1
================================================================================

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

__X__ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 (Fee Required)

For the fiscal year ended December 31, 1996

_____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required)

COMMISSION FILE NUMBER: 0-21075

FIRST ENTERPRISE FINANCIAL GROUP, INC.
(Exact name of Registrant as specified in its Charter)

ILLINOIS 36-3688499
(State or other jurisdiction (I.R.S. employer identification no.)
of incorporation or organization)

500 DAVIS STREET, SUITE 1005
EVANSTON, ILLINOIS 60201 (847) 866-8665
(Address of principal executive offices, (Registrant's telephone number,
including zip code) including area code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

TITLE OF EACH CLASS TITLE OF EACH EXCHANGE ON WHICH REGISTERED
------------------- ------------------------------------------
Common Stock, $.01 par value Nasdaq National Market

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None

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

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this form 10-K. [ ]

The aggregate market value of the voting stock held by non-affiliates
of the registrant was approximately $28,649,303 based on the closing sale price
of $13.375 per share as reported on the Nasdaq Stock Market's National Market
on February 3, 1997.

The number of shares of the registrant's Common Stock, $.01 par value,
outstanding as of February 3, 1997 was 5,323,329.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the following documents of the registrant are incorporated herein
by reference:

DOCUMENT PART OF FORM 10-K
-------- -----------------

Proxy Statement for the 1997 annual meeting of shareholders III

================================================================================

PART I

ITEM 1 - BUSINESS

As used in this report, the "Company" means First Enterprise Financial
Group, Inc., an Illinois corporation ("FEFG"), and First Enterprise Acceptance
Company, an Illinois corporation ("FEAC") and wholly owned subsidiary of FEFG.

GENERAL

The Company is a specialty finance company primarily engaged in
purchasing and servicing installment contracts originated by dealers for
financing the sale of automobiles. The Company purchases installment contracts
which provide financing for non-prime consumers. The Company also offers, as
agent, ancillary products in conjunction with the installment contracts the
Company purchases. The Company commenced operations in 1990 and began
purchasing installment contracts in May 1992 through three branch offices. As
of December 31, 1996, the Company operated 35 branch offices in eight
southeastern states.

THE INDUSTRY

The automobile finance industry is the second largest consumer finance
market in the United States, estimated by the Federal Reserve Board to have
been a $354 billion market in terms of outstanding automobile installment
credit at the end of 1995. Generally, the industry classifies prime and
non-prime consumers based on the creditworthiness of the consumer. The Company
does not further categorize its consumers within the classification of
non-prime. Every non-prime consumer is evaluated by the branch manager and
branch personnel in accordance with the Company's uniform credit guidelines and
procedures which are specifically designed to support its evaluation of
non-prime consumers.

The Company believes that the non-prime portion of the automobile
finance market ranges from $30 billion to $50 billion or more and is highly
fragmented. Many large financial service entities, such as commercial banks,
savings and loans, credit unions and captive finance companies do not
consistently provide financing to the non-prime market. The Company believes
that some of the factors contributing to the limited activities of traditional
lenders in the non-prime segment of the market are (i) the higher risk of the
obligers and the installment contracts, (ii) the lack of effective experience
in servicing non-prime consumers, and (iii) the regulatory oversight and
capital requirements imposed by governmental agencies on traditional lenders
which limit their ability to extend credit to such non-prime consumers. In
many cases, those organizations electing to remain in the automobile finance
business have migrated toward higher credit quality customers in order to
reduce collection and processing costs and to maintain higher levels of credit
quality. Many of the largest providers of financing to the non-prime
automobile finance market are the publicly-traded specialty automobile finance
companies. The Company estimates that these companies collectively have less
than a 15% market share. The

remainder is primarily comprised of privately held finance companies and
dealers who provide financing programs directly to the consumer.

The Company believes that several demographic and economic trends
favor increased growth in the nonprime segment of the automobile finance
industry. Currently, the average American family must spend a significantly
higher percentage of its income to purchase a new or used automobile than it
did several years ago. According to industry data, the average price of a new
automobile in 1994 represented approximately 51% of the U.S. median family
income for that year, an increase from approximately 44% in 1986. The Company
believes this increase, combined with increases in the average useful life of
automobiles and the number of late-model used automobiles available for sale
(including rental cars and cars that were formerly leased) will continue to
expand the used automobile market.

BUSINESS STRATEGY

The Company's strategy is to grow its Total Portfolio by increasing
its penetration of existing markets and by expanding into new market areas.
The principal components of the Company's strategy include:

- Decentralized Structure. The Company operates with a
decentralized branch office network that provides branch
managers with a significant degree of autonomy and
accountability. Within guidelines set by the Company, branch
managers are responsible for the development of dealer
relationships, underwriting of installment contract purchases,
servicing and collection of accounts and implementation of
repossession procedures. Performance goals are established
for each branch office, and the branch manager's incentive
compensation is tied to the performance results of the branch
office. Management believes that its decentralized
operational structure enhances dealer service, results in
better portfolio quality through personal knowledge of local
market conditions and improves collection rates by requiring
collection activity to be handled through direct local contact
with consumers. Decentralization enhances dealer service by
allowing branch managers to frequently meet one-on-one with
local dealers, quickly respond to contract applications and
respond to changes in competitive conditions. The
decentralized structure also enables branch managers to
interact personally with consumers during the origination and
servicing of installment contracts. Decentralization requires
more effective management information systems, internal audit
procedures and credit guidelines to maintain control over the
Company's business.

- Experienced Management Personnel. The Company's growth and
profitability have been largely the result of the services of
its management at the executive, supervisory and branch
levels. The executive officers of the Company have an average
of over 34 years of experience in the financial services
industry. The Company's regional supervisors and branch
managers have an average of 31

years and 20 years of experience, respectively, in the
consumer and automobile finance industries. The Company
believes that hiring and retaining experienced management
personnel, particularly at the branch and supervisory levels,
is essential for the Company to accomplish its bjectives. The
Company believes it attracts and retains experienced
management personnel by providing competitive compensation,
significant autonomy in the Company's decentralized
operational structure and equity participation.

- Focus on Smaller Markets. The Company generally targets
smaller markets with populations of less than 150,000. The
Company believes that these markets tend to be less
competitive than larger markets and that dealers in such
markets are more relationship oriented than in larger markets.
Management believes the Company gains a competitive advantage
by opening branch offices headed by experienced branch
managers who typically have established relationships with
local dealers and extensive knowledge of the market. The
Company considers the availability of experienced branch
managers with knowledge of the local market to be the most
important factor in selecting additional branch office
locations. Other factors considered in the selection of
additional branch office locations include competition,
demographics and the regulatory climate. The Company had 35
branch offices in eight southeastern states as of December 31,
1996. The Company opened ten new branch offices in 1996 and
plans to open five additional branch offices by March 31,
1997, some of which may be in new states.

- Service to Dealers. The Company helps to expand its dealers'
customer bases by providing financing to consumers who
otherwise might not be able to obtain credit. The Company
further assists dealers by promptly responding to credit
applications, by providing a consistent source of financing
and by typically paying dealers within 24 hours after
receiving all required documentation. As of December 31,
1996, the Company purchased installment contracts from a total
of 1,313 dealers in eight southeastern states and had active
relationships with 573 of such dealers. The Company defines
an active relationship with a dealer as one in which the
Company purchases at least five contracts per twelve month
period from such dealer. As of December 31, 1996, no single
dealer accounted for more than 2.1% of the Total Portfolio.

- Management Information System. The Company utilizes an
on-line, real-time data processing system of a third party
vendor to process its installment contract transactions, to
assist in compliance with its credit policies and certain
applicable laws and regulations and to monitor its
decentralized branch office network. This system has been
customized to meet the Company's processing, compliance and
reporting requirements. The executive, operations and branch
offices have immediate access to data from the management
information system. Management believes that the Company's
information system will permit sustained growth in the Total
Portfolio.

BRANCH OFFICES

While the Company generally targets smaller markets with populations
of less than 150,000, the Company has opened and may continue to open branch
offices in larger communities. As of December 31, 1996, the Company had 35
branch offices in eight southeastern states. Ten new branch offices were
opened in 1996 and the Company plans to open five additional branch offices by
March 31, 1997. The Company has never closed a branch office.

The following table summarizes certain information regarding the Company's
branch offices.

Years Ended December 31,
------------------------
1993 1994 1995 1996
---- ---- ---- ----

Number of New Branch Offices . . . . . . . . . . . . . 4 9 8 10
Total Number of Branch Offices . . . . . . . . . . . . 8 17 25 35

Number of Contracts Purchased . . . . . . . . . . . . . 2,685 4.935 10,021 15,810
Dollar Amount of Contracts Purchased
(in thousands) . . . . . . . . . . . . . . . . . . . . $19,248 $35,137 $70,184 $120,154

The actual selection of a new branch office location is generally
based on the availability of an experienced branch manager with industry and
market knowledge in the selected community, competition, certain demographic
factors and the regulatory climate. The Company expects to attract additional
qualified managers to staff new branch offices and has recently established a
training program to provide an expanding pool of qualified branch managers.

Branch managers operate their branch offices with a significant degree
of autonomy and accountability. Operating within the guidelines set by the
Company, branch managers are responsible for the development of new dealer
relationships, underwriting of automobile installment contract purchases,
servicing and collection of accounts and implementation of repossession
procedures. Decentralization allows branch managers to frequently meet
one-on-one with local dealers, quickly respond to contract applications and
respond to changes in competitive conditions. This decentralized structure
also enables branch managers to interact personally with the consumers during
the origination and servicing of installment contracts.

After several months of orientation, a branch manager typically opens
a new branch office with two or three employees. Staff is expanded as growth
warrants. The Company's initial capital expenditure for a new branch office is
approximately $15,000, which includes computer equipment, furniture and signs.
Based on previous experience, the Company's branch offices are expected to be
profitable within nine to 12 months of commencing operations. During the
startup

period, all costs, net of revenue, are treated as current period operating
expenses. The Company leases all of its branch offices with average monthly
rent of approximately $1,000 per branch office.

MONITORING OF BRANCH OFFICES

The Company monitors the performance of each of its branch offices
through daily and monthly review of operating and financial reports from its
management information system, quarterly site reviews of branch offices by the
Company's five regional supervisors and operational reviews of branch offices
by its internal auditor.

The Company's management information system enables the executive
officers and regional supervisors to immediately access branch and portfolio
information. Some of the more important reports received by management from its
information system include: (i) delinquency reports, (ii) charge-off reports,
(iii) inventory repossession reports, (iv) cash reports, (v) trial balances,
(vi) branch income statements and (vii) volume reports. The Company also uses
its management information system to transfer deposits from its local branch
bank accounts to its central bank utilizing the Automated Clearing House.
Branch disbursement checks are drawn on a central bank account which provides
additional controls.

DEALER RELATIONSHIPS

Generally, for each dealer, branch managers evaluate (i) the level and
quality of the dealer's inventory, (ii) the length of time the dealer has been
in business, (iii) historical financial information to determine financial
viability and (iv) the dealer's reputation in the community. Branch managers
review, on an ongoing basis through the Company's management information
system, the loss experience on the installment contracts purchased from each
dealer.

Generally, the Company enters into a non-exclusive written dealer
agreement (a "Dealer Agreement") with each dealer from which the Company
purchases installment contracts on a continuing basis. The Dealer Agreement
does not obligate the Company to purchase installment contracts from the dealer
or the dealer to offer any installment contracts for sale to the Company.
Dealer Agreements generally provide representations and warranties relating to
such matters as to whether (i) the financed automobile is free of all liens,
claims and encumbrances except the Company's lien, (ii) the down payment
specified in the installment contract has been paid in full and no part of the
down payment was loaned to the consumer by the dealer and (iii) the dealer has
complied with applicable law. Dealer Agreements generally also provide that the
dealer shall indemnify the Company against any damages or liabilities,
including reasonable attorneys' fees and including in certain instances
repurchases of the installment contract on demand, arising out of (i) any
breach of a representation or warranty of the dealer set forth in the Dealer
Agreement or (ii) any claim or defense that a consumer may have against a
dealer relating to an installment contract.

The Company believes it has strong relationships with dealers and that
such relationships will continue. The Company is not affiliated with any
dealers, nor is there common ownership with any dealer. The Company's
relationships with dealers are not regulated at the federal or state level.

CREDIT UNDERWRITING PROCEDURES

If a non-prime consumer elects to finance the purchase of an
automobile through a dealer, the dealer may submit the consumer's credit
application to the Company for review of the consumer's creditworthiness and
the proposed transaction terms. The branch manager reviews the transaction in
accordance with the Company's credit guidelines and procedures, which generally
take into account, among other things, the individual's stability of residence,
employment history, credit history, ability to pay and ratio of debt service
payments to income, the down payment, as well as the value of the collateral.
In addition, the branch manager evaluates a credit bureau report in order to
determine if (i) the individual's credit quality is deteriorating, (ii) the
individual's credit history suggests a high probability of default or (iii) the
individual's credit experience is too limited for the Company to assess the
probability of performance. The branch personnel may also require verification
of certain applicant or dealer provided information prior to making the credit
decision. Such verification is performed solely by Company branch personnel
and typically includes (i) submission of supporting documentation, such as a
paycheck stub or other substantiation of income, (ii) evidence of residency and
(iii) proof of physical damage insurance. Within the parameters set by the
Company's credit guidelines and procedures, the branch manager is permitted to
supplement the data received with subjective judgment and knowledge of local
conditions. By using a wide variety of criteria and the knowledge and
experience of the local branch manager, the Company attempts to reduce its
default rate and thus limit its losses.

