Back to GetFilings.com

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2003

Commission File Number 000-24051

UNITED PANAM FINANCIAL CORP.

(Exact name of Registrant as specified in its charter)

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)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x     No  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes  ¨     No  x

The number of shares outstanding of the Registrant’s Common Stock as of May 1, 2003 was 15,872,666 shares.

UNITED PANAM FINANCIAL CORP.

FORM 10-Q

MARCH 31, 2003

INDEX

Item 1.    Financial Statements.

United PanAm Financial Corp. and Subsidiaries

Consolidated Statements of Financial Condition

(Unaudited)

See notes to consolidated financial statements

1

United PanAm Financial Corp. and Subsidiaries

Consolidated Statements of Operations

(Unaudited)

See notes to consolidated financial statements.

2

United PanAm Financial Corp. and Subsidiaries

Consolidated Statements of Comprehensive Income

(Unaudited)

See notes to consolidated financial statements.

3

United PanAm Financial Corp. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

See notes to consolidated financial statements.

4

United PanAm Financial Corp. and Subsidiaries

Consolidated Statements of Cash Flows, Continued

(Unaudited)

See notes to consolidated financial statements.

5

United PanAm Financial Corp. and Subsidiaries

Notes to Consolidated Financial Statements

Three Months Ended March 31, 2003 and 2002

(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 that state, 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 March 31, 2003 and December 31, 2002. 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 generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of 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, 2002.

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

6

3.    Earnings Per Share

Basic EPS and diluted EPS are calculated as follows for the three months ended March 31, 2003 and March 31, 2002:

4.    Stock-Based Compensation

At March 31, 2003 and 2002, the Company has issued stock options to certain of its employees and directors. The Company accounts for these options under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted had an exercise price equal to or greater than the market value of the underlying common stock on the date of grant. Had compensation cost for the Company’s stock option plan been determined based on the fair value consistent with the Provisions of SFAS No. 123, Accounting for Stock-Based Compensation, the Company’s net income and income per share would have been reduced to the pro forma amounts indicated below for the three months ended March 31, 2003 and 2002:

7

5.    Allowance for Loan Losses

Prior to January 1, 2003, the Company’s allowance for loan losses was increased by its allocation of acquisition discounts and a purchase accounting adjustment to allowance for loan losses. At December 31, 2002, the Company was allocating 11.5% of the net loan amount of all new auto loans to allowance for loan losses.

Effective January 1, 2003, after consultation with the OTS, the Bank has elected to allocate the purchase price entirely to auto contracts and unearned discount at the date of purchase. The unearned discount will be accreted as an adjustment to yield over the life of the contract. An allowance for loan losses will be established through provision for losses recorded in income as necessary to provide for estimated contract losses (net of remaining unearned income) at each reporting date. Management expects that current and future results will reflect higher yields and provisions for loan losses being recorded from purchased auto contracts.

The total allowance for loan losses was $19.2 million at March 31, 2003 compared with $18.6 million at March 31, 2002, representing 5.43% of loans at March 31, 2003 and 7.26% at March 31, 2002. Additionally, unearned discounts on loans totaled $4.3 million at March 31, 2003 compared with zero at March 31, 2002, representing 1.21% of loans at March 31, 2003.

Effective January 1, 2003, an allowance for loan losses is established for all new loans based on losses incurred in the portfolio as of the statement date as opposed to estimated losses over the remaining life of the loan.

6.    Recent Accounting Developments

Accounting for Asset Retirement Obligations

In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations” (“SFAS 143”), 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 143 are effective for fiscal years beginning after June 15, 2002. The adoption of SFAS 143 did not have a material impact on the Company’s financial statements.

Gains and Losses from Extinguishment of Debt

In April 2002, the FASB issued SFAS No. 145, “Rescission of SFAS Statements No. 4, 44, and 64, Amendment of SFAS Statement No. 13, and Technical Corrections” (“SFAS 145”), updates, clarifies and simplifies existing account pronouncements. SFAS 145 rescinds SFAS No. 4, “Reporting Gains and Losses from Extinguishment of Debt.” SFAS 145 amends SFAS No. 13, “Accounting for Leases,” to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. The provisions of SFAS 145 related to SFAS No. 4 and SFAS No. 13 are effective for fiscal years beginning and transactions occurring after May 15, 2002, respectively. The adoption of SFAS 145 did not have a material impact on the Company’s financial statements.

