period end loans, net 7.38% 7.88% 8.93% 7.62% 4.37%
At December 31, --------------------------------------------------------------------------- 2001 2000 1999 ----------------------- ----------------------- ----------------------- Percent of Percent of Percent of Loans in Each Loans in Each Loans in Each Amount Category to Amount Category to Amount Category to Total Loans Total Loans Total Loans ------- ------------- ------- ------------- ------- ------------- (Dollars in thousands) Distribution of end of period Allowance by loan type Mortgage loans $ 159 0.1% $ 2,174 8.3% $ 5,800 19.9% Consumer loans 17,165 95.9% 12,982 87.7% 8,339 76.3% Commercial loans 136 4.0% -- 4.0% -- 3.8% ------- ----- ------- ----- ------- ----- $17,460 100.0% $15,156 100.0% $14,139 100.0% ======= ===== ======= ===== ======= =====
At December 31, -------------------------------------------------------- 1998 1997 Percent of Loans Percent of Loans in Each Category in Each Category Amount to Total Loans Amount to Total Loans ------- ---------------- ------- ---------------- (Dollars in thousands) Distribution of end of period Allowance by loan type Mortgage loans $ 5,676 21.8% $3,653 51.9% Consumer loans 4,507 78.2% 2,246 48.1% Commercial loans -- -- 588 -- ------- ----- ------ ----- $10,183 100.0% $6,487 100.0% ======= ===== ====== =====
43 UPFC's policy is to maintain an allowance for loan losses to absorb future losses, which may be realized on its loan portfolio. These allowances include specific reserves for identifiable impairments of individual loans and general valuation allowances for estimates of probable losses not specifically identified. In addition, our allowance for loan losses is also increased by the allocation of acquisition discounts related to the purchase of automobile installment contracts. The determination of the adequacy of the allowance for loan losses is based on a variety of factors, including an assessment of the credit risk inherent in the portfolio, prior loss experience, the levels and trends of non-performing loans, the concentration of credit, current and prospective economic conditions and other factors. UPFC's management uses its best judgment in providing for possible loan losses and establishing allowances for loan losses. However, the allowance is an estimate, which is inherently uncertain and depends on the outcome of future events. In addition, regulatory agencies, as an integral part of their examinations process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to increase the allowance based upon their judgment of the information available to them at the time of their examination. Cash Equivalents and Securities Portfolio UPFC's cash equivalents and securities portfolios are used primarily for liquidity and for investment income. UPFC's 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. December 31, ----------------------------- 2001 2000 1999 -------- -------- ------- (Dollars in thousands) Balance at end of period Overnight deposits $135,267 $ 36,477 $85,500 U.S. agency securities 229,660 166,838 9,918 U.S. agency mortgage-backed securities 35,016 46,376 -- Mutual funds (mortgage-backed securities) 20,162 10,051 -- -------- -------- ------- Total $420,104 $259,742 $95,418 ======== ======== ======= The scheduled maturities and yields by security type are presented in the following tables:
As of December 31, 2001 ------------------------------------------------------------------------- One Year or After 1 Year to After 5 Years to Over 10 Less Five Years 10 Years Years Total ----------- --------------- ---------------- -------- ----------- Maturity Distribution Overnight deposits $135,267 $ -- $ -- $ -- $ 135,267 U.S. agency securities 5,594 110,752 31,461 81,852 229,659 U.S. agency mortgage backed securities (1) -- -- -- 35,016 35,016 Mutual funds (mortgage back securities) 20,162 -- -- -- 20,162 -------- --------- ------- -------- ----------- Total $161,023 $ 110,752 $31,461 $116,868 $ 420,104 ======== ========= ======= ======== =========== Weighted Average Yield Overnight deposits 1.23% --% --% --% 1.23% U.S. agency securities 1.74% 3.72% 3.80% 2.67% 3.35% U.S. agency mortgage backed securities (1) --% --% --% 6.60% 6.60% Mutual funds (mortgage backed securities --% --% --% --% 3.59% -------- --------- ------- -------- ----------- Total 1.54% 3.72% 3.80% 3.85% 2.95% ======== ========= ======= ======== ===========
(1) Securities reflect stated maturities and not anticipated prepayments 44
As of December 31, 2000 ------------------------------------------------------------------------ One Year or After 1 Year After 5 Years to Over 10 Less to Five Years 10 Years Years Total ----------- ------------- ----------------- -------- ----------- Maturity Distribution Overnight deposits $ 36,477 $ -- $ -- $ -- $ 36,477 U.S. agency securities 166,838 -- -- -- 166,838 U.S. agency mortgage backed securities (1) -- -- -- 46,376 46,376 Mutual funds (mortgage back securities) 10,151 -- -- -- 10,051 ----------- ------- ------ -------- ----------- Total $ 213,366 $ -- $ -- $ 46,376 $ 259,742 =========== ======= ====== ======== =========== Weighted Average Yield Overnight deposits 5.69% --% --% --% 5.69% U.S. agency securities 6.27% --% --% --% 6.27% U.S. agency mortgage backed securities (1) --% --% --% 7.35% 7.35% Mutual funds (mortgage backed securities 6.59% --% --% --% 6.59% ----------- ------- ------ -------- ----------- Total 6.19% --% --% 7.35% 3.64% =========== ======= ====== ======== ===========
(1) Securities reflect stated maturities and not anticipated prepayments Impact of Inflation and Changing Prices The financial statements and notes presented herein have been prepared in accordance with Generally Accepted Accounting Principles in the United States of America ("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 the assets and liabilities of UPFC 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. Recent Accounting Developments In July 2001, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No.141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001. SFAS No.141 also specifies criteria which intangible assets acquired in a purchase method business combination must meet in order to be recognized and reported apart from goodwill. The adoption of this statement is not expected to have a material effect on UPFC. SFAS No.142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No.142. SFAS No.142 will also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment. As permitted by SFAS No.142, UPFC plans to adopt the new standard in the first quarter of the fiscal year 2002. Upon adoption of SFAS No.142, UPFC will be required to reassess the useful lives and residual values of all intangible assets acquired in purchase business combinations, and make any necessary amortization period adjustments and/or impairment adjustments. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle in the first interim period. Beginning on January 1, 2002, amortization of goodwill and intangibles with indefinite lives will cease. It is not anticipated that the adoption of this statement will have a material effect on UPFC. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations," which requires that the fair value of a liability for an asset retirement obligation be recognized in the period 45 in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs would be capitalized as part of the carrying amount of the long-lived asset and depreciated over the life of the asset. The liability is accreted at the end of each period through charges to operating expense. If the obligation is settled for other than the carrying amount of the liability, UPFC will recognize a gain or loss on settlement. Two provisions of SFAS No.143 are effective for fiscal years beginning after June 15, 2002. The adoption of this statement will have no material impact on UPFC. In August 2001, the FASB issued SFAS No.144, " Accounting for the Impairment or Disposal of Long-lived Assets." For long-lived assets to be held and used, SFAS No.144 retains the requirements of SFAS No.121 to (a) recognize an impairment loss only if the carrying amount of a long-lived asset is not recoverable from its undiscounted cash flows and (b) measure an impairment loss as the difference between the carrying amount and fair value. Further, SFAS No.144 eliminates the requirement to allocate goodwill to long-lived assets to be tested for impairment, describes a probability-weighted cash flow estimation approach to deal with situations in which alternative courses of action to recover the carrying amount of long-lived asset are under consideration or a range is estimated for the amount of possible future cash flows, and establishes a "primary-assets" approach to determine the cash flow estimation period. For long-lived assets to be disposed of other than by sale (e.g., assets abandoned, exchanged or distributed to owners in a spin off), SFAS No.144 requires that such assets be considered held and used until disposed of. Further, an impairment loss should be recognized at the date an asset is exchanged for a similar productive asset or distributed to owners in a spin off if the carrying amount exceeds its fair value. For long-lived assets to be disposed of by sale, SFAS No.144 retains the requirement of SFAS No.121 to measure a long-lived asset classified as held for sale at the lower of its carrying amount or fair value less cost to sell and to cease depreciation. Discontinued operations would no longer be measured on a net realizable value basis, and future operating losses would no longer be recognized before they occur. SFAS No.144 broadens the presentation of discontinued operations to include a component of an entity, establishes criteria to determine when a long-lived asset is held for sale, prohibits retroactive reclassification of the asset as held for sale at the balance sheet date if the criteria are met after the balance sheet date but before issue of the financial statements, and provides accounting guidance for the reclassification of an asset from "held for sale" to `held and used". The provisions of SFAS No.144 are effective for fiscal years beginning after December 15 2001. It is not anticipated that the adoption of this statement will have a material effect on UPFC. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Information regarding Quantitative and Qualitative Disclosures About Market Risk is set forth under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations - Management of Interest Rate Risk" of Item 7 to this Annual Report on Form 10-K. Item 8. Financial Statements and Supplementary Data Index to Consolidated Finance Statements F-1 Independent Auditors' Report F-2 Consolidated Statements of Financial Condition as of December 31, 2001 and 2000 F-3 Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999 F-4 Consolidated Statements of Comprehensive Income for the years ended December 31, 2001, 2000 and 1999 F-5 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2001, 2000 and 1999 F-6 46 Consolidated Statements of Cash Flows for the F-7 years ended December 31, 2001, 2000 and 1999 Notes to Consolidated Financial Statements F-9 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures None. 47 PART III Item 10. Directors and Executive Officers of the Registrant Item 10 is incorporated by reference to our 2002 definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after December 31, 2001. The information required by Item 10 is set forth in the Sections entitled "Information About Directors and Executive Officers - Executive Officers and Key Employees," and "Did Directors, Executive Officers and Greater-Than-10% Shareholders Comply With Section 16(a) Beneficial Ownership Reporting in 2001". Item 11. Executive Compensation Item 11 is incorporated by reference to the Sections entitled "Information About Directors and Executive Officers" contained in the 2002 Proxy Statement, to be filed with the SEC within 120 days after December 31, 2001. Item 12. Security Ownership of Certain Beneficial Owners and Management Item 12 is incorporated by reference to the Section entitled "Information About UPFC Stock Ownership" contained in the 2002 Proxy Statement, to be filed with the SEC within 120 days after December 31, 2001. Item 13. Certain Relationships and Related Transactions Item 13 is incorporated by reference to the Section entitled "Information About Directors and Executive Officers - Relationships and Related Transactions" contained in the 2002 Proxy Statement, to be filed with the SEC within 120 days after December 31, 2001. 48 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a)(1) Financial Statements. Reference is made to the Index to Consolidated Financial Statements on page F-1 for a list of financial statements filed as a part of this Annual Report. (2) Financial Statement Schedules. All financial statement schedules are omitted because of the absence of the conditions under which they are required to be provided or because the required information is included in the financial statements listed above and/or related notes. (3) List of Exhibits. The following is a list of exhibits filed as a part of this Annual Report.