After reviewing the credit application and the terms of the sale, the
branch office notifies the dealer whether the Company would be willing to
purchase the installment contract upon sale of the automobile to the applicant.
The Company typically responds to submitted dealer applications on the date
received, and in many cases within two to three hours. For the year ended
December 31, 1996, the Company approved approximately 27% of all submitted
credit applications and approximately 61% of the installment contracts related
to approved credit applications were purchased by the Company. The difference
between the number of applications approved and the number of installment
contracts purchased is primarily due to dealers submitting credit applications
to more than one finance company. In cases where the Company is unwilling to
purchase an installment contract from a dealer under the proposed terms but
believes the applicant has the capacity to meet other repayment obligations,
the branch office will work with the dealer to restructure the terms of the
financing or suggest the sale of an alternative automobile with a price more
suited to the applicant's financial means.

INSTALLMENT CONTRACT PURCHASE

When the branch manager approves the purchase of an installment
contract, the branch office notifies the dealer by facsimile. Such notice
confirms all pertinent information relating to the terms of the approval,
including the finance charge, the term, information about the automobile to be
sold, a list of ancillary products purchased by the consumer and the amount of
non-refundable contract acquisition discount that the Company will deduct from
the initial principal balance of the installment contract. Since inception of
the Company's automobile finance activities, the nonrefundable contract
acquisition discount charged by the Company has averaged approximately 10% of
the initial principal balance of the installment contracts. Generally, the
amount paid in cash to dealers for installment contracts ranges between 80% to
110% of the wholesale value of the automobile, with an average of approximately
100%. The consumer is typically required to make a down payment of at least 10%
of the purchase price.

After the dealer delivers all required documentation to the Company,
the Company remits funds to the dealer, generally within 24 hours. In most
cases, the consumer is contacted directly to verify the terms of the
transaction. Upon purchase of the installment contract, the Company acquires a
perfected security interest in the financed automobile. Each installment
contract requires that the automobile be properly insured against physical
damage and that the Company be named as a loss payee on the insurance policy.
Compliance with these requirements is verified prior to the remittance of funds
to the dealer.

The following table summarizes the Company's installment contract volume by
state since 1993.

State Years Ended December 31,
----- ------------------------
1993 1994 1995 1996
---- ---- ---- ----

Alabama . . . . . . . . . . . . . . . . . . . . 32.5% 30.4% 25.2% 17.9%
Florida . . . . . . . . . . . . . . . . . . . . 46.7 42.4 24.8 27.4

Georgia . . . . . . . . . . . . . . . . . . . . 13.6 6.2 3.8 3.6
Mississippi . . . . . . . . . . . . . . . . . . -- 2.9 14.0 14.1

North Carolina . . . . . . . . . . . . . . . . -- 0.9 8.5 6.1
South Carolina . . . . . . . . . . . . . . . . 7.2 6.9 8.8 14.3
Tennessee . . . . . . . . . . . . . . . . . . . -- 10.3 14.9 12.1

Virginia . . . . . . . . . . . . . . . . . . . -- -- -- 4.5
------ ------ ------ ------
Total 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ======

INSTALLMENT CONTRACT TERMS

The Company purchases precomputed, fixed rate, fully secured, retail
installment contracts on a nonrecourse basis. The installment contracts are
purchased from dealers for the principal balance less the nonrefundable
contract acquisition discount. The non-refundable contract acquisition discount
is determined based on, among other factors, the competitive condition of the
market, the age and value of the automobile and the creditworthiness of the
consumer.

In 1993, 1994, 1995 and 1996, the Company purchased 2,685, 4,935,
10,021 and 15,810 installment contracts, respectively, representing aggregate
principal balances of $19.2 million, $35.1 million, $70.2 million and $120.2
million, respectively. Installment contracts purchased in 1996 had an average
initial principal balance of approximately $7,600, a weighted average
contractual APR of approximately 24.9%, a weighted average non-refundable
contract acquisition discount of approximately 10.8% and a weighted average
initial contract term of approximately 41 months.

INSTALLMENT CONTRACT SERVICING

The Company's installment contract servicing activities are
specifically tailored for the higher risks associated with non-prime consumers.
Each branch office collects and posts all payments received, responds to
consumer inquiries, takes all necessary action to maintain the security
interest granted in the financed automobiles, investigates delinquencies,
communicates with the consumer to obtain timely payments and, when necessary,
contracts with third parties to recover and sell the financed automobile.

The Company has established a process through which it attempts to
educate consumers, both in writing and by telephone, upon the Company's
purchase of their installment contracts. This process is designed to ensure
that consumers clearly understand their obligations and includes a review of
the terms of the installment contract with particular emphasis on the amount
and due date of each payment obligation, the Company's expectations as to the
timely receipt of payments, maintenance of insurance coverage and the Company's
delinquency and repossession policies. The branch offices send their
respective customers a payment coupon book prior to the first payment due date.

Branch office personnel typically contact delinquent consumers within
one to two days after such consumer's due date and collection efforts continue
until payment has been received. The Company believes that early and frequent
contact with the consumer reinforces the consumer's recognition of his or her
contractual obligation and the Company's expectation of timely payment. If
early collection efforts are not successful, branch office personnel design a
collection strategy that includes a specific deadline by which each delinquent
obligation should be collected. Accounts that have not been collected by such
deadline are again reviewed and unless there are specific circumstances which
warrant further collection efforts, such accounts are assigned to an outside
recovery agency for repossession. Only branch managers can

authorize repossession of an automobile. Repossessed automobiles are generally
resold through wholesale auctions. The elapsed time between repossession and
resale is generally 15 to 45 days, including passage of the period during which
the law of the applicable jurisdiction permits the consumer to redeem the
automobile.

The Company provides its branch managers with flexibility in working
with consumers in the collection of payments. Specifically, if a consumer is
unable to make a scheduled payment the branch manager can grant a payment
deferment. The consumer must pay a fee and must sign a deferment agreement as
acceptance of the contract modification. The scheduled payment is then
deferred for the period of time agreed upon between the branch manager and the
consumer but will not exceed 30 days. Generally, no more than two deferments
may be granted in any 12 month period. The branch manager and consumer may
also change the day of the month that each contractual payment is due. Each
contract can generally have the due date changed only once and the change
cannot be greater than 30 days from the original due date.

ANCILLARY PRODUCTS

The Company offers to consumers, as agent for unaffiliated providers,
optional credit life and accident and health insurance, extended warranty
coverage and motor club memberships solely in connection with its purchase of
consumer installment contracts. The consumers are obligated to secure physical
damage insurance from any acceptable source. If a consumer fails to maintain
physical damage insurance, under the terms of the installment contract the
Company is permitted to and does force place such insurance with the insurer
that it represents. The Company receives commissions on its sales of all such
ancillary products.

MANAGEMENT INFORMATION SYSTEMS

Management believes that operational information available on a
continuous basis at all levels of management is a key factor in managing the
growth and profitability of a decentralized company in a highly competitive
market. The Company has contracted with a third party, Florida Informanagement
Services, Inc. ("FIS"), to provide daily processing of the Company's
installment contract receivables and all other management reporting and
information needs through December 5, 1999. FIS is required to maintain the
data network, provide customized programming services and provide data backup,
recovery and disaster recovery for the Company's records. The system has been
customized by FIS to process the Company's installment contract transactions,
to assist in compliance with its credit policies and certain applicable laws
and regulations and to monitor its decentralized branch office network. The
management information system provides on-line, real-time data processing that
uses personal computers as terminals with automatic download functions and
customized report writer capability at each branch office location.

All of the Company's offices are connected to the FIS main computer
center in Orlando, Florida. The system provides all of the data processing
with respect to the Company's

installment contract transactions, including application processing, retrieval
of credit bureau reports, purchases of installment contracts, payments to
dealers, customer payment posting, credit and collection monitoring activity
and recording and posting of all general ledger information. The system
requires each branch office to balance all daily transactions before closing
out for the day. In addition, each branch office and the Company's operations
headquarters and executive office have selective access to retrieve data from
the system.

The Company's management information system is programmed with Company
guidelines and legal parameters that limit the acceptance of installment
contracts outside such guidelines and parameters. When certain installment
contract information that does not meet these guidelines is entered into the
system, it will be rejected and only accepted after it is corrected. In
addition, all branch office entries are automatically sorted and classified
into the general ledger system. As a result, the Company is able to compile
financial statements promptly at month-end. The system produces monthly
reports related to selected operational functions and administrative activity
as well as maintains a cash management system to control cash on a daily basis.

The Company believes that the system has the capacity to support
sustained growth in the Total Portfolio.

COMPETITION

The automobile finance business is highly fragmented and competitive.
The Company believes that there are numerous competitors providing, or capable
of providing, financing through dealers to non-prime consumers of automobiles
and that many companies have entered the market for non-prime consumers during
the last several years. The Company does not believe that it currently
competes, in any significant manner, with commercial banks, savings and loans,
credit unions, financing arms of automobile manufacturers such as General
Motors Acceptance Corporation, Ford Motor Credit Corporation and Chrysler
Credit Corporation, and other consumer lenders that apply more traditional
lending criteria to the credit approval process. Traditional lenders such as
banks and credit unions generally lend to "prime" consumers. These consumers
generally borrow at lower finance rates, purchase newer model automobiles and
have a lower default rate than non-prime customers. Many of the largest
providers of financing to the non-prime automobile finance market are
publicly-traded specialty automobile finance companies. The Company estimates
that these companies collectively have less than a 15% market share. The
remainder of providers is primarily comprised of privately held finance
companies and dealers who provide financing programs directly to the consumer.
The Company believes that it competes principally on the basis of the service
provided and terms offered to participating dealers.

Most non-prime lenders require an acquisition discount for each
installment contract purchased. The Company's non-refundable acquisition
discounts are based on the value and condition of the automobile, the
relationship between the amount financed and the automobile's value and the
consumer's creditworthiness which includes length of employment, net income,

stability of residency, indebtedness and payment history. During 1996, the
average non-refundable acquisition discount charged by the Company was 10.8%.

REGULATION

The Company's business is subject to regulation and licensing under
various federal, state and local statutes and regulations. As of December 31,
1996, the Company's business operations were conducted with dealers located in
eight states, and, accordingly, the laws and regulations of such states govern
the Company's operations. Most states where the Company operates (i) limit
finance charges, fees and other charges that may be imposed by, or prescribe
certain other terms of, the installment contracts that the Company purchases,
(ii) govern the sale and type of insurance products offered by the Company and
the insurers for which it acts as agent, (iii) define the Company's rights to
repossess and sell collateral and (iv) prohibit the practice of increasing the
cash sale price for consumers who pay for automobiles on credit rather than in
cash ("cash sale differential"). It is the Company's policy not to purchase
installment contracts from dealers who charge a cash sale differential. In
addition, the Company is required to be licensed or registered to conduct its
finance operations in certain states in which the Company purchases installment
contracts. As the Company expands its operations into other states, it will be
required to comply with the laws of such states.

Numerous federal and state consumer protection laws and regulations
impose substantive disclosure requirements upon lenders and servicers involved
in automobile financing. Some of the federal laws and regulations include the
Truth-in-Lending Act, the Equal Credit Opportunity Act, the Federal Trade
Commission Act, the Fair Credit Reporting Act, the Fair Credit Billing Act, the
Fair Debt Collection Practices Act, the Magnuson-Moss Warranty Act, the Federal
Reserve Board's Regulations B and Z and the Soldiers' and Sailors' Civil Relief
Act.

The Company is subject to state regulations governing insurance agents
in connection with its sales of credit and other insurance, which require that
insurance agents (such as the Company's personnel) be licensed, govern the
commissions that may be paid to agents in connection with the sale of credit
insurance and limit the premium amount charged for insurance.

In addition, the Federal Trade Commission ("FTC") has adopted a
holder-in-due-course rule which has the effect of subjecting persons that
finance consumer credit transactions (and certain related lenders and their
assignees) to all claims and defenses which the consumer could assert against
the seller of the goods and services. With respect to used automobiles
specifically, the FTC's Rule on Sale of Used Automobiles requires that all
sellers of used automobiles prepare, complete and display a Buyer's Guide which
explains the warranty coverage for such automobiles. The Credit Practices Rules
of the FTC impose additional restrictions on sales contract provisions and
credit practices.

EXECUTIVE OFFICERS

As of March 1, 1997, the executive officers of the Company, their ages
and their present positions with the Company are as follows:

NAME AGE POSITION AND OFFICES HELD
---- --- -------------------------

Michael P. Harrington 60 Chairman of the Board, President and Chief Executive Officer

Thomas G. Parker 56 President and Chief Operating Officer of First Enterprise Acceptance Company

Kenneth L. Stucky 58 Vice President and Chief Administrative Officer of First Enterprise Acceptance
Company

Robert J. Harker 57 Vice President and Controller

Paul A. Stinneford 64 Director, Vice President, Secretary and General Counsel

Jan W. Erfert 61 Vice President and Treasurer

Michael P. Harrington has served as Chairman of the Board, President
and Chief Executive Officer of the Company since the Company commenced
operations in 1990. Prior to the formation of the Company, Mr. Harrington
served as President and Treasurer of First Illinois Finance Company ("First
Illinois"), the predecessor company of Mercury Finance Company ("Mercury")
which is a publicly held company. He was a co-founder of First Illinois in
1983. Prior to the commencement of First Illinois, Mr. Harrington served as the
interim Chief Executive Officer of General Finance Corporation ("General
Finance") and had previously been Financial Vice President, Treasurer, and a
Director of General Finance.

