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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
 
(Mark one)
 
x    
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) 
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2002
 
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) 
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                          to                         
 
Commission File Number 000-24051
 
 
UNITED PANAM FINANCIAL CORP.
(Exact name of Registrant as specified in its charter)
 
California
  
94-3211687
(State or other jurisdiction of
  
(I.R.S. Employer
incorporation or organization)
  
Identification Number)
 
3990 Westerly Place, Suite 200
Newport Beach, CA 92660
(Address of principal executive offices) (Zip Code)
 
(949) 224-1917
(Registrant’s telephone number, including area code)
 
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes    x    No    ¨
 
The number of shares outstanding of the Registrant’s Common Stock as of August 2, 2002 was 15,571,400.
 

UNITED PANAM FINANCIAL CORP.
 
FORM 10-Q
 
June 30, 2002
 
INDEX
 
         
Page
PART I.
   
FINANCIAL INFORMATION
     
Item 1.
   
Financial Statements (unaudited)
     
       
1
       
2
       
3
       
4
       
6
Item 2.
      
9
Item 3.
      
23
PART II.
   
OTHER INFORMATION
     
Item 1.
      
24
Item 2.
      
24
Item 3.
      
24
Item 4.
      
24
Item 5.
      
24
Item 6.
      
24
 

PART I. FINANCIAL INFORMATION
 
Item 1. Financial Statements.
 
UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
 
ASSETS
   
June 30,
2002
     
December 31,
2001
  
    
(In thousands, except share and per share data)
  
Cash and due from banks
   
$
14,928
 
   
$
5,428
 
Short term investments
   
 
29,449
 
   
 
135,267
 
    
  
Cash and cash equivalents
   
 
44,377
 
   
 
140,695
 
Securities available for sale, at fair value
   
 
456,996
 
   
 
284,837
 
Loans
   
 
296,285
 
   
 
252,858
 
Less allowance for loan losses
   
 
(20,473
)
   
 
(16,410
)
    
  
Loans, net
   
 
275,812
 
   
 
236,448
 
Loans held for sale
   
 
119
 
   
 
194
 
Premises and equipment, net
   
 
2,349
 
   
 
2,124
 
Federal Home Loan Bank stock, at cost
   
 
5,980
 
   
 
6,500
 
Accrued interest receivable
   
 
1,525
 
   
 
4,029
 
Other assets
   
 
9,949
 
   
 
14,746
 
    
  
Total assets
   
$
797,107
 
   
$
689,573
 
    
  
LIABILITIES AND SHAREHOLDERS’ EQUITY
              
Deposits
   
$
351,235
 
   
$
357,350
 
Federal Home Loan Bank advances
   
 
30,000
 
   
 
130,000
 
Repurchase agreements
   
 
326,889
 
   
 
114,776
 
Accrued expenses and other liabilities
   
 
7,935
 
   
 
11,781
 
    
  
Total liabilities
   
 
716,059
 
   
 
613,907
 
    
  
Common stock (no par value):
                  
Authorized, 30,000,000 shares
                  
Issued and outstanding, 15,571,400 shares at
                  
June 30, 2002 and December 31, 2001
   
 
63,630
 
   
 
63,630
 
Retained earnings
   
 
16,977
 
   
 
11,287
 
Unrealized gain on securities available for sale, net
   
 
441
 
   
 
749
 
    
  
Total shareholders’ equity
   
 
81,048
 
   
 
75,666
 
    
  
Total liabilities and shareholders’ equity
   
$
797,107
 
   
$
689,573
 
    
  
 
See accompanying notes to consolidated financial statements.

1

 
UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF OPERATIONS
 
(Unaudited)
 
    
Three Months
Ended June 30,
   
Six Months
Ended June 30,
    
2002
   
2001
   
2002
   
2001
    
(In thousands, except per share data)
Interest Income
                            
Loans
   
$
14,081
   
$
11,057
   
$
27,115
   
$
21,346
Securities
   
 
3,124
   
 
3,468
   
 
5,782
   
 
7,108
    
  
  
  
Total interest income
   
 
17,205
   
 
14,525
   
 
32,897
   
 
28,454
    
  
  
  
Interest Expense
                            
Deposits
   
 
3,115
   
 
4,811
   
 
6,348
   
 
9,831
Federal Home Loan Bank advances
   
 
215
   
 
393
   
 
784
   
 
907
Repurchase agreements
   
 
1,107
   
 
32
   
 
1,300
   
 
32
    
  
  
  
Total interest expense
   
 
4,437
   
 
5,236
   
 
8,432
   
 
10,770
    
  
  
  
Net interest income
   
 
12,768
   
 
9,289
   
 
24,465
   
 
17,684
Provision for loan losses
   
 
99
   
 
124
   
 
183
   
 
168
    
  
  
  
Net interest income after provision for loan losses
   
 
12,669
   
 
9,165
   
 
24,282
   
 
17,516
    
  
  
  
Non-interest Income
                            
Net gain on sale of securities
   
 
—  
   
 
—  
   
 
61
   
 
—  
Net gain on sale of loans
   
 
—  
   
 
1250
   
 
—  
   
 
1,607
Service charges and fees
   
 
197
   
 
168
   
 
388
   
 
333
Loan related charges and fees
   
 
71
   
 
66
   
 
156
   
 
141
Other income
   
 
32
   
 
34
   
 
61
   
 
67
    
  
  
  
Total non-interest income
   
 
300
   
 
1,518
   
 
666
   
 
2,148
    
  
  
  
Non-interest Expense
                            
Compensation and benefits
   
 
4,971
   
 
5,152
   
 
9,780
   
 
8,861
Occupancy
   
 
895
   
 
753
   
 
1,770
   
 
1,517
Other
   
 
2,126
   
 
1,726
   
 
4,322
   
 
3,705
    
  
  
  
Total non-interest expense
   
 
7,992
   
 
7,631
   
 
15,872
   
 
14,083
    
  
  
  
Income before income taxes and cumulative effect of change in accounting principle
   
 
4,977
   
 
3,052
   
 
9,076
   
 
5,581
Income taxes
   
 
1,953
   
 
1,190
   
 
3,492
   
 
2,175
    
  
  
  
Income before cumulative effect of change in accounting principle
   
 
3,024
   
 
1,862
   
 
5,584
   
 
3,406
    
  
  
  
Cumulative effect of change in accounting principle net of tax
   
 
—  
   
 
—  
   
 
106
   
 
—  
    
  
  
  
Net income
   
$
3,024
   
$
1,862
   
 
5,690
   
$
3,406
    
  
  
  
Earnings per share—basic:
                            
Income before cumulative effect of change in accounting principle
   
$
0.19
   
$
0.12
   
$
0.36
   
$
0.21
    
  
  
  
Cumulative effect of change in accounting principle
   
$
—  
   
$
—  
   
$
0.01
   
$
—  
    
  
  
  
Net income
   
$
0.19
   
$
0.12
   
$
0.37
   
$
0.21
    
  
  
  
Weighted average shares outstanding
   
 
15,571
   
 
16,169
   
 
15,571
   
 
16,161
    
  
  
  
Earnings per share-diluted:
                            
Income before cumulative effect of change in accounting principle
   
$
0.17
   
$
0.11
   
$
0.32
   
$
0.21
    
  
  
  
Cumulative effect of change in accounting principle
   
$
—  
   
$
—  
   
$
0.01
   
$
—  
    
  
  
  
Net income
   
$
0.17
   
$
0.11
   
$
0.33
   
$
0.21
    
  
  
  
Weighted average shares outstanding
   
 
17,626
   
 
17,380
   
 
17,500
   
 
16,613
    
  
  
  
 
See accompanying notes to consolidated financial statements

2

UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
(Unaudited)
 
    
Three Months
Ended June 30,
   
Six Months
Ended June 30,
    
2002
   
2001
   
2002
     
2001
    
(Dollars in thousands)
Net income
   
$
3,024
   
$
1,862
   
$
5,690
 
   
$
3,406
Other comprehensive income, net of tax:
                              
Unrealized gain (loss) on securities available for sale
   
 
254
   
 
141
   
 
(308
)
   
 
286
    
  
  
  
                               
Comprehensive income
   
$
3,278
   
$
2,003
   
$
5,382
 
   
$
3,692
    
  
  
  
                               
 
See accompanying notes to consolidated financial statements

3

 
UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(Unaudited)
 
