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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, 2000
Or
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from ________ to _________
Commission File Number 000-24051
UNITED PANAM FINANCIAL CORP.
(Exact name of Registrant as specified in its charter)
California 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 $4,711,000, based upon the closing sales price of
the Common Stock as reported on the Nasdaq National Market on March 15, 2001.
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, 2001 was 16,149,650 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 2001 Annual Meeting of Shareholders to be held June 19, 2001 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, 2000.
UNITED PANAM FINANCIAL CORP.
2000 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 13
Economic Conditions, Government Policies, Legislation and Regulation 13
Employees 14
Regulation 14
Taxation 27
Subsidiaries 28
Factors That May Affect Future Results of Operations 28
Item 2. Properties 31
Item 3. Legal Proceedings 32
Item 4. Submission of Matters to a Vote of Security Holders 32
PART II
Item 5. Market For Registrant's Common Equity and Related Shareholder Matters 33
Item 6. Selected Financial Data 34
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 36
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 53
Item 8. Financial Statements and Supplementary Data 53
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures 53
PART III
Item 10. Directors and Executive Officers of the Registrant 54
Item 11. Executive Compensation 54
Item 12. Security Ownership of Certain Beneficial Owners and Management 54
Item 13. Certain Relationships and Related Transactions 54
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 55
SIGNATURES 61
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; valuation of our residual interests in securitizations;
reliance on operational systems and controls and key employees; competitive
pressure we face in the banking industry; changes in the interest rate
environment; rapid growth of 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 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.
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 whole loan
sales. All of our revenues are attributed to customers located in the United
States.
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 a joint venture 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 United Auto Credit Corporation ("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, 2000, UACC had a total of 28 branches, of which four were opened in
1996, five in 1997, five in 1998, six in 1999 and eight in 2000. UACC maintains
nine branch offices located in California, five branch offices located in
Florida, two branch offices located in each of North Carolina, Texas and
Washington, and one each in Arizona, Colorado, Georgia, Maryland, Missouri,
Oregon, Utah and Virginia. At December 31, 2000, UACC's portfolio contained
24,027 auto contracts in the aggregate gross amount of $176.3 million, including
unearned finance charges of $20.7 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, thrift and loan companies, 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, 2000 and 1999.
At or For the
Years Ended
December 31,
-------------------------------------------------------
2000 1999
-------------------- ----------------------
(Dollars in thousands, except portfolio and other data)
Operating Data
Gross contracts purchased $174,645 $124,896
Gross contracts outstanding 176,255 128,093
Unearned finance charges 20,737 21,181
Net contracts outstanding 155,518 106,912
Average purchase discount 8.08% 8.79%
APR to customers 21.72% 21.47%
Allowance for loan losses $ 12,614 $ 7,915
Loan Quality Data
Allowance for loan losses (% of net contracts) 8.11% 7.40%
Delinquencies (% of net contracts)
31-60 days 0.31% 0.39%
61-90 days 0.08% 0.16%
90+ days 0.12% 0.08%
Net charge-offs (% of average net contracts) 4.17% 4.05%
Repossessions (net) (% of net contracts) 0.62% 0.47%
Portfolio Data
Used vehicles 99.0% 99.0%
Average vehicle age at time of contract (years) 5.7 6.0
Average original contract term (months) 44.2 42.6
Average gross amount financed to WSBB (1) 117% 119%
Average net amount financed to WSBB (2) 107% 108%
Average net amount financed per contract $ 8,329 $ 8,019
Average down payment 19% 19%
Average monthly payment $ 277 $ 272
Other Data
Number of branches 28 20
___________________
(1) WSBB 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 (i) a used automobile with an
average age of four to seven years and (ii) an average original contract term of
42 to 46 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. For the year ended December 31, 2000, we
allocated 9% of the net contract amount to the allowance for loan losses.
