5.
Loans
Loans
are
summarized as follows:
|
|
|
September 30, 2008
|
|
December 31, 2007
|
|
|
|
|
(Dollars
in thousands)
|
|
|
Loans
securitized
|
|
$
|
520,131
|
|
$
|
832,947
|
|
|
Loans
unsecuritized
|
|
|
317,402
|
|
|
94,974
|
|
|
Unearned
finance charges
|
|
|
(741
|
)
|
|
(1,571
|
)
|
|
Unearned
acquisition discounts
|
|
|
(35,775
|
)
|
|
(43,699
|
)
|
|
Allowance
for loan losses
|
|
|
(47,800
|
)
|
|
(48,386
|
)
|
|
Total
loans, net
|
|
$
|
753,217
|
|
$
|
834,265
|
|
|
Allowance
for loan losses to gross loans net of unearned acquisition
discounts
|
|
|
5.97
|
%
|
|
5.48
|
%
|
|
Unearned
acquisition discounts to gross loans
|
|
|
4.28
|
%
|
|
4.72
|
%
|
|
Average
percentage rate to borrowers
|
|
|
22.72
|
%
|
|
22.64
|
%
|
Loans
securitized represent loans transferred to the Company’s special purpose finance
subsidiaries in securitization transactions accounted for as secured financings.
Loans unsecuritized include $313.9 million and $70.5 million pledged under
the
Company’s warehouse facilities as of September 30, 2008 and December 31,
2007, respectively.
On
August
8, 2008, UPFC entered into an agreement to sell $10.0 million of loans on
a
whole-loan basis with servicing released.
The
activity in the allowance for loan losses consists of the following:
|
|
|
Nine Months Ended September 30,
|
|
Twelve Months
Ended
December
31,
|
|
|
|
|
2008
|
|
2007
|
|
2007
|
|
|
|
|
(Dollars
in thousands)
|
|
|
Allowance
for loan losses at beginning of period
|
|
$
|
48,386
|
|
$
|
36,037
|
|
$
|
36,037
|
|
|
Provision
for loan losses
|
|
|
51,544
|
|
|
48,536
|
|
|
69,764
|
|
|
Net
charge-offs
|
|
|
(52,130
|
)
|
|
(38,523
|
)
|
|
(57,415
|
)
|
|
Allowance
for loan losses at end of period
|
|
$
|
47,800
|
|
$
|
46,050
|
|
$
|
48,386
|
|
The
allowance for loan losses is the estimate of probable losses in our loan
portfolio for the next twelve months as of the statement of financial condition
date. The level of the allowance is based principally on historical loss
trends
and the remaining balance of loans. The Company believes that the allowance
for
loan losses is currently adequate to absorb probable loan losses in the loans
balance as of September 30, 2008. However, ultimate losses may vary from
current
estimates. It is possible that others, given the same information, may reach
different conclusions and such differences could be material. To the extent
that
the analyses considered in determining the allowance for loan losses are
not
indicative of future performance or other assumptions used by the Company
do not
prove to be accurate, loss experience could differ significantly from the
estimate, resulting in higher or lower future provision for loan losses.
6.
Borrowings
Securitizations
Our
securitizations are structured as on-balance-sheet transactions and recorded
as
secured financings because they do not meet the accounting criteria for sale
of
finance receivables under SFAS No. 140,
Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities
.
Since
2005, regular contract securitizations have been an integral part of our
business plan to increase our liquidity and reduce risks associated with
interest rate fluctuations. We had developed a securitization program that
involved selling interests in pools of our automobile contracts to investors
through the public issuance of AAA/Aaa rated asset-backed securities. We
retained the servicing rights for the loans which have been securitized.
Upon
the issuance of securitization notes payable, we retain the right to receive
over time excess cash flows from the underlying pool of securitized automobile
contracts.
However,
due to the fact that the asset-backed securities market, along with credit
markets in general, have been experiencing unprecedented disruptions, the
execution of securitization transactions is more challenging and expensive.
We
have not accessed the securitization market with a transaction since November
2007 and we are currently analyzing our financing strategy going forward.
For
more information, see Recent Market Developments in Item 2. “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” to the
Quarterly Report on this form 10-Q.
In
our securitizations to date, we transferred automobile contracts we purchased
from automobile dealers to a newly formed owner trust for each transaction,
which trust then issued the securitization notes payable. The net proceeds
of
our first securitization were used to replace the Bank’s deposit liabilities and
the net proceeds of our subsequent securitization transactions were used
to fund
our operations. At the time of securitization of our automobile contracts,
we
are required to pledge assets equal to a specific percentage of the
securitization pool to support the securitization transaction. Typically,
the
assets pledged consist of cash deposited to a restricted account known as
a
spread account and additional receivables delivered to the trusts, which
create
over-collateralization. The securitization transaction documents require
the
percentage of assets pledged to support the transaction to increase over
time
until a specific level is attained. Excess cash flow generated by the trusts
is
used to pay down the outstanding debt of the trusts, increasing the level
of
over-collateralization until the required percentage level of assets has
been
reached. Once the required percentage level of assets is reached and maintained,
excess cash flows generated by the trusts are released to us as distributions
from the trusts.
We
have arranged for credit enhancement to improve the credit rating and reduce
the
interest rate on the asset-backed securities issued. This credit enhancement
for
our securitizations has been in the form of financial guaranty insurance
policies insuring the payment of principal and interest due on the asset-backed
securities. Agreements with our financial guaranty insurance insurers provide
that if portfolio performance ratios (delinquency and net charge-offs as
a
percentage of automobile contract outstanding) in a trust’s pool of automobile
contracts exceed certain targets, the over-collateralization and spread account
levels would be increased. Agreements with our financial guaranty insurance
insurers also contain additional specified targeted portfolio performance
ratios. If, at any measurement date, the targeted portfolio performance ratios
with respect to any trust whose securities are insured were to exceed these
additional levels, provisions of the agreements permit our financial guaranty
insurance providers to terminate our servicing rights to the automobile
contracts sold to that trust.
The
principal and interest collected on the automobile contracts pledged is used
to
pay the interest due each month on the notes to the participating lenders
and
any excess cash is released to UPFC. The performance, timing and amount of
cash
flows from automobile contracts varies based on a number of factors, including:
•
the
yields received on automobile contracts;
•
the
rates
and amounts of loan delinquencies, defaults and net credit losses; and
•
how
quickly and at what price repossessed vehicles can be resold.
The
following table lists each of our securitizations as of September 30, 2008:
|
Issue
Number
|
|
Issuance Date
|
|
Maturity Date(1)
|
|
Original
Balance
|
|
Remaining
Balance at
September 30, 2008
|
|
|
(Dollars
in thousands)
|
|
|
2005A
|
|
|
April
14, 2005
|
|
|
December
2010
|
|
$
|
195,000
|
|
$
|
12,867
|
|
|
2005B
|
|
|
November 10, 2005
|
|
|
August
2011
|
|
$
|
225,000
|
|
$
|
29,991
|
|
|
2006A
|
|
|
June
15, 2006
|
|
|
May
2012
|
|
$
|
242,000
|
|
$
|
56,842
|
|
|
2006B
|
|
|
December 14, 2006
|
|
|
August
2012
|
|
$
|
250,000
|
|
$
|
86,065
|
|
|
2007A
|
|
|
June
14, 2007
|
|
|
July
2013
|
|
$
|
250,000
|
|
$
|
125,676
|
|
|
2007B
|
|
|
November 8, 2007
|
|
|
July
2014
|
|
$
|
250,000
|
|
$
|
157,787
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,412,000
|
|
$
|
469,228
|
|
(1)
Contractual maturity of the last maturity class of notes issued by the related
securitization owner trust.
Assets
pledged to the trusts as of September 30, 2008 and December 31, 2007 are as
follows:
|
|
|
September 30,
2008
|
|
December 31,
2007
|
|
|
|
|
(Dollars
in thousands)
|
|
|
Automobile
contracts, net
|
|
$
|
520,131
|
|
$
|
832,947
|
|
|
Restricted
cash
|
|
$
|
30,581
|
|
$
|
30,647
|
|
|
Total
assets pledged
|
|
$
|
550,712
|
|
$
|
863,594
|
|
A
summary
of our securitization activity and cash flows from the trusts is as follows:
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
(Dollars in thousands)
|
|
|
Receivables securitized
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
268,817
|
|
|
Proceeds
from securitization
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
250,000
|
|
|
Distribution
from the trusts
|
|
$
|
19,611
|
|
$
|
30,501
|
|
$
|
61,859
|
|
$
|
72,009
|
|
In
order
to assist our borrowers who have been adversely impacted by the current economic
environment, we increased our extension usage. As a result, under our current
servicing agreements, we are required to repurchase loans in excess of extension
performance targets. As a result, we repurchased $5.5 million and $6.1 million
during the three months ended September 30, 2008 and 2007, respectively.
We
repurchased $27.7 million and $10.8 million during the nine months ended
September 30, 2008 and 2007, respectively. We funded the purchase price for
the
repurchase by obtaining advances under our existing warehouse facility.
As
of
September 30, 2008, we were in compliance with all terms of the financial
covenants related to our securitization transactions. However, we have obtained
temporary waivers from the insurance providers that insure our outstanding
securitizations regarding the approval of the appointment of Mr. James Vagim
as
our chief executive officer and have also obtained temporary waivers regarding
a
covenant that we maintain a warehouse facility. We are continuing discussions
with the insurance providers to obtain permanent waivers, but there is no
assurance we will obtain such waivers. If we are unable to obtain permanent
waivers or continued temporary waivers for both these items, then each insurance
provider may elect to enforce the various rights and remedies that are governed
by the different transaction documents for each securitization
such
as
terminating our servicing rights
.
Warehouse
Facility
On
August
22, 2008, we restructured our $300 million warehouse facility
,
which
we have historically used to fund our automobile finance operations to purchase
automobile contracts pending securitization
.
As
part
of the restructuring, which effectively extinguished the existing warehouse
facility, the Company incurred a fee payable in the amount of $7.3 million.
The
fee has been recorded as part of non-recurring charges during the quarter
ended
September 30, 2008.
The
restructuring continued the revolving nature of the warehouse facility through
its previously scheduled maturity of October 16, 2008. Subsequently, the
credit
facility converted to a term loan for an additional one-year term, which
amortizes pursuant to a pre-determined schedule, providing that the Company
will
pay all amounts owed under the warehouse facility by October 16, 2009.
As
a
result, the Company is unable to access further advances under the newly
converted term loan.
Prior
to
being restructured, the warehouse facility included a requirement that the
Company access the securitization market and reduce amounts owed under the
warehouse facility within certain specified time periods. The August 22,
2008
restructuring removes this securitization requirement.
By
entering into the August 22, 2008 restructuring, the warehouse facility lenders
have approved the July 25, 2008 appointment of James Vagim as our chief
executive officer and have removed the requirement that, within certain
specified time periods, we access the securitization markets to reduce amounts
owed under the warehouse facility.
Under
the
previous terms of the warehouse facility, our indirect subsidiary, UFC had
historically obtained advances on a revolving basis by issuing notes to the
participating lenders and pledging for each advance a portfolio of automobile
contracts. UFC purchases the automobile contracts from UACC and UACC services
the automobile contracts, which are held by a custodian. We provide an absolute
and unconditional and irrevocable guaranty of the full and punctual payment and
performance, of certain liabilities, agreements and other obligations of
UACC
and UABO in connection with the warehouse facility. Although the warehouse
lenders have expressed their intention that UACC continue to service the
automobile contracts pledged to the warehouse facility through UACC’s
decentralized branches, the warehouse facility, as amended, provides that
UACC
will act as servicer on a month-to-month basis for the automobile contracts
pledged to the warehouse facility. UACC’s servicing rights automatically expire
each month, unless extended by the warehouse lenders in their sole and absolute
good faith discretion.