    
Six Months
Ended June 30,
  
    
2002
     
2001
  
    
(Dollars in thousands)
  
Cash Flows from Operating Activities
                  
Net income
   
$
5,690
 
   
$
3,406
 
Adjustments to reconcile net income to net cash provided by operating activities:
                  
Compensation expense for converting option plan
   
 
—  
 
   
 
1,369
 
Sale of loans held for sale
   
 
—  
 
   
 
16,194
 
Gain on sale of securities
   
 
(61
)
   
 
—  
 
Provision for loan losses
   
 
183
 
   
 
168
 
Gain on sale of mortgage loans
   
 
—  
 
   
 
(1,609
)
Depreciation and amortization
   
 
425
 
   
 
443
 
FHLB stock dividend
   
 
(81
)
   
 
(100
)
Decrease in residual interest in securitizations
   
 
—  
 
   
 
8,861
 
Decrease (increase) in accrued interest receivable and other assets
   
 
2,504
 
   
 
(2,285
)
Decrease in deferred taxes
   
 
4,994
 
   
 
1,486
 
Decrease in accrued expenses and other liabilities
   
 
(3,846
)
   
 
(3,115
)
Amortization of premiums (discounts) on securities
   
 
2,598
 
   
 
(270
)
Other net
   
 
—  
 
   
 
(41
)
    
  
Net cash provided by operating activities
   
 
12,406
 
   
 
24,507
 
    
  
Cash Flows from Investing Activities
                  
Proceeds from maturities of investment securities
   
 
188,844
 
   
 
220,398
 
Purchase of investment securities
   
 
(394,052
)
   
 
(206,141
)
Proceeds from sales of securities
   
 
30,007
 
   
 
—  
 
Repayments of mortgage loans
   
 
74
 
   
 
849
 
Originations and purchases, net of repayments, of non-mortgage loans
   
 
(39,546
)
   
 
(30,852
)
Purchase of premises and equipment
   
 
(650
)
   
 
(675
)
Proceeds from sale (purchase) of FHLB stock, net
   
 
601
 
   
 
(500
)
Proceeds from sales of real estate owned
   
 
—  
 
   
 
860
 
Other, net
   
 
—  
 
   
 
(233
)
    
  
Net cash used in investing activities
   
 
(214,722
)
   
 
(16,294
)
    
  
Cash Flows from Financing Activities
                  
Issuance of capital stock
   
 
—  
 
   
 
24
 
Net (decrease) increase in deposits
   
 
(6,115
)
   
 
34,879
 
Repayment, net of proceeds, from FHLB advances
   
 
(100,000
)
   
 
(3,000
)
Proceeds, net of repayments, from repurchase agreements
   
 
212,113
 
   
 
74,183
 
    
  
Net cash provided by financing activities
   
 
105,998
 
   
 
106,086
 
    
  
Net (decrease) increase in cash and cash equivalents
   
 
(96,318
)
   
 
114,299
 
Cash and cash equivalents at beginning of period
   
 
140,695
 
   
 
42,592
 
    
  
Cash and cash equivalents at end of period
   
$
44,377
 
   
$
156,891
 
    
  
 
See accompanying notes to consolidated financial statements

4

 
UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
 
(Unaudited)
 
    
Six Months
Ended June 30,
    
2002
   
2001
    
(Dollars in thousands)
Supplemental Disclosures of Cash Flow Information
              
Cash paid for:
              
Interest
   
$
8,682
   
$
10,642
    
  
Taxes
   
$
798
   
$
1,046
    
  
Supplemental Schedule of Non-cash Investing and Financing
Activities
              
Acquisition of real estate owned through foreclosure of related mortgage loans
   
$
—  
   
$
36
    
  
Loans transferred to be held for sale
   
$
—  
   
$
14,187
    
  
 
 
 
 
See accompanying notes to consolidated financial statements
 

5

 
UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Three and Six Months Ended June 30, 2002 and 2001
(Unaudited)
 
1. Organization
 
United PanAm Financial Corp. (the “Company”) was incorporated in California on April 9, 1998 for the purpose of reincorporating its business in California, through the merger of United PanAm Financial Corp., a Delaware corporation (the “Predecessor”), into the Company. Unless the context indicates otherwise, all references herein to the “Company” include the Predecessor. The Company was originally organized as a holding company for Pan American Financial, Inc. (“PAFI”) and Pan American Bank, FSB (the “Bank”) to purchase certain assets and assume certain liabilities of Pan American Federal Savings Bank from the Resolution Trust Corporation (the “RTC”) on April 29, 1994. The Company, PAFI and the Bank are considered to be Hispanic owned. PAFI is a wholly owned subsidiary of the Company, and the Bank is a wholly owned subsidiary of PAFI.
 
2. Basis of Presentation
 
The accompanying unaudited consolidated financial statements include the accounts of United PanAm Financial Corp., Pan American Financial, Inc. and Pan American Bank, FSB. Substantially all of the Company’s revenues are derived from the operations of the Bank and they represent substantially all of the Company’s consolidated assets and liabilities as of June 30, 2002 and December 31, 2001. Significant inter-company accounts and transactions have been eliminated in consolidation.
 
These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the Company’s financial condition and results of operations for the interim periods presented in this Form 10-Q have been included. Operating results for the interim periods are not necessarily indicative of financial results for the full year. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2001.
 
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

6

 
3. Earnings Per Share From Continuing Operations
 
Basic EPS and diluted EPS are calculated as follows for the three and six months ended June 30, 2002 and 2001:
 
    
Three Months
Ended June 30,
   
Six Months
Ended June 30,
    
2002
   
2001
   
2002
   
2001
    
(In thousands, except per share amounts)
Earnings per share—basic:
                            
Income before cumulative effect of change in accounting principle
   
$
3,024
   
$
1,862
   
$
5,584
   
$
3,406
Net Income
   
$
3,024
   
$
1,862
   
$
5,690
   
$
3,406
    
  
  
  
Average common shares outstanding
   
 
15,571
   
 
16,169
   
 
15,571
   
 
16,161
    
  
  
  
Per share before cumulative effect of change in accounting principle
   
$
0.19
   
$
0.12
   
$
0.36
   
$
0.21
    
  
  
  
Earnings per share
   
$
0.19
   
$
0.12
   
$
0.37
   
$
0.21
    
  
  
  
Earnings per share—diluted:
                            
Income before cumulative effect of change in accounting principle
   
$
3,024
   
$
1,862
   
$
5,584
   
$
3,406
Net Income
   
$
3,024
   
$
1,862
   
$
5.690
   
$
3,406
    
  
  
  
Average common shares outstanding
   
 
15.571
   
 
16,169
   
 
15,157
   
 
16,161
Add: Stock options
   
 
2,055
   
 
1,211
   
 
1,929
   
 
452
    
  
  
  
Average common shares outstanding—diluted
   
 
17,626
   
 
17,380
   
 
17,500
   
 
16,613
Per share before cumulative effect of change in accounting principle
   
$
0.17
   
$
0.11
   
$
0.32
   
$
0.21
    
  
  
  
Earnings per share
   
$
0.17
   
$
0.11
   
$
0.33
   
$
0.21
    
  
  
  
 
4. Accounting Pronouncements
 
In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations,” which requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair valued can be made. The associated asset retirement costs would be capitalized as part of the carrying amount of the long-lived asset and depreciated over the life of the asset. The liability is accreted at the end of each period through charges to operating expense. If the obligation is settled for other than the carrying amount of the liability, the Company will recognize a gain or loss on settlement. The provisions of SFAS No. 143 are effective for fiscal years beginning after June 15, 2002. Management does not expect the adoption of SFAS No 143 to have any material impact on the Company’s financial statements.
 
In August 2001, FASB issued Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS No. 144), which supersedes both FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of (SFAS No. 121) and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions (Opinion 30), for the disposal of a segment of a business (as previously defined in that Opinion). SFAS No. 144 retains the fundamental provisions in SFAS No. 121 for recognizing and measuring impairment losses on long-lived assets held for use and long-lived assets to be disposed of by sale, while also resolving significant implementation issues associated with SFAS No. 121. For example, SFAS No. 144 provides guidance on how a long-lived asset that is used as part of a group should be evaluated for impairment, establishes criteria for when a long-lived asset is held for sale, and prescribes the accounting for a long-lived asset that will be disposed of other than by sale. SFAS No. 144 retains the basic provisions of Opinion 30 on how to present discontinued operations in the income statement but broadens that presentation to include a component of an entity (rather than a segment of a business).
 