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. The Company 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 that recognizes the achievement
of delinquency, charge-off, volume and return on average assets targets
established for the branch, as well as satisfactory audit results. 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,
2000 1999
-------------- ------------
(Dollars in thousands)
Gross amount of contracts $174,645 $124,896
Average original term of contracts (months) 44.2 42.6
For the year ended December 31, 2000, 41% of UACC's auto contracts were
written by its California branches, compared to 68% at December 31, 1999 and 80%
at December 31, 1998. 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, 2000, no dealer accounted for more
than 1.7% of UACC's portfolio and the ten dealers from which UACC purchased the
most contracts accounted for approximately 9.6% 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 by UACC 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, 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 Manager and Operations Manager 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 Operations 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 Operations 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 reserves based on expected losses over the life of the contract are
established when each contract is purchased from the dealer. The reserve is
provided from the dealer discount that is taken on each transaction. Loss
reserve analyses are performed regularly to determine the adequacy of current
reserve levels. For the year ended December 31, 2000, we allocated 9% 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 since UACC's inception through March 2000. Contract pools subsequent
to March 31, 2000 were not included in this table because the loan pools were
not seasoned enough to provide a meaningful comparison with prior periods.
Number of Mar. 1996 Oct. 1996 Apr. 1997 Oct. 1997 Apr. 1998 Oct. 1998 Apr. 1999 Oct. 1999
Months - - - - - - - -
Outstanding Sept. 1996 Mar. 1997 Sept. 1997 Mar. 1998 Sept. 1998 Mar. 1999 Sept. 1999 Mar. 2000
---------- -------- ---------- --------- ---------- --------- ---------- ---------
1 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
4 0.0% 0.0% 0.1% 0.0% 0.0% 0.0% 0.1% 0.1%
7 0.3% 0.4% 0.5% 0.5% 0.5% 0.3% 0.5% 0.4%
10 1.7% 1.4% 1.7% 1.6% 1.5% 0.9% 1.4% 1.3%
13 4.4% 3.1% 3.3% 2.9% 2.7% 1.8% 2.3% 2.4%
16 6.3% 4.4% 4.5% 4.0% 3.6% 2.9% 3.4%
19 7.7% 5.4% 5.3% 4.7% 4.4% 3.8% 4.1%
22 8.7% 6.0% 6.0% 5.4% 5.0% 4.5%
25 9.1% 6.6% 6.8% 5.9% 5.6% 5.2%
28 9.4% 7.5% 7.2% 6.4% 5.9%
31 9.6% 7.9% 7.6% 6.7% 6.4%
34 9.9% 8.2% 7.9% 6.9%
37 10.0% 8.3% 8.0% 7.0%
40 10.1% 8.6% 8.1%
43 10.1% 8.8% 8.3%
46 10.0% 8.8%
49 10.0% 8.8%
52 10.1%
55 10.1%
57 10.0%
Original Pool ($000) $4,896 $9,297 $15,575 $22,488 $30,271 $36,773 $42,115 $47,979
======= ======= ======== ======== ======== ======== ======== ========
Remaining Pool ($000) $ 48 $ 202 $ 739 $ 2,433 $ 5,948 $11,833 $21,267 $33,021
======= ======= ======== ======== ======== ======== ======== ========
Remaining Pool (%) 1% 2% 5% 11% 20% 32% 51% 69%
======= ======= ======== ======== ======== ======== ======== ========
Insurance Premium Finance
Business Overview
In May 1995, we entered into a joint venture with BPN relating to an
insurance premium finance business under the name "ClassicPlan" (such business
is referred to herein as "IPF"). Under this joint venture, 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 twelve-month
insurance policy, the borrower makes a cash down payment of 15% to 25% of the
premium (plus
6
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 loans 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, 2000, IPF had approximately 18% 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 4.8% of total loans outstanding. At December 31, 2000,
approximately 80% 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, 2000, the aggregate gross amount of insurance premium
finance contracts was $34.2 million with 56,120 contracts outstanding.
Commercial loan balances represented 24.4% of these loan balances at December
31, 2000. During 2000, IPF originated 100,244 insurance premium finance
contracts of which 10,717 or 10.7% 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,
2000, BPN had 41 employees.
BPN solicits insurance agents and brokers to submit their clients'
financing requests to the Bank. 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. The Bank 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 the Bank, and the
earnings of the loan portfolio, which include 50% of the interest earned on
portfolio loans after the Bank subtracts a specified floating portfolio interest
rate and 50% of late fees and returned check fees charged by the Bank.
Additionally, BPN and the Bank 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 the Bank whereby they agree to pay any sums owed to the Bank and not
paid by BPN. The total potential liability of the guarantors to the Bank is
limited to $2,000,000 plus any amounts by which BPN is obligated to indemnify
the Bank. Under these guaranties, all debts of BPN to the guarantors are
subordinated to the full payment of all obligations of BPN to the Bank.