As
of
September 30, 2008, the warehouse facility was drawn to $237.4 million. As
of
September 30, 2008, we were in compliance with all terms of the financial
covenants related to our warehouse facility.
Residual
Credit Facility
On
January 24, 2007, we closed a $26 million variable rate residual credit
facility. The facility is secured by eligible residual interests in previously
securitized pools of automobile receivables and certain securities issued
by
UARC, UAFC, and UFC. We had provided an absolute and unconditional and
irrevocable guaranty of the full and punctual payment and performance, of
all
liabilities, agreements and other obligations of UARC, UAFC, and UFC under
the
residual credit facility. This facility expired on January 24, 2008.
7.
Share
Repurchase Program
On
June 27, 2006, our Board of Directors approved a share repurchase program
and authorized us to repurchase up to 500,000 shares of our outstanding common
stock from time to time in the open market or in private transactions in
accordance with the provisions of applicable state and federal law, including,
without limitation, Rule 10b-18 promulgated under the Securities Exchange
Act of
1934, as amended. On August 4, 2006, our Board of Directors approved an
increase in the aggregate number of shares that we may repurchase pursuant
to
the previously announced share repurchase program from 500,000 shares to
1,500,000 shares. On December 21, 2006, our Board of Directors approved a
second increase in the aggregate number of shares of our outstanding common
stock that we may repurchase pursuant to the previously announced share
repurchase program from 1,500,000 shares to 3,500,000 shares. During the
three
months ended September 30, 2007, we did not repurchase any shares of our
common
stock. During the nine months ended September 30, 2007, we repurchased 1,013,213
shares of our common stock for an average price of $12.98 per share for an
aggregate purchase price of $13.2 million. In total we have repurchased
2,089,738 shares of our common stock for an average price of $15.58 per share
for an aggregate purchase price of $32.6 million. We did not repurchase any
shares of our common stock during the three or nine months ended September
30,
2008.
8.
Share
Based Compensation
In
1994,
we adopted a stock option plan and, in November 1997, June 2001, June 2002,
and July 2007 amended and restated such plan as the United PanAm Financial
Corp.
1997 Employee Stock Incentive Plan (the “Plan”). The maximum number of shares
that may be issued to officers, directors, employees or consultants under
the
Plan is 8,500,000. Options issued pursuant to the Plan have been granted
at an
exercise price of no less that book value on the date of grant. Options
generally vest over a one to five year period and have a maximum term of
ten
years. Options may be exercised by using either a standard cash exercise
procedure or a cashless exercise procedure. As of September 30, 2008 there
were
3,268,965 options outstanding.
SFAS
No. 123(R) requires companies to estimate the fair value of share-based
payment awards on the date of grant using an option-pricing model. The value
of
the portion of the award that is ultimately expected to vest is recognized
as
expense over the requisite service periods in our consolidated statement
of
income.
Stock-based
compensation expense recognized during the period is based on the value of
the
portion of share-based payment awards that is ultimately expected to vest
during
the period. Stock-based compensation expense recognized in our consolidated
statement of income for the three and nine months ended September 30, 2008
and
2007 included compensation expense for share-based payment awards granted
prior
to, but not yet vested as of December 31, 2005 based on the grant date fair
value estimated in accordance with the pro forma provisions of SFAS No. 123
and compensation expense for the share-based payment awards granted subsequent
to December 31, 2005 based on the grant date fair value estimated in
accordance with the provisions of SFAS No. 123(R). As stock-based
compensation expense recognized in the consolidated statement of income for
the
three and nine months ended September 30, 2008 and 2007 is based on awards
ultimately expected to vest on a straight-line prorated basis, it has been
reduced for estimated forfeitures. SFAS No. 123(R) requires forfeitures to
be estimated at the time of grant and revised, if necessary, in subsequent
periods if actual forfeitures differ from those estimates. On November 10,
2005, the FASB issued FASB Staff Position No. FAS 123(R)-3,
Transition
Election Related to Accounting for Tax Effects of Share-Based Payment
Awards.
We have
elected to adopt the alternative transition method provided in the FASB Staff
Position for calculating the tax effects of stock-based compensation pursuant
to
SFAS No. 123(R). The alternative transition method includes simplified
methods to establish the beginning balance of the additional paid-in capital
pool (“APIC pool”) related to the tax effects of employee stock-based
compensation, and to determine the subsequent impact on the APIC pool and
consolidated statements of cash flows of the tax effects of employee stock-based
compensation awards that are outstanding upon adoption of SFAS
No. 123(R).
The
following table summarizes stock-based compensation expense, net of tax,
under
SFAS No. 123(R) for the three and nine months ended September 30, 2008 and
2007.
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
(Dollars in thousands)
|
|
|
Stock-based
compensation expense
|
|
$
|
35
|
|
$
|
207
|
|
$
|
520
|
|
$
|
1,400
|
|
|
Tax
benefit
|
|
|
(17
|
)
|
|
(65
|
)
|
|
(205
|
)
|
|
(542
|
)
|
|
Stock-based
compensation expense, net of tax
|
|
$
|
18
|
|
$
|
142
|
|
$
|
316
|
|
$
|
858
|
|
|
Stock-based
compensation expense, net of tax, per diluted shares
|
|
$
|
0.00
|
|
$
|
0.01
|
|
$
|
0.02
|
|
$
|
0.05
|
|
At
September 30, 2008, 1,472,756 shares of common stock were reserved for future
stock based compensation grants.
The
fair
value of options under our Plan was estimated on the date of grant using
the
Black-Scholes option pricing model with the following weighted average
assumptions: no dividend yield; volatility was the actual 45 month
volatility on the date of grant; risk-free interest rate equivalent to the
appropriate US Treasury constant maturity treasury rate on the date of grant
and
expected lives of one to five years depending on final maturity of the options.
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
Expected
dividends
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
|
Expected
volatility
|
|
|
76.62
|
%
|
|
47.71
|
%
|
|
73.66
|
%
|
|
46.77
|
%
|
|
Risk-free
interest rate
|
|
|
3.13
|
%
|
|
4.40
|
%
|
|
3.08
|
%
|
|
4.48
|
%
|
|
Expected
life
|
|
|
5.00
years
|
|
|
5.00
years
|
|
|
5.00
years
|
|
|
5.00
years
|
|
At
September 30, 2008, there was $3.1 million of unrecognized compensation cost
related to share based compensation, which is expected to be recognized over
a
weighted average period of 1.99 years. A summary of option activity for the
nine
months ended September 30, 2008 and 2007 is as follows:
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
(Dollars in thousands, except per share amounts)
|
|
|
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
|
Balance at beginning of period
|
|
|
4,110,335
|
|
$
|
14.02
|
|
|
4,023,436
|
|
$
|
14.66
|
|
|
Granted
|
|
|
1,078,871
|
|
|
5.69
|
|
|
364,299
|
|
|
11.02
|
|
|
Canceled
or expired
|
|
|
(1,920,241
|
)
|
|
13.10
|
|
|
(146,000
|
)
|
|
21.97
|
|
|
Exercised
|
|
|
—
|
|
|
—
|
|
|
(38,700
|
)
|
|
6.19
|
|
|
Balance
at end of period
|
|
|
3,268,965
|
|
|
11.81
|
|
|
4,203,035
|
|
|
14.18
|
|
|
Weighted
average fair value per share of options granted during period
|
|
$
|
2.23
|
|
|
|
|
$
|
7.41
|
|
|
|
|
At
September 30, 2008, options exercisable to purchase 1,971,149 shares of our
common stock under the Plan were outstanding as follows:
|
Range of Exercise Prices
|
|
Number of Shares
Vested
|
|
Number of Shares
Unvested
|
|
Weighted
Average
Exercise Price
|
|
Weighted
Average
Remaining
Contractual
Life (Years)
|
|
Number of Shares
Exercisable
|
|
Exercisable
Shares
Weighted
Average
Exercise Price
|
|
|
$0.0000 to $3.1650
|
|
|
34,557
|
|
|
52,741
|
|
$
|
0.44
|
|
|
7.63
|
|
|
34,557
|
|
$
|
1.12
|
|
|
$3.1651 to $6.3300
|
|
|
398,392
|
|
|
755,500
|
|
|
4.68
|
|
|
6.91
|
|
|
398,392
|
|
|
4.09
|
|
|
$6.3301 to $9.4950
|
|
|
74,100
|
|
|
8,000
|
|
|
7.27
|
|
|
3.54
|
|
|
74,100
|
|
|
7.11
|
|
|
$9.4951 to $12.6600
|
|
|
478,500
|
|
|
225,500
|
|
|
10.53
|
|
|
4.57
|
|
|
478,500
|
|
|
10.59
|
|
|
$12.6601 to $15.8250
|
|
|
329,650
|
|
|
64,500
|
|
|
14.76
|
|
|
3.20
|
|
|
329,650
|
|
|
14.85
|
|
|
$15.8251 to $18.9900
|
|
|
131,200
|
|
|
31,300
|
|
|
17.60
|
|
|
5.16
|
|
|
131,200
|
|
|
17.62
|
|
|
$18.9901 to $22.1550
|
|
|
303,000
|
|
|
32,300
|
|
|
20.02
|
|
|
2.76
|
|
|
303,000
|
|
|
20.02
|
|
|
$22.1551 to $25.3200
|
|
|
35,700
|
|
|
24,300
|
|
|
23.28
|
|
|
6.96
|
|
|
35,700
|
|
|
23.24
|
|
|
$25.3201 to $28.4850
|
|
|
75,900
|
|
|
23,700
|
|
|
26.61
|
|
|
6.96
|
|
|
75,900
|
|
|
26.43
|
|
|
$28.4851 to $31.6500
|
|
|
110,150
|
|
|
79,975
|
|
|
29.94
|
|
|
6.93
|
|
|
110,150
|
|
|
29.62
|
|
|
|
|
|
1,971,149
|
|
|
1,297,816
|
|
$
|
11.80
|
|
|
5.38
|
|
|
1,971,149
|
|
$
|
13.51
|
|
The
weighted average remaining contractual life of outstanding options was 5.38
years at September 30, 2008 and 4.68 years at December 31, 2007.
9.
Earnings
per Share
Basic
earnings per share is computed on the basis of the weighted average number
of
shares of common stock outstanding during the period. Diluted earnings per
share
is computed on the basis of the weighted average number of shares of common
stock plus the effect of dilutive potential common shares outstanding during
the
period using the treasury stock method. Dilutive potential common shares
include
outstanding stock options.
The
following table reconciles the number of shares used in the computations
of
basic and diluted earnings per share for the three and nine months ended
September 30, 2008 and 2007:
|
|
|
Three Months EndedSeptember 30,
|
|
Nine Months EndedSeptember 30,
|
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
(In
thousands)
|
|
|
Weighted
average common shares outstanding during the period to compute
basic
earnings per share
|
|
|
15,737
|
|
|
15,732
|
|
|
15,737
|
|
|
15,990
|
|
|
Incremental
common shares attributable to exercise of outstanding
options
|
|
|
-
|
|
|
312
|
|
|
-
|
|
|
568
|
|
|
Weighted
average number of common shares used to compute diluted earnings
per share
|
|
|
15,737
|
|
|
16,044
|
|
|
15,737
|
|
|
16,558
|
|
The
above
calculation of diluted earnings per share excluded 3,612,000 and 2,192,000
average shares for the three months ended September 30, 2008 and 2007, and
3,761,000 and 1,881,000 average shares for the nine months ended September
30,
2008 and 2007 respectively, attributable to outstanding stock options because
their inclusion would have been anti-dilutive.
10.