Exhibit No. Description - ----------- ----------- 3.1.2* Articles of Incorporation of the Registrant, as amended. 3.2.2* Bylaws of the Registrant 10.1* Insurance Premium Financing Management Agreement dated May 17, 1995, between Pan American Bank, FSB and BPN Corporation. 10.2* First Amendment to Insurance Premium Financing Management Agreement and Guaranties dated October 1995, between Pan American Bank, FSB and BPN Corporation. 10.3* Second Amendment to Insurance Premium Financing Management Agreement and Guaranties dated February 28, 1996, among Pan American Bank, FSB, BPN Corporation, Cornelius J. O'Shea, Peter Walski and Barbara Walski. 10.4* Guaranty dated May 17, 1995 by Peter Walski and Barbara Walski to Pan American Bank, FSB. 10.5* Guaranty dated May 17, 1995 by Cornelius J. O'Shea to Pan American Bank, FSB. 10.6* Stock Option Agreement dated May 17, 1995, among BPN Corporation, Pan American Group, Inc., Peter A. Walski, Barbara R. Walski, Cornelius J. O'Shea and The Walski Family Trust. 10.7* First Amendment to Stock Option Agreement dated October 1, 1997, among BPN Corporation, Pan American Group, Inc., Peter A. Walski, Barbara R. Walski, Cornelius J. O'Shea and The Walski Family Trust. 10.21* Advances and Security Agreement dated January 29, 1996, between the Federal Home Loan Bank of San Francisco and Pan American Bank, FSB. 10.35* Inter-Company Agreement dated May 1, 1994, between Pan American Financial, Inc. and Pan American Bank, FSB. 10.40* Employment Agreement dated October 1, 1997, between Pan American Group, Inc., Pan American Bank FSB and Guillermo Bron. 10.40.1* Amendment No. 1 to Employment Agreement dated November 1, 1997, between the Pan American Group, Inc., Pan American Bank FSB and Guillermo Bron.
49
Exhibit No. Description - ----------- ----------- 10.42* Salary Continuation Agreement dated October 1, 1997, between Pan American Bank, FSB and Lawrence J. Grill. 10.43* Salary Continuation Agreement dated October 1, 1997, between Pan American Bank, FSB and Guillermo Bron. 10.44* Form of Indemnification Agreement between UPFC and officers and directors of UPFC. 10.47* Pan American Group, Inc. 1997 Stock Incentive Plan, together with forms of incentive stock option, non-qualified stock option and restricted stock agreements. 10.49* Pan American Bank, FSB 401(k) Profit Sharing Plan, as amended. 10.50* Income Tax Allocation Agreement dated October 19, 1994, between Pan American Bank, FSB, Pan American Financial, Inc. and the Predecessor. 10.102** On-line Computer Service Agreement dated June 19, 1998 between DHI Computing, Inc. and Pan American Bank, FSB 10.106* Amended and Restated Loan and Stock Pledge Agreement dated January 1, 2000, between Lawrence J. Grill and United PanAm Financial Corp. 10.106.1# Amended and Restated Promissory Note in the principal amount of $300,000 dated January 1, 2000 by Lawrence J. Grill. 10.108# First Amendment to the Salary Continuation Agreement dated December 21, 2000, between Pan American Bank, FSB and Lawrence J. Grill. 10.109## Employment Agreement dated December 8, 2000, between Pan American Bank, FSB and Ray C. Thousand.
50 Exhibit No. Description - ----------- ----------- 21.1 Subsidiaries. 23.1 Consent of KPMG LLP. - -------------- * Incorporated herein by reference from the Exhibits to Form S-1 Registration Statement, declared effective on April 23, 1998, Registration No. 333-39941. ** Incorporated herein by reference from the Exhibits to Form 10-Q for the quarters ended June 30, 1998 and September 30, 1998 and Form 10-K for the year ended December 1998. *** Incorporated herein by reference from the Exhibits to Form 10-Q for the quarter ended March 31, 1999 and Form 10-K for the year ended December 31, 1999. # Incorporated herein by reference from Exhibits to Form 10K for the year ended December 31, 2000 ## Incorporated herein by reference from Exhibits to Form 10Q for the Quarter ended March 31, 2001. (b) Reports on Form 8-K None (c) Exhibits. Reference is made to the Exhibit Index and exhibits filed as a part of this report. (d) Additional Financial Statements. Not applicable. 51 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. By: /s/ Guillermo Bron ------------------------------------- Guillermo Bron Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date --------- ----- ---- /S/ GUILLERMO BRON Chairman of the Board and March 21, 2002 - ---------------------------- Chief Executive Officer (Principal Executive Officer) /S/ RAY C. THOUSAND President, Chief Operating March 21, 2002 - ---------------------------- Officer, Secretary and Director /S/ GARLAND W. KOCH Senior Vice President - March 21, 2002 - ---------------------------- Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) /S/ LAWRENCE J. GRILL Director March 21, 2002 - ---------------------------- /S/ JOHN T. FRENCH Director March 21, 2002 - ---------------------------- /S/ MITCHELL LYNN Director March 21, 2002 - ---------------------------- /S/ LUIS MAIZEL Director March 21, 2002 - ---------------------------- /S/ RON R. DUNCANSON Director March 21, 2002 - ---------------------------- 52 United PanAm Financial Corp. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Independent Auditors' Report F-2 Consolidated Statements of Financial Condition as of December 31, 2001 and 2000 F-3 Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999 F-4 Consolidated Statements of Comprehensive Income for the years ended December 31, 2001, 2000 and 1999 F-5 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2001, 2000 and 1999 F-6 Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999 F-7 Notes to Consolidated Financial Statements F-9 F-1 Independent Auditors' Report The Board of Directors United PanAm Financial Corp.: We have audited the accompanying consolidated statements of financial condition of United PanAm Financial Corp. and subsidiaries (the "Company") as of December 31, 2001 and 2000, and the related consolidated statements of operations, comprehensive income, changes in shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2001. The consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of United PanAm Financial Corp. and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows, for each of the years in the three-year period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP Los Angeles, California January 29, 2002 F-2 United PanAm Financial Corp. and Subsidiaries Consolidated Statements of Financial Condition
December 31, December 31, (Dollars in thousands) 2001 2000 ------------ ------------ Assets Cash and due from banks $ 5,428 $ 6,115 Short term investments 135,267 36,477 -------- -------- Cash and cash equivalents 140,695 42,592 Securities available for sale, at fair value 284,837 223,265 Residual interests in securitizations, at fair value -- 8,861 Loans, net 236,448 192,368 Loans held for sale 194 712 Federal Home Loan Bank stock, at cost 6,500 3,000 Premises and equipment, net 2,124 1,591 Accrued interest receivable 4,029 814 Real estate owned, net -- 871 Deferred tax assets 6,860 10,820 Other assets 7,886 5,084 -------- -------- Total assets $689,573 $489,978 ======== ======== Liabilities and Shareholders' Equity Deposits $357,350 $348,230 Federal Home Loan Bank advances 130,000 60,000 Repurchase agreements 114,776 -- Accrued expenses and other liabilities 11,781 12,431 -------- -------- Total liabilities 613,907 420,661 -------- -------- Common stock (no par value): Authorized, 30,000,000 shares Issued and outstanding, 15,571,400 and 16,149,650 shares at December 31, 2001 and December 31, 2000, respectively 63,630 65,291 Retained earnings 11,287 3,524 Unrealized gain on securities available for sale, net 749 502 -------- -------- Total shareholders' equity 75,666 69,317 -------- -------- Total liabilities and shareholders' equity $689,573 $489,978 ======== ========
See accompanying notes to consolidated financial statements. F-3 United PanAm Financial Corp. and Subsidiaries Consolidated Statements of Operations
(In thousands, except per share data) Years Ended December 31, -------------------------------------- 2001 2000 1999 -------- -------- -------- Interest Income Loans $ 45,648 $ 34,814 $ 27,003 Securities 12,504 9,561 1,800 -------- -------- -------- Total interest income 58,152 44,375 28,803 -------- -------- -------- Interest Expense Deposits 18,119 13,057 5,787 Federal Home Loan Bank advances 1,246 1,506 -- Notes payable 157 -- 246 -------- -------- -------- Total interest expense 19,522 14,563 6,033 -------- -------- -------- Net interest income 38,630 29,812 22,770 Provision for loan losses 615 201 432 -------- -------- -------- Net interest income after provision for loan losses 38,015 29,611 22,338 -------- -------- -------- Non-interest Income (loss) Loss on residual interests in securitizations -- (11,374) -- Gains on sales of loans, net 1,607 -- -- Loan related charges and fees 680 215 113 Service charges and fees 280 616 725 Other income (loss) 137 (369) 136 -------- -------- -------- Total non-interest income (loss) 2,704 (10,912) 974 -------- -------- -------- Non-interest Expense Compensation and benefits 17,135 12,903 10,843 Occupancy 3,088 2,486 1,890 Other 7,769 8,772 5,910 -------- -------- -------- Total non-interest expense 27,992 24,161 18,643 -------- -------- -------- Income (loss) from continuing operations before income taxes 12,727 (5,462) 4,669 Income taxes (benefit) 4,964 (2,094) 1,908 -------- -------- -------- Income (loss) from continuing operations 7,763 (3,368) 2,761 -------- -------- -------- Income (loss) from discontinued operations, net of tax -- -- (941) Loss on disposal of discontinued operations, net of tax -- (3,291) (6,172) -------- -------- -------- Net income (loss) $ 7,763 $ (6,659) $ (4,352) ======== ======== ======== Earnings (loss) per share-basic: Continuing operations $ 0.48 $ (0.21) $ 0.16 ======== ======== ======== Discontinued operations $ -- $ (0.20) $ (0.42) ======== ======== ======== Net income (loss) $ 0.48 $ (0.41) $ (0.26) ======== ======== ======== Weighted average shares outstanding 16,017 16,392 16,854 ======== ======== ======== Earnings (loss) per share-diluted: Continuing operations $ 0.46 $ (0.21) $ 0.16 ======== ======== ======== Discontinued operations $ -- $ (0.20) $ (0.41) ======== ======== ======== Net income (loss) $ 0.46 $ (0.41) $ (0.25) ======== ======== ======== Weighted average shares outstanding 16,931 16,392 17,253 ======== ======== ========
See accompanying notes to consolidated financial statements. F-4 United PanAm Financial Corp. and Subsidiaries Consolidated Statements of Comprehensive Income (Dollars in thousands) Years Ended December 31, --------------------------- 2001 2000 1999 ------ ------- ------- Net income (loss) $7,763 $(6,659) $(4,352) Other comprehensive income, net of tax: Unrealized gain (loss) on securities 247 581 (79) ------ ------- ------- Comprehensive income (loss) $8,010 $(6,078) $(4,431) ====== ======= ======= See accompanying notes to consolidated financial statements. F-5 United PanAm Financial Corp. and Subsidiaries Consolidated Statements of Changes in Shareholders' Equity