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
"Shares 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, which have outstanding
balances of $364,000 in the aggregate at December 31, 2000, earn interest at a
rate of 9.25% per annum and are secured by the common stock of BPN. The loans
provide for principal and interest payments over a three-year period.
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 limit 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, 2000, approximately 5.5% 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, 2000 and 1999.
At or For the
Years Ended
December 31,
------------------------------------------------
2000 1999
-------------------- --------------------
(Dollars in thousands, except portfolio averages)
Operating Data
Loan originations $100,085 $107,212
Loans outstanding at period end 34,185 30,334
Average gross yield (1) 24.05% 22.32%
Average net yield (2) 15.36% 12.73%
Allowance for loan losses $ 346 $ 389
Loan Quality Data
Allowance for loan losses (% of loans outstanding) 1.01% 1.28%
Net charge-offs (% of average loans outstanding) (3) 0.61% 1.00%
Delinquencies (% of loans outstanding) (4) 1.44% 1.38%
Portfolio Data
Average monthly loan originations (number of loans) 8,353 9,018
Average loan size at origination $ 998 $ 991
Commercial insurance policies (% of loans outstanding) 24.40% 24.50%
CAARP policies (% of loans outstanding) 5.46% 13.79%
Cancellation rate (% of premiums financed) 37.6% 39.0%
__________
(1) Gross yield represents total rates and fees paid by the borrower.
(2) Net yield represents the yield to the Bank after interest and fee sharing
with 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 700 agents, primarily located in Los Angeles, Orange and San
Bernardino counties. 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. For the twelve months ended
December 31, 2000, IPF canceled for nonpayment contracts representing
approximately 37.6% of all premiums financed. 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 on loans under $25,000.
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 on 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
and continues to earn interest. 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 five retail branch offices in the state and $348.2 million in deposits at
December 31, 2000. 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. In addition, the Bank holds a
portfolio of primarily traditional residential mortgage loans acquired from the
RTC in 1994 and 1995. These loans aggregated $16.8 million (before unearned
discounts and premiums) at December 31, 2000. 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."
On January 5, 2001, the Bank closed its San Mateo retail deposit branch and
transferred all of the outstanding deposits to its San Carlos deposit facility.
In addition, most of the financial and corporate functions that the Bank
provides to the other business units of UPFC are being relocated to Orange
County, California during the first quarter of 2001. The Bank's San Mateo
branch and corporate headquarters lease terminated on December 31, 2000. Rather
than renewing this lease, we elected to relocate the San Mateo branch deposits
and corporate offices to other facilities mainly due to escalating lease rates
in the San Francisco peninsula region.
In September 2000, the Bank filed an application with the California
Department of Financial Institutions (the "DFI") to convert from its present
status as a federally-chartered savings institution to a California state-
chartered commercial bank (a "Charter Conversion.") The Bank is seeking a
commercial bank charter because of certain lending restrictions in the federal
savings bank charter. Federal savings banks must meet the test of a "qualified
thrift lender" (see "Regulation - Regulation of UPFC") as well as certain
lending limits under the Home Owners Loan Act. While the Bank currently is in
compliance with these federal savings bank lending limitations and the "QTL"
test, now that the Bank has discontinued its subprime mortgage business, it will
be more difficult in the future to maintain its QTL status. In accordance with
the application review process, the DFI has finished an on-site examination of
the Bank and is presently completing its review of the Bank's conversion
application. A Charter Conversion, if and when approved and consummated, would
subject UPFC to regulation as a bank holding company rather than a savings and
loan holding company, and subject the Bank to regulation as a California-
chartered commercial bank rather than a federally-chartered savings association.
(See "Regulation-Charter Conversion")
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
11
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
During 1999, UPAM originated $962.7 million in subprime mortgage loans and
originated another $76.0 million through February 2000 when this operation was
discontinued. UPAM originated loans through its retail and wholesale divisions.
The retail division, which originated loans through the direct solicitation of
borrowers by mail and telemarketing, accounted for $173.4 million, or 18% of
UPAM's total loan production in 1999. The wholesale division, which originated
loans through independent loan brokers, accounted for $789.3 million, or 82%, of
UPAM's total loan production during the same period.
Loan Sales and Securitizations
Whole Loan Sales. In connection with the disposition of UPAM's remaining
subprime loan portfolio, in 2000 UPAM sold, for cash paid in full at closing,
$215.1 million of mortgage loans through whole loan sales at a weighted average
sales price equal to 98.2% 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 2000, UPAM repurchased from investors $4.3
million of such loans.