Trust
Preferred Securities
On
July 31, 2003, the Company issued trust preferred securities of $10.0
million through a subsidiary UPFC Trust I. The Trust issuer is a “100% owned
finance subsidiary” of the Company and the Company “fully and unconditionally”
guaranteed the securities. The Company will pay interest on these funds at
a
rate equal to the three month LIBOR plus 3.05%, variable quarterly, and the
rate
was 5.84% as of September 30, 2008. The final maturity of these securities
is 30
years, however, they can be called at par any time after July 31, 2008 at
the option of the Company.
11.
Consolidation
of Variable Interest Entities
FASB
Interpretation No. 46,
Consolidation
of Variable Interest Entities
(“FIN
46”),
was
issued in January 2003. FIN 46 requires that if an entity is the primary
beneficiary of a variable interest entity, the assets, liabilities and results
of operations of the variable interest entity should be included in the
consolidated financial statements of the entity. FASB Interpretation
No. 46(R),
Consolidation
of Variable Interest Entities
(“FIN
46(R)”), was issued in December 2003. The assets, liabilities and results of
operations of our trusts associated with securitizations and trust preferred
securities have been included in our consolidated financial statements.
12.
Fair Value Option for Financial Assets and Financial
Liabilities
In
February 2007, FASB issued SFAS No. 159,
The
Fair Value Option for Financial Assets and Financial
Liabilities
.
SFAS
No. 159 permits entities to choose to measure many financial instruments
and
certain other items at fair value. The objective of the statement is to improve
financial reporting by providing entities with the opportunity to mitigate
volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. The provisions of SFAS No. 159 are effective for fiscal years
beginning after November 15, 2007. In September 2006, FASB issued SFAS No.
157,
Fair
Value Measurements
.
This
Statement defines fair value, establishes a framework for measuring fair
value
in generally accepted accounting principles and expands disclosures about
fair
value measurements. This Statement applies under other accounting pronouncements
that require or permit fair value measurements but does not require any new
fair
value measurements. The provisions of SFAS No. 157 are effective for fiscal
years beginning after November 15, 2007, however, a proposed FASB Staff Position
would delay the effective date of certain provisions of SFAS No. 157 that
relate
to non-financial assets and non-financial liabilities. On January 1, 2008,
management adopted SFAS No. 159 and SFAS No. 157 which had no impact on our
consolidated financial position, results of operation or cash flows. The
carrying amounts of our financial instruments are included in the consolidated
statements of financial condition. The fair value of our financial instruments
and the methodologies and assumptions used to measure the fair value of our
financial instruments are described in detail in Note 15 to our Notes to
Consolidated Financial Statements presented in our 2007 Annual Report on
Form
10-K.
13.
Restructuring Charges
A
pretax
restructuring charge of $4.1 million was recorded for costs associated with
closure of branches in the third quarter of 2008, which included severance,
fixed asset write-offs, closure and post-closure costs. The restructuring
charge
included a $2.2 million reserve for estimated future lease obligations as
of
September 30, 2008. As of September 30, 2008, the liabilities related to
the
restructuring charges totaled $6.5 million.
14.
Other Non-recurring Charges
A
pretax
other non-recurring charge of $9.9 million was recorded in the third quarter
of
2008 for costs associated with $7.3 million fees payable on the exit from
the
warehouse facility and $2.6 million professional fees paid on discontinued
financing transactions.
Item 2.
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
The
following discussion is intended to help the reader understand our results
of
operations and financial condition and is provided as a supplement to, and
should be read in conjunction with, our consolidated financial statements,
the
accompanying notes to the consolidated financial statements, and the other
information included or incorporated by reference herein.
Overview
We
are a
specialty finance company engaged in automobile finance, which includes the
purchase and servicing of automobile installment sales contracts, or automobile
contracts, originated by independent and franchised dealers of used automobiles.
We conduct our automobile finance business through our wholly-owned
subsidiaries, United Auto Credit Corporation, or UACC and United Auto Business
Operations, LLC, or UABO, which provide financing to borrowers who typically
have limited or impaired credit histories that restrict their ability to
obtain
loans through traditional sources. Financing arms of automobile manufacturers
generally do not make these loans to non-prime borrowers, nor do many other
traditional automotive lenders. Non-prime borrowers generally pay higher
interest rates and loan fees than do prime borrowers.
As
a
result of the continued disruptions in the capital markets, including the
uncertainty for use of securitizations as a source of financing, as well
as the
lack of available borrowing capacity under a warehouse facility for an extended
period of time, we determined to downsize our operations and reduce our branch
footprint in order to lower expenses and meet required liquidity needs. During
the quarter ended September 30, 2008, we closed an additional 27 branches
bringing the total number of branches to 79 branches in operation as of
September 30, 2008. The majority of closures were from the consolidation
of
branches within the same market. The closures of the 63 branches year-to-date
resulted in a decrease in the number of employees of approximately 400 or
35% of
the work force since December 31, 2007. These closures will result in a
significant reduction in overall operating expenses. In addition, we suspended
new loan originations during the end of the third quarter of 2008 to allow
our
outstanding receivables to shrink to a level where our capital base will
be able
to finance future originations at the lower advance structures available
in the
market.
On
August
22, 2008, we restructured our $300 million warehouse facility
,
which
we have historically used to fund our automobile finance operations to purchase
automobile contracts pending securitization
.
As
part
of the restructuring, which effectively extinguished the existing warehouse
facility, UPFC incurred a fee payable in the amount of $7.3 million. The
fee has
been recorded as part of non-recurring charges during the quarter ended
September 30, 2008.
The
restructuring continued the revolving nature of the warehouse facility through
its previously scheduled maturity of October 16, 2008. Subsequently, the
credit
facility converted to a term loan for an additional one-year term, which
amortizes pursuant to a pre-determined schedule, providing that the Company
will
pay all amounts owed under the credit facility by October 16, 2009.
Management
is currently pursuing and evaluating alternative sources of financing and
is
also considering selling loans on a whole-loan basis. At this time, there
is no
assurance we will be able to arrange for other types of interim financing
or be
able to sell receivables on a whole-loan basis in the future.
Critical
Accounting Policies
We
have
established various accounting policies, which govern the application of
accounting principles generally accepted in the United States of America,
or
GAAP, in the preparation of our consolidated financial statements. Our
accounting policies are integral to understanding the results reported. Certain
accounting policies are described in detail in Note 3 to our Notes to
Consolidated Financial Statements presented in our 2007 Annual Report on
Form
10-K.
Certain
accounting policies require us to make significant estimates and assumptions,
which have a material impact on the carrying value of certain assets and
liabilities, and we consider these to be critical accounting policies. The
estimates and assumptions we use are based on historical experience and other
factors, which we believe to be reasonable under the circumstances. Actual
results could differ significantly from these estimates and assumptions,
which
could have a material impact on the carrying value of assets and liabilities
at
the date of the statement of financial condition and our results of operations
for the reporting periods. The following is a brief description of our current
accounting policies involving significant management valuation judgments.
Securitization
Transactions
The
transfer of our automobile contracts to securitization trusts is treated
as a
secured financing under Statement of Financial Accounting Standard (“SFAS”)
No. 140,
Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities
.
The
trusts are considered variable interest entities. The assets, liabilities
and
results of operations of the trusts have been included in our consolidated
financial statements. The contracts are retained on the statement of financial
condition with the securities issued to finance the contracts recorded as
securitization notes payable. We record interest income on the securitized
contracts and interest expense on the notes issued through the securitization
transactions. Debt issuance costs are amortized over the expected term of
the
securitization using the interest method.
As
servicer of these contracts, we remit funds collected from the borrowers
on
behalf of the trustee to the trustee and direct the trustee how the funds
should
be invested until the distribution dates. We have retained an interest in
the
securitized contracts, and have the ability to receive future cash flows
as a
result of that retained interest.
Allowance
for Loan Losses
The
allowance for loan losses is calculated based on incurred loss methodology
for
the determination of the amount of probable credit losses inherent in the
finance receivables as of the reporting date. Our loan loss allowance is
estimated by management based upon a variety of factors including an assessment
of the credit risk inherent in the portfolio and prior loss
experience.
The
allowance for credit losses is established through provisions for losses
recorded in income as necessary to provide for estimated contract losses
in the
next 12 months at each reporting date. We account for such contracts by static
pool, stratified into three-month buckets, so that the credit risk in each
individual static pool can be evaluated independently in order to estimate
the
future losses within each pool. Any such adjustment is recorded in the current
period as the assessment is made.
Despite
these analyses, we recognize that establishing an allowance is an estimate,
which is inherently uncertain and depends on the outcome of future events.
Our
operating results and financial condition are sensitive to changes in our
estimate for loan losses and the estimate’s underlying assumptions. Our
operating results and financial condition are immediately impacted as changes
in
estimates for calculating loan loss reserves are immediately recorded in
our
consolidated statement of income as an addition or reduction in provision
expense.
Stock-Based
Compensation
On
January 1, 2006, we adopted SFAS No. 123(R),
Share-Based
Payment
,
which
requires that the compensation cost relating to share-based payment transactions
(including the cost of all employee stock options) be recognized in the
financial statements. That cost will be measured based on the estimated fair
value of the equity or liability instruments issued. SFAS No. 123(R) covers
a wide range of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation rights,
and
employee share purchase plans. SFAS No. 123(R) replaces SFAS No. 123,
Accounting
for Stock-Based Compensation
,
and
supersedes Accounting Principles Board Opinion (“APB Opinion”) No. 25,
Accounting
for Stock Issued to Employees
.
In
March 2005, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 107 (“SAB No. 107”) relating to SFAS No. 123(R).
We
adopted SFAS No. 123(R) using the modified prospective transition method,
which requires the application of the accounting standard as of January 1,
2006, the first day of our 2006 fiscal year. Our Consolidated Financial
Statements after December 31, 2005 reflect the impact of SFAS
No. 123(R). In accordance with the modified prospective transition method,
our Consolidated Financial Statements prior to January 1, 2006 have not been
restated to reflect, and do not include, the impact of SFAS No. 123(R).
Stock-based compensation expense recognized under SFAS No. 123(R) was
$35,000 and $207,000 for the three months ended September 30, 2008 and 2007,
respectively. Stock-based compensation expense recognized under SFAS
No. 123(R) was $521,000 and $1,400,000 for the nine months ended September
30, 2008 and 2007, respectively.
Lending
Activities
Summary
of Loan Portfolio
The
following table sets forth the composition of our loan portfolio at the dates
indicated.
|
|
|
September 30, 2008
|
|
December 31, 2007
|
|
|
|
|
(Dollars in Thousands)
|
|
|
Automobile Contracts
|
|
$
|
837,533
|
|
$
|
927,921
|
|
|
Unearned
finance charges (1)
|
|
|
(741
|
)
|
|
(1,571
|
)
|
|
Unearned
acquisition discounts (1)
|
|
|
(35,775
|
)
|
|
(43,699
|
)
|
|
Allowance
for loan losses (1)
|
|
|
(47,800
|
)
|
|
(48,386
|
)
|
|
Total
loans, net
|
|
$
|
753,217
|
|
$
|
834,265
|
|
(1)
See
“—Critical Accounting Policies”
Allowance
for Loan Losses
Our
policy is to maintain an allowance for loan losses to absorb inherent losses
which may be realized on our portfolio. These allowances are general valuation
allowances for estimates for probable losses, not specifically identified
to
individual loans, that will occur in the next twelve months. The total allowance
for loan losses was $47.8 million at September 30, 2008 compared with $48.4
million at December 31, 2007, representing 5.97% of loans at September 30,
2008 and 5.48% at December 31, 2007.