Thomas G. Parker has served as President and Chief Operating Officer
of First Enterprise Acceptance Company since 1992. Prior to joining the
Company, Mr. Parker was employed by Mercury from 1984 to 1992; his last
position was as a District Director. Prior to joining Mercury, Mr. Parker was
the Senior Vice President of Operations for Atlantic Discount Company, a
company he had joined in 1974. From 1963 through 1974 Mr. Parker was employed
at General Finance at which his last capacity was as a Director of Supervision.

Kenneth L. Stucky has served as Vice President and Chief
Administrative Officer of First Enterprise Acceptance Company since 1992.
Prior to joining the Company, Mr. Stucky was a Financial Business Consultant.
From 1981 through 1986 he was the Business Manager for a law firm in
Jacksonville, FL. From 1975 through 1981 he served as Administrative Vice
President

for Atlantic Discount Company, a consumer finance company doing business in
several southeastern states. Prior to joining Atlantic Discount Company, Mr.
Stucky was employed at General Finance for 13 years in a number of
administrative, planning and financial positions.

Robert J. Harker has served as a Vice President and the Controller of
the Company since the Company commenced operations in 1990. Mr. Harker was a
Director of the Company from 1994 until July 1996. Prior to the formation of
the Company, Mr. Harker was Vice President and Controller of First Illinois, of
which he vas a co-founder in 1983. Prior to the commencement of First Illinois,
Mr. Harker served for over 23 years in a number of accounting and finance
capacities with General Finance.

Paul A. Stinneford has served as a Director, Vice President, the
Secretary and the General Counsel of the Company since the Company commenced
operations in 1990. Prior to the formation of the Company, Mr. Stinneford was
Vice President, Secretary and General Counsel of Spiegel, Inc. Prior to joining
Spiegel, Inc. in 1972, Mr. Stinneford was employed as an attorney with Sears,
Roebuck and Co. which he had joined in 1958.

Jan W. Erfert has served as a Vice President and the Treasurer of the
Company since 1994. Prior to joining the Company, Mr. Erfert served as Chief
Information Officer for The American Hospital Association from 1989 to 1992 and
was Vice President, Management Services for Allied Van Lines, Inc. from 1985 to
1989. His previous experience includes ten years with the American Medical
Association as Vice President and Chief Financial Officer from 1975 to 1985. He
was General Manager, Accounting Division at the U.S. Postal Service from 1973
to 1975 and had a three year association with the Aetna Finance Company
subsidiary of ITT Corporation while serving on the ITT Headquarters
Comptroller's Staff from 1965 to 1973. Mr. Erfert is a certified public
accountant.

EMPLOYEES

As of December 31, 1996, the Company employed 226 persons, none of
whom is covered by a collective bargaining agreement. The Company provides
medical insurance and other benefits for eligible employees. The Company
generally considers its relationships with its employees to be good.

ITEM 2 - PROPERTIES

PROPERTIES

The principal executive office of the Company is located in Evanston,
Illinois in a leased office facility of approximately 2,600 square feet, and
the lease for such office expires on October 31, 2000. The operations
headquarters is located in Enterprise, Alabama in a leased office facility of
approximately 7,200 square feet, and the lease for such office expires on June
30, 1999. As of December 31, 1996, the Company leased office space for 35
branch offices

ranging from approximately 1,000 square feet to 3,000 square feet, and was
obligated under leases expiring on dates ranging from May 1997 to December
2005.

ITEM 3 - LEGAL PROCEEDINGS

The Company is involved from time to time in ordinary routine
litigation incidental to its business. The litigation is generally based upon
claims that certain of the Company's business practices such as acquiring
installment contracts at an acquisition discount, force placing insurance and
offering other insurance products violate laws, including the Alabama Consumer
Credit Act, the Alabama Deceptive Practices Act and the Federal Truth in
Lending Act. Three of the suits pending against the Company as of March 1, 1997
are purported class actions. One of the purported class actions was
conditionally certified as a class action, but the other class actions have not
been so certified. The Company believes that the ultimate outcome of all
pending litigation as of March 1, 1997, will not have a material adverse effect
on the Company, its profitability and its financial position. The Company
intends to vigorously defend all such actions.

Due to the consumer-oriented nature of the Company's industry and the
application of certain laws and regulations, industry participants are
regularly named as defendants in litigation alleging violations of federal and
state laws and regulations and consumer law torts, including fraud. Many of
these actions allege violations of consumer protection laws. Therefore, there
can be no assurance that the Company will not be named as a defendant in future
suits or that such suits will not have a material adverse effect on the
Company, its profitability and its financial condition.

ITEM 4 - SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the
quarter ended December 31, 1996.

PART II

ITEM 5 - MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDERS
MATTERS

The Company's Common Stock is listed on the Nasdaq stock market's
National Market under the symbol "FENT." The approximate number of holders of
record of the Common Stock was 45 as of February 3, 1997.

3rd Quarter* 4th Quarter

1996 price range of common stock:
High $10.375 $11.125
Low 7.00 9.00
1996 dividends per common share -- --

* For the period commencing July 22, 1996, the date the public market
for the Company's Common Stock commenced, through September 30, 1996.

17
ITEM 6 - SELECTED FINANCIAL DATA

The selected financial data set forth below as of and for the years ended
December 31, 1992 through 1996 are derived from the audited financial
statements of the Company. The selected financial and operating data should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Financial Statements, including
the Notes thereto, and other financial data included elsewhere herein.

YEARS ENDED DECEMBER 31,
--------------------------------------------------
1992 1993 1994 1995 1996
------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

STATEMENT OF INCOME DATA:
Automobile portfolio finance charges (1)............................. $557 $3,002 $5,082 $9,634 $17,665
Interest from timeshare receivables (1).............................. 1,458 752 123 11 -
------ ------- ------- -------- --------
Finance charges and interest......................................... 2,015 3,754 5,205 9,645 17,665
Interest expense..................................................... 1,080 1,201 1,576 4,039 6,281
------ ------- ------- -------- --------
Net interest income ................................................. 935 2,553 3,629 5,606 11,384
Provision for credit losses.......................................... - - - - 4,000
Other income:
Servicing income................................................... - 227 1,323 3,052 4,964
Insurance commissions.............................................. 93 534 550 1,342 3,198
Fees and other income.............................................. 53 169 257 606 1,649
Gain on sale of installment contracts.............................. - - - - 524
------ ------- ------- -------- --------
Total other income............................................... 146 930 2,130 5,000 10,335
Total operating expenses............................................. 1,168 2,421 5,095 8,172 12,790
Income taxes (2)..................................................... (2) 30 3 60 1,962
Income tax effect of S Corporation termination (2)................... - - - - (267)
Extraordinary item................................................... - - - - 150
------ ------- ------- -------- --------
Net income (loss).................................................... ($85) $1,032 $661 $2,374 $3,084
====== ======= ======= ======== ========
Pro forma net income................................................. $2,285 $3,578
======== ========
Per share data:
Pro forma net income per share (3)................................. $0.42 $0.63
Pro forma weighted average shares outstanding (in thousands) (3)... 5,408 5,683

PORTFOLIO DATA:
Total Portfolio...................................................... $6,215 $19,399 $39,724 $80,261 $149,470
Average Total Portfolio.............................................. 2,001 12,204 28,553 59,374 117,132
Average Owned Portfolio.............................................. 2,001 11,560 19,997 40,153 79,375
Average indebtedness (4)............................................. 16,899 18,252 18,480 34,917 66,782

Number of installment contracts purchased............................ 800 2,685 4,935 10,021 15,810
Installment contracts purchased...................................... $7,525 $19,248 $35,137 $70,184 $120,154

OPERATING DATA:
Owned Portfolio yield (5)............................................ 27.84% 25.97% 25.41% 23.99% 22.26%
Cost of borrowed funds (4)........................................... 6.39 6.58 8.53 11.57 9.41
Net interest spread ................................................. 21.45 19.39 16.88 12.42 12.85
Net interest margin (6).............................................. 21.65 19.98 18.10 13.96 14.34
Allowance for credit losses as a
percentage of Owned Portfolio...................................... 9.59 6.86 7.59 8.42 9.57
Net charge-offs in the Owned Portfolio as a
percentage of average Owned Portfolio.............................. 1.00 4.35 6.04 7.49 8.51
Net charge-offs in the Total Portfolio as a
percentage of average Total Portfolio.............................. 1.00 4.12 5.94 6.46 7.42
Operating expenses as a percentage of
average Total Portfolio............................................ 58.37% 19.84% 17.84% 13.76% 10.92%

Number of branch offices............................................. 4 8 17 25 35
Number of dealers.................................................... 69 187 333 722 1,313

BALANCE SHEET DATA:
Net principal balance (7)............................................ $6,215 $7,612 $33,779 $59,495 $118,551
Allowance for credit losses.......................................... (596) (522) (2,563) (5,011) (11,350)
Timeshare receivables................................................ 12,955 4,326 266 - -
Total assets......................................................... 19,077 12,272 33,101 58,411 119,756
Senior debt.......................................................... 7,200 5,966 25,640 43,267 61,153
Notes payable - securitized pool..................................... - - - - 36,733
Subordinated debt.................................................... 10,777 4,000 3,850 8,355 -
Stockholders' equity................................................. 885 1,524 1,728 2,165 16,316

(1) In May 1992, the Company changed its business strategy from the financing
of timeshare receivables at resort properties to purchasing installment
contracts originated by automobile dealers for financing the sale of
automobiles.
(2) For all periods presented except 1996, the Company was an S Corporation and
was not subject to income taxes. Effective January 1, 1996, the Company
terminated its Subchapter S status and is subject to federal and state
income taxes. Upon termination, and in compliance with SFAS No. 109, the
Company recognized a deferred tax benefit of $267,000 representing the
cumulative temporary differences between the financial reporting and tax
basis of its assets and liabilities.
(3) Pro forma net income per share represents pro forma net income divided by
pro forma weighted average shares outstanding. Pro forma net income
represents net income, adjusted for the pro forma provision for income
taxes as if the Company had been subject to income taxes for the year-ended
December 31, 1995, plus the after-tax interest savings resulting from the
repayment of debt resulting from the issuance of common stock in connection
with the initial public offering. Pro forma weighted shares outstanding is
based on the Company's actual weighted average shares and common share
equivalents outstanding plus 2,169,636 shares sold by the Company in
connection with the initial public offering.
(4) Average indebtedness represents the average dollar balance of borrowings
outstanding under the Credit Facility and subordinated notes throughout the
year. Cost of borrowed funds represents interest expense as a percentage
of average indebtedness. Averages were computed using the beginning and
ending balance for each month during the year.
(5) Represents automobile portfolio finance charges as a percentage of the
average Owned Portfolio.
(6) Represents net interest income as a percentage of the average Owned
Portfolio. For periods prior to 1996, interest expense was allocated to
the Owned Portfolio based on the ratio of the average Owned Portfolio to
the average total finance receivables (consisting of both the Owned
Portfolio and timeshare receivables).
(7) Represents the net principal balance of finance receivable in the Owned
Portfolio.

17
18

ITEM 7 - MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the
preceding "Selected Financial and Operating Data" and the Company's Financial
Statements and the Notes thereto and the other financial data included in this
report. The financial information provided below has been rounded in order to
simplify its presentation. The ratios and percentages provided below are
calculated using the detailed financial information contained in the Financial
Statements, the Notes thereto and the financial data elsewhere in this report.

GENERAL

The Company is a specialty finance company engaged primarily in
purchasing and servicing installment contracts originated by dealers in the
sale of automobiles. The Company derives most of its revenue from (i) finance
charges earned on the installment contracts, (ii) contractual servicing fees
and bonus servicing fees resulting from the sales of certain receivables and
(iii) fees and commissions derived from the sale of ancillary products. The
following table summarizes the Company's sources of revenues,

YEARS ENDED DECEMBER 31,
------------------------------
1994 1995 1996
---- ---- ----

Finance charges from installment contracts . . . . . . . . 69.3% 65.8% 63.1%
Servicing income . . . . . . . . . . . . . . . . . . . . . 18.0 20.8 17.7
Other fees and commissions . . . . . . . . . . . . . . . . 11.0 13.3 17.3
Gain on sale of installment contracts . . . . . . . . . . . -- -- 1.9
Interest income from timeshare receivables . . . . . . . . 1.7 0.1 --
----- ----- -----
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0%
===== ===== =====

From its inception in 1990 through May 1992, the Company engaged in
the financing of timeshare receivables at resort properties. In May 1992 the
Company changed its operating strategy to focus on the financing of automobile
installment contracts. As of December 31, 1996, the Company had sold or
collected all remaining timeshare receivables. The Company's automobile
installment contract portfolio has grown significantly since 1992. The Total
Portfolio increased from $6.2 million at December 31, 1992 to $149.5 million at
December 31, 1996.