The Company adopted SFAS No. 144 on January 1, 2002. Management does not expect the adoption of SFAS No. 144 for long-lived assets held for use to have any material impact on the Company’s financial statements because the impairment assessment under SFAS No. 144 is largely unchanged from SFAS No. 121.

7

 
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections (SFAS No. 145). SFAS No. 145 will rescind SFAS No. 4 which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. As a result of SFAS No. 145, the criteria in APB Opinion No. 30, Reporting the Results of Operations Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions will now be used to classify those gains and losses. SFAS No. 64 amended SFAS No. 4, and is no longer necessary because SFAS No. 4 has been rescinded. The adoption of FASB 145 did not have any effect on the Company’s financial statements.
 
Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”), requires the Company to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS 146 replaces Emerging Issues Task Force (“EITF”) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” The provisions of SFAS 146 are to be applied prospectively to exit or disposal activities initiated after December 31, 2002.
 
5. Operating Segments
 
The Company has three reportable segments: auto finance, insurance premium finance and banking. The auto finance segment acquires, holds for investment and services nonprime retail automobile installment sales contracts generated by franchised and independent dealers of used automobiles. The insurance premium finance segment, through a contractual agreement, underwrites and finances automobile and commercial insurance premiums in California. The banking segment operates a four-branch federal savings bank and is the principal funding source for the Company’s auto and insurance premium finance segments.
 
The accounting policies of the segments are the same as those of the Company’s except for funds provided by the banking segment to the other operating segments which are accounted for at a predetermined transfer price (including certain overhead costs).
 
The Company’s reportable segments are strategic business units that offer different products and services. They are managed and reported upon separately within the Company.
 
    
At or For Three Months Ended June 30, 2002
    
Auto
Finance
   
Insurance
Premium Finance
   
Banking
     
Total
    
(In thousands)
Net interest income
   
$
9,579
   
$
603
   
$
2,586
 
   
$
12,768
Provision for loan losses
   
 
—  
   
 
99
   
 
—  
 
   
 
99
Non-interest income
   
 
88
   
 
139
   
 
73
 
   
 
300
Non-interest expense
   
 
6,381
   
 
55
   
 
1,556
 
   
 
7,992
    
  
  
  
Segment profit, pre-tax
   
$
3,286
   
$
588
   
$
1,103
 
   
$
4,977
    
  
  
  
Total assets
   
$
239,521
   
$
41,906
   
$
515,680
 
   
$
797,107
    
  
  
  
    
At or For Three Months Ended June 30, 2001
    
Auto
Finance
   
Insurance
Premium Finance
   
Banking
     
Total
    
(In thousands)
Net interest income
   
$
7,361
   
$
568
   
$
1,360
 
   
$
9,289
Provision for loan losses
   
 
  —
   
 
124
   
 
  —
 
   
 
124
Non-interest income
   
 
76
   
 
149
   
 
1,293
 
   
 
1,518
Non-interest expense
   
 
4,558
   
 
54
   
 
3,019
 
   
 
7,631
    
  
  
  
Segment profit (loss), pre-tax
   
$
2,879
   
$
539
   
$
(366
)
   
$
3,052
    
  
  
  
Total assets
   
$
175,891
   
$
35,152
   
$
386,752
 
   
$
597,795
    
  
  
  

8

 
    
At or For Six Months Ended June 30, 2002
    
Auto
Finance
   
Insurance
Premium Finance
   
Banking
     
Total
    
(In thousands)
Net interest income
   
$
18,510
   
$
1,143
   
$
4,812
 
   
$
24,465
Provision for loan losses
   
 
—  
   
 
183
   
 
—  
 
   
 
183
Non-interest income
   
 
183
   
 
271
   
 
212
 
   
 
666
Non-interest expense
   
 
12,316
   
 
105
   
 
3,451
 
   
 
15,872
    
  
  
  
Segment profit, pre-tax
   
$
6,377
   
$
1,126
   
$
1,573
 
   
$
9,076
    
  
  
  
Total assets
   
$
239,521
   
$
41,906
   
$
515,680
 
   
$
797,107
    
  
  
  
    
At or For Six Months Ended June 30, 2001
    
Auto
Finance
   
Insurance
Premium Finance
   
Banking
     
Total
    
(In thousands)
Net interest income
   
$
13,903
   
$
1,284
   
$
2,497
 
   
$
17,684
Provision for loan losses
   
 
—  
   
 
168
   
 
—  
 
   
 
168
Non-interest income
   
 
156
   
 
254
   
 
1,738
 
   
 
2,148
Non-interest expense
   
 
8,679
   
 
229
   
 
5,175
 
   
 
14,083
    
  
  
  
Segment profit (loss), pre-tax
   
$
5,380
   
$
1,141
   
$
(940
)
   
$
5,581
    
  
  
  
Total assets
   
$
175,891
   
$
35,152
   
$
386,752
 
   
$
597,795
    
  
  
  
 
For the reportable segment information presented, substantially all expenses are recorded directly to each industry segment.
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
Certain statements in this Annual Report on Form 10-Q, including statements regarding United PanAm Financial Corp.’s (the”Company”) strategies, plans, objectives, expectations and intentions, may include forward-looking information within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements involve certain risks and uncertainties that could cause actual results to differ materially from those expressed or implied in such forward-looking statements. Such risks and uncertainties include, but are not limited to, the following factors: our limited operating history; loans we made to credit-impaired borrowers; our need for additional sources of financing; concentration of our business in California; reliance on operational systems and controls and key employees; competitive pressure we face in the banking industry; changes in the interest rate environment; rapid growth of our businesses; general economic conditions; impact of inflation and changing prices; and other risks, some of which may be identified from time to time in our filings with the Securities and Exchange Commission (the “SEC”).
 
General
 
    The Company
 
The Company is a specialty finance company engaged primarily in originating and acquiring retail automobile installment sales contracts and insurance premium finance contracts financed by retail bank deposits. The Company markets to customers who generally cannot obtain financing from traditional lenders. These customers usually pay higher interest rates than those charged by traditional lenders to gain access to consumer financing. The Company has funded its operations to date principally through retail deposits, brokered deposits, Federal Home Loan Bank (“FHLB”) advances, and commercial repurchase agreements. The Company is a holding company for Pan American Bank, FSB, a federally chartered savings association (the”Bank”).
 
The Company commenced operations in 1994 by purchasing from the Resolution Trust Corporation (RTC) certain assets and assuming certain liabilities of the Bank’s predecessor, Pan American Federal Savings Bank. The Company has used the Bank as a base for expansion into its current specialty finance businesses. In

9

1995, the Company commenced its insurance premium finance business through an agreement with BPN Corporation (“BPN”) and in 1996, the Company commenced its automobile finance business.
 
    Automobile Finance
 
In 1996, the Bank commenced its automobile finance business through its subsidiary, United Auto Credit Corporation (“UACC”). UACC acquires, holds for investment and services nonprime retail automobile installment sales contracts (“auto contracts”) generated by franchised and independent dealers of used automobiles. UACC’s customers are considered “nonprime” because they typically have limited credit histories or credit histories that preclude them from obtaining loans through traditional sources. As UACC provides all marketing, origination, underwriting and servicing activities for its loans, income is generated from a combination of spread and non-interest income and is used to cover all operating costs, including compensation, occupancy and systems expense.
 
    Insurance Premium Finance
 
In May 1995, the Bank entered into an agreement with BPN under the name “ClassicPlan” (such business, “IPF”). Under this agreement, which commenced operations in September 1995, the Bank underwrites and finances private passenger automobile and small business insurance premiums in California and BPN markets the financing program and services the loans for the Bank. The Bank lends to individuals or small businesses for the purchase of single premium insurance policies and the Bank’s collateral is the unearned insurance premium held by the insurance company. The unearned portion of the insurance premium is refundable to IPF in the event the underlying insurance policy is canceled. The Company does not sell or have the risk of underwriting the underlying insurance policy.
 
As a result of BPN performing substantially all marketing and servicing activities, the Company’s role is primarily that of an underwriter and funder of loans. Therefore, IPF’s income is generated primarily on a spread basis, supplemented by non-interest income generated from late payment and returned check fees. The Bank uses this income to cover the costs of underwriting and loan administration, including compensation, occupancy and data processing expenses.
 