Following
is a summary of the changes in our consolidated allowance for loan losses
for
the periods indicated.
|
|
|
At or For the Nine Months Ended
|
|
|
|
|
September 30, 2008
|
|
September 30, 2007
|
|
|
|
|
(Dollars in Thousands)
|
|
|
Allowance
for Loan Losses
|
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
$
|
48,386
|
|
$
|
36,037
|
|
|
Provision
for loan losses (1)
|
|
|
51,544
|
|
|
48,536
|
|
|
Net
charge-offs
|
|
|
(52,130
|
)
|
|
(38,523
|
)
|
|
Balance
at end of period
|
|
$
|
47,800
|
|
$
|
46,050
|
|
|
Annualized
net charge-offs to average loans
|
|
|
7.65
|
%
|
|
5.80
|
%
|
|
Ending
allowance to period end loans
|
|
|
5.97
|
%
|
|
5.13
|
%
|
(1)
See
“—Critical Accounting Policies”
Past
Due and Nonaccrual Loans
The
following table sets forth the remaining balances of all loans (net of unearned
finance charges, excluding loans for which vehicles have been repossessed)
that
were more than 30 days delinquent at the periods indicated.
|
|
|
September 30, 2008
|
|
December 31, 2007
|
|
September 30, 2007
|
|
|
|
|
(Dollars in Thousands)
|
|
|
Loan Delinquencies
|
|
Balance
|
|
% of Total
Loans
|
|
Balance
|
|
% of Total
Loans
|
|
Balance
|
|
% of Total
Loans
|
|
|
30
to 59 days
|
|
$
|
9,423
|
|
|
1.13
|
%
|
$
|
7,194
|
|
|
0.78
|
%
|
$
|
6,729
|
|
|
0.71
|
%
|
|
60
to 89 days
|
|
|
2,403
|
|
|
0.29
|
%
|
|
2,756
|
|
|
0.30
|
%
|
|
2,641
|
|
|
0.28
|
%
|
|
90+
days
|
|
|
1,271
|
|
|
0.15
|
%
|
|
1,534
|
|
|
0.16
|
%
|
|
1,674
|
|
|
0.18
|
%
|
|
Total
|
|
$
|
13,097
|
|
|
1.57
|
%
|
$
|
11,484
|
|
|
1.24
|
%
|
$
|
11,044
|
|
|
1.17
|
%
|
Our
policy is to charge off loans delinquent in excess of 120 days.
The
following table sets forth the aggregate amount of nonaccrual loans (net
of
unearned finance charges, including loans over 30 days delinquent and loans
for
which vehicles have been repossessed) at the periods indicated.
|
|
|
September 30, 2008
|
|
December 31, 2007
|
|
September 30, 2007
|
|
|
|
|
(Dollars
in Thousands)
|
|
|
Nonaccrual
loans
|
|
$
|
23,634
|
|
$
|
21,185
|
|
$
|
19,970
|
|
|
Nonaccrual
loans to gross loans
|
|
|
2.82
|
%
|
|
2.29
|
%
|
|
2.12
|
%
|
|
Allowance
for loan losses to gross loans, net of unearned acquisition
discounts
|
|
|
5.97
|
%
|
|
5.48
|
%
|
|
5.13
|
%
|
Cumulative
Losses for Contract Pools
The
following table reflects our 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 three-month period)
purchased from October 2003 through June 2008. Contract pools subsequent
to June
2008 were not included in this table because the loan pools were not seasoned
enough to provide a meaningful comparison with prior periods.
|
Number
of
|
|
Oct-03
|
|
Jan-04
|
|
Apr-04
|
|
Jul-04
|
|
Oct-04
|
|
Jan-05
|
|
Apr-05
|
|
Jul-05
|
|
Oct-05
|
|
Jan-06
|
|
Apr-06
|
|
Jul-06
|
|
Oct-06
|
|
Jan-07
|
|
Apr-07
|
|
Jul-07
|
|
Oct-07
|
|
Jan-08
|
|
Apr-08
|
|
|
Months
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
|
Outstanding
|
|
Dec-03
|
|
Mar-04
|
|
Jun-04
|
|
Sep-04
|
|
Dec-04
|
|
Mar-05
|
|
Jun-05
|
|
Sep-05
|
|
Dec-05
|
|
Mar-06
|
|
Jun-06
|
|
Sep-06
|
|
Dec-06
|
|
Mar-07
|
|
Jun-07
|
|
Sep-07
|
|
Dec-07
|
|
Mar-08
|
|
Jun-08
|
|
|
1
|
|
|
0.00
|
%
|
|
0.00
|
%
|
|
0.00
|
%
|
|
0.00
|
%
|
|
0.00
|
%
|
|
0.00
|
%
|
|
0.00
|
%
|
|
0.00
|
%
|
|
0.00
|
%
|
|
0.00
|
%
|
|
0.00
|
%
|
|
0.00
|
%
|
|
0.00
|
%
|
|
0.00
|
%
|
|
0.00
|
%
|
|
0.00
|
%
|
|
0.00
|
%
|
|
0.00
|
%
|
|
0.00
|
%
|
|
4
|
|
|
0.11
|
%
|
|
0.02
|
%
|
|
0.04
|
%
|
|
0.08
|
%
|
|
0.05
|
%
|
|
0.03
|
%
|
|
0.06
|
%
|
|
0.12
|
%
|
|
0.05
|
%
|
|
0.02
|
%
|
|
0.06
|
%
|
|
0.09
|
%
|
|
0.10
|
%
|
|
0.05
|
%
|
|
0.08
|
%
|
|
0.08
|
%
|
|
0.10
|
%
|
|
0.04
|
%
|
|
0.05
|
%
|
|
7
|
|
|
0.48
|
%
|
|
0.37
|
%
|
|
0.45
|
%
|
|
0.65
|
%
|
|
0.49
|
%
|
|
0.40
|
%
|
|
0.64
|
%
|
|
0.59
|
%
|
|
0.47
|
%
|
|
0.40
|
%
|
|
0.62
|
%
|
|
0.88
|
%
|
|
0.64
|
%
|
|
0.54
|
%
|
|
0.84
|
%
|
|
0.82
|
%
|
|
0.61
|
%
|
|
0.47
|
%
|
|
|
|
|
10
|
|
|
1.20
|
%
|
|
1.37
|
%
|
|
1.33
|
%
|
|
1.29
|
%
|
|
1.19
|
%
|
|
1.35
|
%
|
|
1.63
|
%
|
|
1.36
|
%
|
|
1.28
|
%
|
|
1.61
|
%
|
|
2.00
|
%
|
|
1.84
|
%
|
|
1.73
|
%
|
|
1.77
|
%
|
|
2.28
|
%
|
|
1.90
|
%
|
|
1.77
|
%
|
|
|
|
|
|
|
|
13
|
|
|
2.13
|
%
|
|
2.44
|
%
|
|
2.13
|
%
|
|
2.21
|
%
|
|
2.41
|
%
|
|
2.48
|
%
|
|
2.57
|
%
|
|
2.37
|
%
|
|
2.71
|
%
|
|
2.96
|
%
|
|
3.13
|
%
|
|
3.23
|
%
|
|
3.09
|
%
|
|
3.29
|
%
|
|
3.51
|
%
|
|
3.30
|
%
|
|
|
|
|
|
|
|
|
|
|
16
|
|
|
3.29
|
%
|
|
3.20
|
%
|
|
2.88
|
%
|
|
3.12
|
%
|
|
3.56
|
%
|
|
3.32
|
%
|
|
3.47
|
%
|
|
3.56
|
%
|
|
4.07
|
%
|
|
3.90
|
%
|
|
4.35
|
%
|
|
4.95
|
%
|
|
4.87
|
%
|
|
4.54
|
%
|
|
4.90
|
%
|
|
|
|
|
|
|
|
|
|
|
19
|
|
|
4.06
|
%
|
|
3.96
|
%
|
|
3.87
|
%
|
|
4.20
|
%
|
|
4.44
|
%
|
|
4.21
|
%
|
|
4.70
|
%
|
|
4.85
|
%
|
|
5.01
|
%
|
|
5.03
|
%
|
|
5.92
|
%
|
|
6.73
|
%
|
|
6.23
|
%
|
|
5.89
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
|
|
|
4.78
|
%
|
|
4.87
|
%
|
|
4.77
|
%
|
|
4.95
|
%
|
|
5.17
|
%
|
|
5.50
|
%
|
|
5.95
|
%
|
|
5.76
|
%
|
|
5.96
|
%
|
|
6.42
|
%
|
|
7.41
|
%
|
|
7.98
|
%
|
|
7.53
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
|
|
|
5.53
|
%
|
|
5.63
|
%
|
|
5.35
|
%
|
|
5.56
|
%
|
|
6.12
|
%
|
|
6.56
|
%
|
|
6.69
|
%
|
|
6.69
|
%
|
|
7.05
|
%
|
|
7.66
|
%
|
|
8.59
|
%
|
|
9.07
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
|
|
|
6.07
|
%
|
|
6.16
|
%
|
|
5.96
|
%
|
|
6.31
|
%
|
|
7.02
|
%
|
|
7.23
|
%
|
|
7.41
|
%
|
|
7.67
|
%
|
|
8.08
|
%
|
|
8.56
|
%
|
|
9.65
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
|
|
|
6.42
|
%
|
|
6.76
|
%
|
|
6.62
|
%
|
|
7.05
|
%
|
|
7.66
|
%
|
|
7.86
|
%
|
|
8.24
|
%
|
|
8.62
|
%
|
|
8.78
|
%
|
|
9.41
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
|
|
|
6.77
|
%
|
|
7.37
|
%
|
|
7.20
|
%
|
|
7.47
|
%
|
|
8.24
|
%
|
|
8.52
|
%
|
|
9.04
|
%
|
|
9.25
|
%
|
|
9.45
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37
|
|
|
7.14
|
%
|
|
7.95
|
%
|
|
7.52
|
%
|
|
7.81
|
%
|
|
8.73
|
%
|
|
9.11
|
%
|
|
9.54
|
%
|
|
9.69
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40
|
|
|
7.61
|
%
|
|
8.24
|
%
|
|
7.83
|
%
|
|
8.21
|
%
|
|
9.12
|
%
|
|
9.43
|
%
|
|
9.91
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43
|
|
|
7.78
|
%
|
|
8.44
|
%
|
|
8.12
|
%
|
|
8.47
|
%
|
|
9.34
|
%
|
|
9.70
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46
|
|
|
7.93
|
%
|
|
8.63
|
%
|
|
8.33
|
%
|
|
8.63
|
%
|
|
9.59
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49
|
|
|
8.11
|
%
|
|
8.81
|
%
|
|
8.43
|
%
|
|
8.82
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52
|
|
|
8.16
|
%
|
|
8.85
|
%
|
|
8.49
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55
|
|
|
8.24
|
%
|
|
8.91
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58
|
|
|
8.30
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Original
Pool ($000)
|
|
$
|
68,791
|
|
$
|
94,369
|
|
$
|
91,147
|
|
$
|
89,688
|
|
$
|
86,697
|
|
$
|
118,883
|
|
$
|
120,502
|
|
$
|
112,487
|
|
$
|
101,482
|
|
$
|
142,873
|
|
$
|
143,988
|
|
$
|
136,167
|
|
$
|
113,767
|
|
$
|
164,019
|
|
$
|
162,873
|
|
$
|
144,586
|
|
$
|
91,581
|
|
$
|
127,243
|
|
$
|
95,869
|
|
|
Remaining
Pool ($000)
|
|
$
|
678
|
|
$
|
1,800
|
|
$
|
2,745
|
|
$
|
4,205
|
|
$
|
5,664
|
|
$
|
11,619
|
|
$
|
14,424
|
|
$
|
16,965
|
|
$
|
19,709
|
|
$
|
36,133
|
|
$
|
43,190
|
|
$
|
48,802
|
|
$
|
48,272
|
|
$
|
85,171
|
|
$
|
95,105
|
|
$
|
98,003
|
|
$
|
68,542
|
|
$
|
109,005
|
|
$
|
88,659
|
|
|
Remaining
Pool (%)
|
|
|
1.0
|
%
|
|
1.9
|
%
|
|
3.0
|
%
|
|
4.7
|
%
|
|
6.5
|
%
|
|
9.8
|
%
|
|
12.0
|
%
|
|
15.1
|
%
|
|
19.4
|
%
|
|
25.3
|
%
|
|
30.0
|
%
|
|
35.8
|
%
|
|
42.4
|
%
|
|
51.9
|
%
|
|
58.4
|
%
|
|
67.8
|
%
|
|
74.8
|
%
|
|
85.7
|
%
|
|
92.5
|
%
|
Loan
Maturities
The
following table sets forth the principal dollar amount of automobile contracts
maturing in our automobile contracts portfolio at September 30, 2008 based
on
final maturity. Automobile contract balances are reflected before unearned
acquisition discounts and allowance for loan losses.
|
|
|
One
Year or
Less
|
|
More Than
1 Year to
3 Years
|
|
More Than
3 Years to
5 Years
|
|
More Than
5 Years to
10 Years
|
|
Total
Loans
|
|
|
|
|
(Dollars in
thousands)
|
|
|
Total
loans
|
|
$
|
28,364
|
|
$
|
347,614
|
|
$
|
397,521
|
|
$
|
63,293
|
|
$
|
836,792
|
|
All
loans
are fixed rate loans.