Installment contracts are generally purchased from dealers at a
discount from the principal amount financed by consumers which is
non-refundable to dealers ("non-refundable contract acquisition discount").
The amount of the non-refundable contract acquisition discount is negotiated
between the dealers and the branch managers based on several factors, including
the creditworthiness of the consumers, the value and condition of the
automobiles and the relationship between the amount to be financed and the
automobile's value. Installment contracts purchased during the year ended
December 31, 1996 had a weighted average non-refundable contract acquisition
discount of approximately 10.8%. The portfolio of owned and sold installment
contracts is grouped into pools on a chronological basis (quarterly beginning
in 1995) for purposes of evaluating the non-refundable contract acquisition
discounts. The non-refundable contract acquisition discount represents both a
credit allowance and a yield enhancement, with the portion necessary to absorb
credit losses allocated to the allowance for credit losses. The remaining
portion of the non-refundable contract acquisition discount, if any, is
allocated to the unamortized contract acquisition discount and is accreted into
finance charge income over the estimated life of the installment contracts
using the sum-of-the-months'-digits method which approximates the interest
method. Since August 1995, all of the Company's non-refundable contract
acquisition discount has been allocated to the allowance for credit losses.
See "---Credit Loss Experience."

The Company records an installment contract on its books as the total
of contractually scheduled payments under such contract, reduced by: (i)
unearned finance charges, which are recognized as income using the interest
method; (ii) unearned insurance commissions, which are recognized as income
over the average terms of the related policies using the
sum-of-the-months'-digits method; (iii) the unamortized contract acquisition
discount, which

represents the portion of the non-refundable contract acquisition discount not
allocated to the allowance for credit losses and (iv) that portion of the
contract acquisition discount allocated to the allowance for credit losses. If
an installment contract becomes 90 or more days contractually delinquent and no
full contractual payment is received in the month the account reaches such
delinquency status, the accrual of income is suspended until one or more full
contractual monthly payments are received. Late charges, deferment fees and
extensions fees are recognized as income when collected.

As part of its overall funding strategy, the Company has sold finance
receivables under various asset purchase agreements. During the years ended
December 31, 1993, 1995 and 1996, the Company sold $12.1 million, $27.5
million, and $35.2, respectively, under such agreements. The sales were
without recourse and no gain or loss was recognized for those sales in 1993 and
1995 as they were not material to the financial statements. Gains were
recognized for the sales in the year ended December 31, 1996 in the amount of
$524,000 primarily due to a decrease in the fixed rate to the purchaser
compared to previous sales. The gains on the sales of finance receivables were
determined by the difference between sales proceeds and the cost of the finance
receivables and adjusted for the present value of the difference between the
estimated future servicing revenues (net of a fixed rate to the purchaser) and
the normal servicing costs ("excess servicing rights"). The excess servicing
rights were capitalized and are being amortized over the expected life of the
finance receivables. In conjunction with the sale of these receivables, the
Company and the purchasers have entered into servicing agreements whereby the
Company retained servicing rights on the installment contracts sold and
receives contractual servicing fees equal to 3% per annum of the remaining
principal balance of the installment contracts sold. Under the terms of the
existing agreements, the Company is also eligible to receive additional
servicing fees, based upon portfolio performance, on the installment contracts
("bonus servicing fees"). The bonus servicing fees represent the difference
between the yield received by the Company and the sum of (i) the Company's 3%
contractual servicing fee, (ii) the yield due to the purchaser and (iii) the
addition or reduction necessary to maintain the purchaser's reserve at the
required level. At December 31, 1996, the outstanding balance of installment
contracts sold and serviced by the Company was $30.9 million. All servicing
fees earned by the Company are recognized in the Company's financial statements
as servicing income.

This report contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in "Risk
Factors."

GROWTH, PROFITABILITY AND RECENT TRENDS AND DEVELOPMENTS

The Company has experienced significant growth since it changed its
operating strategy to focus on the financing of automobile installment
contracts. From December 31, 1992 to December 31, 1996, the Total Portfolio
increased from $6.2 million to $149.5 million. The Company's strategy is to
grow the Total Portfolio by increasing its penetration of existing markets and
by expanding into new market areas. The Company has grown from four branch
offices at December 31, 1992 to 35 branch offices at December 31, 1996.

The principal determinant of the Company's net interest income is the
difference between the finance charge income earned on the Owned Portfolio and
the interest paid on borrowed funds. The laws of most states establish the
maximum finance charge rates and prescribe the types and maximum amounts of
fees, insurance premiums and other amounts that consumers may be charged. As
is common in the non-prime consumer market, the Company's installment contracts
generally bear the maximum allowable interest rates and other charges permitted
under applicable state laws.

The Company's liabilities are generally more interest-rate sensitive
than are its earning assets. As a result, significant increases in the
Company's cost of funds could have a material adverse effect on its
profitability and financial condition. To a degree, the Company can mitigate
the adverse effect of an increase in interest rates by (i) selling or
financing portions of its Total Portfolio with fixed liabilities, (ii)
focusing on purchasing only installment contracts which bear the maximum
finance charge rates permitted by law or which are originated in states where
finance charge rate ceilings have not been established, (iii) expanding into
states that permit higher finance charge rates on consumer installment
contracts, (iv) reducing the amount it pays for an installment contract (e.g.,

19
20

increasing the non-refundable contract acquisition discount) and (v) entering
into interest rate protection agreements. Additionally, management believes
that the improved capitalization resulting from its Initial Public Offering
done in July 1996, will allow the Company to take advantage of financing
structures which may reduce the Company's cost of funds or mitigate interest
rate exposures.

The following table sets forth information with regard to the
Company's net interest spread, which represents the difference between the
yield on installment contracts and the Company's cost of borrowed funds.

Years Ended December 31,
---------------------------------
1994 1995 1996
---- ---- ----

Owned Portfolio yield (1) . . . . . . . . . . . . . . . . . . . . . . 25.41% 23.99% 22.26%
Cost of borrowed funds . . . . . . . . . . . . . . . . . . . . . . . 8.53 11.57 9.41
----- ----- -----
Net interest spread . . . . . . . . . . . . . . . . . . . . 16.88% 12.42% 12.85%
Net interest margin (2) . . . . . . . . . . . . . . . . . . . . . . . 18.10% 13.96% 14.34%

- -------------------
(1) Represents automobile portfolio finance charges as a percentage of the
average Owned Portfolio.
(2) Represents net interest income as a percentage of the average Owned
Portfolio. For 1994 and 1995, interest expense was allocated to the
Owned Portfolio based on the ratio of the average Owned Portfolio to
the average total finance receivables (consisting of both the Owned
Portfolio and timeshare receivables).

As reflected in the preceding table, the Company's yield has decreased
during the period from 1994 through December 31, 1996. This is due primarily
to increased penetration into states which have laws which limit the maximum
amount of finance charges, fees, premiums and other charges that can be
charged. Additionally, the decrease is due to (i) force placed collateral
protection insurance ("CPI") for which the Company does not charge interest,
accounting for a larger percentage of the Owned Portfolio, and (ii) the
reduction of accretion income stemming from the unamortized contract
acquisition discount. The Company's cost of borrowed funds increased from 1994
to 1995, but decreased in 1996. The increase in 1995 was due primarily to the
replacement of subordinated debt, the issuance of new subordinated debt and a
higher average cost of borrowed funds under the Credit Facility in 1995. In
December 1994, the Company replaced $4 million in subordinated debt bearing
interest at 6%, with a $4 million subordinated note bearing interest at 13.5%.
Additionally, in September 1995, the Company issued a new subordinated note for
$4.5 million bearing interest at 13%, the proceeds of which were used to pay
down borrowings under the Credit Facility. The average cost of borrowed funds
on the Credit Facility increased from 9.1% in 1994 to 10.5% in 1995. The
average cost of borrowed funds decreased from 1995 to 1996 due primarily to the
retirement of all subordinated debt, a lower average cost of funds on the
Credit Facility, and the securitization of certain finance receivables. In
July 1996, the Company completed its initial public offering of 1,886,640
shares of common stock at a price of $7 per share and in August 1996, the
Underwriters exercised their 30-day overallotment option to purchase an
additional 282,996 shares, also at $7 per share. The proceeds to the Company
were used to retire all subordinated debt and reduce the balance on the Credit
Facility by approximately $3 million. Further, effective October 1, 1996, the
Company renegotiated its Credit Facility, increasing the commitment to $85
million from $62 million and reducing the interest rate to prime plus 25 basis
points with an option of 250 basis points over LIBOR. The average cost of
borrowed funds on the Credit Facility decreased from 10.5% in 1995 to 9.5% in
1996. Finally, in June 1996, the Company completed a $45.1 million debt
financing transaction consisting of 6.84% fixed rate securitization notes. The
proceeds received by the Company were used to repay indebtedness under the
Credit Facility.

The Company's profitability is also dependent on its credit loss
experience. See "--Credit Loss Experience."

YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31,1995

Net Interest Income

Finance charges and interest increased $8.1 million, or 83.2%, from
$9.6 million in 1995 to $17.7 million in 1996. The growth in finance charges
and interest resulted from an increase in the Owned Portfolio due to an

20
21

increase in the number of installment contracts purchased. Installment
contracts purchased increased $50.0 million, or 71.2%, from $70.2 million in
1995 to $120.2 million in 1996. The Company opened 10 branch offices in 1996,
increasing to 35 the number of its branch offices.

The average Owned Portfolio yield decreased from 24.0% in 1995 to
22.3% in 1996. This decrease was primarily attributable to increased
penetration into states which have laws which limit the maximum amount of
finance charges, fees and premiums and other charges that can be charged. The
decrease was also attributable to (i) an increase in CPI insurance, for which
the Company does not charge interest, as a percentage of the Owned Portfolio in
1996 as compared to 1995, and (ii) accretion of the unamortized contract
acquisition discount of approximately $128,000 in 1995 compared to no accretion
income for 1996. Receivables relating to CPI insurance premiums as a
percentage of the Owned Portfolio increased from 5.2% at December 31, 1995 to
6.4% at December 31, 1996.

Interest expense increased $2.3 million from $4.0 million in 1995 to
$6.3 million in 1996. The increase in interest expense resulted from an
increase in borrowings under the Credit Facility and the securitization of
finance receivables. Average total indebtedness increased $31.9 million, or
91.3%, from $34.9 million for 1995 to $66.8 million for 1996. The average cost
of borrowed funds decreased from 11.6% for 1995 to 9.4% for 1996. The decrease
in the average cost of borrowed funds was due to the following factors, (i)
the extinguishment of $8.5 million of subordinated debt bearing interest at a
weighted average rate of 13.3% in July 1996 from the proceeds of the Initial
Public Offering, (ii) a reduction of the interest rate on the Credit Facility
from an average rate of 10.5% for 1995 to 9.5% for 1996, and (iii) the
securitization in June 1996, of installment contracts as a fixed rate debt
transaction bearing interest at a rate of 6.8%, the proceeds of which were used
to pay down borrowings under the Credit Facility. In addition to the weighted
average interest rates on the subordinated debt, the Company amortized both the
fees associated with the debt and the discount related to the detachable
warrants attached to the debt. Further, in addition to the stated rate of 6.8%
on the fixed rate securitized notes, the Company is amortizing fees associated
with the securitization, which totaled approximately $966,000.

Net interest income increased $5.8 million, or 103.1%, from $5.6
million in 1995 to $11.4 million in 1996. The net interest margin on the Owned
Portfolio increased from 14.0% in 1995 to 14.3% in 1996, due to the lower cost
of funds, offset by the reduction in the average portfolio yield as discussed
above.

Provision for Credit Losses

For 1996, the Company made provisions for credit losses of $4 million.
There were no provisions for credit losses in 1995. The provisions for credit
losses were necessary to increase the allowance for credit losses to the level
required from management's static pool loss analyses performed on the
portfolio. As a result, the allowance for credit losses as a percentage of the
Owned Portfolio increased from 8.4% at December 31, 1995 to 9.6% at December
31, 1996. See "--Credit Loss Experience."

Other Income

Other income increased $5.3 million, or 106.7%, from $5.0 million in
1995 to $10.3 million in 1996. The increase in other income was due primarily
to the increase in servicing income, the sale of ancillary products, the
collection of certain fees, and the recognition of a gain on the sale of
installment contracts.

Servicing income increased $1.9 million, or 62.7%, from $3.1 million
in 1995 to $5.0 million in 1996. The increase in servicing income was due to
the sale of $35.2 million in installment contracts during 1996 as compared to
the sale of $27.5 million in 1995. Further, the average balance of sold
contracts increased $18.5 million, or 96.4%, from $19.2 million in 1995 to
$37.7 million in 1996.

Income from insurance commissions increased $1.9 million, or 138.3%,
from $1.3 million in 1995 to $3.2 million in 1996. The increase was
attributable to the increased sales of insurance products in connection with
the

21
22

increase in the volume of installment contracts purchased and the introduction
of certain new insurance products in late 1995.

Fee and other income increased $1.0 million from $606,000 in 1995 to
$1.6 million in 1996. The increase was attributable to increased fees
collected in connection with the growth of the Total Portfolio due to an
increase in the number of installment contracts purchased.