    The Bank
 
The Company currently funds its operations primarily through the Bank’s deposits; FHLB advances and repurchase agreements. As of June 30, 2002, the Bank was a four-branch federal savings bank with $351.2 million in deposits. The Bank generates spread income not only from loans originated or purchased by each of the Company’s principal businesses, but also from its securities portfolio and consumer loans originated by its retail branches. This income is supplemented by non-interest income from its branch banking activities (e.g., deposit service charges, safe deposit box fees) and is used to cover operating costs and other expenses.

10

 
Average Balance Sheets
 
The following table sets forth information relating to the Company for the three and six-month periods ended June 30, 2002 and 2001. The yields and costs are derived by dividing income or expense by the average balance of assets or liabilities allocated to continuing operations, respectively, for the periods shown. The yields and costs include fees, which are considered adjustments to yields.
 
    
Three Months Ended June 30,
  
    
2002
     
2001
  
    
Average
Balance(1)
   
Interest
   
Average
Yield/
Cost
     
Average
Balance(1)
   
Interest
   
Average
Yield/
Cost
  
         
(Dollars in thousands)
            
Assets
                                          
Interest earning assets
                                          
Securities
   
$
427,289
   
$
3,123
   
2.93
%
   
$
254,309
   
$
3,468
   
5.51
%
Mortgage loans, net(2)
   
 
132
   
 
—
   
—
 
   
 
2,079
   
 
46
   
8.85
%
IPF loans, net(3)
   
 
41,170
   
 
1,433
   
13.97
%
   
 
33,986
   
 
1,333
   
15.69
%
Automobile installment
contracts, net(4)
   
 
224,656
   
 
12,649
   
22.58
%
   
 
165,793
   
 
9,678
   
23.27
%
    
  
         
  
      
Total interest earning assets
   
 
693,247
   
 
17,205
   
9.96
%
   
 
456,167
   
 
14,525
   
12.74
%
           
                
      
Non-interest earning assets
   
 
37,168
                 
 
28,419
              
    
                
             
Total assets
   
$
730,415
                 
$
484,586
              
    
                
             
Liabilities and Equity
                                          
Interest bearing liabilities
                                          
Deposits
   
$
363,164
   
$
3,114
   
3.44
%
   
$
366,189
   
$
4,811
   
5.26
%
FHLB advances
   
 
40,198
   
 
215
   
2.14
%
   
 
31,970
   
 
393
   
4.92
%
Repurchase Agreements
   
 
235,279
   
 
1,108
   
1.89
%
   
 
2,317
   
 
32
   
5.35
%
    
  
         
  
      
Total interest bearing liabilities
   
 
638,641
   
 
4,437
   
2.79
%
   
 
400,476
   
 
5,236
   
5.23
%
           
         
  
      
Non-interest bearing liabilities
   
 
12,488
                 
 
11,906
              
    
                
             
Total liabilities
   
 
651,129
                 
 
412,382
              
Equity
   
 
79,286
                 
 
72,204
              
    
                
             
Total liabilities and equity
   
$
730,415
                 
$
484,586
              
    
                
             
Net interest income before provision for loan losses
          
$
12,768
                 
$
9,289
       
           
                
      
Net interest rate spread(5)
                 
7.17
%
                 
7.51
%
Net interest margin(6)
                 
7.39
%
                 
8.15
%
Ratio of interest earning assets to interest bearing liabilities
                 
109
%
                 
114
%
(1)
Average balances are computed on a monthly basis.
(2)
Net of allowance for loan losses; includes non-performing loans.
(3)
Net of allowance for loan losses; includes non-performing loans.
(4)
Net of unearned finance charges and allowance for loan losses; includes non-performing loans.
(5)
Net interest rate spread represents the difference between the yield on interest earning assets and the cost of interest bearing liabilities.
(6)
Net interest margin represents net interest income divided by average interest earning assets.

11

 
    
Six Months Ended June 30,
  
    
2002
     
2001
  
(Dollars in thousands)
   
Average
Balance(1)
   
Interest
     
Average Yield/ Cost
     
Average
Balance(1)
   
Interest
     
Average Yield/
Cost
  
    
  
    
  
  
    
Assets
                                              
Interest earning assets
                                              
Securities
   
$
375,636
   
$
5,782
     
3.10
%
   
$
248,264
   
$
7,108
     
5.75
%
Mortgage loans, net(2)
   
 
147
   
 
3
     
3.55
%
   
 
7,627
   
 
423
     
11.10
%
IPF loans, net(3)
   
 
40,243
   
 
2,762
     
13.86
%
   
 
33,992
   
 
2,655
     
15.62
%
Automobile installment contracts, net(4)
   
 
215,051
   
 
24,350
     
22.83
%
   
 
158,888
   
 
18,268
     
22.95
%
    
  
    
  
  
        
Total interest earning assets
   
 
631,077
   
 
32,897
     
10.51
%
   
 
448,771
   
 
28,454
     
12.68
%
    
  
    
  
  
        
Non-interest earning assets
   
 
35,923
                   
 
26,057
                
Total assets
   
$
667,000
                   
$
474,828
                
    
                  
               
Liabilities and Equity
                                              
Interest bearing liabilities
                                              
Deposits
   
$
364,445
   
$
6,348
     
3.51
%
   
$
358,195
   
$
9,831
     
5.49
%
FHLB advances
   
 
74,450
   
 
784
     
2.13
%
   
 
32,503
   
 
907
     
5.58
%
Repurchase agreements
   
 
137,465
   
 
1,300
     
1.91
%
   
 
1,158
   
 
32
     
5.35
%
    
  
    
  
  
        
Total interest bearing liabilities
   
 
576,360
   
 
8,432
     
2.95
%
   
 
391,856
   
 
10,770
     
5.50
%
    
  
    
  
  
        
Non-interest bearing liabilities
   
 
12,568
                   
 
11,820
                
    
                  
               
Total liabilities
   
 
588,928
                   
 
403,676
                
Equity
   
 
78,072
                   
 
71,152
                
Total liabilities and equity
   
$
667,000
                   
$
474,828
                
    
                  
               
Net interest income before provision for loan losses
          
$
24,465
                   
$
17,684
         
           
                  
        
Net interest rate spread(5)
                   
7.56
%
                   
7.18
%
Net interest margin(6)
                   
7.82
%
                   
7.88
%
Ratio of interest earning assets to interest bearing liabilities
                   
109
%
                   
115
%
(1)
Average balances are computed on a monthly basis.
(2)
Net of allowance for loan losses; includes non-performing loans.
(3)
Net of allowance for loan losses; includes non-performing loans.
(4)
Net of unearned finance charges and allowance for loan losses; includes non-performing loans.
(5)
Net interest rate spread represents the difference between the yield on interest earning assets and the cost of interest bearing liabilities.
(6)
Net interest margin represents net interest income divided by average interest earning assets.
 
Comparison of Operating Results for the Three Months Ended June 30, 2002 and June 30, 2001
 
    General
 
For the three months ended June 30, 2002, the Company reported income of $3.0 million or $.17 per diluted share; an increase of $1.1 million from $1.9 million or $.11 per diluted share for the comparable period a year ago.
 
The increase in net income was due primarily to a $3.5 million increase in net interest income to $12.8 million from $9.3 million in the second quarter of 2001, partially offset by a $1.2 million decrease in non-interest income. Net interest income was favorably impacted by the continued expansion and growth of the Company’s automobile finance business.
 
Auto contracts purchased, including unearned finance charges, increased $17.7 million to $77.2 million from $59.5 million for the three months ended June 30, 2001, as a result of our planned growth in the auto finance business. Insurance premium finance originations increased $5.4 million to $30.1 million from $24.7 million for the three months ended June 30, 2001.
 
    Interest Income
 
Interest income increased to $17.2 million from $14.5 million for the three months ended June 30, 2001, due primarily to a $237 million increase in average interest earning assets, partially offset by a .76% decrease in net interest margin. The largest growth components in average interest earning assets were in

12

investment securities, which increased by $173 million and automobile installment contracts, which increased by $59.5 million. The increase in investment securities reflects the need to increase assets to meet the 30% qualified thrift lender requirement of the Office of Thrift Supervision (“OTS”) while the increase in auto contracts resulted from the purchase of additional dealer contracts in existing and new markets consistent with planned growth.
 