Liquidity
and Capital Resources
General
We
require substantial cash and capital resources to operate our business. Our
primary funding sources in the past have been a warehouse credit line,
securitizations and retained earnings. However, as discussed in more detail
below, due to the restructuring of our warehouse credit line and increasing
challenges in the credit markets, we are currently evaluating alternative
sources of financing.
Our
primary uses of cash include:
•
acquisition
of automobile contracts;
•
interest
expense;
•
operating
expenses; and
•
securitization
costs.
The
capital resources currently available to us include:
•
interest
income and principal collections on automobile contracts;
•
servicing
fees that we earn under our securitizations;
•
releases
of excess cash from the spread accounts relating to the securitizations;
and
•
releases
of excess cash from our warehouse credit facility.
Recent
Market Developments
A
number
of factors have adversely impacted our liquidity in 2008 and we anticipate
these
factors will continue to adversely impact our liquidity through 2008 and
2009.
The disruptions in the capital markets and, to a lesser extent, the credit
deterioration we are experiencing in our portfolio and substantially weakened
demand for securities guaranteed by insurance policies, are making the execution
of securitization transactions more challenging and expensive. We may also
realize decreased cash distributions from our securitization trusts due to
weaker credit performance and higher borrowing costs.
The
asset-backed securities market, along with credit markets in general, has
been
experiencing unprecedented disruptions. Market conditions began deteriorating
in
mid-2007 and remain impaired in 2008. Further, the prime quality automobile
securitizations that were executed in 2008 utilized senior-subordinated
structures and sold only the highest rated securities. In addition, the
financial guaranty insurance providers used by us in the past are facing
financial stress and rating agency downgrades. As a result, demand for
asset-backed securities backed by a financial guarantee insurance policy
has
substantially weakened and there has been a limited number of public issuances
of insured automobile asset-backed securities since November 2007. We have
not
accessed the securitization market with a transaction since November 2007
and do
not anticipate accessing the securitization market during the remainder of
the
year.
Current
conditions in the asset-backed securities market include reduced liquidity,
increased risk premiums for issuers, reduced investor demand for asset-backed
securities, particularly those securities backed by non-prime collateral,
financial stress and rating agency downgrades impacting the financial guaranty
insurance providers, and a general tightening of availability of credit.
These
conditions, which may increase our cost of funding and reduce our access
to the
asset-backed securities market or other types of receivable financings, may
continue or worsen in the future. Due to the current conditions in the
asset-backed securities market, along with credit markets in general, the
execution of securitization transactions is more challenging and expensive
and
we are analyzing our liquidity strategies going forward.
We
are
currently pursuing and evaluating alternative sources of financing and are
also
considering selling receivables on a whole-loan basis. At this time, there
is no
assurance that we will be able to arrange for other types of interim financing
or be able to sell receivables on a whole-loan basis.
For
a
more complete description of the financing risks that we face, see Item 1A.
“Risk Factors” in our 2007 Annual Report on Form 10-K and other factors or
conditions described under Part II, Item 1A. “Risk Factors” of this Quarterly
Report on Form 10-Q.
Securitizations
Our
securitizations are structured as on-balance-sheet transactions and recorded
as
secured financings because they do not meet the accounting criteria for sale
of
finance receivables under SFAS No. 140. Since 2004, regular contract
securitizations have been an integral part of our business plan in order
to
increase our liquidity and reduce risks associated with interest rate
fluctuations. We had developed a securitization program that involves selling
interests in pools of our automobile contracts to investors through the public
issuance of AAA/Aaa rated asset-backed securities. We retain the servicing
rights for the loans which have been securitized. Upon the issuance of
securitization notes payable, we retain the right to receive over time excess
cash flows from the underlying pool of securitized automobile
contracts.
In
our securitizations to date, we transferred automobile contracts we purchased
from automobile dealers to a newly formed owner trust for each transaction,
which trust then issued the securitization notes payable. The net proceeds
of
our first securitization were used to replace the Bank’s deposit liabilities and
the net proceeds of our subsequent securitization transactions were used
to fund
our operations. At the time of securitization of our automobile contracts,
we
are required to pledge assets equal to a specific percentage of the
securitization pool to support the securitization transaction. Typically,
the
assets pledged consist of cash deposited to a restricted account known as
a
spread account and additional receivables delivered to the trusts, which
create
over-collateralization. The securitization transaction documents require
the
percentage of assets pledged to support the transaction to increase over
time
until a specific level is attained. Excess cash flow generated by the trusts
is
used to pay down the outstanding debt of the trusts, increasing the level
of
over-collateralization until the required percentage level of assets has
been
reached. Once the required percentage level of assets is reached and maintained,
excess cash flows generated by the trusts are released to us as distributions
from the trusts.
We
had
arranged for credit enhancement to improve the credit rating and reduce the
interest rate on the asset-backed securities issued to date. This credit
enhancement for our securitizations has been in the form of financial guaranty
insurance policies insuring the payment of principal and interest due on
the
asset-backed securities. Agreements with our financial guaranty insurance
providers provide that if portfolio performance ratios (delinquency and net
charge-offs as a percentage of automobile contract outstanding) in a trust’s
pool of automobile contracts exceed certain targets, the over-collateralization
and spread account levels would be increased. Agreements with our financial
guaranty insurance providers also contain additional specified targeted
portfolio performance ratios. If, at any measurement date, the targeted
portfolio performance ratios with respect to any trust whose securities are
insured were to exceed these additional levels, provisions of the agreements
permit our financial guaranty insurance providers to terminate our servicing
rights to the automobile contracts sold to that trust.
Our
financial guaranty insurance providers are not required to insure our future
securitizations, and there can be no assurance that they will continue to
do so.
In addition, a downgrading of any of our financial guaranty insurance providers’
credit ratings or the inability to structure alternative credit enhancements,
such as senior subordinated transactions, for our securitization program
could
result in higher interest costs for our future securitizations and larger
initial and/or target credit enhancement requirements. The absence of a
financial guaranty insurance policy may also impair the marketability of
our
securitizations.
The
following table lists each of our securitizations and its remaining balance
as
of September 30, 2008.
(Dollars
in thousands)
|
Issue
Number
|
|
Issuance Date
|
|
Original
Balance
|
|
Current
Balance
Class A-1
|
|
Interest
Rate
|
|
Current
Balance
Class A-2
|
|
Interest
Rate
|
|
Current
Balance
Class A-3
|
|
Interest
Rate
|
|
Total
Current
Balance
|
|
Current
Receivables
Pledged
|
|
Surety
Costs(1)
|
|
Back-up
Servicing
Fees
|
|
|
2005A
|
|
|
April 14, 2005
|
|
|
195,000
|
|
|
—
|
|
|
3.12
|
%
|
|
—
|
|
|
3.85
|
%
|
|
12,867
|
|
|
4.84
|
%
|
|
12,867
|
|
|
13,798
|
|
|
0.43
|
%
|
|
0.035
|
%
|
|
2005B
|
|
|
November 10, 2005
|
|
|
225,000
|
|
|
—
|
|
|
4.28
|
%
|
|
—
|
|
|
4.82
|
%
|
|
29,991
|
|
|
4.98
|
%
|
|
29,991
|
|
|
33,630
|
|
|
0.41
|
%
|
|
0.035
|
%
|
|
2006A
|
|
|
June
15, 2006
|
|
|
242,000
|
|
|
—
|
|
|
5.27
|
%
|
|
—
|
|
|
5.46
|
%
|
|
56,842
|
|
|
5.49
|
%
|
|
56,842
|
|
|
62,296
|
|
|
0.39
|
%
|
|
0.035
|
%
|
|
2006B
|
|
|
December 14, 2006
|
|
|
250,000
|
|
|
—
|
|
|
5.34
|
%
|
|
—
|
|
|
5.15
|
%
|
|
86,065
|
|
|
5.01
|
%
|
|
86,065
|
|
|
94,976
|
|
|
0.38
|
%
|
|
0.035
|
%
|
|
2007A
|
|
|
June
14, 2007
|
|
|
250,000
|
|
|
—
|
|
|
5.33
|
%
|
|
26,676
|
|
|
5.46
|
%
|
|
99,000
|
|
|
5.53
|
%
|
|
125,676
|
|
|
139,790
|
|
|
0.37
|
%
|
|
0.032
|
%
|
|
2007B
|
|
|
November 8, 2007
|
|
|
250,000
|
|
|
—
|
|
|
4.99
|
%
|
|
58,787
|
|
|
5.75
|
%
|
|
99,000
|
|
|
6.15
|
%
|
|
157,787
|
|
|
175,641
|
|
|
0.45
|
%
|
|
0.035
|
%
|
|
|
|
|
|
|
$
|
1,412,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
469,228
|
|
$
|
520,131
|
|
|
|
|
|
|
|
(1)
Related to premiums on financial guaranty insurance policies.
There
is
an average of $1.0 million in underwriting and issuance costs associated
with
each securitization transaction, which is amortized over the term of the
securitizations.
As
of
September 30, 2008, we were in compliance with all terms of the financial
covenants related to our securitization transactions. However, there are
two
non-financial covenants under the various financial guaranty insurance policies
for the securitizations for which we are seeking permanent waivers. We have
obtained temporary waivers from the insurance providers that insure our
outstanding securitizations regarding the approval of the appointment of
Mr.
James Vagim as our chief executive officer and have also obtained temporary
waivers regarding a covenant that we maintain a warehouse facility. We are
continuing discussions with the insurance providers to obtain permanent waivers,
but there is no assurance we will obtain such waivers. If we are unable to
obtain permanent waivers or continued temporary waivers for both these items,
then each insurance provider may elect to enforce the various rights and
remedies that are governed by the different transaction documents for each
securitization such as terminating our servicing rights.
Warehouse
Facility
On
August
22, 2008, we restructured our $300 million warehouse facility
,
which
we have historically used to fund our automobile finance operations to purchase
automobile contracts pending securitization
.
As
part
of the restructuring, which effectively extinguished the existing warehouse
facility, the Company incurred a fee payable in the amount of $7.3 million.
The
fee has been recorded as part of non-recurring charges during the quarter
ended
September 30, 2008.