Unrealized (Dollars in thousands) Gain (Loss) Total Number Common Retained On Shareholders' of Shares Stock Earnings Securities, Net Equity ---------- ------- -------- --------------- ------------- Balance, December 31, 1998 17,375,000 $68,378 $14,535 -- $ 82,913 Net loss -- -- (4,352) -- (4,352) Exercise of stock options 333,750 425 -- -- 425 Note receivable from shareholder -- (75) -- -- (75) Issuance of restricted stock 35,600 216 -- -- 216 Repurchase of stock (1,375,000) (3,695) -- -- (3,695) Change in unrealized loss on securities, -- -- -- (79) (79) net ---------- ------- ------- ------- -------- Balance, December 31, 1999 16,369,350 65,249 10,183 (79) 75,353 Net loss -- -- (6,659) -- (6,659) Exercise of stock options 267,500 468 -- -- 468 Issuance of restricted stock 13,400 35 -- -- 35 Repurchase of stock (500,600) (461) -- -- (461) Change in unrealized gain on securities, net -- -- -- 581 581 ---------- ------- ------- ------- -------- Balance, December 31, 2000 16,149,650 65,291 3,524 502 69,317 Net income -- -- 7,763 -- 7,763 Exercise of stock options 58,750 83 -- -- 83 Effect of compensation expense for options -- 1,369 -- -- 1,369 Issuance of restricted stock 9,000 -- -- -- -- Repurchase of stock (646,000) (3,113) -- -- (3,113) Change in unrealized gain on securities, net -- -- -- 247 247 ---------- ------- ------- ------- -------- Balance, December 31, 2001 15,571,400 $63,630 $11,287 $ 749 $ 75,666 ========== ======= ======= ======= ========
See accompanying notes to consolidated financial statements. F-6 United PanAm Financial Corp. and Subsidiaries Consolidated Statements of Cash Flows
(Dollars in thousands) Years Ended December 31, --------------------------------- 2001 2000 1999 --------- --------- --------- Cash flows from operating activities: Net income (loss) $ 7,763 $ (6,659) $ (4,352) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Compensation expense for converting option plan 1,369 -- -- Discontinued operations -- 3,291 7,113 Gains on sales of loans (1,607) -- -- Origination of loans held for sale -- (76,368) (977,244) Sales of loans held for sale 16,643 203,586 983,734 Provision for loan losses 615 201 432 Accretion of discount on loans (62) -- (178) Depreciation and amortization 830 1,216 1,139 FHLB stock dividend (202) (168) (121) Decrease in residual interests in securitizations 8,861 12,366 569 Decrease (increase) in accrued interest receivable (3,215) 687 533 Decrease (increase) in other assets (2,802) 3,897 7,438 Deferred income taxes 3,681 (4,285) (3,109) Amortization of premiums (discounts) on securities 1,565 (4,645) -- Decrease in accrued expenses and other liabilities (650) (6,221) (1,223) Other, net -- 34 373 --------- --------- --------- Net cash provided by (used in) operating activities 32,789 126,932 15,104 --------- --------- --------- Cash flows from investing activities: Purchase of securities (499,547) (491,769) (9,918) Proceeds from maturities of investment securities 436,936 284,021 -- Repayments of mortgage loans 849 13,006 39,128 Originations, net of repayments, of non-mortgage loans (60,036) (47,673) (22,244) Purchases of premises and equipment (1,363) (900) (985) Purchase of FHLB stock, net (3,298) (327) (264) Proceeds from sale of real estate owned 907 7,434 7,120 Other, net -- (367) (286) --------- --------- --------- Net cash provided by (used in) investing activities (125,552) (236,575) 12,551 --------- --------- --------- Cash flows from financing activities: Net increase (decrease) in deposits 9,120 56,286 (29,724) Proceeds (repayments) from warehouse lines of credit -- (54,415) 54,415 Purchase of treasury stock (3,113) (461) (3,695) Proceeds (repayments) from repurchase agreements 114,776 -- (10,930) Proceeds (repayments) from FHLB advances 70,000 60,000 -- Exercise of stock options 83 468 425 --------- --------- --------- Net cash provided by financing activities 190,866 61,878 10,491 --------- --------- --------- Net increase (decrease) in cash and cash equivalents 98,103 (47,765) 38,146 Cash and cash equivalents at beginning of year 42,592 90,357 52,211 --------- --------- --------- Cash and cash equivalents at end of year $ 140,695 $ 42,592 $ 90,357 ========= ========= =========
See accompanying notes to consolidated financial statements. F-7 United PanAm Financial Corp. and Subsidiaries Consolidated Statements of Cash Flows, Continued
(Dollars in thousands) Years Ended December 31, ---------------------------- 2001 2000 1999 -------- ------- ------- Supplemental disclosures of cash flow information: Cash paid for: Interest $ 19,082 $17,924 $17,793 ======== ======= ======= Taxes $ 2,669 $ 236 $ 253 ======== ======= ======= Supplemental schedule of non-cash investing and financing activities: Loans transferred to held for sale $ 14,187 $ -- $ -- ======== ======= ======= Real estate acquired through foreclosure $ -- $ 5,715 $ 7,833 ======== ======= =======
See accompanying notes to consolidated financial statements. F-8 United PanAm Financial Corp. and Subsidiaries Notes to Consolidated Financial Statements 1. BUSINESS ORGANIZATION - ------------ United PanAm Financial Corp. ("UPFC" or the "Company") was incorporated in California on April 9, 1998 for the purpose of reincorporating its business in California, through the merger of United PanAm Financial Corp., a Delaware corporation into UPFC. 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. UPFC, PAFI and the Bank are minority owned. PAFI is a wholly-owned subsidiary of UPFC and the Bank is a wholly-owned subsidiary of PAFI. WorldCash Technologies, Inc. ("WorldCash") is a wholly-owned subsidiary of UPFC and was incorporated in 1999. United Auto Credit Corp. ("UACC") was incorporated in 1996 as a wholly-owned subsidiary of the Bank. These financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America. In preparing these consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amount of revenues and expenses during the reporting periods. Actual results could differ from those estimates. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION - --------------------------- The consolidated financial statements include the accounts of UPFC, PAFI, WorldCash and the Bank. Substantially all of UPFC's revenues are derived from the operations of the Bank and they represent substantially all of UPFC's consolidated assets and liabilities as of December 31, 2001 and 2000. Significant inter-company accounts and transactions have been eliminated in consolidation. CASH AND CASH EQUIVALENTS - ------------------------- For financial statement purposes, cash and cash equivalents include cash on hand, non-interest-bearing deposits, federal funds sold and highly liquid interest-bearing deposits with original maturities of three months or less. SECURITIES - ---------- Securities are classified in one of three categories; held-to-maturity, trading, or available-for-sale. Investments classified as held to maturity are carried at amortized cost because management has both the intent and ability to hold these investments to maturity. Investments classified as trading are carried at fair value with any gains and losses reflected in earnings. All other investments are classified as available-for- sale and are carried at fair value with any unrealized gains and losses included as a separate component of shareholders' equity, net of applicable taxes. Premiums and discounts are amortized or accreted over the life of the related security as an adjustment to yield using the effective interest method. Dividend and interest income are recognized when earned. Realized gains and losses for securities classified as available for sale or held to maturity are included in earnings and are derived using the specific identification method for determining the cost of securities sold. F-9 United PanAm Financial Corp. and Subsidiaries Notes to Consolidated Financial Statements LOANS - ----- UPFC originates and purchases loans for investment. Loans held for investment are reported at cost, net of unamortized discounts or premiums, unearned loan origination fees and allowances for losses. Loans held for sale, which remain from UPFC's discontinued mortgage operations, are reported at the lower of cost or market value applied on an aggregate basis. Market values of loans held for sale are based upon prices available in the secondary market for similar loans or estimated net recoverable value. Transfers of loans from the held-for-investment portfolio to the held-for-sale portfolio are recorded at the book value on the transfer date. INTEREST INCOME - --------------- Interest income is accrued as it is earned. Loan origination fees and certain direct loan origination costs are deferred and recognized in interest income over the contractual lives of the related loans using the interest method. When a loan is paid-off or sold, the unamortized balance of these deferred fees and costs is recognized in income. UPFC ceases to accrue interest on mortgage loans that are delinquent 90 days or more. The Company's policy is to charge-off non-mortgage loans delinquent 120 days or more, or place the loan on nonaccrual, if the ultimate collectibility of the interest is in doubt. Interest income deemed uncollectible is reversed. UPFC ceases to amortize deferred fees on non-performing loans. Income is subsequently recognized only to the extent cash payments are received, until in management's judgment, 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. RESIDUAL INTERESTS IN SECURITIZATIONS - ------------------------------------- Residual interests in securitizations consisted 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. UPFC classified its residual interests in securitizations as trading securities and recorded them at fair value with any unrealized gains or losses recorded in the results of operations. UPFC sold all of its residual interests in January 2001. Accordingly, as of December 31, 2000, its residual interests were valued based on the terms and conditions of the sales contract and the net cash proceeds received at the settlement date in January 2001. SALE OF LOANS - ------------- Gains or losses resulting from sales of loans are recognized at settlement and are based on the difference between the sales proceeds and the carrying value of the related loans sold. ALLOWANCE FOR LOAN LOSSES - ------------------------- UPFC charges current earnings with a provision for estimated losses on loans. The provision consists of losses identified specifically with certain problem loans