In 1996, the Company recognized a gain on the sale of $35.2 million of
installment contracts in the amount of $524,000. The gain on the sale of
installment contracts was determined by the difference between sales proceeds
and the cost of the installment contracts adjusted for the present value of the
excess servicing rights. The excess servicing rights were capitalized and are
being amortized over the expected life of the installment contracts in direct
proportion to the reduction in the related pool of installment contracts sold.

Operating Expenses

Operating expenses increased $4.6 million, or 56.5%, from $8.2 million
in 1995 to $12.8 million in 1996. The increase in operating expenses was due
to increases in salaries and employee benefits, rent and other expenses
relating to the opening of new branch offices as well as the addition of
administrative personnel at the Evanston, Illinois and Enterprise, Alabama
offices. Salaries and employee benefits increased $2.7 million, or 52.5%, from
$5.1 million in 1995 to $7.8 million in 1996. Although total operating
expenses increased in 1996 as compared to 1995, the Total Portfolio increased
at a faster rate than the rate of increase in operating expenses. As a result,
operating expenses as a percentage of the average Total Portfolio decreased
from 13.8% in 1995 to 10.9% in 1996.

Income Taxes

Income taxes increased $1.9 million from $60,000 in 1995 to $2.0
million in 1996. The increase is due to the Company terminating its status as
an S Corporation effective on January 1, 1996. As a result, the Company is now
subject to federal and certain state and local income taxes.

Upon termination of its S Corporation status, and in compliance with
SFAS No. 109, the Company recognized a deferred tax benefit of $267,000 for
1996 representing the cumulative temporary differences between the financial
reporting and tax basis in its assets and liabilities.

Extraordinary Item

In 1996, the Company incurred an extraordinary charge against earnings
of $150,000, net of taxes of $96,000, related to the early extinguishment of
$8.5 million in subordinated debt. The subordinated debt was extinguished in
July 1996, from the proceeds of the Initial Public Offering of the Company's
common stock. The extraordinary charge was comprised of previously unamortized
fees associated with the debt and unamortized discounts related to the
detachable warrants attached to the subordinated debt.

Net Income

Net income increased $710,000, or 29.9%, from $2.4 million in 1995 to
$3.1 million in 1996. The increase in net income was primarily attributable to
the growth in the Total Portfolio and related factors as discussed above, as
well as the income tax benefit resulting from the termination of the S
Corporation status.

22
23

YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31,1994

Net Interest Income

Finance charges and interest increased $4.4 million, or 85.3%, from
$5.2 million in 1994 to $9.6 million in 1995. The growth in finance charges
and interest resulted from an increase in the Owned Portfolio due to an
increase in the number of installment contracts purchased in 1995.

The Company opened eight branch offices in 1995, increasing to 25 the
number of its branch offices. In 1995, the Company purchased 10,021
installment contracts representing $70.2 million, an increase of 103.1% and
99.7%, respectively, from the 4,935 installment contracts representing $35.1
million purchased in 1994.

The average Owned Portfolio increased $20.2 million, or 100.8%, from
$20.0 million in 1994 to $40.2 million in 1995. The average portfolio yield
decreased from 25.4% in 1994 to 24.0% in 1995. This decrease was primarily
attributable to increased penetration in 1995 in states which have laws which
limit the maximum amount of finance charges, fees, premiums and other charges
that can be charged.

Interest expense increased $2.4 million from $1.6 million in 1994 to
$4.0 million in 1995. The increase in interest expense resulted from an
increase in borrowings under the Credit Facility and an increase in the average
interest rate paid on borrowed funds. Average indebtedness in 1995 increased
$16.4 million, or 88.9%, from $18.5 million in 1994 to $34.9 million in 1995.
The average cost of borrowed funds was 8.5% and 11.6% in 1994 and 1995,
respectively. The increase in the average cost of borrowed funds was due
primarily to the replacement of subordinated debt at a higher interest rate and
the issuance of new subordinated debt. In December 1994, the Company replaced
$4 million in subordinated debt bearing interest at 6% with a $4 million
subordinated note bearing interest at 13.5%. Additionally, in September 1995,
the Company issued a new subordinated note for $4.5 million bearing interest at
13%, the proceeds of which were used to pay down borrowings under the Credit
Facility. See"---Liquidity and Capital Resources." In addition to the
increase in the interest rate on the subordinated debt, the Company is
amortizing both the fees associated with the debt and the discount related to
the detachable warrants attached to the debt. Net interest income increased
$2.0 million, or 54.5%, from $3.6 million in 1994 to $5.6 million in 1995.

The net interest margin on the Owned Portfolio decreased from 18.1% in
1994 to 14.0% in 1995, primarily due to the higher cost of borrowed funds and
lower average portfolio yield as discussed above.

Other Income

Other income increased $2.9 million, or 134.8%, from $2.1 million in
1994 to $5.0 million in 1995. The increase in other income was primarily due
to increases in servicing income and income from the sale of ancillary
products.

Servicing income increased $1.8 million, or 130.8%, from $1.3 million
in 1994 to $3.1 million in 1995. The increase in servicing income was due to
the sale of $27.5 million in installment contracts in 1995.

Income from insurance commissions increased $792,000, or 144.2%, from
$550,000 in 1994 to $3.1 million in 1995. The increase was attributable to the
increased sales of insurance products in connection with the increase in the
volume of installment contracts purchased.

Operating Expenses

Operating expenses increased $3.1 million, or 60.4%, from $5.1 million
in 1994 to $8.2 million in 1995. The increase in operating expenses was due to
increases in salaries and employee benefits, rent and other expenses relating
to the opening of new branch offices in 1995, as well as the addition of
administrative personnel at the Evanston, Illinois and Enterprise, Alabama
offices. Salaries and employee benefits increased $1.9 million, or 59.5%, from
$3.2 million in 1994 to $5.1 million in 1995. Although operating expenses
increased in 1995, as

23
24

compared to 1994, the Total Portfolio grew at a faster rate than the rate of
increase in operating expenses. As a result, operating expense as a percentage
of the average Total Portfolio decreased from 17.8% in 1994 to 13.8% in 1995.

Net Income

Net income increased $1.7 million, or 259.1%, from $661,000 in 1994 to
$2.4 million in 1995. The increase in net income was primarily attributable to
the growth in the Total Portfolio and related factors as discussed above.

CREDIT LOSS EXPERIENCE

The Company maintains an allowance for credit losses at a level
management believes adequate to absorb potential losses in the Owned Portfolio.
The adequacy of the allowance for credit losses is evaluated by management on
an ongoing basis through historical credit loss experience, delinquencies, the
value of the underlying collateral, the level of the finance contract portfolio
and general economic conditions and trends. An account is charged off against
the allowance for credit losses at the earliest of the time the account's
collateral is repossessed, the account is 150 days or more past due or the
account is otherwise deemed to be uncollectible.

The Total Portfolio is grouped into pools on a chronological basis
(quarterly beginning in 1995) for purposes of evaluating trends and loss
experience on a more detailed basis ("static pools"). If management determines
that the allowance for credit losses is not adequate to provide for potential
losses of an individual pool, amounts will be transferred, to the extent
available, from the unamortized contract acquisition discounts for that pool to
the allowance for credit losses. Any remaining shortfall in the allowance for
credit losses for an individual pool would be provided through a charge against
income. If management determines that the allowance for credit losses is in
excess of amounts required to provide for losses of an individual pool, the
allowance for credit losses charged to income, if any, will be reduced or the
contract acquisition discounts will be amortized over the remaining life of the
contracts in the pool.

Based upon historical analysis and expected future trends, management
changed the allocation of the non-refundable contract acquisition discount to
the allowance for credit losses, such that all non-refundable contract
acquisition discount was allocated entirely to the allowance for credit losses
after 1994. Additionally, after reviewing the adequacy of the allowance for
credit losses, the remaining balance of the unamortized contract acquisition
discount was transferred to the allowance for credit losses on August 1, 1995.
For the year ended December 31, 1996, the Company increased its allowance for
credit losses by $4.0 million through a charge against income based upon
continued historical analysis, particularly evaluation of the earliest static
pools. Management will continue to monitor this allocation and may, if
appropriate, in the future allocate portions of the non-refundable acquisition
discount to unamortized contract acquisition discount.

The following table sets forth the cumulative net charge offs as a
percentage of the original pool balance based on the quarter of origination and
segmented by the number of months elapsing since origination.

POOL'S CUMULATIVE NET LOSSES AS A PERCENTAGE OF ORIGINAL POOL BALANCE

% of
Original
Principal
Number of Months Since Origination Balance
Pool 3 6 9 12 15 18 21 24 Remaining
---- - - - -- -- -- -- -- ---------

1995:
1st Qtr 0.10% 0.67% 2.06% 3.55% 5.79% 6.96% 7.68% 8.53% 32.6%
2nd Qtr 0.01% 0.63% 1.81% 3.39% 4.71% 5.69% 6.83% 38.7%
3rd Qtr 0.06% 0.57% 2.26% 4.17% 5.92% 7.31% 47.8%
4th Qtr 0.01% 0.41% 2.07% 3.73% 5.80% 60.4%

24
25

POOL'S CUMULATIVE NET LOSSES AS A PERCENTAGE OF ORIGINAL POOL BALANCE

% of
Original
Principal
Number of Months Since Origination Balance
Pool 3 6 9 12 15 18 21 24 Remaining
---- - - - -- -- -- -- -- ---------

1996:
1st Qtr 0.01% 0.25% 1.53% 3.73% 77.2%
2nd Qtr 0.00% 0.32% 1.58% 81.3%
3rd Qtr 0.00% 0.38% 92.3%
4th Qtr 0.00% 91.9%

The following table summarizes certain information relating to the
Company's allocation of the non-refundable contract acquisition discount and
its allowance for credit losses and unamortized contract acquisition discount.

YEARS ENDED DECEMBER 31,
-----------------------------------
1994 1995 1996
---- ---- ----
(DOLLARS IN THOUSANDS)

ALLOWANCE FOR CREDIT LOSSES:
Allowance for credit losses, beginning of period . . . . $ 522 $ 2,563 $ 5,011
Non-refundable contract acquisition discount obtained
on contracts purchased and allocated to allowance
for credit losses . . . . . . . . . . . . . . . . . . 3,249 7,553 12,037
Discount allocated to installment contracts sold . . . . --- (2,197) (2,947)
Installment contracts charged off, net of recoveries . . (1,208) (3,009) (6,751)
Provision for credit losses . . . . . . . . . . . . . . . . --- --- 4,000
Transferred from unamortized contract
acquisition discount . . . . . . . . . . . . . . . . . . --- 101 ---
------- ------- -------
Allowance for credit losses, end of period . . . . . . . $ 2,563 $ 5,011 $11,350
======= ======= =======

UNAMORTIZED CONTRACT ACQUISITION DISCOUNT:
Unamortized contract acquisition discount,
beginning of period . . . . . . . . . . . . . . . . . $ 117 $ 229 $ ---
Non-refundable contract acquisition discount obtained
on contracts purchased, to be accreted into finance
charge income . . . . . . . . . . . . . . . . . . . . 332 --- ---
Accreted into finance charge income . . . . . . . . . . (210) (128) ---
Transferred to allowance for credit losses . . . . . . . . --- (101) ---
------- ------- -------

Unamortized contract acquisition discount,
end of period . . . . . . . . . . . . . . . . . . . . $ 229 $ --- $ ---
======= ======= =======

Under the Company's credit policy, the Company suspends the accrual of
finance charge income with respect to an installment contract that is 90 days
past due. An account is charged off against the allowance for credit losses at
the earliest of the time (i) the account's collateral is repossessed, (ii)
the account is 150 days or more past due or (iii) the account is otherwise
deemed to be uncollectible.

25
26

The following table summarizes data relating to the Company's
charge-off experience and allowance for credit losses.

YEARS ENDED DECEMBER 31,
-----------------------------------
1994 1995 1996
---- ---- ----
(DOLLARS IN THOUSANDS)

CHARGE OFF EXPERIENCE:

TOTAL PORTFOLIO:
Average Total Portfolio . . . . . . . . . . . . . . . . . $28,553 $59,374 $117,132
Net charge-offs (1) . . . . . . . . . . . . . . . . . . . 1,697 3,834 8,693
Net charge-offs as a percentage of average Total
Portfolio . . . . . . . . . . . . . . . . . . . . . . 5.9% 6.5% 7.4%

OWNED PORTFOLIO:
Average Owned Portfolio . . . . . . . . . . . . . . . . $19,997 $40,153 $ 79,375
Net charge-offs (1) . . . . . . . . . . . . . . . . . . . 1,208 3,009 6,751
Net charge-offs as a percentage of average Owned
Portfolio . . . . . . . . . . . . . . . . . . . . . . 6.0% 7.5% 8.5%

ALLOWANCE FOR CREDIT LOSSES:
Owned Portfolio . . . . . . . . . . . . . . . . . . . . . $33,779 $59,495 $118,551
Allowance for credit losses . . . . . . . . . . . . . . 2,563 5,011 11,350
Allowance for credit losses as a percentage of
Owned Portfolio . . . . . . . . . . . . . . . . . . . 7.6% 8.4% 9.6%

- --------------------
(1) The Company's experience to date is that only nominal amounts are
collected on charged-off accounts.