The
restructuring continued the revolving nature of the warehouse facility through
its previously scheduled maturity of October 16, 2008. Subsequently, the
credit
facility converted to a term loan for an additional one-year term, which
amortizes pursuant to a pre-determined schedule, providing that the Company
will
pay all amounts owed under the credit facility by October 16, 2009.
As
a
result, we are unable to access further advances under the newly converted
term
loan. Management is currently pursuing and evaluating alternative sources
of
financing and is also considering selling loans on a whole-loan basis. At
this
time, there is no assurance we will be able to arrange for other types of
interim financing or be able to sell receivables on a whole-loan basis in
the
future.
Under
the
previous terms of the warehouse facility, our indirect subsidiary, UFC had
historically obtained advances on a revolving basis by issuing notes to the
participating lenders and pledging for each advance a portfolio of automobile
contracts. UFC purchases the automobile contracts from UACC and UACC services
the automobile contracts, which are held by a custodian. UPFC provides an
absolute and unconditional and irrevocable guaranty of the full and punctual
payment and performance, of certain liabilities, agreements and other
obligations of UACC and UABO in connection with the warehouse facility. Although
the warehouse lenders have expressed their intention that UACC continue to
service the automobile contracts pledged to the warehouse facility through
UACC’s decentralized branches, the warehouse facility, as amended, provides that
UACC will act as servicer on a month-to-month basis for the automobile contracts
pledged to the warehouse facility. UACC’s servicing rights automatically expire
each month, unless extended by the warehouse lenders in their sole and absolute
good faith discretion.
In
addition, we are required to hold certain funds in restricted cash accounts
to
provide additional collateral for borrowings under the warehouse facility.
In
the event that we fail to satisfy certain covenants in the sale and servicing
agreement requiring minimum financial ratios, asset quality, and portfolio
performance ratios (portfolio net loss and delinquency ratios and pool level
cumulative net loss ratios), we could be required to increase the amount
of
funds that we hold in restricted cash. Failure to meet any of these covenants
could also result in an event of default under the warehouse facility. If
an
event of default occurs under the warehouse facility, the lender could elect
to
declare all amounts outstanding under the facility to be immediately due
and
payable, enforce the interest against collateral pledged under the agreement
or
restrict our ability to obtain additional borrowings under the facility.
We were
in compliance with the terms of such financial covenants as of September
30,
2008.
Residual
Credit Facility
On
January 24, 2007, we closed a $26 million variable rate residual credit
facility. The facility is secured by eligible residual interests in previously
securitized pools of automobile receivables and certain securities issued
by
UARC, UAFC, and UFC. We had provided an absolute and unconditional and
irrevocable guaranty of the full and punctual payment and performance, of
all
liabilities, agreements and other obligations of UARC, UAFC, and UFC under
the
residual credit facility. This facility expired on January 24, 2008.
Share
Repurchase Program
On
June 27, 2006, our Board of Directors approved a share repurchase program
and authorized us to repurchase up to 500,000 shares of our outstanding common
stock from time to time in the open market or in private transactions in
accordance with the provisions of applicable state and federal law, including,
without limitation, Rule 10b-18 promulgated under the Securities Exchange
Act of
1934, as amended. On August 4, 2006, our Board of Directors approved an
increase in the aggregate number of shares that we may repurchase pursuant
to
the previously announced share repurchase program from 500,000 shares to
1,500,000 shares. On December 21, 2006, our Board of Directors approved a
second increase in the aggregate number of shares of our outstanding common
stock that we may repurchase pursuant to the previously announced share
repurchase program from 1,500,000 shares to 3,500,000 shares. We repurchased
1,013,213 shares of our common stock for an average price of $12.98 per share
for an aggregate purchase price of $13.2 million during the nine months ended
September 30, 2007. In total we have repurchased 2,089,738 shares of our
common
stock for an average price of $15.58 per share for an aggregate purchase
price
of $32.6 million. We did not repurchase any shares of our common stock during
the nine months ended September 30, 2008.
Subordinated
Debentures
On
July 31, 2003, the Company issued trust preferred securities of $10.0
million through a subsidiary UPFC Trust I. The Trust issuer is a “100% owned
finance subsidiary” of the Company and the Company “fully and unconditionally”
guaranteed the securities. The Company will pay interest on these funds at
a
rate equal to the three month LIBOR plus 3.05%, variable quarterly, and the
rate
was 5.84% as of September 30, 2008. The final maturity of these securities
is 30
years, however, they can be called at par any time after July 31, 2008 at
the option of the Company.
Aggregate
Contractual Obligations
The
following table provides the amounts due under specified obligations for
the
periods indicated as of September 30, 2008.
|
|
|
Less than
1 Year
|
|
1 Year
to 3 Years
|
|
3 Years
to 5 Years
|
|
More Than
5 Years
|
|
Total
|
|
|
|
|
(Dollars in thousands)
|
|
|
Warehouse line of credit
|
|
$
|
237,378
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
237,378
|
|
|
Securitization
notes payable
|
|
|
219,209
|
|
|
215,401
|
|
|
34,618
|
|
|
—
|
|
|
469,228
|
|
|
Operating
lease obligations
|
|
|
5,846
|
|
|
10,311
|
|
|
4,600
|
|
|
124
|
|
|
20,881
|
|
|
Junior
subordinated debentures
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
10,310
|
|
|
10,310
|
|
|
Total
|
|
$
|
462,433
|
|
$
|
225,712
|
|
$
|
39,218
|
|
$
|
10,434
|
|
$
|
737,797
|
|
The
obligations are categorized by their contractual due dates, except
securitization borrowings that are categorized by the expected repayment
dates.
We may, at our option, prepay the junior subordinated debentures prior to
their
maturity date. Furthermore, the actual payment of certain current liabilities
may be deferred into future periods.
Selected
Financial Data
|
(Dollars
in thousands)
|
|
At or For the
Three Months Ended
|
|
At or For the
Nine Months Ended
|
|
|
|
|
September 30,
2008
|
|
September 30,
2007
|
|
September 30,
2008
|
|
September 30,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contracts
purchased
|
|
$
|
38,136
|
|
$
|
149,294
|
|
$
|
266,574
|
|
$
|
484,741
|
|
|
Contracts
outstanding
|
|
$
|
836,792
|
|
$
|
944,101
|
|
$
|
836,792
|
|
$
|
944,101
|
|
|
Unearned
acquisition discounts
|
|
$
|
(35,775
|
)
|
$
|
(45,728
|
)
|
$
|
(35,775
|
)
|
$
|
(45,728
|
)
|
|
Average
loan balance
|
|
$
|
884,433
|
|
$
|
934,334
|
|
$
|
910,319
|
|
$
|
887,548
|
|
|
Unearned
acquisition discounts to gross loans
|
|
|
4.28
|
%
|
|
4.84
|
%
|
|
4.28
|
%
|
|
4.84
|
%
|
|
Average
percentage rate to borrowers
|
|
|
22.72
|
%
|
|
22.62
|
%
|
|
22.72
|
%
|
|
22.62
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan
Quality Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses
|
|
$
|
(47,800
|
)
|
$
|
(46,050
|
)
|
$
|
(47,800
|
)
|
$
|
(46,050
|
)
|
|
Allowance
for loan losses to gross loans net of unearned acquisition
discounts
|
|
|
5.97
|
%
|
|
5.13
|
%
|
|
5.97
|
%
|
|
5.13
|
%
|
|
Delinquencies
(% of net contracts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31-60
days
|
|
|
1.13
|
%
|
|
0.71
|
%
|
|
1.13
|
%
|
|
0.71
|
%
|
|
61-90
days
|
|
|
0.29
|
%
|
|
0.28
|
%
|
|
0.29
|
%
|
|
0.28
|
%
|
|
90+
days
|
|
|
0.15
|
%
|
|
0.18
|
%
|
|
0.15
|
%
|
|
0.18
|
%
|
|
Total
|
|
|
1.57
|
%
|
|
1.17
|
%
|
|
1.57
|
%
|
|
1.17
|
%
|
|
Repossessions
over 30 days past due (% of net contracts)
|
|
|
1.08
|
%
|
|
0.76
|
%
|
|
1.08
|
%
|
|
0.76
|
%
|
|
Annualized
net charge-offs to average loans
(1)
|
|
|
9.14
|
%
|
|
6.66
|
%
|
|
7.65
|
%
|
|
5.80
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of branches
|
|
|
79
|
|
|
142
|
|
|
79
|
|
|
142
|
|
|
Number
of employees
|
|
|
750
|
|
|
1,095
|
|
|
750
|
|
|
1,095
|
|
|
Interest
income
|
|
$
|
54,763
|
|
$
|
59,726
|
|
$
|
170,859
|
|
$
|
170,005
|
|
|
Interest
expense
|
|
$
|
13,148
|
|
$
|
12,532
|
|
$
|
37,227
|
|
$
|
34,647
|
|
|
Interest
margin
|
|
$
|
41,615
|
|
$
|
47,194
|
|
$
|
133,632
|
|
$
|
135,358
|
|
|
Net
interest margin as a percentage of interest income
|
|
|
75.99
|
%
|
|
79.02
|
%
|
|
78.21
|
%
|
|
79.62
|
%
|
|
Net
interest margin as a percentage of average loans
(1)
|
|
|
18.72
|
%
|
|
20.04
|
%
|
|
19.61
|
%
|
|
20.39
|
%
|
|
Non-interest
expense to average loans
(1)
|
|
|
15.25
|
%
|
|
10.08
|
%
|
|
12.55
|
%
|
|
10.77
|
%
|
|
Non-interest
expense to average loans
(2)
|
|
|
8.94
|
%
|
|
10.08
|
%
|
|
9.94
|
%
|
|
10.77
|
%
|
|
Return
on average assets
(1)
|
|
|
(2.74
|
)%
|
|
1.03
|
%
|
|
(0.16
|
)%
|
|
1.45
|
%
|
|
Return
on average shareholders’ equity
(1)
|
|
|
(15.59
|
)%
|
|
6.46
|
%
|
|
(0.94
|
)%
|
|
8.72
|
%
|
|
Consolidated
capital to assets ratio
|
|
|
17.74
|
%
|
|
16.01
|
%
|
|
17.74
|
%
|
|
16.01
|
%
|
(1)
Quarterly information is annualized for comparability with full year
information.
(2)
Excluding restructuring charges.
Results
of Operations
Comparison
of Operating Results for the three Months Ended September 30, 2008 and 2007
General
For
the
quarter ended September 30, 2008, we reported net loss of $6.5 million, compared
to net income of $2.6 million for the same period a year ago. Interest income
decreased 8.2% to $54.8 million for the quarter ended September 30, 2008
from
$59.7 million for the same period a year ago. We reported net loss of $0.41
per
diluted share for the quarter ended September 30, 2008 compared to net income
of
$0.16 per diluted share for the same period a year ago. The reported net
income
for the quarter ended September 30, 2008 includes an after tax charge of
$8.9
million or $0.56 per diluted share for restructuring charges associated with
the
closure of 27 branches in the third quarter of 2008 and other non-recurring
charges.
Interest
income decreased 8.2% to $54.8 million for the three months ended September
30,
2008 from $59.7 million for the same period a year ago due to a decrease
in
average automobile contracts outstanding of $49.9 million. Automobile contracts
purchased decreased $111.2 million to $38.1 million for the three months
ended
September 30, 2008 from $149.3 million for the same period a year ago. This
decrease was the result of our strategy of downsizing our operations, suspending
new loan originations and reducing our branch footprint in order to lower
expenses and meet liquidity needs. During the three months ended September
30,
2008, we closed an additional 27 branches bringing our total number of operating
branches to 79 in 33 states.