and a general provision for losses not specifically identified in the loan portfolio. In addition, the allowance for loan losses includes a portion, generally 8.5% to 10.5% of the net loan amount, of acquisition discounts from our purchase of automobile installment contracts. This allocation represents Management's estimate of the losses expected over the life of the loan. Management's determination of the adequacy of the allowance for loan losses takes into consideration numerous factors, including an assessment of the credit risk inherent in the portfolio, prior F-10 United PanAm Financial Corp. and Subsidiaries Notes to Consolidated Financial Statements loss experience, the levels and trends of non-performing loans, the concentration of credit, current and prospective economic conditions and other factors. Additionally, regulatory authorities, as an integral part of their examination process, review our allowance for estimated losses based on their judgment of information available to them at the time of their examination and may require the recognition of additions to the allowance. PREMISES AND EQUIPMENT - ---------------------- Premises and equipment are carried at cost, less accumulated depreciation and amortization. Depreciation and amortization are computed on the straight-line method over the shorter of the estimated useful lives of the related assets or terms of the leases. Furniture, equipment, computer hardware, software and data processing equipment are currently depreciated over 3-5 years. GOODWILL AND OTHER INTANGIBLE ASSETS - ------------------------------------ Goodwill and other intangible assets consist of core deposit premiums arising from the acquisition of deposits and the excess of cost over the fair value of certain net assets acquired. On a periodic basis, UPFC reviews its goodwill for events or changes in circumstances that may indicate that the estimated undiscounted future cash flows from these acquisitions will be less than the carrying amount of the goodwill. If it becomes probable that impairment exists, a reduction in the carrying amount is recognized. In 1994, the Company purchased deposits from the RTC and recorded core deposit premiums in conjunction with the acquisition. Core deposit premiums of $198,000 at December 31, 1999 were amortized over the estimated life of the acquired deposit base, using the straight-line method. These core deposit premiums were fully amortized by the end of 2000. In January and November 1998, the Company purchased from Providian National Bank and Norwest Financial Corp, respectively, the rights to solicit new and renewal personal and commercial insurance premium finance business from brokers who previously provided contracts to Providian National Bank and Norwest Financial Corp. The excess of the cash consideration paid over the fair value of the assets acquired of $2.1 million was considered goodwill. The unamortized goodwill remaining from these acquisitions was $1.5 million at December 31, 1999. In 2000, the remaining goodwill was written-off as the Company determined that its fair value was zero. REAL ESTATE OWNED - ----------------- Real estate owned consists of properties acquired through foreclosure and is recorded at the lower of cost or fair value at the time of foreclosure. Subsequently, allowance for estimated losses are established when the recorded value exceeds fair value less estimated costs to sell. As of December 31, 2001 and 2000, there were no such allowances. Real estate owned at December 31, 2000 consisted of one to four unit residential real estate. INCOME TAXES - ------------ UPFC uses the asset/liability method of accounting for income taxes. Under the asset/liability method, deferred tax assets and liabilities are recognized for the future consequences of differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases (temporary differences). Deferred tax assets and liabilities are measured using tax rates expected to apply to taxable income in the years in which those temporary differences are recovered or settled. The effect of deferred tax assets and liabilities from a change in tax rate is recognized in income in the period of enactment. For income tax return purposes, we file as part of a consolidated group. F-11 United PanAm Financial Corp. and Subsidiaries Notes to Consolidated Financial Statements EARNINGS PER SHARE - ------------------ Basic EPS excludes dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted from issuance of common stock. SEGMENT INFORMATION AND DISCLOSURE - ---------------------------------- Accounting principles generally accepted in the United States of America establish standards to report information about operating segments in annual financial statements and requires reporting of selected information about operating segments in interim reports to stockholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. UPFC has concluded it has three operating segments consistent with the ones evaluated internally for operating decisions and assessing performance. RECENT ACCOUNTING PRONOUNCEMENTS - -------------------------------- In July 2001, the Financial Accounting Standards Board (the "FASB") issued SFAS No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No.141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001. SFAS No.141 also specifies criteria intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill. The adoption of this statement is not expected to have a material effect on UPFC. SFAS No.142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No.142. SFAS No.142 will also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment. As permitted by SFAS No.142, UPFC plans to adopt the new standard in the first quarter of the fiscal year 2002. Upon adoption of SFAS No.142, the Company will be required to reassess the useful lives and residual values of all intangible assets acquired in purchase business combinations, and make any necessary amortization period adjustments and/or impairment adjustments. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle in the first interim period. Beginning on January 1, 2002, amortization of goodwill and intangibles with indefinite lives will cease. It is not anticipated that the adoption of this statement will have a material effect on UPFC. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations," which requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs would be capitalized as part of the carrying amount of the long-lived asset and depreciated over the life of the asset. The liability is accreted at the end of each period through charges to operating expense. If the obligation is settled for other than the carrying amount of the liability, UPFC will recognize a gain or loss on settlement. The provisions of SFAS No.143 are effective for fiscal years beginning after June 15, 2002. The adoption of this statement will have no impact on UPFC. F-12 United PanAm Financial Corp. and Subsidiaries Notes to Consolidated Financial Statements In August 2001, the FASB issued SFAS No.144, " Accounting for the Impairment or Disposal of Long-lived Assets." For long-lived assets to be held and used, SFAS No.144 retains the requirements of SFAS No.121 to (a) recognize an impairment loss only if the carrying amount of a long-lived asset is not recoverable from its undiscounted cash flows and (b) measure an impairment loss as the difference between the carrying amount and fair value. Further, SFAS No.144 eliminates the requirement to allocate goodwill to long-lived assets to be tested for impairment, describes a probability-weighted cash flow estimation approach to deal with situations in which alternative courses of action to recover the carrying amount of long-lived asset are under consideration or a range is estimated for the amount of possible future cash flows, and establishes a "primary-assets" approach to determine the cash flow estimation period. For long-lived assets to be disposed of other than by sale (e.g., assets abandoned, exchanged or distributed to owners in a spin off), SFAS No.144 requires that such assets be considered held and used until disposed of. Further, an impairment loss should be recognized at the date an asset is exchanged for a similar productive asset or distributed to owners in a spin off if the carrying amount exceeds its fair value. For long-lived assets to be disposed of by sale, SFAS No.144 retains the requirement of SFAS No.121 to measure a long-lived asset classified as held for sale at the lower of its carrying amount or fair value less cost to sell and to cease depreciation. Discontinued operations would no longer be measured on a net realizable value basis, and future operating losses would no longer be recognized before they occur. SFAS No.144 broadens the presentation of discontinued operations to include a component of an entity, establishes criteria to determine when a long-lived asset is held for sale, prohibits retroactive reclassification of the asset as held for sale at the balance sheet date if the criteria are met after the balance sheet date but before issue of the financial statements, and provides accounting guidance for the reclassification of an asset from "held for sale" to `held and used". The provisions of SFAS No.144 are effective for fiscal years beginning after December 15 2001. It is not anticipated that the adoption of this statement will have a material effect on UPFC. 3. DISCONTINUED OPERATIONS In February 2000, UPFC announced that it had ceased originating loans in its mortgage finance business as part of an overall corporate strategy to focus on more profitable areas of lending. This business originated and sold or securitized subprime mortgage loans secured primarily by first mortgages on single family residences. In connection with the discontinuance of the mortgage finance business, all related operating activity is reclassified and reported as discontinued operations in the 2000 and the preceding years' consolidated financial statements. Also included in our consolidated statements of financial condition are the assets of the mortgage finance business of $55 million at December 31, 2000, consisting of loans and other assets. In addition, the liabilities of the mortgage business were $3.3 million at December 31, 2000, consisting of other liabilities in 2000. In determining net interest income charged to discontinued operations, the Company included all interest income from its mortgage finance business less an allocation of interest expense. The Company allocated average deposits of $61.5 million and $189.7 million in 2000 and 1999, respectively, and average warehouse lines of credit of $1.8 million and $45.4 million in 2000 and 1999, respectively, to the discontinued mortgage operations in computing interest expense. No such allocations were made in 2001. F-13 United PanAm Financial Corp. and Subsidiaries Notes to Consolidated Financial Statements The results of discontinued operations are as follows: (Dollars in thousands)