The decline in net interest margin was due primarily to an increased concentration of lower yielding securities in the three months ended June 30, 2002 compared to the three months ended June 30, 2001. The yield on the average balance of short term investments and investment securities decreased from 5.5% to 2.9% for the 3 month periods ending June 30, 2001 and 2002, respectively.
 
    Interest Expense
 
Interest expense decreased from $5.2 million for the three months ended June 30, 2001 to $4.4 million for the three months ended June 30, 2002, due to a general decline in market interest rates, partially offset by a $238 million increase in average interest bearing liabilities. The largest components of average interest bearing liabilities were deposits of $363 million, repurchase agreements of $235 million and FHLB advances of $40 million. Repurchase agreements increased to $235 million from $2 million as of June 30, 2001 as a result of a corresponding increase in investment securities. The average cost of liabilities decreased from 5.23% for the three months ended June 30, 2001 to 2.79% for the comparable period in 2002, generally as a result of a decrease in market interest rates.
 
    Provision for Loan Losses
 
Provision for loan losses was $99,000 for the three months ended June 30, 2002 compared to $124,000 for the three months ended June 30, 2001. The provision for loan losses reflects estimated losses associated with the Company’s insurance premium finance business.
 
In addition to its provision for losses, the Company’s allowance for loan losses is also increased by its allocation of acquisition discounts related to the purchase of automobile installment contracts. The Company allocates the estimated amount of its acquisition discounts attributable to credit risk to the allowance for loan losses. At June 30, 2002, the Company was allocating 10.5% of acquisition discounts to allowance for loan losses.
 
The total allowance for loan losses was $20.5 million at June 30, 2002 compared with $16.4 million at June 30, 2001, representing 6.91% of loans at June 30, 2002 and 7.28% at June 30, 2001. Annualized net charge-offs to average loans were 5.5% for the three months ended June 30, 2002 compared with 3.9% for the three months ended June 30, 2001.
 
A provision for loan losses is charged to operations based on the Company’s regular evaluation of its loans held for investment and the adequacy of its allowance for loan losses. 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 conditions or other circumstances will not result in increased losses in the loan portfolio.
 
    Non-interest Income
 
Non-interest income decreased to $300,000 from $1.5 million for the three months ended June 30, 2001 primarily as a result of a $1.3 million gain on the sale of substantially all of the remaining mortgage loan portfolio during 2001, partially offset by an increase in service charges and fee income.

13

 
Non-interest expense increased $400,000 to $8.0 million from $7.6 million for the three months ended June 30, 2001. During 2001, the Company recognized a one-time non-cash charge of $1.4 million for compensation expense as a result of converting the option plan in UACC to options in the Company. Without considering this item, non-interest expense increased by $1.7 million. The increase in non-interest expense was driven primarily by an increase in salaries, employee benefit costs and occupancy expenses associated with the planned growth of the auto finance business segment. During the last 12 months, the Company expanded its automobile finance operations, resulting in an increase from 225 employees in 32 offices, as of June 30, 2001, to 310 employees in 46 offices, as of June 30, 2002.
 
    Income Taxes
 
Income taxes increased $800,000 from $1.2 million for the three months ended June 30, 2001 to $2.0 million for the three months ended June 30, 2002. This increase occurred as a result of a $1.9 million increase in income before income taxes between the two periods.
 
    Comparison of Operating Results for the Six Months Ended June 30, 2002 and June 30, 2001
 
    General
 
For the six months ended June 30, 2002, the Company reported income of $5.7 million or $0.33 per diluted share. This compares with income of $3.4 million or $0.21 per diluted share, for the comparable period a year ago.
 
In 2002, net interest income increased $6.8 million as a result of the planned increase in the auto finance unit receivables. In 2001, the Company recognized a gain of $1.3 million as a result of the sale of substantially all of the remaining mortgage loan portfolio, and incurred a $1.4 million one-time non-cash charge in compensation expense as a result of the conversion of an option plan in UACC, its auto lending unit, to options in the Company. These items were not repeated in 2002.
 
Purchased auto contracts increased to $149.1 million from $117.3 million for the six months ended June 30, 2001, while insurance premium finance originations increased to $58.3 million from $49.0 million for the six months ended June 30, 2001.
 
    Interest Income
 
Interest income increased to $32.9 million from $28.5 million for the six months ended June 30, 2001, due primarily to a $182 million increase in average interest earning assets, partially offset by a .06% decrease in net interest margin. The largest growth components in average interest earning assets were in investment securities, which increased by $127 million and automobile installment contracts, which increased by $56 million. The increase in investment securities reflects the need to increase assets to meet the 30% qualified thrift lender requirement of the OTS, while the increase in auto contracts resulted from the purchase of additional dealer contracts in existing and new markets consistent with planned growth.
 
The decline in net interest margin was due primarily to an increased concentration of lower yielding securities in the six months ended June 30, 2002 compared to the six months end June 30, 2001. The yield on the average balance of short term investments and investment securities decreased from 5.8% to 3.1% for the six month periods ending June 30, 2001 and 2002, respectively.

14

 
    Interest Expense
 
Interest expense decreased to $8.4 million from $10.8 million for the six months ended June 30, 2001 due to a general decline in market interest rates, partially offset by a $184.5 million increase in average interest bearing liabilities. The largest components of average interest bearing liabilities are Bank deposits, which increased to $364.4 million from an average balance of $358.2 million during the six months ended June 30, 2001, repurchase agreements, which increased to $137.5 million from $1.2 million for the six months ended June 30, 2001 and FHLB advances which increased to $74.4 million from $32.5 million for the six months ended June 30, 2001. The average cost of liabilities decreased from 5.50% for the six months ended June 30, 2001 to 2.95% for the comparable period in 2002 generally as a result of a decrease in market interest rates.
 
Provision for Loan Losses
 
Provision for loan losses was $183,000 for the six months ended June 30, 2002 compared to $168,000 for the six months ending June 30, 2001. The provision for loan losses reflects estimated losses associated with the Company’s insurance premium finance business.
 
In addition to its provision for losses, the Company’s allowance for loan losses is also increased by its allocation of acquisition discounts related to the purchase of automobile installment contracts. The Company allocates the estimated amount of its acquisition discounts attributable to credit risk to the allowance for loan losses. At June 30, 2002, the Company was allocating 10.5% of the net loan amount of all new loans to allowance for loan losses.
 
The total allowance for loan losses was $20.5 million at June 30, 2002 compared with $16.4 million at June 30, 2001, representing 6.91% of loans at June 30, 2002 and 7.28% at June 30, 2001. Annualized net charge-offs to average loans were 6.15% for the six months ended June 30, 2002 compared with 4.17% for the six months ended June 30, 2001 and 6.77% for the three months ended December 31, 2001.
 
A provision for loan losses is charged to operations based on the Company’s regular evaluation of its loans and the adequacy of its 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 real estate market conditions or other circumstances will not result in increased losses in the loan portfolio.
 
Non-interest Income
 
Non-interest income decreased to $666,000 from $2.1 million for the six months ended June 30, 2001 as a result of a $1.3 million gain on the sale of substantially all of the remaining mortgage loan portfolio in 2001, partially offset by a $61,000 gain on the sale of securities and an increase in service charges and fee income.
 
Non-interest Expense
 
Non-interest expense increased $1.8 million to $15.9 million from $14.1 million for the six months ended June 30, 2001. During 2001, the Company recognized a one-time non-cash charge of $1.4 million for compensation expense as a result of converting the option plan in UACC, its auto lending unit, to options in the Company. Without considering this item, non-interest expense increased $3.2 million. The increase in non-interest expense was driven primarily by an increase in salaries, employee benefit costs and occupancy expenses associated with the planned growth of the auto finance business. During the last 12 months, the Company expanded its automobile finance operations, resulting in an increase from 225 employees in 32 offices, as of June 30, 2001, to 310 employees in 46 offices, as of June 30, 2002.

15

 
    Income Taxes
 
Income taxes increased $1.3 million; from $2.2 million for the six months ended June 30, 2001 to $3.5 million for the six month period ended June 30, 2002. This increase occurred as a result of a $3.5 million increase in income before income taxes between the two periods.
 
Comparison of Financial Condition at June 30, 2002 and December 31, 2001
 
Total assets increased $107.5 million to $797.1 million, from $689.6 million at December 31, 2001. This increase occurred primarily as a result of a $39.4 million increase in loans to $275.8 million from $236.4 million at December 31, 2001 and a $75.8 million increase in the combined balance of cash and cash equivalents and securities available for sale to $501.4 million, from $425.5 million at December 31, 2001.
 