Acquisitions of Certain Financial Institutions

In October 2002, the FASB issued SFAS No. 147, “Acquisitions of Certain Financial Institutions, an amendment of FASB Statements No. 72 and 144 and FASB Interpretation No. 9” (“SFAS 147”), addresses the financial accounting and reporting for the acquisition of all or part of a financial institution, except for a transaction between two or more mutual enterprises. SFAS 147 removes acquisitions of financial institutions,

8

other than transaction between two or more mutual enterprises, from the scope of Statement of Financial Accounting Standards No. 72, “Accounting for Certain Acquisitions of Banking or Thrift Institutions,” (“SFAS 72”), and Financial Accounting Standards Board Interpretation No. 9, “Applying APB Option No. 16 and 17 When a Savings and Loan Association or a Similar Institution Is Acquired in a Business Combination Accounted for by the Purchase Method,” and requires that those transactions be accounted for in accordance with Statement of Financial Accounting Standards No. 141, “Business Combinations,” and SFAS 142. Thus, the requirement in SFAS 72 to recognize, and subsequently amortize, any excess of the fair value of liabilities assumed over the fair value of tangible and identifiable intangible assets acquired as an unidentifiable intangible asset no longer applies to acquisitions within the scope of SFAS 147.

SFAS 147 also provides guidance on the accounting for the impairment or disposal of acquired long-term customer-relationship intangible assets of financial institutions such as depositor and borrower relationship intangible assets and credit cardholder intangible assets. Those intangible assets are subject to the same undiscounted cash flow recoverability test and impairment loss recognition and measurement provisions that SFAS 144 requires for other long-lived assets that are held and used. The provisions of SFAS 147 are effective on October 1, 2002. The adoption of SFAS 147 did not have a material impact on the Company’s financial statements.

Guarantor’s Accounting and Disclosure Requirements for Guarantees

In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” The Interpretation, which clarifies previously issued accounting guidance and disclosure requirements for guarantees, expands the disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees, and requires the guarantor to recognize a liability for the fair value of an obligation assumed under a guarantee.

In general, the Interpretation applies to contracts or indemnification agreements that contingently require the guarantor to make payments to the guaranteed party based on specified changes in an underlying variable that is related to an asset, liability, or equity security of the guaranteed party. Guarantee contracts excluded from both the disclosure and recognition requirements of the Interpretation include, among others, guarantees relating to employee compensation, residual value guarantees under capital lease arrangements, commercial letters of credit, commitments to extend credit, subordinated interests in an SPE, and guarantees of a company’s own future performance. Other guarantees subject to the disclosure requirements of the Interpretation, but not to the recognition provisions, include, among others, a guarantee accounted for as a derivative instrument under SFAS No. 133, a parent’s guarantee of debt owed to a third party by its subsidiary or vice versa, and a guarantee which is based on performance but not price. The adoption of FIN 45 did not have a material impact on the Company’s financial statements.

Accounting for Stock-Based Compensation

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure” amends FASB Statement No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), to provide alternative methods of transition for enterprises that elect to change to the SFAS 123 fair value method of accounting for stock-based employee compensation. SFAS 148 will permit two additional transition methods for entities that adopt the preferable SFAS 123 fair value method of accounting for stock-based employee compensation. Both of those methods avoid the ramp-up effect arising from prospective application of the fair value method under the existing transition provisions of SFAS 123. In addition, under the provisions of SFAS 148, the original Statement 123 prospective method of transition for changes to the fair value method will no longer be permitted in fiscal periods beginning after December 15, 2003.

SFAS 148 amended the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The provisions of SFAS 148 are effective for fiscal years ended after December 15, 2002. The disclosures to be provided in annual financial statements will be required for fiscal years ended after December 15, 2002, and the disclosures to be provided in interim

9

financial reports will be required for interim periods begun after December 15, 2002, with earlier application encouraged. Presently, the Company does not intend to adopt the fair value method.