2000 1999 ------- -------- Net interest income after provision for loan losses $ -- $ 1,970 Non-interest income -- 31,964 Non-interest expense -- 35,580 ------- -------- Operating income (loss) before income taxes and loss on -- (1,646) disposal Loss on disposal (5,288) (10,511) ------- -------- Income (loss) before income taxes (benefit) (5,288) (12,157) Income taxes (benefit) (1,997) (5,044) ------- -------- Income (loss) from discontinued operations $(3,291) $ (7,113) ======= ========
The loss on disposal in 1999 provides for lease termination, employment severance and benefits, write-off of fixed assets and leasehold improvements and an accrual for estimated future operating losses, net of estimated gains on loan sales. The 2000 loss on disposal represents an additional charge relating to the disposal of the remaining subprime mortgage loans included in the discontinued operations of the Company. 4. SECURITIES AVAILABLE FOR SALE Securities available for sale are as follows:
Gross Gross Gross Estimated (Dollars in thousands) Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- --------- 2001 U.S. government agency securities $ 229,081 $ 674 $ 96 $ 229,659 U.S. government agency mortgage-backed securities 34,436 587 7 35,016 Mutual funds 20,000 162 -- 20,162 --------- ------- ----- --------- Total securities $ 283,517 $1,423 $ 103 $ 284,837 ========= ======= ===== ========= 2000 U.S. government agency securities $ 166,899 $ 1 $ 62 $ 166,838 U.S. government agency mortgage-backed securities 45,571 805 -- 46,376 Mutual funds 10,000 51 -- 10,051 --------- ------- ----- --------- Total securities $ 222,470 $ 857 $ 62 $ 223,265 ========= ======= ===== =========
F-14 United PanAm Financial Corp. and Subsidiaries Notes to Consolidated Financial Statements The carrying and estimated fair values of securities at December 31, 2001 by contractual maturity are shown on the following table. Actual maturities may differ from contractual maturities because issuers generally have the right to call or prepay obligations with or without call or prepayment penalties. At December 31, 2001 there were $250 million of securities pledged for FHLB borrowings and repurchase agreements. (Dollars in thousands) Estimated Amortized Fair Cost Value --------- --------- One year or less $ 20,000 $ 20,162 One to five years 116,017 116,345 Over five years 113,064 113,314 Mortgage-backed securities 34,436 35,016 --------- --------- Total $ 283,517 $284,837 ========= ========= 5. LOANS Loans are summarized as follows: December 31, ------------------- (Dollars in thousands) 2001 2000 -------- -------- Consumer loans: Automobile installment contracts $232,902 $176,255 Insurance premium finance 28,710 25,843 Other consumer 98 577 -------- -------- 261,710 202,675 -------- -------- Commercial loans: Insurance premium finance 10,921 8,342 Other commercial -- 55 -------- -------- 10,921 8,397 -------- -------- Mortgage loans: Fixed rate 157 14,428 Adjustable rate 195 3,489 -------- -------- 352 17,917 -------- -------- Total loans 272,983 228,989 Less: Unearned discounts and premiums -- (728) Unearned finance charges (18,881) (20,737) Allowance for loan losses (17,460) (15,156) -------- -------- Total loans, net $236,642 $192,368 ======== ======== Contractual weighted average interest rate 21.54% 19.62% -------- -------- At December 31, 2001 and 2000 approximately 100% of the Company's mortgage loans were collateralized by first deeds of trust on one-to-four family residences. At December 31, 2001 and 2000, approximately 50% and 59%, respectively, of the Company's loan portfolio is related to collateral or borrowers located in California. The amount of interest income related to IPF loans included in the Consolidated Statements of Operations was $2,229,000, $2,572,000 and $2,454,000 for 2001, 2000 and 1999 respectively. These amounts represented the interest received by IPF after netting the servicing fees paid to BPN of $3,078,000 $2,264,000 and $2,589,000 respectively. F-15 United PanAm Financial Corp. and Subsidiaries Notes to Consolidated Financial Statements In connection with the purchase of the rights to solicit new and renewal personal and commercial insurance premium finance business, the Company made loans in the original amount of $1.2 million to two stockholders of BPN, the company that provides insurance premium finance marketing and sales support for UPFC. The loans earn interest at a rate of 9.25% per annum, are secured by BPN's common stock and provide for principal and interest payments over a three-year period. The amounts outstanding under these loan agreements are $0 and $364,000, at December 31, 2001 and 2000, respectively. The loans were fully paid in 2001. The activity in the allowance for loan losses consists of the following:
Years Ended December 31, ---------------------------- (Dollars in thousands) 2001 2000 1999 ------- -------- ------- Balance at beginning of year $15,156 $14,139 $10,183 Provision for loan losses - continuing operations 615 201 432 Provision for loan losses - discontinued operations -- 2,396 7,376 Purchase discounts on automobile installment contracts allocated to 12,169 10,234 7,358 the allowance for loan losses Charge-offs (10,886) (12,427) (11,920) Recoveries 406 613 710 ------- -------- ------- Net charge-offs (10,480) (11,814) (11,210) ------- -------- ------- Balance at end of year $17,460 $15,156 $14,139 ======= ======== =======
The discounts allocated to the allowance for loan losses are comprised of acquisition discounts on the Company's purchase of automobile installment contracts. UPFC allocates the estimated amount of discounts attributable to credit risk to the allowance for loan losses based on an analysis of loss history. Allocation amounts were 10.5%, 9.0% and 9.0% of net loan amount as of December 31, 2001, 2000 and 1999, respectively. The following table sets forth information with respect to the Company's non-performing assets: (nonaccrual loans are shown net of specific allowances for loan losses) December 31, ------------------- (Dollars in thousands) 2001 2000 ------- -------- Nonaccrual loans $ 1,041 $ 3,067 Real estate owned, net -- 871 ------- -------- Totals $1,041 $ 3,938 ======= ======== Percentage of non-performing assets to total assets 0.15% 0.80% ======= ======== A loan is impaired when, based on current information and events, management believes it will be unable to collect all amounts contractually due under a loan agreement. Loans are evaluated for impairment as part of the Company's normal internal asset review process. When a loan is determined to be impaired, a valuation allowance is established based upon the difference between the investment in the loan and the fair value of the collateral securing the loan. Consumer loans are not individually evaluated for impairment as the Company collectively evaluates large groups of homogeneous loans for impairment. At December 31, 2001, the aggregate investment in loans considered to be impaired was $353,000 compared to $2.8 million at December 31, 2000. Allowance for loan losses was provided for all impaired loans at December 31, 2001 and 2000; the related allowances were $159,000 and $364,000 respectively. For the years ended December 31, 2001 and 2000, UPFC recognized interest income on impaired loans of zero and $698,000, respectively, all of which was recorded using the cash received method. The average recorded investment in impaired loans during the years ended December 31, 2001 and 2000 was approximately $1.3 million and $13.0 million, respectively. F-16 United PanAm Financial Corp. and Subsidiaries Notes to Consolidated Financial Statements 6. FEDERAL HOME LOAN BANK STOCK The Bank is a member of the Federal Home Loan Bank System ("FHLB") and as such is required to maintain an investment in capital stock of the FHLB of San Francisco. The Bank owned 65,000 shares at December 31, 2001 and 30,000 shares at December 31, 2000 of the FHLB's $100 par value capital stock. The amount of stock required is adjusted annually based on a determination made by the FHLB. The determination is based on the balance of the Bank's outstanding residential loans and advances from the FHLB. 7. INTEREST RECEIVABLE Interest receivable is as follows: December 31, --------------- (Dollars in thousands) 2001 2000 ------- ----- Loans $ 53 $ 170 Securities 3,976 644 ------- ----- Total $ 4,029 $ 814 ======= ===== 8. PREMISES AND EQUIPMENT Premises and equipment are as follows: (Dollars in thousands) December 31, --------------- 2001 2000 ------ ------ Furniture and equipment $4,701 $3,361 Leasehold improvements 237 392 ------ ------ 4,938 3,753 Less : Accumulated depreciation and amortization (2,814) (2,162) ------ ------ Total $2,124 $1,591 ====== ====== Depreciation and amortization expense was $830,000 for the year ended December 31, 2001, $739,000 for the year ended December 31, 2000 and $641,000 for the year ended December 31, 1999. Depreciation expense of the subprime mortgage operations is included in discontinued operations. 9. DEPOSITS Deposits are summarized as follows:
December 31, --------------------------------------------------- 2001 2000 ------------------------- ----------------------- (Dollars in thousands) Weighted Weighted Amount Average Rate Amount Average Rate ---------- ------------ -------- ------------ Deposits with no stated maturity: Regular and money market passbook $ 47,931 2.31% $ 38,730 4.32% NOW accounts 12,902 1.04% 14,828 2.24% Money market checking 893 1.42% 422 2.47% -------- ---- -------- ---- 61,726 2.03% 53,980 3.73% -------- ---- -------- ---- Time deposits less than $100,000 212,981 4.43% 211,427 6.40% Time deposits $100,000 and over 82,643 4.33% 82,823 6.57% -------- ---- -------- ---- 295,624 4.40% 294,250 6.45% -------- ---- -------- ---- Total deposits $357,350 3.99% $348,230 6.03% ======== ==== ======== ====
F-17 United PanAm Financial Corp. and Subsidiaries Notes to Consolidated Financial Statements A summary of time deposits by remaining maturity is as follows: December 31, ------------------- 2001 2000 (Dollars in thousands) -------- -------- Maturity within one year $237,683 $257,710 Maturity within two years 46,170 36,440 Maturity within three years 7,657 100 Maturity over three years 4,114 -- -------- -------- Total $295,624 $294,250 ======== ======== 10. Borrowings The following table sets forth certain information regarding our short-term borrowed funds (consisting of FHLB advances and warehouse lines of credit) at or for the years ended on the dates indicated. All borrowings had original maturities of less than 1 year.