Cash and cash equivalents decreased to $44.4 million from $140.7 million at December 31, 2001. Securities available for sale increased to $457.0 million from $284.8 million at December 31, 2001. These net increases reflected the reinvestment of the proceeds received from expanded usage of repurchase agreements in investment securities to meet the 30% qualified thrift lender requirement of the OTS.
 
Deposits decreased $6.1 million to $351.2 million from $357.3 million at December 31, 2001 while retail deposits increased $44 million to $322.3 million from $278.0 million at December 31, 2001 as a result of the expanded use of the Internet in originating deposits. Brokered deposits decreased $50.5 million to $28.9 million from $79.4 million at December 31, 2001.
 
Other interest bearing liabilities include commercial repurchase agreements and Federal Home Loan Bank advances. Outstanding Federal Home Loan Bank advances were $30.0 million compared to $130.0 million at December 31, 2001. Commercial repurchase agreements were $326.9 million compared with 114.8 million at December 31, 2001. The increase in repurchase agreements resulted from a decline in borrowings from FHLB and the purchase of investment securities to increase assets to comply with the 30% QTL test of the OTS.
 
Shareholders’ equity increased to $81.0 million from $75.7 million at December 31, 2001, primarily as a result of net income of $5.7 million during the six months ended June 30, 2002.
 
Management of Interest Rate Risk
 
The principal objective of the Company’s interest rate risk management program is to evaluate the interest rate risk inherent in the Company’s business activities, determine the level of appropriate risk given the Company’s operating environment, capital and liquidity requirements and performance objectives and manage the risk consistent with guidelines approved by the Board of Directors. Through such management, the Company seeks to reduce the exposure of its operations to changes in interest rates. The Board of Directors reviews on a quarterly basis the asset/liability position of the Company, including simulation of the effect on capital of various interest rate scenarios.
 
The Company’s profits depend, in part, on the difference, or “spread,” between the effective rate of interest received on the loans it originates and the interest rates paid on deposits and other financing facilities, which can be adversely affected by movements in interest rates.
 
The Bank’s interest rate sensitivity is monitored by the Board of Directors and management through the use of a model, which estimates the change in the Bank’s net portfolio value (“NPV”) over a range of interest rate scenarios. NPV is the present value of expected cash flows from assets and liabilities, and “NPV Ratio” is defined as the NPV in that scenario divided by the market value of assets in the same scenario. The Company reviews a market value model (the “OTS NPV model”) prepared quarterly by the Office of Thrift Supervision (the “OTS”), based on the Bank’s quarterly Thrift Financial Reports filed with the OTS. The OTS NPV model measures the Bank’s interest rate risk by approximating the Bank’s NPV under various

16

scenarios which range from a 300 basis point increase to a 300 basis point decrease in market interest rates. The OTS has incorporated an interest rate risk component into its regulatory capital rule for thrifts. Under the rule, an institution whose sensitivity measure, as defined by the OTS, in the event of a 200 basis point increase or decrease in interest rates exceeds 20% would be required to deduct an interest rate risk component in calculating its total capital for purposes of the risk-based capital requirement.
 
At March 31, 2002, the most recent date for which the relevant OTS NPV model is available, the Bank’s sensitivity measure resulting from a 100 basis point decrease in interest rates was -21 basis points and would result in a $1.4 million decrease in the NPV of the Bank, and from a 200 basis point increase in interest rates was -30 basis points and would result in a $4.1 million decrease in the NPV of the Bank. At March 31, 2002, the Bank’s sensitivity measure was below the threshold at which the Bank could be required to hold additional risk-based capital under OTS regulations.
 
Although the NPV measurement provides an indication of the Bank’s interest rate risk exposure at a particular point in time, such measurement is not intended to and does not provide a precise forecast of the effect of changes in market interest rates on the Bank’s net interest income and will differ from actual results. Management monitors the results of this modeling, which are presented to the Board of Directors on a quarterly basis.
 
The following table shows the NPV and projected change in the NPV of the Bank at March 31, 2002 assuming an instantaneous and sustained change in market interest rates of 100, 200 and 300 basis points (“bp”). This table is based on data prepared by the OTS. The table does not include data for –200 and –300 basis points because these changes would infer negative interest rates and are therefore irrelevant.
 
Interest Rate Sensitivity of Net Portfolio Value
 
      
Net Portfolio Value
     
NPV as % of Portfolio
Value of Assets
Change in Rates
     
$ Amount
     
$ Change
     
% Change
     
NPV Ratio
     
% Change
             
(Dollars in thousands)
       
+300 bp    
     
$120,057
     
$(9,636)
     
-7%
     
15.39%
     
-82 bp
+200 bp    
     
125.550
     
(4,143)
     
-3%
     
15.91%
     
-30 bp
+100 bp    
     
128,847
     
(846)
     
-1%
     
16.19%
     
-2 bp
0 bp    
     
129,693
     
—  
     
—  
     
16.21%
     
—  
-100 bp    
     
128,321
     
(1,372)
     
-1%
     
16.00%
     
-21 bp
-200 bp    
     
—  
     
—  
     
—  
     
—  
     
—  
-300 bp    
     
—  
     
—  
     
—  
     
—  
     
—  

17

 
Liquidity and Capital Resources
 
    General
 
The Company’s primary sources of funds are deposits at the Bank, FHLB advances, commercial repurchase agreements, and, to a lesser extent, interest payments on short-term investments and proceeds from the maturation of securities. While maturities and scheduled amortization of loans are a predictable source of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition. However, the Company has continued to maintain adequate levels of liquid assets to fund its operations. Management, through its Asset and Liability Committee, monitors rates and terms of competing sources of funds to use the most cost-effective source of funds wherever possible.
 
The major source of funds consists of deposits obtained through the Bank’s four retail branches in California. The Bank offers checking accounts, various money market accounts, regular passbook accounts, fixed interest rate certificates with varying maturities and retirement accounts. Deposit account terms vary by interest rate, minimum balance requirements and the duration of the account. Interest rates paid, maturity terms, service fees and withdrawal penalties are established by the Bank periodically based on liquidity and financing requirements, rates paid by competitors, growth goals and federal regulations. The Bank also solicits deposits by posting its interest rates on a national on-line service which advertises the bank’s products to investors. At June 30, 2002, retail deposits were $322.3 million or 91.8% of total deposits.
 
The Bank also uses broker-originated deposits to supplement its retail deposits and, at June 30, 2002, brokered deposits totaled $28.9 million or 8.2% of total deposits. Brokered deposits are originated through major dealers specializing in such products.
 
The following table sets forth the balances and rates paid on each category of deposits for the dates indicated.
 
    
June 30,
     
December 31,
  
    
2002
     
2001
     
2000
  
    
Balance
   
Weighted Average
Rate
     
Balance
   
Weighted Average Rate
     
Balance
   
Weighted Average Rate
  
                
(Dollars in thousands)
              
Passbook accounts
   
$
58,887
   
2.21
%
   
$
47,931
   
2.31
%
   
$
38,730
   
4.32
%
Checking accounts
   
 
16,441
   
1.08
%
   
 
13,795
   
1.06
%
   
 
15,250
   
2.25
%
Certificates of deposit
                                          
Under $100,000
   
 
191,772
   
3.65
%
   
 
212,981
   
4.43
%
   
 
211,427
   
6.40
%
$100,000 and over
   
 
84,135
   
3.38
%
   
 
82,643
   
4.33
%
   
 
82,823
   
6.57
%
    
         
         
      
Total
   
$
351,235
   
3.22
%
   
$
357,350
   
3.99
%
   
$
348,230
   
6.03
%
    
         
         
      
 
The following table sets forth the time remaining until maturity for all CDs at June 30, 2002, December 31, 2001 and 2000.
 
    
June 30,
2002
   
December 31,
2001
   
December 31,
2000
    
(Dollars in thousands)
Maturity within one year
   
$201,718
   
$237,683
   
$257,710
Maturity within two years
   
39,873
   
46,170
   
36,440
Maturity within three years
   
19,748
   
7,657
   
100
Maturity over three years
   
14,568
   
4,114
   
—  
    
  
  
Total certificates of deposit
   
$275,907
   
$295,624
   
$294,250
    
  
  
 
Although the Bank has a significant amount of deposits maturing in less than one year, the Company believes the Bank’s current pricing strategy will enable it to retain a significant portion of these accounts at

18

maturity and that it will continue to have access to sufficient amounts of CDs which, together with other funding sources, will provide the necessary level of liquidity to finance its lending businesses. However, as a result of these shorter-term deposits, the rates on these accounts may be more sensitive to movements in market interest rates, which may result in a higher cost of funds.
 