Consolidation of Variable Interest Entities

In January 2003, the FASB issued Interpretation 46, “Consolidation of Variable Interest Entities an interpretation of ARB No. 51” (“FIN 46”), which requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or is entitled to receive a majority of the entity’s residual returns or both. Prior to FIN 46, a company included another entity in its consolidated financial statements only if it controlled the entity through voting interests. FIN 46 also requires disclosures about variable interest entities that the company is not required to consolidate but in which it has a significant variable interest. The consolidated requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003. The consolidated requirements apply to older entities in the first fiscal year or interim period after June 15, 2003. Certain disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. Management does not expect the adoption of FIN 46 to have a material impact on the Company’s financial statements.

7.    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 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.

In the Insurance Premium Finance segment the allowance for loan losses was reduced during the first quarter, resulting in a recovery in provision for loan losses in this segment. This reduction reflects a substantial reduction in loan losses in this segment in the first quarter of 2003 and in expected losses. This resulted from a change in loan mix from auto insurance premium loans to commercial insurance premium loans, which have lower expected losses.

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.

10

During 2002, funds provided to the Company’s auto and insurance premium finance segments were charged utilizing a fixed 7.00% transfer rate. During 2003 the transfer rate was adjusted to 4.6% to reflect the expected cost of borrowings and operations at the banking segment. If the funds had been transferred in 2002 on this same basis, the transfer rate utilized would have been 5.5% and the segment reporting would have been as follows:

For the reportable segment information presented, substantially all expenses are recorded directly to each industry segment.

Certain statements in this Annual Report on Form 10-Q, including statements regarding United PanAm Financial Corp.’s (“UPFC”) strategies, plans, objectives, expectations and intentions, may include forward-looking information within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements involve certain risks and uncertainties that could cause actual results to differ materially from those expressed or implied in such forward-looking statements. Such risks and uncertainties include, but are not limited to, the following factors: loans we made to credit-impaired borrowers; our need for additional sources of financing; concentration of the Bank’s 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; the Bank’s continuing qualification as a qualified thrift lender; and other risks, some of which may be identified from time to time in our filings with the Securities and Exchange Commission (the “SEC”). See “Item 1. Business – Factors That May Affect Future Results of Operations.”

General

The Company

The Company is a specialty finance company engaged primarily in originating and acquiring, for investment, retail automobile installment sales contracts and insurance premium finance contracts. We market to customers who generally cannot obtain financing from traditional lenders. These customers usually pay higher loan fees and interest rates than those charged by traditional lenders to gain access to

11

consumer financing. We fund our operations principally through retail and wholesale deposits, Federal Home Loan Bank (“FHLB”) advances and repurchase agreements. All of our revenues are attributed to customers located in the United States of America.

We have used the Bank as a base for expansion into our current specialty auto finance and insurance premium finance business. We commenced our automobile finance business in 1996 through United Auto Credit Corporation (“UACC”), a wholly owned subsidiary of the Bank. We commenced our insurance premium finance business in 1994, through an agreement with BPN Corporation (“BPN”).

Automobile Finance

The Company entered the nonprime automobile finance business in February 1996 by establishing UACC as a subsidiary of the Bank. UACC purchases auto contracts primarily from dealers in used automobiles, approximately 75% from independent dealers and 25% from franchisees of automobile manufacturers. UACC’s borrowers are classified as nonprime because they typically have limited credit histories or credit histories that preclude them from obtaining loans through traditional sources. UACC’s business strategy includes controlled growth through a national retail branch network. 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 Bank is a federally chartered stock savings bank, which was formed in 1994. It is the largest Hispanic-controlled savings association in California with four retail branch offices in the state and $471.0 million in deposits at March 31, 2003. The Bank has been the principal funding source to date for our insurance premium and automobile finance businesses primarily through its retail and wholesale deposits and FHLB advances. The Bank has focused its branch marketing efforts on building a middle-income customer base, including some efforts targeted at local Hispanic communities. In addition to operating its retail banking business through its branches, the Bank provides, subject to appropriate cost sharing arrangements, compliance, risk management, executive, financial, facilities and human resources management to other business units of UPFC.

12

Average Balance Sheets

The following table sets forth information relating to the Company for the three months ended March 31, 2003 and 2002. The yields and costs are derived by dividing annualized income or expense by the average balance of assets or liabilities for the periods shown. The yields and costs include fees, which are considered adjustments to yields.

Comparison of Operating Results for the Three Months Ended March 31, 2003 and March 31, 2002

General

Net income increased $1.24 million to $3.91 million for the three months ended March 31, 2003 from $2.67 million for the three months ended March 31, 2002.