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. We
classify our residual interests in securitizations as trading securities and
record them at fair market value with any unrealized gains or losses recorded in
the results of operations. At December 31, 1999, UPFC's residual interests were
recorded at a fair value of $21.2 million. During 2000, we wrote-down the value
of these assets by $11.4 million and at December 31, 2000 reported them at a
fair value of $8.9 million in the consolidated statements of financial
condition.
Valuations of the residual interests in securitizations at December 31,
1999 are based on discounted cash flow analyses. Cash flows are estimated as
the amount of the excess of the weighted average coupon on the loans sold over
the sum of the interest pass-through on the senior certificates, a servicing
fee, an estimate of annual future credit losses and prepayment assumptions and
other expenses associated with the securitization, discounted at an interest
rate which we believe is commensurate with the risks involved. We used
prepayment and default assumptions that market participants would use for
similar instruments subject to prepayment, credit and interest rate risks. The
assumptions we used for valuing the residual interests at December 31, 1999
included prepayment assumptions of 5% for the first year increasing to 30%-42%
thereafter, an annual credit loss assumption of 0.95% and a discount rate of
15%.
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.
12
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, loan
origination fees and interest rates. Many of our competitors are substantially
larger and have considerably greater financial, technical and marketing
resources than UPFC. We compete in the insurance premium finance business with
other specialty finance companies, independent insurance agents who offer
premium finance services, captive premium finance affiliates of insurance
companies and direct bill plans established by insurance companies. We compete
in the 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 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
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."
13
Employees
At December 31, 2000, UPFC had 264 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 currently 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"). Upon completion of a Charter Conversion, the
Bank would become a California-chartered commercial bank insured under the Bank
Insurance Fund ("BIF") and subject to extensive regulation by the DFI, the FDIC,
and the Federal Reserve Board. The following discussion addresses certain
aspects of regulations of UPFC and the Bank prior to a Charter Conversion. For
a discussion of certain aspects of regulation of UPFC and the Bank after a
Charter Conversion, see the discussion "Charter Conversion" below.
Regulation Prior to the Charter Conversion
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 the Company. 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 UPFC
General. UPFC is a unitary savings and loan holding company subject to
regulatory oversight by the OTS. For purposes of this discussion, the
description of holding company regulation also applies to PAFI, a direct
subsidiary of UPFC and parent of the Bank. 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 domestic building and loan association pursuant to the Internal Revenue Code
of 1986, as amended (the "Code"). 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 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 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. See "Charter
Conversion." Furthermore, if UPFC were in the future to sell control of the
Bank to any other company, such company would not succeed to UPFC's
grandfathered status under the law and would be subject to business activity
restrictions. See "- Regulation of the Bank - Qualified Thrift Lender Test."
14
On October 27, 2000 the OTS issued a proposed rule that would require some
savings and loan holding companies to notify the OTS 30 days before undertaking
certain significant new business activities. As proposed, thrift companies
would have to give the OTS advance notice if:
. debt, combined with all other transactions by the company or any
subsidiaries other than the thrift during the past 12 months,
increases non-thrift liabilities by 5 percent or more; and non-
thrift liabilities, after the debt transaction, equal 50 percent
or more of the company's consolidated core capital;
. an asset acquisition or series of such transactions by the
company or non-thrift subsidiary during the past 12 months that
involves assets other than cash, cash equivalents and securities
or other obligations guaranteed by the U.S. Government and
exceeds 15 percent of the company's consolidated assets; and
. any transaction that, when combined with all other transactions
during the past 12 months, reduces the company's capital by 10
percent or more.
Exempt from the notice requirement would be any holding company with
consolidated subsidiary thrift assets of less than 20 percent of total assets or
consolidated holding company capital of at least 10 percent. The OTS could
object to or conditionally approve an activity or transaction if it finds a
material risk to the safety and soundness and stability of the thrift. The
review period could be extended an additional 30 days if necessary.
The OTS proposal also would codify current practices and the factors
relevant to a holding company's need for capital. To determine the need for and
level of an explicit holding company capital requirement, the OTS will look at
overall risk at the thrift and the consolidated entity, their tangible and
equity capital, whether the holding company's debt-to-capital ratio is rising,
what investments or activities are funded by debt, its cash flow, how much the
holding company relies on dividends from subsidiary thrift to service debt or
fulfill other obligations, earnings volatility and the thrift's standing in the
corporate structure.