DELINQUENCY EXPERIENCE

A payment is considered past due if the customer fails to make any
full payment on or before the due date as specified by the terms of the
installment contract. The Company typically contacts delinquent customers
within one to two days after the due date.

The following table summarizes the Company's delinquency experience
for accounts with payments 60 days or more past due on a dollar basis for the
Total Portfolio and Owned Portfolio. The delinquency experience data exclude
automobiles which have been repossessed.

YEARS ENDED DECEMBER 31,
-----------------------------------
1994 1995 1996
---- ---- ----
(DOLLARS IN THOUSANDS)

TOTAL PORTFOLIO:
Installment contracts, gross . . . . . . . . . . . . . . $52,262 $105,881 $197,485
Past due contracts, gross:
60 to 89 days . . . . . . . . . . . . . . . . . . . . 159 726 1,755
90 days or more . . . . . . . . . . . . . . . . . . . 57 454 1,338

Total 60 days or more . . . . . . . . . . . . . . . . $ 216 $ 1,180 $ 3,093
======= ======== ========

Contracts with payments 60 days or more past due
as a percentage of total installment contracts,
gross . . . . . . . . . . . . . . . . . . . . . . . . 0.41% 1.11% 1.57%
======= ======== ========

26
27

YEARS ENDED DECEMBER 31,
-----------------------------------
1994 1995 1996
---- ---- ----
(DOLLARS IN THOUSANDS)

OWNED PORTFOLIO:
Installment contracts, gross . . . . . . . . . . . . . . $45,206 $79,422 $159,898
Past due contracts, gross:
60 to 89 days . . . . . . . . . . . . . . . . . . . 105 509 1,365
90 days or more . . . . . . . . . . . . . . . . . . . 57 317 796

Total 60 days or more . . . . . . . . . . . . . . . . $ 162 $ 826 $ 2,161
======= ======= ========
Contracts with payments 60 days or more past due
as a percentage of total installment contracts,
gross . . . . . . . . . . . . . . . . . . . . . . . . 0.36% 1.04% 1.35%
======= ======= ========

REPOSSESSED COLLATERAL

The Company commences repossession procedures against the underlying
collateral when it determines that collection efforts are likely to be
unsuccessful. Repossession generally occurs after a customer has missed two
consecutive monthly payments. In such cases, the net amount due under the
installment contract is reduced to the estimated fair value of the collateral,
less estimated costs of disposition, through a charge to the allowance for
credit losses. Repossessed collateral is valued at the lower of cost or
market, which on average was approximately 60% of the net balance of the
contract at the time of repossession for repossessions made through December
31, 1996. Repossessed inventory was valued at $543,000 and $930,000 at
December 31, 1995 and 1996, respectively.

LIQUIDITY AND CAPITAL RESOURCES

The Company has funded its operations, branch office openings and the
growth of the Total Portfolio through six principal sources of funds: (i)
payments received under installment contracts, (ii) borrowings under the
Credit Facility, (iii) proceeds from the issuance of subordinated notes, (iv)
proceeds from the sale of installment contracts, (v) proceeds from the
issuance of common stock in connection with the initial public offering, (vi)
proceeds from an asset securitization transaction and (vii) proceeds from the
liquidation of timeshares receivables.

Net cash flows provided by operating activities were $1.1 million,
$3.9 million and $1.1 million in 1994, 1995 and 1996, respectively.

The Company's cash flows used in investing activities since inception
have been used primarily for the purchase of installment contracts. Cash used
for the purchase of installment contracts was $35.1 million, $70.2 million and
$120.2 million for 1994, 1995 and 1996, respectively. Capital expenditures
were $543,000, $521,000 and $739,000 for 1994, 1995 and 1996, respectively.
Cash used in investing activities was offset by (i) the collection of principal
on installment contracts of $11.4 million, $22.0 million and $31.6 million in
1994, 1995 and 1996, respectively; (ii) net proceeds of $24.8 million and
$31.7 million from the sales of installment contracts in 1995 and 1996,
respectively; and (iii) proceeds from the liquidation of timeshare receivables
of $4.1 million and $266,000 in 1994 and 1995, respectively.

Cash was provided by financing activities, primarily from net
borrowings under the Credit Facility, the securitization of installment
contracts, an initial public offering of the Company's common stock and the
issuance of subordinated debt. Net borrowings under the Credit Facility were
$19.7 million, $17.6 million and $17.9 million in 1994, 1995 and 1996,
respectively. In addition, cash was provided through the securitization of
installment contracts in the amount of $45.1 million in 1996, the proceeds of
which were used to reduce the borrowings under the Credit Facility. Further,
$11.2 million in cash was raised in 1996 through the initial public offering of
the Company's common stock, the net proceeds of which were used to repay $8.5
million of subordinated debt, with the balance reducing amounts outstanding on
the Credit Facility. In addition, cash was provided in 1995 through borrowings
on a subordinated basis in the amount of $4.5 million. Offsetting cash
provided from financing activities were dividends paid of $474,000, $1.5
million and $2.1 million in 1994, 1995 and 1996, respectively.

27
28

As of the date hereof, the Company has a $85 million Credit Facility
with a group of seven banks, for which LaSalle National Bank acts as agent, and
which expires June 1, 1998. The Credit Facility is collateralized by a lien on
all the Company assets not subjected to the securitized pool. Interest is
payable at the agent bank's reference rate plus .25% (8.50% at December 31,
1996) and the Company has a option of 2.50% over the LIBOR rate. Borrowings
outstanding under the Credit Facility were $61.2 million at December 31, 1996.
The Credit Facility requires the Company to maintain minimum capital funds (as
defined) of $11.5 million. The Credit Facility also requires that total loss
reserves be maintained at not less than 8% of net installment contracts
receivable and no more than 3% of net installment contracts receivable may be
more than 60 days past due. The Credit Facility also requires that earnings
before interest and taxes to cash interest expense may not be less than 125%
and the ratio of unsubordinated debt to tangible net worth plus subordinated
debt cannot exceed 5 to 1. At December 31, 1996, the Company was in compliance
with all of these covenants.

The Company issued a senior and a junior subordinated note in 1990.
Each note had a face value of $5.0 million, carried an interest rate of 6% and
was unsecured. The Company granted warrants to the junior subordinated note
holder allowing for the purchase of 51% of the Common Stock of the Company. The
senior subordinated note was paid off in 1993. In December 1994, the junior
subordinated note was paid off and the remaining warrants were surrendered to
the Company.

In December 1994, in order to refinance the junior subordinated note,
the Company issued a subordinated note in the amount of $4.0 million to Michael
P. Harrington, its Chairman, President and Chief Executive Officer. Under the
terms of such note, interest was payable at the end of each quarter at a fixed
rate of 13.5% and was due on September 30, 1996. The proceeds were used to
retire the remaining principal balance on the junior subordinated note.
Simultaneously, Mr. Harrington issued a $4.0 million note to LaSalle secured by
capital stock in the Company owned by Mr. Harrington. Under the terms of the
note issued to LaSalle, interest was payable at the end of each quarter at a
fixed rate of 13.5% and was due on September 30, 1996. In connection with this
note issuance, the Company issued to LaSalle a detachable warrant to purchase
193,320 shares of Common Stock. The warrant was exercised by LaSalle at a
price of $1.13 per share in connection with the initial public offering of the
Company's common stock in July 1996.

On September 21, 1995, the Company issued a subordinated note in the
amount of $4.5 million to Banc One Capital Partners V, Ltd. ("Banc One").
Under the terms of the agreement, interest was payable monthly at a fixed rate
of 13%. The note was due on August 31, 1998. In connection with the issuance of
the Banc One note, a detachable warrant to purchase 193,320 shares of Common
Stock was issued to Banc One. The warrant was exercised at a price of $1.56 per
share in connection with the initial public offering of the Company's common
stock in July 1996.

The company sold a total of $74.8 million of installment contracts -
$12.1 million in 1993, $27.5 million in 1995 and $35.2 million under various
asset purchase agreements and servicing agreements. Pursuant to these
servicing agreements, the Company retains the servicing rights on the
installment contracts sold and receives servicing fees. At December 31, 1996
the outstanding balance of installment contracts sold and serviced by the
Company was $30.9 million, and such installment contracts were sold to yield
the purchasers, including GECC, a range of 8.9% to 11.0% per annum. See Notes
to Financial Statements.

In order to meet its 1997 funding needs, the Company will require
additional financing to supplement its expected cash flows from operations and,
the anticipated borrowings under its Credit Facility. The Company has entered
into a securitization facility with a placement agent for the issuance of up to
$200 million of securitized notes through one or more wholly-owned special
purpose subsidiaries. Initially, on June 18, 1996, a wholly-owned subsidiary
of the Company sold approximately $45.1 million of 6.84% fixed rate Securitized
Notes in an asset securitization transaction (the "Securitization"). The
Securitized Notes were secured by installment contracts and the payments under
the Securitized Notes are guaranteed pursuant to a financial guaranty insurance
policy issued by Financial Security Assurance Inc. The net proceeds of the
Securitization to the Company were used to reduce the outstanding balance
under the Credit Facility. The debt incurred in the Securitization is
reflected on the balance sheet of the Company and did not result in a gain on
sale. The Company has not entered into any agreements with

28
29

the purchasers of the Securitized Notes in excess of the $45.1 million of the
Securitized Notes sold and there can be no assurance that any such additional
sales will occur. The Company presently intends to finance additional 1997
funding needs through borrowings under the Credit Facility and securitization
transactions.

IMPACT OF INFLATION

Although the Company does not believe that inflation directly has a
material adverse effect on its financial condition or results of operations,
increases in the inflation rate generally are associated with increased
interest rates. Because the Company borrows funds on a floating rate basis and
purchases installment contracts bearing fixed rates, increased costs of
borrowed funds could have a material adverse impact on the Company's
profitability. Inflation also can affect the Company's operating expenses.

IMPACT OF NEW ACCOUNTING STANDARDS

The Company believes that the provisions of certain Statements of
Financial Accounting Standards ("SFAS") which have not been implemented by the
Company either do not apply to the Company or would not affect the Company's
financial position, results of operations, or disclosures relating thereto.
These statements include SFAS No. 106 "Employer's Accounting for Postretirement
Benefits Other than Pensions" and SFAS No. 121 "Accounting for the Impairment
of Long-Lived Assets to be Disposed of."

The Company intends to continue to apply the provisions of Accounting
Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" in
accounting for stock-based compensation. The Company will provide pro forma
net income and net income per share disclosures as if the fair value based
accounting method in Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation" had been used to account for
stock-based compensation.

The Company will adopt Statement of Financial Accounting Standards No.
125 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities" effective January 1, 1997. As a result, for all
securitization transactions completed after this date and meeting the specific
criteria of SFAS 125, the company will remove the securitized assets and
related liabilities from its balance sheet and recognize applicable servicing
assets.

29
30

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors
First Enterprise Financial Group, Inc.

We have audited the accompanying consolidated balance sheets of First
Enterprise Financial Group, Inc. and subsidiary (the "Company") as of December
31, 1996 and 1995, and the related consolidated statements of income, changes
in stockholders' equity, and cash flows for each of the years in the three year
period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First Enterprise
Financial Group, Inc. and subsidiary as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three year period ended December 31, 1996, in conformity with generally
accepted accounting principles.

As discussed in note A, effective January 1, 1996, the Company changed its tax
status by terminating its S Corporation election. Concurrent with this change,
the Company adopted the provisions of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes."

GRANT THORNTON LLP

Chicago, Illinois
February 8, 1997 (except for note K, as
to which the date is March 7, 1997)

30
31
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

FIRST ENTERPRISE FINANCIAL GROUP, INC.

CONSOLIDATED BALANCE SHEETS

December 31,
-------------------------
ASSETS 1996 1995
------------ -----------

Cash ........................................................ $ 1,323,149 $ 1,703,320
Restricted cash ............................................. 4,586,780 -

Automobile finance receivables .............................. 118,537,808 59,305,631
Allowance for credit losses ................................. (11,349,783) (5,010,919)
------------ ------------

Finance receivables, net .................................. 107,188,025 54,294,712

Property and equipment, net ................................. 1,255,777 881,713
Repossessed assets .......................................... 929,560 542,841
Deferred tax asset .......................................... 2,241,000 -
Other assets ................................................ 2,231,660 988,194
------------ ------------

TOTAL ASSETS ............................................... $119,755,951 $ 58,410,780
============ ============

December 31,
-------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
------------ -----------

Senior debt ................................................. $ 61,153,000 $43,267,000
Notes payable - securitized pool ............................ 36,732,987 -
Subordinated debt ........................................... - 8,354,541
Accounts payable - dealers .................................. 2,704,455 1,937,710
Other accounts payable and accrued expenses ................. 2,524,003 1,577,189
Other liabilities ........................................... 325,208 460,271
------------ -----------

Total liabilities ......................................... 103,439,653 55,596,711

Commitments and contingencies ............................... - -

Common stock warrants ....................................... - 649,300

Stockholders' equity:
Common stock, $.01 par value; 20,000,000 shares authorized;
5,285,955 and 2,062,080 shares issued and outstanding
at December 31, 1996 and 1995, respectively ............ 52,860 20,621
Class B common stock, $.01 par value, non-voting;
2,262,080 shares authorized; 917,625 issued
and outstanding at December 31, 1995 ................... - 9,176
Additional paid-in capital ................................ 13,921,286 1,201,718
Retained earnings ......................................... 2,342,152 1,328,405
Guaranteed loans of stockholders .......................... - (395,151)
------------ -----------

Total stockholders' equity ................................ 16,316,298 2,164,769
------------ -----------

TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY .................................. $119,755,951 $58,410,780
============ ===========

The accompanying notes are an integral part of these statements.