At or For Years Ended December 31, 2001 2000 -------- ------- (Dollars in thousands) FHLB advances Maximum month-end balance $130,000 $60,000 Balance at end of period 130,000 60,000 Average balance for period 30,830 22,877 Weighted average interest rate on balance at end of period 1.97% 6.81% Weighted average interest rate on average balance for period 4.04% 6.58% Warehouse lines of credit Maximum month-end balance -- $26,623 Balance at end of period -- -- Average balance for period -- 1,796 Weighted average interest rate on balance at end of period -- --% Weighted average interest rate on average balance for period -- 6.27% Repurchase Agreements -- Maximum month-end balance $114,776 -- Balance at end of period 114,776 -- Average balance for period 4,503 -- Weighted average interest rate on balance at end of period 2.37% -- Weighted average interest rate on average balance for period 3.46% --
11. INCOME TAXES Total income tax expense (benefit) was allocated as follows: (Dollers in thousands) Years Ended December 31, ----------------------------- 2001 2000 1999 ------ ------- ------- Income (loss) from continuing operations $4,964 $(2,094) $ 1,908 Discontinued operations -- (1,997) (5,044) ------ ------- ------- Total tax expense (benefit) $4,964 $(4,091) $(3,136) ====== ======= ======= F-18 United PanAm Financial Corp. and Subsidiaries Notes to Consolidated Financial Statements The provision for income taxes including discontinued operations is comprised of the following: (Dollars in thousands) Years Ended December 31, ------------------------------ 2001 2000 1999 ------ ------- ------- Federal taxes: Current $1,186 $ 156 $ (20) Deferred 2,651 (3,477) (2,514) ------ ------- ------- 3,837 (3,321) (2,534) ------ ------- ------- State taxes: Current 97 38 (7) Deferred 1,030 (808) (595) ------ ------- ------- 1,127 (770) (602) ------ ------- ------- Total $4,964 $(4,091) $(3,136) ====== ======= ======= The tax effects of significant items comprising the Company's net deferred taxes as of December 31 are as follows:
December 31, ------------------- (Dollars in thousands) 2001 2000 ------- -------- Deferred tax assets: Residual interests in securitizations $ -- $ 4,478 Net operating loss carryforwards 5,460 3,892 Loan loss allowances 73 -- Discontinued operations and accrued lease obligations 411 1,631 Intangible assets 847 915 Compensation related reserve 661 427 State taxes 11 2 Depreciation and amortization 140 141 Accrued liabilities 152 131 Other 20 15 ------- -------- Total gross deferred tax assets 7,775 11,632 ------- -------- Deferred tax liabilities: FHLB stock dividends (344) (259) Loan loss allowances -- (188) Unrealized gain on securities available for sale (571) (292) Loans marked to market for tax purposes -- (73) ------- -------- Total gross deferred tax liabilities (915) (812) ------- -------- Net deferred tax assets $ 6,860 $ 10,820 ======= ========
UPFC believes a valuation allowance is not needed to reduce the net deferred tax assets as it is more likely than not that the deferred tax assets will be realized through recovery of taxes previously paid or future taxable income. At December 31, 2001 and 2000, the Company had net current income tax receivable (payable) of $1.2 million and ($1.2 million), respectively. UPFC has $15.9 million in federal tax net operating loss carry-forwards expiring under current tax laws in 2019-2021. The Company's state tax net operating loss carry-forwards are $1.0 million and expire in 2004-2011. F-19 United PanAm Financial Corp. and Subsidiaries Notes to Consolidated Financial Statements UPFC's effective income tax rate differs from the federal statutory rate due to the following: Years Ended December 31, ---------------------------- 2001 2000 1999 ---- ---- ---- Expected statutory rate 34.0% 34.0% 34.0% State taxes, net of federal benefits 5.8 4.9 5.0 Other, net (0.8) (0.8) 2.9 ---- ---- ---- Effective tax rate 39.0% 38.1% 41.9% ==== ==== ==== Amounts for the current year are based upon estimates and assumptions as of the date of this report and could vary significantly from amounts shown on the tax returns as filed. 12. REGULATORY CAPITAL REQUIREMENTS The Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") established new capital standards for savings institutions, requiring the Office of Thrift Supervision ("OTS") to promulgate regulations to prescribe and maintain uniformly applicable capital standards for savings institutions. Such regulations include three capital requirements: a tangible capital requirement equal to 1.5% of adjusted total assets, a leverage limit or core capital requirement equal to 3.0% of adjusted total assets, and a risk-based capital requirement equal to 8.0% of risk-weighted assets. At December 31, 2001 the Bank had the following regulatory capital requirements and capital position:
December 31, 2001 December 31, 2000 -------------------------------------- -------------------------------------- (Dollars in thousands) Actual Required Excess Actual Required Excess ---------- ---------- ---------- ---------- ---------- ---------- Tangible capital $ 49,707 $ 10,301 $ 39,406 $ 40,840 $ 7,189 $ 33,651 Tangible capital ratio 7.24% 1.50% 5.74% 8.52% 1.50% 7.02% Core capital $ 49,707 $ 20,602 $ 29,105 $ 40,840 $ 14,378 $ 26,462 Core capital (leverage) ratio 7.24% 3.00% 4.24% 8.52% 3.00% 5.52% Risk-based capital $ 53,181 $ 27,076 $ 26,105 $ 35,134 $ 19,354 $ 15,780 Percent of risk-weighted assets 15.71% 8.00% 7.71% 14.52% 8.00% 6.52%
The FDIC Improvement Act of 1991 ("FDICIA") required each federal banking agency to implement prompt corrective actions for institutions that it regulates. In response to these requirements, the OTS adopted final rules, effective December 19, 1992, based upon FDICIA's five capital tiers: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. The rules provide that a savings association is "well capitalized" if its leverage ratio is 5% or greater, its Tier 1 risk-based capital ratio is 6% or greater, its total risk-based capital ratio is 10% or greater, and the institution is not subject to a capital directive. As used herein, leverage ratio means the ratio of core capital to adjusted total assets, Tier 1 risk-based capital ratio means the ratio of core capital to risk-weighted assets, and total risk-based capital ratio means the ratio of total capital to risk-weighted assets, in each case as calculated in accordance with current OTS capital regulations. Under these regulations, the Bank is deemed to be "well capitalized" as of December 31, 2001. Since that date, there are no conditions or events that management believes would have changed its "well-capitalized" designation. F-20 United PanAm Financial Corp. and Subsidiaries Notes to Consolidated Financial Statements The Bank had the following regulatory capital calculated in accordance with FDICIA's capital standards for a "well capitalized" institution:
December 31, 2001 December 31, 2000 ------------------------------ ------------------------------ (Dollars in thousands) Actual Required Excess Actual Required Excess -------- -------- -------- -------- -------- -------- Leverage $ 49,707 $ 34,336 $ 15,371 $ 40,840 $ 23,964 $ 16,876 Leverage ratio 7.24% 5.00% 2.24% 8.52% 5.00% 3.52% Tier 1 risk-based $ 48,807 $ 20,316 $ 28,491 $ 31,979 $ 14,515 $ 17,464 Tier 1 risk-based ratio 14.41% 6.00% 8.41% 13.22% 6.00% 7.22% Total risk-based $ 53,181 $ 33,860 $ 19,321 $ 35,134 $ 24,192 $ 10,942 Total risk-based ratio 15.71% 10.00% 5.71% 14.52% 10.00% 4.52%
At periodic intervals, both the OTS and Federal Deposit Insurance Corporation ("FDIC") routinely examine the Bank's financial statements as part of their legally prescribed oversight of the savings and loan industry. Based on these examinations, the regulators can direct that the Bank's financial statements be adjusted in accordance with their findings. 13. COMMITMENTS AND CONTINGENCIES Certain branch and office locations are leased by UPFC under operating leases expiring at various dates through the year 2007. Rent expense was $1.9 million; $1.5 million and $1.1 million for the years ended December 31, 2001, 2000 and 1999, respectively. Future minimum rental payments as of December 31, 2001 under existing leases, including approximately $1.6 million to be recovered from sublease rental arrangements through 2003, are set forth as follows: (Dollars in thousands) Years ending December 31: 2002 $2,607 2003 2,229 2004 2,035 2005 1,659 2006 895 Thereafter 118 ------ Total $9,543 ====== UPFC has entered into loan sale agreements with investors in the normal course of business, which include standard representations and warranties customary to the mortgage banking industry. Violations of these representations and warranties may require the Company to repurchase loans previously sold or to reimburse investors for losses incurred. In the opinion of management, the potential exposure related to these loan sale agreements will not have a material effect on the financial position and operating results of UPFC. UPFC is involved in various claims or legal actions arising in the normal course of business. In the opinion of management, the ultimate disposition of such matters will not have a material effect on the financial position or operating results of UPFC. 14. STOCK OPTIONS F-21 United PanAm Financial Corp. and Subsidiaries Notes to Consolidated Financial Statements In 1994, UPFC adopted a stock option plan and, in November 1997 and June 2001, amended and restated such plan as the United PanAm Financial Corp. 1997 Employee Stock Incentive Plan (the "Plan"). The maximum number of shares that may be issued to officers, directors, employees or consultants under the Plan is 5,000,000. Options issued pursuant to the Plan have been granted at an exercise price of not less than fair market value on the date of grant. Options generally vest over a three to five year period and have a maximum term of ten years. Stock option activity is as follows:
Years Ended December 31, -------------------------------------------------------------------- (Dollars in thousands, except per share amounts) Weighted Weighted Weighted Average Average Average Shares Exercise Shares Exercise Shares Exercise 2001 Price 2000 Price 1999 Price --------- -------- ---------- -------- ---------- -------- Balance at beginning of year 1,161,250 $5.48 1,783,250 $ 5.82 1,820,000 $ 5.74 Granted 2,899,195 3.15 -- -- 445,000 3.66 Canceled or expired (372,704) 6.96 (354,500) 10.42 (148,000) 9.68 Exercised (58,750) 1.41 (267,500) 1.02 (333,750) 0.80 --------- -------- ---------- ---------- Balance at end of year 3,628,991 $3.53 1,161,250 $ 5.48 1,783,250 $ 5.82 ========= ========== ========== Weighted average fair value per share of options granted during the year $ 1.13 $ -- $ 1.21 ========= ========== ==========