The comment period for the proposed rule was extended to February 9, 2001.
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 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."
Financial Services Modernization Legislation
General. On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act of 1999 (the "Financial Services Modernization Act").
The Financial Services Modernization Act 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
15
. Section 32, which restricts officer, director, or employee
interlocks between a member bank and any company or person
"primarily engaged" in specified securities activities.
In addition, the Financial Services Modernization Act 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 system to engage in a full range of
financial activities through a new entity known as a "Financial Holding
Company." The term "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 Financial Services Modernization Act 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 Financial Institution Modernization Act grandfathers any
company, such as UPFC, 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 the two tests: it can
control only one savings institution, excluding supervisory acquisitions, and
each such institution must meet 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 Financial Services Modernization Act 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 Financial Services Modernization
Act will have a material adverse effect on its operations 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 Financial Services Modernization Act 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, this act 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 new
legislation.
Privacy. Under the Financial Services Modernization Act, federal banking
regulators are required to adopt rules that will limit the ability of banks and
other financial institutions to disclose non-public information about consumers
to nonaffiliated third parties. Federal banking regulators issued final rules
on May 10, 2000. Pursuant to those rules, 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.
16
The rules were effective November 13, 2000, but compliance is optional
until July 1, 2001. These privacy provisions will affect how consumer
information is transmitted through diversified financial companies and conveyed
to outside vendors. It is not possible at this time to assess the impact of the
privacy provisions on UPFC's financial condition or results of operations.
Consumer Protection Rules - Sale of Insurance Products. In December 2000,
pursuant to the requirements of the Financial Services Modernization Act, the
federal bank and thrift regulatory agencies adopted consumer protection rules
for the sale of insurance products by depository institutions. The rules are
effective on April 1, 2001. The final rules apply to any depository institution
or any person selling, soliciting, advertising, or offering insurance products
or annuities to a consumer at an office of the institution or on behalf of the
institution. Before an institution can complete the sale of an insurance
product or annuity, the regulation requires oral and written disclosure that
such product:
. is not a deposit or other obligation of, or guaranteed by, the
depository institution or its affiliate;
. is not insured by the FDIC or any other agency of the United
States, the depository institution or its affiliate; and
. has certain risks in investment, including the possible loss of
value.
Finally, the depository institution may not condition an extension of
credit:
. on the consumer's purchase of an insurance product or annuity
from the depository institution or from any of its affiliates; or
. on the consumer's agreement not to obtain, or a prohibition on
the consumer from obtaining, an insurance product or annuity from
an unaffiliated entity.
The rule also requires formal acknowledgment from the consumer that
disclosures were received.
In addition, to the extent practicable, a depository institution must keep
insurance and annuity sales activities physically segregated from the areas
where retail deposits are routinely accepted from the general public.
Safeguarding Confidential Customer Information. In January 2000, the
banking agencies adopted guidelines requiring financial institutions to
establish an information security program to:
. identify and assess the risks that may threaten customer
information;
. develop a written plan containing policies and procedures to
manage and control these risks;
. implement and test the plan; and
. adjust the plan on a continuing basis to account for changes in
technology, the sensitivity of customer information, and internal
or external threats to information security.
Each institution may implement a security program appropriate to its size and
complexity and the nature and scope of its operations.
The guidelines outline specific security measures that institutions should
consider in implementing a security program. A financial institution must adopt
those security measures determined to be appropriate. The guidelines require
the board of directors to oversee an institution's efforts to develop,
implement, and maintain an effective information security program and approve
written information security policies and programs. The guidelines are
effective July 1, 2001.
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
17
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.
Regulation of the Bank
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.
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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 mortgage 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 UPFC, 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, 2000, 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 of
approximately .0212% of insured 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.
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 3.0% 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,
19
2000, 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.
As shown below, the Bank's regulatory capital exceeded all minimum
regulatory capital requirements applicable to it as of December 31, 2000.
Percent of
Amount Adjusted Assets
------------ ---------------
(Dollars in thousands)
GAAP Capital $ 42,451 8.83%
Tangible Capital: (1)
Regulatory requirement $ 7,189 1.50%
Actual capital 40,840 8.52%
----------- ---------------
Excess $ 33,651 7.02%
=========== ===============
Leverage (Core) Capital: (1)
Regulatory requirement $ 14,378 3.00%
Actual capital 40,840 8.52%
----------- ---------------
Excess $ 26,462 5.52%
=========== ===============
Risk-Based Capital: (2)
Regulatory requirement $ 19,354 8.00%
Actual capital 35,134 14.52%
----------- ---------------
Excess $ 15,780 6.52%
=========== ===============
____________
(1) Regulatory capital reflects modifications from GAAP capital due to goodwill
and other intangible assets and a portion of deferred tax assets not
permitted to be included in regulatory capital.