At June 30, 2002, the Bank exceeded all of its regulatory capital requirements with tangible capital of $71.6 million, or 8.99% of total adjusted assets, which is above the required level of $11.9 million, or 1.5%; core capital of $71.6 million, or 8.99% of total adjusted assets, which is above the required level of $23.9 million, or 3.0%; and risk-based capital of $76.3 million, or 21.19% of risk-weighted assets, which is above the required level of $28.8 million, or 8.0%.
 
As used herein, leverage ratio means the ratio of core capital to adjusted total assets, Tier 1 risk-based capital ratio means the ratio of core capital to risk-weighted assets, and total risk-based capital ratio means the ratio of total capital to risk-weighted assets, in each case as calculated in accordance with current OTS capital regulations. Under the Federal Deposit Insurance Corporation Act of 1991 (“FDICIA”), the Bank is deemed to be “well capitalized” as of June 30, 2002.
 
The Company has other sources of liquidity, including FHLB advances, repurchase agreements and its liquidity and securities portfolio. Through the Bank, the Company can obtain advances from the FHLB, collateralized by its securities and enter into repurchase agreements utilizing its securities. The FHLB functions as a central reserve bank providing credit for thrifts and certain other member financial institutions. Advances are made pursuant to several programs, each of which has its own interest rate and range of maturities. Limitations on the amount of advances are based generally on a fixed percentage of total assets or on the FHLB’s assessment of an institution’s credit-worthiness. As of June 30, 2002, the Bank’s total borrowing capacity under this credit facility was $199.3 million of which $169.3 million was unused and available for borrowing.
 
The following table sets forth certain information regarding the Company’s short-term borrowed funds (consisting of FHLB advances and reverse repurchase agreements) at or for the periods ended on the dates indicated.
 
      
Six Months ended
June 30, 2002
     
December 31,
  
         
2001
     
2000
  
      
(Dollars in thousands)
  
FHLB advances
                             
Maximum month-end balance
     
$
130,000
 
   
$
130,000
 
   
$
60,000
 
Balance at end of period
     
 
    30,000
 
   
 
130,000
 
   
 
60,000
 
Average balance for period
     
 
    74,450
 
   
 
38,830
 
   
 
22,877
 
Weighted average interest rate on balance at end of period
     
 
    2.07
%
   
 
1.97
%
   
 
6.81
%
Weighted average interest rate on average balance for period
     
 
2.13
%
   
 
4.04
%
   
 
6.58
%
Warehouse lines of credit
                             
Maximum month-end balance
     
$
—
 
   
$
—  
 
   
$
26,623
 
Balance at end of period
     
 
—
 
   
 
—  
 
   
 
—  
 
Average balance for period
     
 
—
 
   
 
—  
 
   
 
1,796
 
Weighted average interest rate on balance at end of period
     
 
—
%
   
 
—  
%
   
 
—  
%
Weighted average interest rate on average balance for period
     
 
—
%
   
 
—  
%
   
 
6.27
%
Repurchase agreements
                             
Maximum month end balance
     
$
326,889
 
   
$
114,776
 
   
$
—  
 
Balance at end of period
     
 
326,889
 
   
 
114,776
 
   
 
—  
 
Average balance for period
     
 
137,466
 
   
 
4,503
 
   
 
—  
 
Weighted average interest rate on balance at end of period
     
 
1.84
%
   
 
2.37
%
   
 
—  
%
Weighted average interest rate on average balance for period
     
 
1.91
%
   
 
3.46
%
   
 
—  
%
 
The Company had no material contractual obligations or commitments for capital expenditures at June 30, 2002.
 
 
Lending Activities
 
 

19

 
 
Summary of Loan Portfolio. At June 30, 2002, the Company’s net loan portfolio constituted of $275.9 million, or 34.6% of the Company’s total assets.
 
The following table sets forth the composition of the Company’s loan portfolio at the dates indicated.
 
    
June 31,
2002
     
December 31,
2001
     
December 31,
2000
  
    
(Dollars in thousands)
  
Consumer Loans
                           
Automobile installment contracts
   
$
266,794
 
   
$
232,902
 
   
$
176,255
 
Insurance premium finance
   
 
28,380
 
   
 
28,710
 
   
 
25,843
 
Other consumer loans
   
 
47
 
   
 
98
 
   
 
577
 
    
  
  
Total consumer loans
   
 
295,221
 
   
 
261,710
 
   
 
202,675
 
    
  
  
Mortgage Loans
                           
Mortgage loans
   
 
—
 
   
 
—
 
   
 
16,784
 
Subprime mortgage loans
   
 
278
 
   
 
352
 
   
 
1,845
 
Total mortgage loans
   
 
278
 
   
 
352
 
   
 
18,629
 
    
  
  
Commercial Loans
                           
Insurance premium finance
   
 
13,526
 
   
 
10,921
 
   
 
8,342
 
Other commercial loans
   
 
—
 
   
 
—
 
   
 
55
 
    
  
  
Total commercial loans
   
 
13,526
 
   
 
10,921
 
   
 
8,397
 
    
  
  
Total loans
   
 
309,025
 
   
 
272,983
 
   
 
229,701
 
Unearned discounts and premium
   
 
—
 
   
 
—
 
   
 
(728
)
Unearned finance charges
   
 
(12,621
)
   
 
(18,881
)
   
 
(20,737
)
Allowance for loan losses
   
 
(20,473
)
   
 
(17,460
)
   
 
(15,156
)
Total loans, net
   
$
275,931
 
   
$
236,642
 
   
$
193,080
 
    
  
  
 
Loan Maturities. The following table sets forth the dollar amount of loans maturing in the Company’s loan portfolio at June 30, 2002 based on final maturity. Loan balances are reflected before unearned discounts and premiums, unearned finance charges and allowance for loan losses.
 
    
June 30, 2002
    
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
   
More Than 10 Years to 20 Years
     
More Than 20 Years
   
Total Loans
    
(Dollars in thousands)
Mortgage loans
   
$
—  
   
$
—  
   
$
—  
     
$
—  
   
$
278
     
—  
   
$
278
Commercial loans
   
 
13,526
   
 
—  
   
 
—  
     
 
—  
   
 
—  
     
—  
   
 
13,526
Consumer loans
   
 
35,972
   
 
105,760
   
 
153,129
     
 
360
   
 
—  
     
—  
   
 
295,221
Total
   
$
49,498
   
$
105,760
   
$
153,129
     
$
360
   
$
278
     
—  
   
$
309,025
    
  
  
    
  
    
  
 
Classified Assets and Allowance for Loan Losses
 
The Company’s policy is to maintain an allowance for loan losses to absorb inherent losses, which may be realized on its loan portfolio. The allowance includes a specific allowance for identifiable impairments of individual loans and a general valuation allowance for estimates for probable losses not specifically identified. In addition, the Company’s allowance for loan losses is increased by a percentage of each new auto loan, currently 10.5% of the net contract amount. For IPF loans, management established a level of allowance for loan losses based on recent trends in delinquencies and historical charge offs, currently 1.25% of loans, that it feels adequate for the risk in the portfolio. Each month an amount necessary to reach that level is charged against current earnings and added to allowance for loan losses.

20

 
Periodically, management reviews the level of allowance for loan losses to determine adequacy. The determination of the adequacy of the allowance for loan losses is based on a variety of factors including an assessment of the credit risk inherent in the portfolio, prior loss experience, the levels and trends of non-performing loans, current and prospective economic conditions and other factors.
 
The Company’s management uses its best judgment in providing for possible loan losses and establishing allowances for loan losses. However, the allowance is an estimate, which is inherently uncertain and depends on the outcome of future events. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for loan losses. Such agencies may require the Bank to increase the allowance based upon their judgment of the information available to them at the time of their examination. The Bank’s most recent examination by its regulatory agencies was completed in May 2002 and no adjustment to the Bank’s allowance for loan losses was required.
 
The following table sets forth the remaining balances of all loans (before specific allowances for losses) that were more than 30 days delinquent at June 30, 2002, December 31, 2001 and 2000.
 