Certain shares exercised in 1997 and 1999 were exercised by a shareholder and officer of UPFC. In connection with this transaction, UPFC loaned this individual $300,000 to finance the exercise of these options, which loan is secured by the shares purchased. The loan bears interest at an annual rate of 5.81% and is due and payable on December 31, 2002. During 2001, stock options representing 1,884,029 shares were granted as part of the conversion of UACC's Stock Option Plan to the Plan. These shares were included in the total number granted in 2001. During 1998, 147,500 shares of restricted stock were granted to certain key employees. The weighted average market value per share of the restricted stock at the grant date was $5.00. During 2001, 2000 and 1999, 9,000,13,400 and 35,600 shares, respectively, of restricted stock vested and 7,500, 59,000 and 23,000 shares, respectively, were canceled. UPFC applies APB Opinion No. 25 in accounting for the Plan. Compensation expense related to this stock compensation plan was $1,369,000, $35,000 and $216,000 in 2001, 2000 and 1999, respectively. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," the Company's net income (loss) and earnings (loss) per share would have been reduced to the pro-forma amounts indicated below for the years ended December 31: Years Ended December 31, -------------------------- 2001 2000 1999 ------ ------- ------- Net income (loss) to common shareholders: As reported $7,763 $(6,659) $(4,352) Pro-forma $7,025 $(7,032) $(4,956) Earnings (loss) per share: As reported - basic $ 0.48 $ (0.41) $ (0.26) As reported - diluted $ 0.46 $ (0.41) $ (0.25) Pro-forma - basic $ 0.44 $ (0.43) $ (0.29) Pro-forma - diluted $ 0.41 $ (0.43) $ (0.29) F-22 United PanAm Financial Corp. and Subsidiaries Notes to Consolidated Financial Statements The fair value of options and restricted stock granted under the Plan was estimated on the date of grant using the Black-Sholes option-pricing model with the following weighted average assumptions used: no dividend yield, 76% and 72% volatility in 2001 and 1999, respectively, risk-free interest rate of 5.5% in 2001 and 7.0% in 1999 and expected lives of 5 years. At December 31, 2001, options exercisable to purchase 2,554,075 shares of UPFC's common stock under the Plan were outstanding as follows:
Options Outstanding Options Exercisable --------------------------------- -------------------- Weighted Weighted Average Average Expiration Exercise Exercise Range of Exercise Prices Shares Date Price Shares Price - ------------------------------ --------- ---------- -------- --------- -------- $11.00 - $12.10 120,000 2002 $11.55 120,000 $11.55 $3.00 20,000 2005 3.00 20,000 3.00 $0.80 150,000 2006 0.80 150,000 0.80 $10.50 - $11.00 80,000 2007 10.63 80,000 10.63 $0.24 - $4.75 1,644,431 2008 0.96 1,619,721 0.93 $1.31 - $5.00 451,675 2009 3.45 439,001 3.47 $1.78 - $3.35 105,922 2010 2.57 42,820 1.98 $1.78 - $10.00 1,056,963 2011 6.61 82,533 4.00 --------- ------ --------- ------ 3,628,991 $ 3.53 2,554,075 $ 1.89 ========= ====== ========= ======
During 2001, options granted by UACC were converted to options of UPFC. Compensation expense of $1.4 million was recognized in connection with these options. 15. 401(k) PLAN UPFC maintains the Pan American Bank, FSB 401(k) Profit Sharing Plan (the "401(k) Plan") for the benefit of all eligible employees of UPFC. Under the 401(k) Plan, employees may contribute up to 15% of their pre-tax salary or the annual dollar limit of $10,500 for 2001. The Company will match, at its discretion, 50% of the amount contributed by the employee up to a maximum of 6% of the employee's salary. The contributions made by UPFC in 2001, 2000 and 1999 were $173,000, $72,000 and $419,000, respectively. The Company used account forfeitures in 2001 to fund a portion of its contribution. 16. OTHER EXPENSES Other expenses are comprised of the following: Years Ended December 31, ------------------------ (Dollars in thousands) 2001 2000 1999 ------ ------ ------ Amortization/write-off of intangible assets $ 561 $1,735 $ 600 Professional fees 903 1,174 792 Loan and collection expenses 1,351 927 655 Travel and entertainment 1,057 792 478 Marketing 505 780 256 Data processing 759 708 682 Corporate relocation -- 700 -- Forms, supplies, postage and delivery 819 546 477 Telephone 801 533 417 Insurance premiums 489 409 461 Loan servicing expense 13 54 559 Other 511 414 533 ------ ------ ------ Total $7,769 $8,772 $5,910 ====== ====== ====== F-23 United PanAm Financial Corp. and Subsidiaries Notes to Consolidated Financial Statements 17. EARNINGS FROM CONTINUING OPERATIONS PER SHARE UPFC calculates earnings per share as shown below:
Years Ended December 31, ---------------------------- (In thousands, except per share amounts) 2001 2000 1999 ------- -------- ------- Earnings per share from continuing operations - basic: Income from continuing operations $ 7,763 $ (3,368) $ 2,761 ======= ======== ======= Average common shares outstanding 16,017 16,392 16,854 ======= ======== ======= Per share $ 0.48 $ (0.21) $ 0.16 ======= ======== ======= Earnings per share from continuing operations - diluted: Income from continuing operations $ 7,763 $ (3,368) $ 2,761 ======= ======== ======= Average common shares outstanding 16,017 16,392 16,854 Add: Stock options 914 -- 399 ------- -------- ------- Average common shares outstanding - diluted 16,931 16,392 17,253 ======= ======== ======= Per share $ 0.46 $ (0.21) $ 0.16 ======= ======== =======
Options to purchase 273,750 shares of common stock at a weighted average price of $0.80 per share were outstanding at December 31, 2000, but were not included in the computation of diluted earnings per share because the Company reported a loss from continuing operations in 2000. 18. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair value of UPFC's financial instruments is as follows at the dates indicated:
December 31, December 31, 2001 2000 --------------------- --------------------- (Dollars in thousands) Carrying Fair Value Carrying Fair Value Value Estimate Value Estimate -------- ---------- -------- ---------- Assets: Cash and cash equivalents $140,695 $140,695 $ 42,592 $ 42,592 Securities 284,837 284,837 223,265 223,265 Loans, net 236,448 236,448 192,368 192,368 Loans held for sale 194 194 712 712 Residual interests in securitizations -- -- 8,861 8,861 Federal Home Loan Bank Stock 6,500 6,500 3,000 3,000 Liabilities: Deposits 357,350 361,181 348,230 349,221 Federal Home Loan Bank advances 130,000 130,000 60,000 60,000 Other borrowings 114,776 114,776 -- --
The following summary presents a description of the methodologies and assumptions used to estimate the fair value of UPFC's financial instruments. Because no ready market exists for a significant portion of the Company's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. The use of different assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. Cash and cash equivalents: Cash and cash equivalents are valued at their carrying amounts included in the consolidated statements of financial condition, which are reasonable estimates of fair value due to the relatively short period to maturity of the instruments. F-24 United PanAm Financial Corp. and Subsidiaries Notes to Consolidated Financial Statements Securities: Securities are valued at quoted market prices where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Loans, net: For non-mortgage loans, fair values, were estimated at carrying amounts due to their short-term maturity and portfolio interest rates that are equivalent to present market interest rates. Loans held for sale: The fair value of loans held for sale is based on current pricing of whole loan transactions that a purchaser unrelated to the seller would demand for a similar loan. Residual interests in securitizations: At December 31, 2000, the fair value of the residual interests is based on the terms and conditions of the sales contract and the cash proceeds received at the settlement date in January 2001. Federal Home Loan Bank stock: Since no secondary market exists for FHLB stock and the stock is bought and sold at par by the FHLB, fair value of these financial instruments approximates the carrying value. Deposits: The fair values of demand deposits, passbook accounts, money market accounts, and other deposits immediately withdrawable, by definition, approximate carrying values for the respective financial instruments. For fixed maturity deposits, the fair value was estimated by discounting expected cash flows by the current offering rates of deposits with similar terms and maturities. Federal Home Loan Bank advances: The fair value of FHLB advances are valued at their carrying amounts included in the consolidated statements of financial condition, which are reasonable estimates of fair value due to the relatively short period to maturity of the advances and note rates consistent with present market rates. Other Borrowings: The fair value of the other borrowings is considered to approximate carrying value due to the short period to maturity and note rates consistent with present market rates. 19. 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 premium finance segment, through a joint venture, underwrites and finances automobile and commercial insurance premiums in California. The banking segment operates a federal savings bank and is the principal funding source for the auto and insurance premium finance segments. The accounting policies of the segments are the same as those described in the summary of significant accounting policies 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). F-25 United PanAm Financial Corp. and Subsidiaries Notes to Consolidated Financial Statements UPFC's reportable segments are strategic business units that offer different products and services. They are managed and reported upon separately within UPFC. At or For Year Ended December 31, 2001 ------------------------------------------ Insurance Auto Premium Finance Finance Banking Total -------- ------- -------- -------- Net interest income $ 30,378 $ 2,299 $ 5,953 $ 38,630 Provision for loan losses 250 365 -- 615 Non-interest income 321 459 1,924 2,704 Non-interest expense 18,846 255 8,891 27,992 -------- ------- -------- -------- Segment profit (loss) (pre-tax) $ 11,603 $ 2,138 $ (1,014) $ 12,727 ======== ======= ======== ======== Total assets $200,665 $39,632 $449,276 $689,573 ======== ======= ======== ======== At or For Year End ed December 31, 2000 ------------------------------------------ Insurance Auto Premium Finance Finance Banking Total -------- --------- -------- -------- Net interest income $ 21,637 $ 2,572 $ 5,603 $ 29,812 Provision for loan losses -- 147 54 201 Non-interest income 245 369 (11,526) (10,912) Non-interest expense 13,609 2,429 8,123 24,161 -------- ------- -------- -------- Segment profit (pre-tax) $ 8,273 $ 365 $(14,100) $ (5,462) ======== ======= ======== ======== Total assets $145,018 $33,894 $311,011 $489,923 ======== ======= ======== ======== At or For Year Ended December 31, 1999 ------------------------------------------ Insurance Auto Premium Finance Finance Banking Total -------- --------- -------- -------- Net interest income $ 14,780 $ 2,454 $ 10,114 $ 27,348 Provision for loan losses -- 432 -- 432 Non-interest income 190 439 1,625 2,254 Non-interest expense 9,961 957 7,725 18,643 -------- ------- -------- -------- Segment profit (pre-tax) $ 5,009 $ 1,504 $ 4,014 $ 10,527 ======== ======= ======== ======== Total assets $100,955 $31,598 $160,767 $293,320 ======== ======= ======== ======== Substantially all expenses are recorded directly to each industry segment. Segment total assets, interest income, non-interest income and segment profit (loss) differ from the consolidated results due to the allocation of assets, income and expense to discontinued operations. No allocations were required in 2001.