(2) Based on risk-weighted assets of $241.9 million.
As a result of a number of federally-insured financial institutions
extending their risk selection standards to attract lower credit quality
accounts due to such credits having higher interest rates and fees, in March
1999, the federal banking regulatory agencies jointly issued Interagency
Guidelines on Subprime Lending. Subprime lending involves extending credit to
individuals with less than perfect credit histories. The guidelines provide that
if the risks associated with subprime lending are not properly controlled, the
agencies consider subprime lending a high-risk activity that is unsafe and
unsound. The federal banking agencies believe that subprime lending activities
can present a greater than normal risk for financial institutions and the
deposit insurance funds. Therefore, the federal
20
banking agencies believe that the level of regulatory capital an institution
needs to support this activity should be commensurate with the additional risks
incurred.
Although no formal rulemaking has occurred related to increased regulatory
capital minimums for institutions engaged in subprime lending, regulatory
agencies may impose additional regulatory capital requirements upon an
institution as part of their comprehensive regulatory authority. Should a rule
be adopted to increase capital or the OTS require the Bank to maintain
additional regulatory capital as a result of our activities in subprime lending,
this could have an adverse affect on our future prospects and operations, and
may restrict our ability to grow. If we are unable to comply with any new
capital requirements, if adopted or imposed, then we may be subject to the
prompt corrective action regulations of the OTS. Although we believe we maintain
appropriate controls and regulatory capital for our subprime activities, we
cannot determine whether, or in what form, rules may eventually be adopted. In
addition, there can be no guaranty that the OTS, upon examination, will not
require us to increase capital or cease our activities in subprime lending.
The Home Owners' Loan Act ("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.
Proposed Capital Requirements for Community Institutions. In November 2000
the federal bank and thrift regulatory agencies requested public comment on an
advance notice of proposed rulemaking that considers the establishment of a
simplified regulatory capital framework for non-complex institutions.
In the proposal, the agencies suggested criteria that could be used to
determine eligibility for a simplified capital framework, such as the nature of
a bank's activities, its asset size and its risk profile. In the advance notice,
the agencies seek comment on possible minimum regulatory capital requirements
for non-complex institutions, including a simplified risk-based ratio, a simple
leverage ratio, or a leverage ratio modified to incorporate certain off-balance
sheet exposures.
The advance notice solicits public comment on the agencies' preliminary
views. Comments are due on the proposal on February 1, 2001. Given the
preliminary nature of the proposal, it is not possible to predict its impact on
the Bank at this time.
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, 2000, 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.
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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.
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, 2000, the Bank's loans-to-one-borrower limit was $6.3
million based upon the 15% of unimpaired capital and surplus measurement.
Qualified Thrift Lender Test. Savings associations must meet a QTL test,
which test may be met either by maintaining a specified level of assets in
qualified thrift investments as specified in HOLA or by meeting the definition
of a "domestic building and loan association" pursuant to the Internal Revenue
Service Code. Qualified thrift investments are primarily residential mortgages
and related investments, including certain mortgage-related securities. The
required percentage of investments under HOLA is 65% of assets while the Code
requires investments of 60% of 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. The FHLB also
relies on the qualified thrift lender test. A savings association will only
enjoy full borrowing privileges from an FHLB if the savings association is a
qualified thrift lender. As of December 31, 2000, the Bank was in compliance
with its QTL requirement by meeting the definition of a domestic building and
loan association.
In September 2000, the Bank filed its application with the DFI 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. As a result of the discontinuation of its subprime
mortgage business, it will be more difficult for the Bank to remain in
compliance with the "QTL" test and certain other consumer lending restrictions.
California-chartered commercial banks are not subject to compliance with the
"QTL" test or certain consumer lending limitations. In the event that a Charter
Conversion is not approved by the DFI, or is approved but not completed by the
Bank, the Bank would have to adjust its lending activities to ensure that it
continues to comply with the "QTL" and other consumer lending limitations in the
future.