The increase in net income was due primarily to a $3.5 million increase in net interest income, which increased to $15.2 million in the first quarter of 2003 from $11.7 million during the same quarter of 2002 partially offset by a $1.4 million increase in non-interest expense. 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 $34.3 million to $106.2 million for the three months ended March 31, 2003 from $71.9 million for the three months ended March 31, 2002, as a result of our planned growth in the auto finance business, while insurance premium finance originations decreased $3.8 million to $24.4 million for the three months ended March 31, 2003 from $28.2 million for the three months ended March 31, 2002.

13

Interest Income

Interest income increased to $20.5 million for the three months ended March 31, 2003 from $15.7 million for the three months ended March 31, 2002 due primarily to a $443.4 million increase in average interest earning assets partially offset by a 297 basis point decrease in the weighted average interest rate on interest earning assets. The largest components of growth in average interest earning assets were securities, which increased $368.9 million and automobile installment contracts, which increased $79.6 million. The increase in securities was a result of an increase in commercial borrowings, reflecting the need to increase assets to meet the 30% qualified thrift lender requirement of the Office of Thrift Supervision (“OTS”). The increase in auto contracts principally resulted from the purchasing of additional dealer contracts in existing and new markets consistent with the planned growth of this business unit.

The decline in the average yield on interest earning assets was due to a general decline in market interest rates and an increased concentration of lower yielding securities in the three months ended March 31, 2003 compared to the three months ended March 31, 2002. Average short term investments and investment securities, with an average yield of 2.17%, comprised 68.4% of average interest earning assets in the three months ended March 31, 2003 compared with 56.9% of average interest earning assets in the three months ended March 31, 2002.

Interest Expense

Interest expense increased to $5.3 million for the three months ended March 31, 2003 from $4.0 million for the three months ended March 31, 2002 due to a $436.2 million increase in average interest bearing liabilities, partially offset by an 89 basis point decrease in the weighted average interest rate on interest bearing liabilities. The largest components of average interest bearing liabilities were deposits of the Bank, which increased to an average balance of $470.9 million during the quarter ended March 31, 2003 from $365.7 million during the quarter ended March 31, 2003 and repurchase agreements which increased to an average balance of $479.4 million for the quarter ended March 31, 2003 from $39.7 million during the quarter ended March 31, 2002. The average cost of liabilities decreased to 2.26% for the three months ended March 31, 2003 from 3.15% for the comparable period in 2002 generally as a result of a decrease in market interest rates and a greater concentration in repurchase agreements with lower funding costs.

Provision and Allowance for Loan Losses

Provision for loan losses was $535,000 for the three months ended March 31, 2003 compared to $85,000 for the three months ending March 31, 2002. The provision for loan losses in 2002 reflects only estimated losses associated with the Company’s insurance premium finance business. The provision for 2003 reflects a provision expense of $737,000 in UACC, partially offset by a $202,000 recovery of expense in IPF. The recovery of expense in IPF reflects a substantial reduction in loan losses in the first quarter of 2003 and in expected losses. This change in losses resulted from a change in loan mix in IPF from auto insurance premium loans to commercial insurance premium loans, which have lower expected losses.

In addition to its provision for loan losses in 2002, the Company’s allowance for loan losses was increased by its allocation of acquisition discounts and a purchase accounting adjustment to allowance for loan losses. At December 31, 2002, the Company was allocating 11.5% of the net loan amount of all new auto loans to allowance for loan losses.

Effective January 1, 2003, after consultation with the OTS, the Bank has elected to allocate the purchase price entirely to auto contracts and unearned discount at the date of purchase. The unearned discount will be accreted as an adjustment to yield over the life of the contract. An allowance for loan losses will be established through provision for losses recorded in income as necessary to provide for estimated contract losses (net of remaining unearned income) at each reporting date. Management expects that current and future results will reflect higher yields and provisions for loan losses being recorded from purchased auto contracts.

The total allowance for loan losses was $19.2 million at March 31, 2003 compared with $18.6 million at March 31, 2002, representing 5.43% of loans at March 31, 2003 and 7.26% at March 31, 2002.

14

Additionally, unearned discounts on loans totaled $4.3 million at March 31, 2003 compared with zero at March 31, 2002, representing 1.21% of loans at March 31, 2003.