31
32
FIRST ENTERPRISE FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF INCOME

Years ended December 31,
-----------------------------------
1996 1995 1994
----------- ---------- ----------

Finance charges and interest .......................... $17,665,105 $9,644,486 $5,205,150

Interest expense ...................................... 6,281,428 4,038,900 1,575,923
----------- ---------- ----------

Net interest income ............................ 11,383,677 5,605,586 3,629,227

Provision for credit losses ........................... 4,000,000 - -
----------- ---------- ----------

Net interest income after
provision for credit losses .................. 7,383,677 5,605,586 3,629,227

Other income:
Servicing income .................................... 4,964,039 3,051,952 1,322,604
Insurance commissions ............................... 3,198,225 1,342,099 549,682
Fees and other income ............................... 1,648,878 606,202 257,257
Gain on sale of finance receivables ................. 524,000 - -
----------- ---------- ----------

Total other income ............................. 10,335,142 5,000,253 2,129,543
----------- ---------- ----------

Income before operating expenses ............... 17,718,819 10,605,839 5,758,770

Operating expenses:
Salaries and employee benefits ...................... 7,768,586 5,095,792 3,194,775
Rent expense ........................................ 530,088 355,420 212,310
Depreciation and amortization ....................... 364,563 267,962 137,365
Professional services ............................... 647,914 472,480 229,176
Data processing ..................................... 950,481 610,205 267,708
Other expenses ...................................... 2,528,839 1,370,228 1,053,912
----------- ---------- ----------

Total operating expenses ....................... 12,790,471 8,172,087 5,095,246
----------- ---------- ----------

Income before income taxes and
extraordinary item .......................... 4,928,348 2,433,752 663,524

Income taxes .......................................... 1,962,000 60,000 2,500
Deferred income tax effect of S Corporation
termination ......................................... (267,000) - -
----------- ---------- ----------

Income before extraordinary item ............... 3,233,348 2,373,752 661,024

Extraordinary charge from early extinguishment of debt,
net of income taxes .................................. (149,789) - -
----------- ---------- ----------

Net income ..................................... $ 3,083,559 $2,373,752 $ 661,024
=========== ========== ==========

Per share data:
Pro forma net income before extraordinary item ....... $ .66 $ .42
Extraordinary charge ................................. (.03) -
----------- ----------

Pro forma net income per share ........................ $ .63 $ .42
=========== ==========
Pro forma weighted average number of common
and common equivalent shares outstanding ............. 5,683,341 5,407,709
=========== ==========

The accompanying notes are an integral part of these statements.

32
33
FIRST ENTERPRISE FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

Class B Additional Guaranteed
Common Common Paid-in Retained Loans of
Stock Stock Capital Earnings Stockholders Total
------- -------- ----------- ----------- ------------ -----------

Balance December 31, 1993 ........... $20,621 $ - $ 779,379 $ 724,018 $ - $ 1,524,018

Net income .......................... - - - 661,024 - 661,024

Dividends paid ...................... - - - (474,027) - (474,027)

Exercise of options to acquire
547,740 shares of Class B
common stock ..................... - 5,477 252,098 - (240,606) 16,969
------- -------- ----------- ----------- ------------ -----------

Balance December 31, 1994 ........... 20,621 5,477 1,031,477 911,015 (240,606) 1,727,984

Net income .......................... - - - 2,373,752 - 2,373,752

Dividends paid ...................... - - - (1,549,125) - (1,549,125)

Appreciation of common stock
warrants ......................... - - - (407,237) - (407,237)

Exercise of options to acquire
384,062 shares of Class B
common stock ..................... - 3,841 176,765 - (154,545) 26,061

Repurchase of 14,177 shares of
Class B common stock ............. - (142) (6,524) - - (6,666)
------- -------- ----------- ----------- ------------ -----------

Balance at December 31, 1995 ........ 20,621 9,176 1,201,718 1,328,405 (395,151) 2,164,769

Net income .......................... - - - 3,083,559 - 3,083,559

Dividends paid - Final
S Corporation distribution
payment .......................... - - - (2,069,812) - (2,069,812)

Exercise of common stock
warrants to purchase 386,640
shares of common stock ........... 3,867 - 1,165,465 - - 1,169,332

Tax benefits relating to the exercise
of common stock warrants ......... - - 750,000 - - 750,000

Exercise of options to acquire
136,609 shares of common
stock ............................ 386 980 156,766 - - 158,132

Conversion of Class B stock to
common stock ..................... 10,156 (10,156) - - - -

Issuance of 1,782,996 shares of
common stock in connection
with the initial public offering,
net of offering costs ............ 17,830 - 10,647,337 - - 10,665,167

Release of guarantee on loans of
stockholders ..................... - - - - 395,151 395,151
------- -------- ----------- ----------- ------------ -----------

Balance at December 31, 1996 ........ $52,860 $ - $13,921,286 $ 2,342,152 $ - $16,316,298
======= ======== =========== =========== ============ ===========

The accompanying notes are an integral part of this statement.

33
34
FIRST ENTERPRISE FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended December 31,
-----------------------------------------
1996 1995 1994
------------- ------------ ------------

Cash flows from operating activities:
Net income ......................................... $ 3,083,559 $ 2,373,752 $ 661,024
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and amortization .................. 364,563 267,962 137,365
Amortization of discount on subordinated debt .. 145,459 96,604 -
Provision for credit losses .................... 4,000,000 - -
Deferred income taxes .......................... (1,974,000) - -
Deferred income tax effect of
S Corporation termination .................... (267,000) - -
Gain on sale of finance receivables ............ (524,000) - -
Loss on disposal of property and
equipment .................................... - - 47,458
Accretion of contract acquisition
discounts .................................... - (127,797) (209,940)
Changes in assets and liabilities:
Restricted cash .............................. (4,586,780) - -
Repossessed assets ........................... (386,719) (320,554) (176,971)
Other assets ................................. (700,466) (888,653) (47,115)
Accounts payable and accrued
expenses ................................... 207,702 479,123 486,272
Income taxes payable ......................... 1,489,112 - -
Other liabilities ............................ 1,007,833 2,047,075 223,250
------------- ------------ ------------

Total adjustments ....................... (1,224,296) 1,553,760 460,319
------------- ------------ ------------

Net cash provided by
operating activities .................. 1,859,263 3,927,512 1,121,343

Cash flows from investing activities:
Automobile installment contracts
purchased ........................................ (120,154,468) (70,184,351) (35,136,768)
Proceeds from sale of automobile
installment contracts ............................ 31,665,399 24,777,933 -
Principal collections on automobile
installment contracts ............................ 31,595,756 21,970,934 11,444,010
Principal collections on timeshare
receivables ...................................... - 266,323 4,059,978
Capital expenditures ............................... (738,627) (521,291) (542,644)
------------- ------------ ------------

Net cash (used in)
investing activities .................. (57,631,940) (23,690,452) (20,175,424)

34
35
FIRST ENTERPRISE FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

Years ended December 31,
--------------------------------------
1996 1995 1994
------------ ----------- -----------

Cash flows from financing activities:
Borrowings under senior debt ....................... $107,845,000 $50,385,000 $25,278,000
Payments on senior debt ............................ (89,959,000) (32,758,000 (5,604,000)
Borrowings under notes payable - securitized pool .. 45,087,652 - -
Payments on notes payable - securitized pool ....... (8,354,665) - -
Proceeds from issuance of subordinated
debt ............................................. - 4,500,000 4,000,000
Payments on subordinated debt ...................... (8,500,000) - (4,000,000)
Proceeds from issuance of common stock ............. 11,343,331 180,606 257,575
Payments on repurchase of common stock ............. - (6,666) -
Dividends paid ..................................... (2,069,812) (1,549,125) (474,027)
------------ ----------- -----------

Net cash provided by
financing activities ................. 55,392,506 20,751,815 19,457,548
------------ ----------- -----------

(DECREASE) INCREASE
IN CASH .............................. (380,171) 988,875 403,467

Cash at beginning of period .......................... 1,703,320 714,445 310,978
------------ ----------- -----------

Cash at end of period ................................ $ 1,323,149 $ 1,703,320 $ 714,445
============ =========== ===========

Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest ......................................... $ 6,405,798 $ 3,767,277 $ 1,459,751
Income taxes ..................................... 2,423,119 34,213 43,149

Supplemental schedule of non-cash financing
activities:
Issuance of common stock warrants in
connection with subordinated debt .............. $ - $ 92,063 $ 150,000
Guaranteed loans of stockholders for the
purchase of common stock ....................... - 154,545 240,606
Increase in additional paid-in capital resulting
from tax benefit in conjunction with the
exercise of common stock warrants .............. 750,000 - -

The accompanying notes are an integral part of these statements.

35
36

FIRST ENTERPRISE FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF THE BUSINESS

First Enterprise Financial Group, Inc., which operates under the name First
Enterprise Acceptance Company, including its wholly-owned special purpose
subsidiary, First Enterprise Securitization Corp. (collectively, the
"Company"), is a specialty finance company engaged primarily in purchasing and
servicing installment sales contracts originated by automobile dealers for
financing the sale of used automobiles, vans and light trucks.

The accounting policies of the Company conform to generally accepted accounting
principles and to the general practice within the automobile finance company
industry. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

CONSOLIDATION

The consolidated financial statements include accounts of First Enterprise
Financial Group, Inc. and its wholly-owned special purpose subsidiary, First
Enterprise Securitization Corp. All significant intercompany accounts have
been eliminated in consolidation.

ACCOUNTING CHANGES

In connection with the initial public offering ("IPO") of common stock, the
Company performed a comprehensive evaluation of its accounting policies. As a
result of this review and in accordance with the provisions of Accounting
Principles Board ("APB") Opinion No. 20, "Accounting Changes," the Company has
retroactively adopted an accounting change which the Company believes is more
consistent with prevailing industry practices regarding non-refundable contract
acquisition discounts. Non-refundable contract acquisition discounts arise
from the purchase of installment contracts from dealers at amounts less than
the principal amounts of such contracts. These discounts are allocated to the
allowance for credit losses in an amount necessary to absorb estimated credit
losses with the remaining amount, if any, allocated to unamortized contract
acquisition discounts and accreted into finance charge income over the
estimated average life of the installment contracts.

36
37

FIRST ENTERPRISE FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996, 1995 AND 1994

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

CONCENTRATION OF CREDIT RISK

The Company's installment contract receivables are primarily with individuals
located in the southeastern United States. As of December 31, 1996,
approximately 26.8% and 21.2% of automobile finance receivables were purchased
from dealers located in Florida and Alabama, respectively.

REVENUE RECOGNITION

Finance charges on automobile installment contracts are credited to unearned
finance charges at the time the contracts are acquired. The finance charges
are recognized over the life of the installment contracts using the interest
(actuarial) method to produce constant rates of interest (yields).

If an installment contract becomes 90 or more days contractually delinquent and
no full contractual payment is received in the month the account reaches such
delinquency status, the accrual of income is suspended until one or more full
contractual monthly payments are received. Late charges, deferment fees and
extension fees are recognized as income when collected.

The Company, as agent for unaffiliated insurers, offers credit life and
accident and health insurance to borrowers under financing contracts purchased
from automobile dealers. Commissions earned on these insurance products are
recognized as income over the average terms of the related policies using the
sum-of-the-months'-digits method, which approximates the results under the
interest method.

SERVICING INCOME

Contractual servicing income on sold receivables is recognized over the life of
the related receivables as a percentage of receivables outstanding. Bonus
servicing fees are recognized when earned and are based on the difference
between the yield received by the Company and the sum of the Company's 3%
contractual servicing fee, the yield due to the purchaser and the addition or
reduction necessary to maintain the purchaser's reserve at the required level.
Gain or loss on sale of finance receivables is determined by the difference
between sales proceeds and the cost of the finance receivables and adjusted for
the present value of the difference, if any, between the estimated future
servicing revenues (net of a fixed rate to the purchaser) and normal servicing
costs ("excess servicing rights"). The excess servicing rights, if any, are
capitalized and amortized over the expected repayment life of the sold finance
receivables. All servicing fees earned by the Company are recognized in the
Company's financial statements as servicing income.