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
22
. 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:
. 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 regulation generally excludes 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
23
. 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:
. 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. Further, a federal savings
association, like the Bank, cannot distribute regulatory capital that is needed
for its liquidation account.
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 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.
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.
Federal Home Loan Bank System. The Bank is a member of the 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, 2000, the Bank had $3.0 million in FHLB stock, which was in
compliance with this requirement.
24
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. The balances maintained to
meet the reserve requirements imposed by the Federal Reserve Board may be used
to satisfy the liquidity requirements that are imposed by the OTS. At December
31, 2000, the Bank was in compliance with these requirements.
Charter Conversion
Charter Conversion. The Bank's application seeking approval to convert
from a federal savings association charter to a state commercial bank charter
was filed with the DFI in September 2000. In accordance with the application
review process, the DFI has finished an on-site examination of the Bank and is
presently completing its review of the Bank's conversion application. In the
event that the application is approved, and the Bank converts to a California
commercial bank charter, certain aspects of federal and state regulation will be
affected. The discussion below describes selected aspects of federal and state
regulation to which UPFC and the Bank would become subject if and when a Charter
Conversion occurred.
Regulation of UPFC. UPFC would, upon consummation of a Charter Conversion,
become registered as a bank holding company subject to regulation under the Bank
Holding Company Act of 1956, as amended (the "BHCA"). UPFC would then be
required to file with the Federal Reserve Board periodic reports and such
additional information as the Federal Reserve Board may require pursuant to the
BHCA. The Federal Reserve Board may conduct examinations of UPFC and its
subsidiaries.
The Federal Reserve Board may require that UPFC terminate an activity or
terminate control of or liquidate or divest certain subsidiaries or affiliates
if the Federal Reserve Board believes the activity or the control of the
subsidiary or affiliate constitutes a significant risk to the financial safety,
soundness or stability of any of its banking subsidiaries. The Federal Reserve
Board also has the authority to regulate provisions of certain bank holding
company debt, including the authority to impose interest ceilings and reserve
requirements on such debt. Under certain circumstances, UPFC would be required
to file written notice and obtain approval from the Federal Reserve Board prior
to purchasing or redeeming its equity securities.
Further, UPFC would be required by the Federal Reserve Board to maintain
certain levels of capital. UPFC would be required to obtain the prior approval
of the Federal Reserve Board for the acquisition of more than 5% of the
outstanding shares of any class of voting securities or substantially all of the
assets of any bank or bank holding company. Prior approval of the Federal
Reserve Board would also be required for the merger or consolidation of UPFC and
another bank holding company.
UPFC would be prohibited by the BHCA, except in certain statutorily
prescribed instances, from acquiring direct or indirect ownership or control of
more than 5% of the outstanding voting shares of any company that is not a bank
or bank holding company and from engaging directly or indirectly in activities
other than those of banking, managing or controlling banks, or furnishing
services to its subsidiaries. However, UFPC, subject to the prior approval of
the Federal Reserve Board, could engage in any, or acquire shares of companies
engaged in, activities that are deemed by the Federal Reserve Board to be so
closely related to banking or managing or controlling banks as to be a proper
incident thereto.
Under Federal Reserve Board regulations, a bank holding company is required
to serve as a source of financial and managerial strength to its subsidiary
banks and may not conduct its operations in an unsafe or unsound manner. In
addition, it is the Federal Reserve Board's policy that a bank holding company
should stand ready to use available resources to provide adequate capital funds
to its subsidiary banks during periods of financial stress or adversity and
should maintain the financial flexibility and capital-raising capacity to obtain
additional resources for assisting its subsidiary banks. A bank holding
company's failure to meet its obligations to serve as a source of strength to
its subsidiary banks will generally be considered by the Federal Reserve Board
to be an unsafe and unsound banking practice or a violation of the Federal
Reserve Board's regulations or both.
25
UPFC will also become a bank holding company within the meaning of Section
3700 of the California Financial Code. As such, UPFC and its subsidiaries are
subject to examination by, and may be required to file reports with, the DFI.
Regulation of the Bank. The Bank, as a California-chartered commercial
bank following a Charter Conversion, would become subject to primary
supervision, periodic examination, and regulation by the DFI and the FDIC. In
addition, the Bank would cease to be insured under the SAIF as a savings
association and would, following a Charter Conversion, become insured under the
BIF as a state-chartered commercial bank. (See "Regulation-Regulation of the
Bank-Insurance of Deposit Ac