Effective January 1, 2003, an allowance for loan losses is established for all new loans based on losses incurred in the portfolio as of the statement date as opposed to estimated losses over the remaining life of the loan.

Annualized net charge-offs to average loans were 5.76% for the three months ended March 31, 2003 compared with 6.63% for the three months ended March 31, 2002. The allowance for loan losses was favorably impacted by the recovery of $520,000 from the State of California for refund of sales taxes on repossessed autos.

Non-interest Income

Non-interest income increased $854,000 to $1.2 million for the three months ended March 31, 2003 from $366,000 for the three months ended March 31, 2002. The major portion of this increase resulted from a $716,000 gain on the sale of the remaining portions of our mortgage securitization pools and the disposition of all remaining assets related to mortgage servicing and a $166,000 increase in income on bank owned life insurance, partially offset by a $61,000 gain on sale of investment securities in 2002 that was not repeated in 2003.

Non-interest Expense

Non-interest expense increased $1.4 million to $9.3 million for the three months ended March 31, 2003 from $7.9 million for the three months ended March 31, 2002. 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 to 387 employees in 58 offices, as of March 31, 2003, from 294 employees in 42 offices, as of March 31, 2002.

Income Taxes

Income taxes increased $1,142,000 to $2,683,000 for the three months ended March 31, 2003 from $1,541,000 for the three months ended March 31, 2002. This increase occurred as a result of a $2.5 million increase in income before income taxes between the two periods.

Comparison of Financial Condition at March 31, 2003 and December 31, 2002

Total assets increased $244.1 million, to $1,195.4 million at March 31, 2003 from $951.3 million at December 31, 2002. The increase resulted primarily from a $201.7 million increase in securities to $805.0 million at March 31, 2003 from $603.3 million at December 31, 2002 and a $26.1 million increase in loans to $357.4 million at March 31, 2003 from $331.3 million at December 31, 2002. The increase in securities was a result of an increase in commercial borrowings, reflecting the need to increase assets to meet the 30% qualified thrift lender requirement of the OTS. The increase in loans principally resulted from the purchasing of additional dealer contracts in existing and new markets consistent with planned growth in the auto finance business unit.

Deposits increased $2.5 million to $471.0 million at March 31, 2003 from $468.5 million at December 31, 2002. Retail deposits increased $2.5 million to $315.3 million at March 31, 2003 from $312.8 million at December 31, 2002. Brokered deposits were unchanged at $155.7 million at March 31, 2003.

Repurchase agreements increased $240.6 million to $625.2 million at March 31, 2003 from $384.6 million at December 31, 2002. The increase was in LIBOR based floating rate borrowings used to fund LIBOR based floating rate securities.

Shareholders’ equity increased to $93.3 million at March 31, 2003 from $89.7 million at December 31, 2002, primarily as a result of net income of $3.9 million during the three months ended March 31, 2003, partially offset by a $264,000 decrease in unrealized gains on securities.

15

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, liabilities and off-balance sheet instruments, and “NPV Ratio” is defined as the NPV in that scenario divided by the market value of assets in the same scenario. The Company reviews a market value model (the “OTS NPV model”) prepared quarterly by the OTS, based on the Bank’s quarterly Thrift Financial Reports filed with the OTS. The OTS NPV model measures the Bank’s interest rate risk by approximating the Bank’s NPV under various scenarios which range from a 300 basis point increase to a 300 basis point decrease in market interest rates. The OTS has incorporated an interest rate risk component into its regulatory capital rule for thrifts. Under the rule, an institution whose sensitivity measure, as defined by the OTS, in the event of a 200 basis point increase or decrease in interest rates exceeds 20% would be required to deduct an interest rate risk component in calculating its total capital for purposes of the risk-based capital requirement.

At December 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 -29 basis points and would result in a $1.9 million decrease in the NPV of the Bank and a 200 basis point increase in interest rates was 26 basis points and would result in a $268,000 increase in the NPV of the Bank. At December 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 December 31, 2002 assuming an instantaneous and sustained change in market interest rates of 100, 200 and 300 basis points (“bp”). This table is prepared by the OTS. The table does not include data for –200 and –300 basis points because these changes in rates would infer negative interest rates and are therefore not relevant.

Interest Rate Sensitivity of Net Portfolio Value

16

Liquidity and Capital Resources