Years Ended December 31 ----------------------- 2000 1999 -------- -------- Net interest income for reportable segments $ 29,812 $ 27,348 Net interest income allocated to discontinued operations -- (4,578) -------- -------- Consolidated net interest income $ 29,812 $ 22,770 ======== ======== Non-interest income for reportable segments $(10,912) $ 2,254 Non-interest income allocated to discontinued operations -- (1,280) -------- -------- Consolidated non-interest income $(10,912) $ 974 ======== ======== Segment profit (loss) for reportable segments $ (5,462) $ 10,527 Loss allocated to discontinued operations -- (5,858) -------- -------- Consolidated income (loss) from continuing operations before income taxes $ (5,462) $ 4,669 ======== ======== Total assets for reportable segments $489,923 $293,320 Total assets allocated to discontinued operations 55 144,970 -------- --------
F-26 United PanAm Financial Corp. and Subsidiaries Notes to Consolidated Financial Statements Consolidated total assets $489,978 $438,290 ======== ========
20. HOLDING COMPANY FINANCIAL INFORMATION Following are the financial statements of United PanAm Financial Corp. (holding company only): (Dollars in thousands) Years Ended December 31, ------------------------ 2001 2000 ------- ------- Statements of Financial Condition Cash $ 1,195 $ 151 Note receivable from affiliate 21,203 14,022 Loans 232 7,619 Other assets 1,566 2,637 Investment in subsidiaries 51,536 45,539 ------- ------- Total assets $75,732 $69,968 ======= ======= Other liabilities 66 651 ------- ------- Total liabilities 651 Shareholders' equity 75,666 69,317 ------- ------- Total liabilities and shareholders' equity $75,732 $69,968 ======= =======
Years Ended December 31, ------------------------------ 2001 2000 1999 ------- -------- ------- Statements of Operations Equity in undistributed income (loss) of subsidiaries $ 8,362 $ (7,261) $(5,060) Interest income 1,446 1,936 2,364 ------- -------- ------- Total income 9,808 (5,325) (2,696) ------- -------- ------- Interest expense -- -- -- Other expense 2,433 858 1,137 ------- -------- ------- Total expense 2,433 858 1,137 ------- -------- ------- Income (loss) before income taxes 7,375 (6,183) (3,833) Income taxes (388) 476 519 ------- -------- ------- Net income (loss) $ 7,763 $ (6,659) $(4,352) ======= ======== ======= Statements of Cash Flows Cash flows from operating activities: Net income (loss) $ 7,763 $ (6,659) $(4,352) Equity in earnings of subsidiaries (8,362) 7,261 5,060 (Increase) decrease in accrued interest receivable 2,226 (2,310) 1,492 (Increase) decrease in other assets (1,155) 66 80 Increase in other liabilities (585) 106 127 Compensation expense for converting option plan 1,369 Other, net -- 95 219 ------- -------- ------- Net cash provided by (used in) operating activities 1,256 (1,441) 2,626 ------- -------- ------- Cash flows from investing activities: Purchase of loans held for investment -- (7,619) -- Repayment of notes receivable 206 12,284 31,832 Other, net -- (60) (77) ------- -------- ------- Net cash provided by investing activities 206 4,605 31,755 ------- -------- ------- Cash flows from financing activities: Purchase of treasury stock (3,113) (461) (3,695) Capital contributed to subsidiary 2,612 (3,129) (31,180) Exercise of stock options 83 468 425 ------- -------- ------- Net cash (used in) financing activities (418) (3,122) (34,450) ------- -------- ------- Net increase (decrease) in cash and cash equivalents 1,044 42 (69) Cash and cash equivalents at beginning of year 151 109 178 ------- -------- ------- Cash and cash equivalents at end of year $ 1,195 $ 151 $ 109 ======= ======== =======
F-27 United PanAm Financial Corp. and Subsidiaries Notes to Consolidated Financial Statements 21. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(Dollars in thousands, except per share data) Three months ended --------------------------------------------------- March 31, June 30, September 30, December 31, 2001 2001 2001 2001 --------- -------- ------------- ------------ 2001: Net interest income $8,395 $9,289 $10,109 $10,835 Provision for loan losses 44 124 108 339 Non-interest income 630 1,518 267 289 Non-interest expense 6,452 7,631 6,761 7,146 ------ ------ ------- ------- Income (loss) from continuing operations before income taxes 2,529 3,052 3,507 3,639 Income taxes (benefit) 985 1,190 1,369 1,420 ------ ------ ------- ------- Income (loss) from continuing operations $1,544 $1,862 $ 2,138 $ 2,219 ====== ====== ======= ======= Earnings (loss) from continuing operations per share - basic $ 0.10 $ 0.12 $ 0.13 $ 0.14 ====== ====== ======= ======= Earnings (loss) from continuing operations share diluted $ 0.10 $ 0.11 $ 0.12 $ 0.13 ====== ====== ======= =======
Three months ended --------------------------------------------------- March 31, June 30, September 30, December 31, 2000 2000 2000 2000 --------- -------- ------------- ------------ 2000: Net interest income $6,683 $ 7,266 $ 7,655 $ 8,208 Provision for loan losses 72 5 30 94 Non-interest income 239 (4,764) (5,087) (1,300) Non-interest expense 5,156 5,480 7,819 5,706 ----- ----- ----- ----- Income from continuing operations before income taxes 1,694 (2,983) (5,281) 1,108 Income taxes 692 (1,158) (1,970) 342 ------ ------- ------- ------- Income from continuing operations $1,002 $(1,825) $(3,311) $ 766 ====== ======= ======= ======= Earnings from continuing operations per share - basic $ 0.06 $ (0.11) $ (0.20) $ 0.05 ====== ======= ======= ======= Earnings from continuing operations share - diluted $ 0.06 $ (0.11) $ (0.20) $ 0.05 ====== ======= ======= =======
F-28 EX-21.1 3 dex211.txt LIST OF SUBSIDIARIES Exhibit 21.1 Subsidiaries Pan American Financial, Inc. Delaware Pan American Bank, FSB California World Cash Technologies, Inc. California United Auto Credit Corporation California Pan American Service Corporation California United PanAm Mortgage Corporation California EX-23.1 4 dex231.txt CONSENT OF KPMG LLP Exhibit 23.1 CONSENT OF THE INDEPENDENT AUDITORS The Board of Directors United PanAm Financial Corp.: We consent to incorporation by reference in the registration statement (No. 333-67049) on Form S-8 of United PanAm Financial Corp. of our report dated January 29, 2002, relating to the consolidated statements of financial condition of United PanAm Financial Corp. and subsidiaries as of December 31, 2001, and 2000, and the related consolidated statements of operations, comprehensive income, changes in shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2001, which report appears in the December 31, 2001, annual report on Form 10-K of United PanAm Financial Corp. /s/ KPMG LLP Los Angeles, California March 25, 2002 -----END PRIVACY-ENHANCED MESSAGE-----