Loan
Delinquencies
   
June 30,
2002
     
% of Total Loans
     
December 31,
2001
     
% of Total Loans
     
December 31,
2000
     
% of Total
Loans
    
(Dollars in thousands)
30 to 59 days
   
$1,324
     
.4%
     
$   953
     
0.5%
     
$  3,071
     
1.0%
60 to 89 days
   
591
     
.2%
     
494
     
0.3%
     
2,443
     
0.8%
90+ days
   
743
     
.3%
     
2,374
     
1.2%
     
13,307
     
4.6%
    
    
    
    
    
    
Total
   
$2,658
     
.9%
     
$3,821
     
2.0%
     
$18,821
     
6.4%
    
    
    
    
    
    
 
Nonaccrual and Past Due Loans. A non-mortgage loan is placed on nonaccrual status when it is delinquent for 120 days or more. When a loan is reclassified from accrual to nonaccrual status, all previously accrued interest is reversed. Interest income on nonaccrual loans is subsequently recognized only to the extent that cash payments are received or the borrower’s ability to make periodic interest and principal payments is in accordance with the loan terms, at which time the loan is returned to accrual status. Accounts, which are deemed fully or partially uncollectible by management, are generally fully reserved or charged off for the amount that exceeds the estimated fair value (net of selling costs) of the underlying collateral.
 
The following table sets forth the aggregate amount of nonaccrual loans (net of unearned discounts, premiums and unearned finance charges) at June 30, 2002, December 31, 2001 and 2000.
 
    
June 30,
2002
     
December 31,
  
       
2001
     
2000
  
    
(Dollars in thousands)
  
Nonaccrual loans
                         
Single-family residential
   
$278
 
   
$
2,281
 
   
$
15,825
 
Multi-family residential and commercial
   
—  
 
   
 
—  
 
   
 
100
 
Consumer and other loans
   
471
 
   
 
1,323
 
   
 
1,060
 
    
  
  
Total
   
$749
 
   
$
3,604
 
   
$
16,985
 
    
  
  
Nonaccrual loans as a percentage of
                         
Total loans held for investment
   
0.27
%
   
 
1.87
%
   
 
10.73
%
Total assets
   
0.09
%
   
 
0.74
%
   
 
3.88
%
Allowance for loan losses as a percentage of total loans
   
6.91
%
   
 
7.28
%
   
 
4.58
%
 
Allowance for Loan Losses. The following is a summary of the changes in the consolidated allowance for loan losses of the Company for the period indicated.

21

 
      
At or For the Six Months Ended
June 30,
2002
     
At or For the
Year Ended
December 31,
  
         
2001
     
2000
  
      
(Dollars in thousands)
  
Allowance for Loan Losses
                           
Balance at beginning of period
     
$17,460
 
   
$
15,156
 
   
$
14,139
 
Provision for loan losses
     
183
 
   
 
615
 
   
 
201
 
Provision for loan losses – discontinued operations
     
—  
 
   
 
—  
 
   
 
2,396
 
Charge-offs
                           
Mortgage loans
     
(10
)
   
 
(1,713
)
   
 
(6,402
)
Consumer loans
     
(8,386
)
   
 
(9,173
)
   
 
(6,025
)
      
  
  
      
(8,396
)
   
 
(10,886
)
   
 
(12,427
)
Recoveries
                           
Mortgage loans
     
—  
 
   
 
140
 
   
 
327
 
Consumer loans
     
539
 
   
 
266
 
   
 
286
 
      
  
  
      
539
 
   
 
406
 
   
 
613
 
      
  
  
Net charge-offs
     
(7,857
)
   
 
(10,480
)
   
 
(11,814
)
Acquisition discounts allocated to loss allowance
     
10,686
 
   
 
12,169
 
   
 
10,234
 
Balance at end of period
     
$20,473
 
   
$
17,460
 
   
$
15,156
 
      
  
  
Annualized net charge-offs to average loans
     
6.15
%
   
 
4.94
%
   
 
5.03
%
Ending allowance to period end loans
     
6.91
%
   
 
7.28
%
   
 
4.58
%
 
The Company’s policy is to maintain an allowance for loan losses to absorb future losses, which may be realized on its loan portfolio. The Company’s allowance for loan losses is also increased by its allocation of acquisition discounts related to the purchase of automobile installment contracts. The Company currently allocates 10.5% from acquisition discounts to allowance for loan losses.
 
The determination of the adequacy of the allowance for loan losses is based on a variety of factors, including an assessment of the credit risk inherent in the portfolio, prior loss experience, the levels and trends of non-performing loans, the concentration of credit, current and prospective economic conditions and other factors.
 
Cash Equivalents and Securities Portfolio
 
The Company’s cash equivalents and securities portfolios are used primarily for liquidity and investment income purposes. Cash equivalents and securities satisfy regulatory requirements for liquidity.

22

 
The following is a summary of the Company’s short term investments and securities portfolios as of the dates indicated.
 
    
June 30,
2002
     
December 31,
  
       
2001
     
2000
  
    
(Dollars in thousands)
  
Balance at end of period
                     
Overnight deposits
   
$  29,449
 
   
$135,267
 
   
$  36,477
 
U.S. agency securities
   
250,525
 
   
229,660
 
   
166,838
 
U. S. mortgage backed securities
   
186,309
 
   
35,015
 
   
46,376
 
Mutual funds
   
20,162
 
   
20,162
 
   
10,051
 
    
  
  
Total
   
$486,445
 
   
$420,104
 
   
$259,742
 
    
  
  
Weighted average yield at end of period
                     
Overnight deposits
   
1.31
%
   
1.23
%
   
5.69
%
U.S. agency securities
   
2.62
%
   
3.35
%
   
6.27
%
U.S. mortgage backed securities
   
3.03
%
   
6.60
%
   
7.35
%
Mutual funds (mortgage backed securities)
   
3.23
%
   
3.59
%
   
6.59
%
Weighted average maturity at end of period
                     
Overnight deposits
   
1 day
 
   
1 day
 
   
1 day
 
U.S. agency securities
   
60 months
 
   
85 months
 
   
5 months
 
U.S. mortgage backed securities
   
306 months
 
   
254 months
 
   
267 months
 
Mutual funds (mortgage backed securities)
   
1 day
 
   
1 day
 
   
1 day
 
 
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.”

23

 
PART II. OTHER INFORMATION
 
Item 1. Legal Proceedings.
 
Not applicable
 
Item 2. Changes in Securities and Use of Proceeds.
 
Not applicable
 
Item 3. Defaults Upon Senior Securities.
 
Not applicable
 
Item 4. Submission of Matters to a Vote of Security Holders.
 
At the Annual Meeting of the Company’s shareholders held on June 25, 2002 the shareholders considered the following proposals:
 
Proposal I. The election of three directors to serve terms of two years
 
Proposal II. The approval of an amendment to the Company’s Stock Incentive Plan to increase the number of shares of common stock reserved for issuance.
 
Proposal III. The ratification of the selection of KPMG LLP as the Company’s independent auditors for 2002
Proposal I Messrs. Lawrence Grill, Ron Duncanson and Mitchell Lynn were elected as directors of the Company with terms expiring in 2004. These directors were elected with the following share voting: Lawrence Grill 15,309,718 authority given; 23,500 authority waived, Ron Duncanson 15,327,968 authority given, 5,250 authority waived; Mitchell Lynn 15,327,968 authority given, 5,250 authority waived.
 
Proposal II. The amendment to the stock option plan was approved by shareholders with voting of 12,039,538 for, 722,326 against and 1,750 abstained.
 
Proposal III. Ratification of KPMG LLP as the Company’s independent auditors was approved by shareholders with voting at 15,330,218 for, 2,500 against and 0 abstained.
 
Item 5. Other Information.
 
Not applicable
 
Item 6. Exhibits and Reports on Form 8-K.
 
(a) List of Exhibits
Exhibit 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act.
 
(b) Reports on Form 8-K
 
None

24

 
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.
 
By:
  
/S/    GUILLERMO BRON        
   
Guillermo Bron
Chairman
and Chief Executive Officer
(Principal Executive Officer)
Date: August 9, 2002
 
By:
  
/S/    GARLAND W. KOCH        
   
Garlanld W. Koch
Sr. Vice President
and Chief Financial Officer
(Principal Financial and Accounting
Officer)
August 9, 2002
 
 
 
 

25