Interest
Income
Interest
income decreased by 8.2% to $54.8 million for the three months ended September
30, 2008 from $59.7 million for the same period a year ago due primarily
to a
decrease in average loan outstanding as a result of our strategy of downsizing
operations, suspending new loan originations and reducing our branch footprint
in order to lower expenses and meet required liquidity needs.
Interest
Expense
Interest
expense increased to $13.1 million for the three months ended September 30,
2008
from $12.5 million for the same period a year ago
due
primarily to higher market interest rates on the warehouse facility. As a
result, net interest margin decreased from 79.0% for the quarter ended September
30, 2007 to 76.0% for the quarter ended September 30, 2008.
Provision
and Allowance for Loan Losses
Provisions
for loan losses are charged to income to bring our allowance for loan losses
to
a level which management considers adequate to absorb probable credit losses
inherent in the portfolio of automobile loans. The provision for loan losses
recorded in the three months ended September 30, 2008 and 2007 reflects inherent
losses on receivables originated during those periods and changes in the
amount
of inherent losses on receivables originated in prior periods. The provision
for
loan losses decreased to $18.8 million for the three months ended September
30,
2008 compared with $20.0 million for the same period a year ago. The
decrease in the provision for loan losses was due primarily to a $49.9 million
decrease in average automobile contracts offset by an increase in the annualized
charge-off rate to 9.14% for the three months ended September 30, 2008 compared
to 6.66% for the same period a year ago.
The
increase in our annualized net charge-off rates was the result of increased
defaults due to the overall deteriorating economic environment and the adverse
effect of a smaller denominator (used in the computation) as a result of
a
declining automobile loan portfolio balance.
The
total
allowance for loan losses was $47.8 million at September 30, 2008 compared
with
$46.1 million at September 30, 2007, representing 5.97% of automobile contracts,
less unearned acquisition discounts, at September 30, 2008 and 5.13% at
September 30, 2007. The increase in the allowance for loan losses was due
primarily to an increase in the loss rate within the portfolio.
A
provision for loan losses is charged to operations based on our regular
evaluation of the adequacy of the allowance for loan losses. While management
believes it has adequately provided for losses and does not expect any material
loss on its loans in excess of allowances already recorded, no assurance
can be
given that economic or other market conditions or other circumstances will
not
result in increased losses in the loan portfolio.
For
further information, see “—Critical Accounting Policies.”
Non-interest
Income
Non-interest
income increased $0.4 million to $0.9 million for the three months ended
September 30, 2008 from $0.5 million for the same period a year ago. The
increase was primarily the result of higher fee income related to collection
activities.
Non-interest
Expense
Non-interest
expense increased to $33.9 million for the three months ended September 30,
2008
from $23.7 million for the same period a year ago. The increase in non-interest
expense was due to a pretax restructuring charge of $4.1 million ($2.6 million
after tax) associated with the closure of 27 branches. The restructuring
charge
included severance, fixed asset write-offs, closure and post-closure costs
and a
$1.8 million reserve for estimated future lease obligations. The other
non-recurring charge of $9.9 million ($6.3 million after tax) was mainly
due to
$7.3 million fee payable on the exit from the warehouse facility and $2.6
million associated with professional fees paid on discontinued financing
transactions. Non-interest expense, excluding the restructuring charges and
other non-recurring charges as a percentage of average loans dropped to 8.9%
for
the three months ended September 30, 2008 from 10.1% for the same period
a year
ago. Compensation and benefits decreased to $13.0 million for the three months
ended September 30, 2008 from $15.1 million for the same period a year ago
due
primarily to branch closures during the past twelve months.
Income
Taxes
Income
tax benefit was $3.8 million for the three months ended September 30, 2008.
Income tax expense was $1.3 million for the same period a year ago. Income
tax
expense is based upon the estimated effective income tax rate that we expect
to
realize for the year ending December 31, 2008.
Comparison
of Operating Results for the Nine Months Ended September 30, 2008 and 2007
General
For
the
nine months ended September 30, 2008, we reported net loss of $1.1 million,
compared to net income of $10.2 million for the same period a year ago. Interest
income increased 0.5% to $170.9 million for the nine months ended September
30,
2008 from $170.0 million for the same period a year ago. We reported net
loss of
$0.07 per diluted share for the nine months ended September 30, 2008 compared
to
net income of $0.62 per diluted share for the same period a year ago. The
reported net loss for the nine months ended September 30, 2008 includes an
after
tax charge of $13.2 million or $0.84 per diluted share for restructuring
charges
associated with the closure of 63 branches during the nine months ended
September 30, 2008 and other non-recurring charges.
Interest
income increased 0.5% to $170.9 million for the nine months ended September
30,
2008 from $170.0 million for the same period a year ago due primarily to
an
increase in average loan receivable outstanding during the period of $22.8
million.
Interest
Income
Interest
income increased 0.5% to $170.9 million for the nine months ended September
30,
2008 from $170.0 million for the same period a year ago. Interest income
on
loans represents finance charges taken into earnings as well as the accretion
of
the acquisition discount fee on loans acquired.
Interest
Expense
Interest
expense increased 8.4% to $37.2 million for the nine months ended September
30,
2008 from $34.6 million for the same period a year ago. The average interest
rate increased to 6.31% for the nine months ended September 30, 2008 from
5.99%
for the same period a year ago. The increase was the result of higher market
interest rates on the warehouse facility, coupled with pay down of lower
priced
securitizations.
Provision
and Allowance for Loan Losses
Provisions
for loan losses are charged to income to bring our allowance for loan losses
to
a level which management considers adequate to absorb probable credit losses
inherent in the portfolio of automobile loans. The provision for loan losses
recorded in the nine months ended September 30, 2008 and 2007 reflects inherent
losses on receivables originated during those periods and changes in the
amount
of inherent losses on receivables originated in prior periods. The provision
for
loan losses increased to $51.5 million for the nine months ended September
30,
2008 compared with $48.5 million for the same period a year ago. The
increase in the provision for loan losses was due primarily to an increase
in
the annualized charge-off rate to 7.65% for the nine months ended September
30,
2008 compared to 5.80% for the same period a year ago. The increase in our
year-to-date annualized net charge-offs was the result of increased defaults
due
to the overall deteriorating economic environment, and continued employment
contraction. In addition, the loss rate is adversely impacted by declining
receivable balance and maturation of the portfolio as a result of lower
origination levels in 2008.
The
total
allowance for loan losses was $47.8 million at September 30, 2008 compared
with $46.1 million at September 30, 2007, representing 5.97% of net
receivables at September 30, 2008 and 5.13% at September 30, 2007. The
increase in allowance loan losses was due primarily to an increase in the
loss
rate within the portfolio.
A
provision for loan losses is charged to operations based on our regular
evaluation of the adequacy of the allowance for loan losses. While management
believes it has adequately provided for losses and does not expect any material
loss on its loans in excess of allowances already recorded, no assurance
can be
given that economic or other market conditions or other circumstances will
not
result in increased losses in the loan portfolio. For further information,
see
“—Critical Accounting Policies.”
Non-interest
Income
Non-interest
income increased to $1.9 million for the nine months ended September 30,
2008 from $1.3 million for the same period a year ago. The increase was
primarily the result of higher fee income related to collection
activities.
Non-interest
Expense
Non-interest
expense increased $14.0 million to $85.5 million for the nine months ended
September 30, 2008 from $71.5 million for the same period a year ago. The
increase in non-interest expense was due to a pretax restructuring charge
of
$7.9 million ($5.9 million after tax) for the nine months ended September
30,
2008 associated with the closure of 63 branches and other non-recurring charges
of $9.9 million ($7.3 million after tax) associated with fee payable on the
exit
from the warehouse facility and professional fees paid on discontinued financing
transactions. The restructuring charge included severance, fixed asset
write-offs, closure and post-closure costs and a $2.2 million reserve for
estimated future lease obligations. Non-interest expense, excluding the
restructuring charges and other non-recurring charges as a percentage of
average
loans dropped to 9.94% for the nine months ended September 30, 2008 from
10.77%
for the same period a year ago. Other non-interest expense decreased to $16.2
million for the nine months ended September 30, 2008 from $18.7 million for
the
same period a year ago due primarily to branch closures during the past twelve
months.
Income
Taxes
Income
tax benefit was $0.4 million for the nine months ended September 30, 2008
as compared to a provision of $6.5 million for the same period a year ago.
This
decrease in the provision of $6.9 million occurred primarily as a result
of a
$18.2 million decrease in income before income taxes. Income tax expense
in
interim reporting period is based upon the estimated effective income tax
rate
that we expect to realize for the full fiscal year ending December 31, 2008.
Financial
Condition
Comparison
of Financial Condition at September 30, 2008 and December 31, 2007
Total
assets decreased $82.6 million, to $894.6 million at September 30, 2008,
from
$977.2 million at December 31, 2007. The decrease resulted from a $81.7
million decrease in automobile loans to $801.0 million, net of unearned
acquisition discounts and unearned finance charges, at September 30, 2008
from
$882.7 million at December 31, 2007. On August 8, 2008, we entered into an
agreement to sell $10.0 million of receivables on a whole-loan basis with
servicing released.
Securitization
notes payable decreased to $469.2 million at September 30, 2008 from
$762.2 million at December 31, 2007 due to payments on the automobile
contracts backing the securitized borrowings.
Warehouse
line of credit borrowing increased to $237.4 million as of September 30,
2008
from $35.6 as of December 31, 2007 due to no securitization in
2008.
The
reduction in securitization notes payable and the increase in borrowings
under
the warehouse facility reflect the fact that we have not accessed the
securitization market with a transaction since November 2007.
Shareholders’
equity decreased to $158.7 million at September 30, 2008 from $159.3 million
at
December 31, 2007, primarily as a result of net loss of $1.1
million.
Cash
Flows
Comparison
of Cash Flows for the Nine Months Ended September 30, 2008 and
2007
Management
believes that the resources available to us will provide the needed capital
and
cash flows to fund ongoing operations and servicing capabilities for the
next
twelve months.
Cash
provided by operating activities was $44.3 million and $38.2 million for
the
nine months ended September 30, 2008 and 2007, respectively. Cash provided
by
operating activities increased for the nine months ended September 30, 2008
compared to the same period in 2007 due primarily to an increase in cash
received on interest income, partially offset by an increase in cash used
on
interest expense.
Cash
used
in investing activities was $48.2 million and $145.6 million for the nine
months
ended September 30, 2008 and 2007, respectively. Cash used in investing
activities decreased for the nine months ended September 30, 2008 compared
to
the same period in 2007 due to a decrease of $218.2 million in automobile
contracts purchased.
Cash
used
in financing activities was $92.9 million for nine months ended September
30,
2008. Cash provided by financing activities was $96.0 million for the nine
months ended September 30, 2007. Cash used in financing activities for the
nine
months ended September 30, 2008 reflects $236.1 million in proceeds from
the
warehouse line, $34.4 million in payments on the warehouse line of credit,
no
proceeds from securitization as we did not access the securitization market
during the nine months ended September 30, 2008 and $293.0 million in payments
on securitization notes payable. Cash provided by financing activities for
the
nine months ended September 30, 2007 reflects $442.6 million in proceeds
from
the warehouse line of credit, $249.4 million in payments on the warehouse
line
of credit, $250.0 million in proceeds from securitization and $330.6 million
in
payments on securitization notes payable.
Management
of Interest Rate Risk
The
principal objective of our interest rate risk management program is to evaluate
the interest rate risk inherent in our business activities, determine the
level
of appropriate risk given our operating environment, capital and liquidity
requirements and performance objectives and manage the risk consistent with
guidelines approved by our Board of Directors. Through such management, we
seek
to reduce the exposure of our operations to changes in interest rates.
Our
profits depend, in part, on the difference, or “spread,” between the effective
rate of interest received on the loans which we originate and the interest
rates
paid on our financing facilities, which can be adversely affected by movements
in interest rates.
The
automobile contracts purchased and held by us are written at fixed interest
rates and, accordingly, have interest rate risk while such contracts are
funded
with warehouse borrowings because the warehouse borrowings accrue interest
at a
variable rate. Prior to closing our first securitization, while we were shifting
the funding source of our automobile finance business to the public capital
markets through securitizations and warehouse facilities, we entered into
forward agreements in order to reduce the interest rate risk exposure on
our
securitization notes payable. The market value of these forward agreements
was
designed to respond inversely to changes in interest rate. Because of this
inverse relationship, we were able to effectively lock in a gross interest
rate
spread for our automobile contracts held in portfolio prior to the sale of
the
securitization notes payable. Losses related to these agreements were recorded
on our Consolidated Statements of Operations during 2004 because the derivative
transactions did not meet the accounting requirements to qualify for hedge
accounting. Accordingly, we did not amortize them over the life of the
automotive contracts.
Recent
Accounting Developments
See
Note
3 to the Consolidated Financial Statements included in Item 1 to this
Quarterly Report on Form 10-Q for a discussion of recent accounting
developments.
Item 3.
Quantitative
and Qualitative Disclosures About Market Risk.
See
“Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Management of Interest Rate Risk.”
Item 4.
Controls
and Procedures.
Disclosure
Controls and Procedures
Under
the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we conducted an evaluation
of our
disclosure controls and procedures, as such term is defined under Rules
13a-15(e) and 15d-15(e) under the Exchange Act. Based on this evaluation,
our
Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures were effective as of September 30, 2008.
Changes
in Internal Control Over Financial Reporting
There
was
no change in our internal control over financial reporting during the quarter
ended September 30, 2008 that has materially affected, or is reasonably likely
to materially affect, our internal control over financial reporting.
PART
II. OTHER INFORMATION
Item 1.
Legal
Proceedings.
Not
applicable
Item 1A.
Risk
Factors.
In
addition to the other risk factors and information set forth in this report,
you
should carefully consider the factors discussed in Part I, “Item 1A. Risk
Factors” in our Annual Report on Form 10-K for the year ended December 31,
2007, which could materially affect our business, financial condition or
future
results. The risks described in our Annual Report on Form 10-K are not the
only
risks facing the Company. Additional risks and uncertainties not currently
known
to us or that we currently deem to be immaterial also may materially adversely
affect our business, financial condition, operating results and/or cash flows.
Given recent developments in the asset-backed securities market and credit
markets in general experiencing unprecedented disruptions, along with the
amendment to our warehouse facility, we are adding the following risk
factors:
Risks
Related to Our Business
Our
access to liquidity sources has been negatively impacted by changes to our
warehouse facility, our inability to access the securitization market and
may be
further negatively impacted if market conditions persist.
While
we
actively maintain liquidity at least sufficient to cover all our maturing
debt
obligations or other forecasted funding requirements, our liquidity has been,
and may continue to be affected, by continued disruptions in the capital
markets
and an inability to access the securitizations markets. Our past primary
source
of operating liquidity came from a $300 million warehouse facility, which
we
have depended on to fund our automobile finance operations in order to finance
the purchase of automobile contracts pending securitization. We required
continued execution of securitization transactions in order to generate cash
proceeds for repayment of our warehouse facility and to create availability
to
purchase additional automobile contracts. However, due to unprecedented
disruptions in the asset-backed securities market and credit markets in general,
we have not accessed the securitization market with a transaction since November
2007 and our warehouse facility has recently converted to a term
loan.
Management
is currently
pursuing
and evaluating alternative sources of financing and is also considering selling
receivables on a whole-loan basis. At this time, there is no assurance we
will
be able to arrange for other types of interim financing or be able to sell
receivables on a whole-loan basis in the future. We also cannot forecast
if or
when market liquidity conditions will improve from current stresses, although
it
is our expectation that the existing turmoil in the financial and credit
markets
may continue to affect our performance. If we are unable to arrange for other
types of interim financing, then our results of operations, financial condition
and cash flows would be materially and adversely affected.
We
may be unable to manage consolidating our operations.
As
a
result of the continued disruptions in the capital markets, including the
uncertainty for use of securitizations as a source of financing, as well
as the
lack of available borrowing capacity under our warehouse facility for an
extended period of time, we determined to consolidate our operations and
reduce
our branch footprint in order to lower expenses and meet required liquidity
needs. We are vulnerable to a variety of business risks generally associated
with downsizing business operations including, among others, portfolio credit
deterioration, retaining and motivating qualified employees and successfully
managing the resulting consolidated branches. Our failure to effectively
manage
this consolidation, would have a material adverse effect on our financial
condition, results of operations and business prospects.
We
may be unable to obtain permanent waivers under our insurance agreement for
non-compliance with covenants.
As
of
September 30, 2008, we were in compliance with all terms of the financial
covenants related to our securitization transactions. However, there are
two
non-financial covenants under the various financial guaranty insurance policies
for the securitizations for which we are seeking permanent waivers. We are
currently operating under temporary waivers for these covenants. These two
covenants relate to the appointment of our chief executive officer and our
agreement to maintain a warehouse facility. If we are unable to obtain permanent
waivers for both these items or continuing temporary waivers, then each
insurance provider may elect to enforce the various rights and remedies that
are
governed by the different transaction documents for each securitization,
which
could have a material adverse effect on our financial condition, results
of
operations and business prospects.
Item 2.
Unregistered
Sales of Equity Securities and Use of Proceeds.
Issuer
Purchases of Equity Securities
During
the quarter ended September 30, 2008, we did not repurchase any shares of
our
common stock.
|
Period
|
|
Total
Number of
Shares
Purchased
|
|
Average
Price Paid
Per Share
|
|
Total Number of Shares
Purchased as Part of
Publicly Announced
Plan or Program
|
|
Approximate Number
of Shares That
May Yet Be
Purchased Under the
Plan or Program
|
|
|
July 1, 2008 to July 31,
2008
|
|
|
—
|
|
$
|
—
|
|
|
—
|
|
|
1,410,262
|
|
|
August
1, 2008 to August 31, 2008
|
|
|
—
|
|
$
|
—
|
|
|
—
|
|
|
1,410,262
|
|
|
September
1, 2008 to September 30, 2008
|
|
|
—
|
|
$
|
—
|
|
|
—
|
|
|
1,410,262
|
|
|
Total
|
|
|
—
|
|
$
|
—
|
|
|
—
|
|
|
1,410,262
|
|
On
June 27, 2006, our Board of Directors approved a share repurchase program
and authorized us to repurchase up to 500,000 shares of our outstanding common
stock from time to time in the open market or in private transactions in
accordance with the provisions of applicable state and federal law, including,
without limitation, Rule 10b-18 promulgated under the Securities Exchange
Act of
1934, as amended. On August 4, 2006, our Board of Directors approved an
increase in the aggregate number of shares of our outstanding common stock
that
we may repurchase pursuant to the previously announced share repurchase program
from 500,000 shares to 1,500,000 shares. On December 21, 2006, our Board of
Directors approved a second increase in the aggregate number of shares of
our
outstanding common stock that we may repurchase pursuant to the previously
announced share repurchase program from 1,500,000 shares to 3,500,000 shares.
This share repurchase program does not have an expiration date.
Item 3.
Defaults
Upon Senior Securities.
Not
applicable
Item 4.
Submission
of Matters to a Vote of Security Holders.
The
Company’s 2008 Annual Meeting of Shareholders was held on September 24, 2008. At
this meeting, the following matters were submitted to a vote of the Company’s
shareholders:
|
Proposal 1:
|
Elect
Three Directors
|
|
|
|
|
Proposal 2:
|
Ratify
Selection of Independent Public Accountants for
2008
|
Proposal
1. At this meeting, each of the following directors was elected to serve
on the
Company’s Board of Directors until the annual meeting of shareholders to be held
in 2010, or until election of his successor, or until he resigns:
|
|
|
Votes
For
|
|
Votes Withheld
|
|
|
Giles
H. Bateman
|
|
|
12,796,656
|
|
|
1,338,840
|
|
|
Mitchell
G. Lynn
|
|
|
12,796,656
|
|
|
1,338,840
|
|
|
James
Vagim
|
|
|
11,982,747
|
|
|
2,152,749
|
|
Other
directors continuing to serve on the Company’s Board of Directors until the
annual meeting of shareholders to be held in 2009, or until election of their
successors, or until they resign, are Guillermo Bron, Luis Maizel and Julie
Sullivan.
Proposal
2. At this meeting, the ratification of Grobstein, Horwath & Company
LLP as the Company’s independent auditors for the year ending December 31,
2008 was approved by the Company’s shareholders (with 14,114,077 votes cast for,
2,740 votes cast against, and 18,679 votes abstaining).
Item 5.
Other
Information.
Not
applicable
Item 6.
Exhibits.
|
10.1
|
|
Employment
Agreement dated August 13, 2008 by and between United PanAm Financial
Corp. and James Vagim.
|
|
10.2
|
|
Employment
Agreement dated August 13, 2008 by and between United PanAm Financial
Corp. and Ravi Gandhi.
|
|
10.3
|
|
Amended
and Restated Receivables Financing Agreement dated as of October
18, 2007,
2007 by and among UPFC Funding Corp., United Auto Credit Corporation,
United Auto Business Operations, LLC, United PanAm Financial Corp.,
the
Lenders from time to time parties thereto, the Agents from time
to time
parties thereto, CenterOne Financial Services LLC and Deutsche
Bank Trust
Company Americas.*
|
|
10.4
|
|
First
Amendment to Amended and Restated Receivables Financing Agreement
dated as
of February 8, 2008 by and among UPFC Funding Corp., United Auto
Credit
Corporation, United Auto Business Operations, LLC, United PanAm
Financial
Corp., the Lenders from time to time parties thereto, the Agents
from time
to time parties thereto, CenterOne Financial Services LLC, and
Deutsche
Bank Trust Company Americas.*
|
|
10.5
|
|
Second
Amendment to the Amended and Restated Receivables Financing Agreement
dated as of August 22, 2008 by and among UPFC Funding Corp., United
Auto
Credit Corporation, United Auto Business Operations, LLC, United
PanAm
Financial Corp., the Lenders from time to time parties thereto,
the Agents
from time to time parties thereto, CenterOne Financial Services
LLC and
Deutsche Bank Trust Company Americas.*
|
|
31.1
|
|
Certification
of Chief Executive Officer under Section 302 of the Sarbanes-Oxley
Act
2002.
|
|
|
|
|
|
31.2
|
|
Certification
of Chief Financial Officer under Section 302 of the Sarbanes-Oxley
Act
2002.
|
|
|
|
|
|
32.1
|
|
Certification
of Chief Executive Officer under Section 906 of the Sarbanes-Oxley
Act
2002.
|
|
|
|
|
|
32.2
|
|
Certification
of Chief Financial Officer under Section 906 of the Sarbanes-Oxley
Act
2002.
|
*
Filed in
redacted form pursuant to a request for confidential treatment filed separately
with the SEC.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
|
|
United
PanAm Financial Corp.
|
|
|
|
|
|
|
|
Date:
|
November
10, 2008
|
|
By:
|
/s
/ J
AMES
V
AGIM
|
|
|
|
|
|
James
Vagim
|
|
|
|
|
|
Chief
Executive Officer and President
|
|
|
|
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
|
|
|
November
10, 2008
|
|
By:
|
/s/ A
RASH
K
HAZEI
|
|
|
|
|
|
Arash
Khazei
|
|
|
|
|
|
Chief
Financial Officer and Executive Vice President
|
|
|
|
|
|
(Principal
Financial and Accounting
Officer)
|