37
38

FIRST ENTERPRISE FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996, 1995 AND 1994

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

NON-REFUNDABLE CONTRACT ACQUISITION DISCOUNTS

Installment contracts are generally purchased from dealers at a discount from
the principal amounts financed by the consumer and are non-refundable to the
dealers ("non-refundable contract acquisition discount"). This discount, which
represents both a credit allowance and a yield enhancement, is negotiated by
the Company and the dealers. The portfolio of owned and sold installment
contracts is grouped into pools on a chronological basis (quarterly beginning
in 1995) for purposes of evaluating the non-refundable contract acquisition
discount. The portion of the non-refundable contract acquisition discount
necessary to absorb estimated credit losses for each pool is allocated to the
allowance for credit losses. The remaining portion of the contract acquisition
discount ("unamortized contract acquisition discount") for each pool, if any,
is reflected as a reduction of the net principal balance and accreted into
finance charge income over the estimated average life of the installment
contracts using the sum-of-the-months'-digits method, which approximates the
results under the interest method. Beginning in 1995, the full discount has
been allocated to the allowance for credit losses and the discount is no longer
being amortized to interest income.

ALLOWANCE FOR CREDIT LOSSES

The allowance for credit losses is established through an allocation of the
non-refundable contract acquisition discount based upon amounts necessary to
absorb credit losses in the installment contract portfolio, as previously
discussed. The adequacy of the allowance for credit losses is evaluated by
management on an ongoing basis through historical credit loss experience,
delinquencies, the value of the underlying collateral, the level of the
installment contract portfolio and general economic conditions and trends. The
Company has found that borrowers under its installment contract receivables are
payment sensitive rather than interest rate sensitive. Consequently, the
Company does not consider interest rates a predominant risk characteristic for
purposes of evaluating credit losses. The portfolio of owned and sold loans is
grouped into pools on a chronological basis (quarterly beginning in 1995) for
purposes of evaluating trends and loss experience. If management determines
that the allowance for credit losses is not adequate to provide for potential
losses of an individual pool, amounts will be transferred, to the extent
available, from the unamortized contract acquisition discounts for that pool to
the allowance for credit losses. Any remaining shortfall in the allowance for
credit losses would be provided through a charge against income. If management
determines that the allowance for credit losses is in excess of amounts
required to provide for losses of an individual pool, the allowance for credit
losses charged to income, if any, will be reduced or the contract acquisition
discounts will be amortized over the remaining life of the installment
contracts in the pool.

An account is charged off against the allowance for credit losses at the
earliest of the time the account's collateral is repossessed, the account is
150 days or more past due or the account is otherwise deemed to be
uncollectible.

38
39

FIRST ENTERPRISE FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996, 1995 AND 1994

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

RESTRICTED CASH

The Company is required to establish and maintain cash reserves and collection
accounts with a trustee with respect to the securitized pool of funding
receivables. These balances are reported as restricted cash on the Company's
Consolidated Balance Sheet.

REPOSSESSED ASSETS

Repossessed collateral is valued at the lower of cost or market value.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost less accumulated depreciation.
Depreciation is provided in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated lives, generally ranging
from five to seven years. Leasehold improvements are amortized over the lives
of the respective leases or the service lives of the improvements, whichever is
shorter. The straight-line method of depreciation and amortization is followed
for all assets for financial reporting purposes, and accelerated methods are
used for income tax purposes.

INCOME TAXES

Since its inception, the Company was an S Corporation under the Internal
Revenue Code of 1986, as amended. As a result, the income of the Company has
been taxed, for federal and certain state and local income tax purposes,
directly to the Company's stockholders, rather than the Company. The Company
terminated its status as an S Corporation effective January 1, 1996 and, as
result, the Company is subject to federal and state corporate income taxation.

Effective January 1, 1996, the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109 "Accounting for Income Taxes."
The Company recognizes deferred tax assets and liabilities based on differences
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse. The effect of a change in tax rates on deferred tax assets and
liabilities is recognized in the period in which the enactment in effective.

39
40

FIRST ENTERPRISE FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996, 1995 AND 1994

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company's financial instruments include cash, finance receivables and debt.
The estimated fair value of finance receivables approximates their carrying
value due to the duration of the receivables as well as the interest rates
negotiated. Estimated fair value of finance receivables is based upon the
average contractual lives of the receivables less expected prepayments and
estimated interest rates on similar receivables. The estimated fair value of
the senior debt with floating interest rates approximates its carrying value.
The fair value of the subordinated debt and the notes payable - securitized
pools obligations approximates their carrying value based upon current quoted
market prices.

NET INCOME PER SHARE

Net income per share amounts are calculated based on pro forma net income
divided by the pro forma weighted average number of shares of common stock
outstanding during the period after consideration of the dilutive effect of
common stock equivalents.

INITIAL PUBLIC OFFERING AND REORGANIZATION

On July 22, 1996, the Company completed a public offering of 1,500,000 shares
of its common stock at a price of $7.00 per share pursuant to a Form S-1
Registration Statement under the Securities Act of 1933, as originally filed on
February 1, 1996 and subsequently amended. The underwriters exercised their
over-allotment option and purchased an additional 282,996 shares of common
stock at a price of $7.00 per share on August 20, 1996. The Company received
$10,665,167 from the Common Stock Offering, after deducting the underwriting
discount and offering expenses. The proceeds were used to fund purchases of
finance contracts and, prior to such use, the proceeds were used to reduce
borrowings under the Senior Secured Credit Facility.

In connection with its IPO, the Company increased its authorized capital stock
to 20,000,000 shares of common stock, par value $.01 per share through a
reincorporation. Existing Class A common stock and Class B common stock were
exchanged for 1,288.8 shares of common stock and Class B common stock,
respectively, and all options and warrants were converted at the same exchange
rate. The Company's stock, Class B common stock was also exchanged for common
stock on a share for share basis. The outstanding warrants were exercised and
sold in the IPO. The Company sold 1,500,000 shares of the common stock and the
underwriters exercised a 30-day option to purchase an additional 282,996 shares
to cover over-allotments.

40
41

FIRST ENTERPRISE FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996, 1995 AND 1994

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

IMPACT OF NEW ACCOUNTING STANDARDS

Effective January 1, 1997, the Company will adopt SFAS No. 125 "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities."
As a result, for all securitization transactions completed after this date and
meeting the specific criteria of SFAS No. 125, the Company will remove the
securitized assets and related liabilities from its balance sheet and recognize
applicable servicing assets.

RECLASSIFICATIONS

Certain reclassifications have been made to the 1995 and 1994 financial
statements to conform to the 1996 presentation. These reclassifications did
not affect the results of operations.

NOTE B - FINANCE RECEIVABLES

Finance receivables are summarized as follows:
December 31,
--------------------------
1996 1995
------------ ------------

Contractual payments ......................... $160,224,969 $79,422,000
Unearned finance charges ..................... (41,673,797) (19,926,632)
------------ ------------

Net principal balance ........................ 118,551,172 59,495,368
Unearned insurance commissions ............... (13,364) (189,737)
------------ ------------

Automobile finance receivables ............... 118,537,808 59,305,631
Allowance for credit losses .................. (11,349,783) (5,010,919)
------------ ------------

Finance receivables, net ............. $107,188,025 $ 54,294,712
============ ============

Automobile finance receivables are accounted for on a discount basis and
generally have terms of 24 to 36 months, with a maximum term of 54 months.
Contractual maturities on the finance receivables by year are not readily
available as of December 31, 1996, but the Company's experience has shown that
such information is not significant in that receivables may be paid in full
prior to contractual maturity. Principal collections on finance receivables
were $31,595,756 and $21,970,934 for the years ended December 31, 1996 and
1995, respectively. The principal cash collections as a percentage of the
average receivable balance, net of unearned finance charges, were 39.8% and
54.7% for the years ended December 31, 1996 and 1995, respectively.

41
42

FIRST ENTERPRISE FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996, 1995 AND 1994

NOTE B - FINANCE RECEIVABLES - CONTINUED

A summary of the activity in the unamortized contract acquisition discounts is
as follows for the years ended December 31, 1996, 1995 and 1994.

December 31,
--------------------------
1996 1995 1994
---- --------- ---------

Balance at beginning of year ................ $ - $ 228,617 $ 117,274
Additions from new business ................. - - 321,283
Accreted into finance charge income ......... - (127,797) (209,940)
Transferred to allowance for credit losses .. - (100,820) -
---- --------- ---------

Balance at end of year ...................... $ - $ - $ 228,617
==== ========= =========

A summary of the activity in allowance for credit losses is as follows for the
years ended December 31, 1996, 1995, and 1994.

December 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------

Balance at beginning of year ........... $ 5,010,919 $ 2,562,723 $ 522,368
Additions from new business ............ 12,036,835 7,553,059 3,248,531
Reduction related to finance receivables
sold ................................. (2,946,826) (2,196,577) -
Finance receivables charged off, net of
recoveries ........................... (6,751,145) (3,009,106) (1,208,176)
Transferred from unamortized contract
acquisition discounts ................ - 100,820 -
Provision for credit losses ............ 4,000,000 - -
----------- ----------- -----------

Balance at end of year ................. $11,349,783 $ 5,010,919 $ 2,562,723
=========== =========== ===========

The Company utilized Asset Purchase Agreements and Servicing Agreements to sell
automobile finance receivables between 1993 and 1996. All sales under the
agreements have been without recourse to the Company and are accounted for as
sale of receivables.

42
43

FIRST ENTERPRISE FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996, 1995 AND 1994

NOTE B - FINANCE RECEIVABLES - CONTINUED

The Company sold $12.1 million, $10.8 million, $2.6 million, $9.1 million,
$15.7 million and $9.7 million of automobile finance receivables under a $40
million Asset Purchase Agreement and Servicing Agreement on December 10, 1993,
February 24, 1995, June 7, 1995, June 29, 1995, January 30, 1996, and March 8,
1996, respectively. The purchaser is entitled to earn a fixed rate (9.5%,
11.0%, 9.8%, 9.8%, 8.9% and 9.0%, respectively). In addition, on May 22, 1995
and April 22, 1996, the Company sold $5 million and $9.8 million of receivables
under another Asset Purchase Agreement and Servicing Agreement, entitling the
purchaser to earn a fixed rate of 10.3% and 9.8%, respectively. Ten percent of
the purchase price of each sale is being retained by the purchaser as a reserve
for potential losses. Gains of $524,000 were recorded on the sales
transactions occurring in 1996. The gains were determined by the difference
between the sales proceeds and the cost of the finance receivables and adjusted
for the present value of the difference between the estimated future servicing
revenues (net of a fixed rate to the purchaser) and normal servicing costs
("excess servicing rights"). The excess servicing rights have been capitalized
and are being amortized over the expected repayment
life of the sold finance receivables. The unamortized balance of excess
servicing rights at December 31, 1996 was $323,276.

Under the terms of all the above agreements, the Company retains the servicing
rights for the sold receivables and receives a contractual annualized servicing
fee equal to 3% of the net outstanding receivables from the purchaser. The
outstanding balance of all receivables sold and serviced by the Company totaled
$30,918,651 and $20,765,687 at December 31, 1996 and 1995, respectively.
Contractual servicing income amounted to $956,026, $573,812 and $269,998 for
the years ended December 31, 1996, 1995 and 1994, respectively. The Company is
eligible to receive additional bonus servicing fees based upon portfolio
performance. The bonus servicing fees represent the difference between the
yield received by the Company and the sum of the Company's 3% contractual
servicing fee, the yield retained by the purchaser and the addition or
reduction necessary to maintain the purchaser's reserve at the required level.
Bonus servicing fees amounted to approximately $4,008,000, $2,478,000 and
$1,053,000 for the years ended December 31, 1996, 1995 and 1994, respectively.

43
44

FIRST ENTERPRISE FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996, 1995 AND 1994

NOTE C - PROPERTY AND EQUIPMENT

Property and equipment consist of the following at:
December 31,
---------------------
1996 1995
---------- ---------

Furniture and fixtures ............................ $ 425,899 $ 267,773
Equipment ......................................... 1,298,432 861,417
Leasehold improvements ............................ 358,441 218,538
---------- ---------

2,082,772 1,347,728

Less accumulated depreciation and amortization .... 826,995 466,015
---------- ---------

Total ............................................. $1,255,777 $ 881,713
========== =========

NOTE D - SENIOR DEBT AND SUBORDINATED DEBT

Senior debt and subordinated debt consist of the following at:

December 31,
------------------------
1996 1995
----------- -----------

Senior Debt:
$85,000,000, Senior Secured Credit Facility (the "Credit Facility"),
due June 1, 1998, with interest at the reference rate as
defined in the agreement, plus .25%, which was 8.50% at
December 31, 1996, and included a placement option of
250 basis points over the LIBOR rate. ........................................... $61,153,000 $43,267,000
=========== ===========

Subordinated Debt :
$4,000,000, subordinated note, unsecured, due September 30,
1996, with interest at 13.5% (net of unamortized allocation
of $62,046 to common stock warrants) ............................................ $ - $ 3,937,954
$4,500,000, subordinated note, unsecured, due August 31,
1998, with interest at 13.0% (net of unamortized allocation
of $83,413 to common stock warrants) ............................................ - 4,416,587
----------- -----------

Total ............................................................................... $ - $ 8,354,541
=========== ===========

44
45

FIRST ENTERPRISE FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996, 1995 AND 1994

NOTE D - SENIOR DEBT AND SUBORDINATED DEBT - CONTINUED

SENIOR DEBT

The Company has established a Credit Facility. This facility is renewable
annually and expires June 1, 1998. To fund this facility, the Company has
entered into an agreement that permits the Company to borrow up to $85,000,000.
The agreement requires the Company to execute a collateral and security
agreement to secure payment in full of the principal and interest on all
indebtedness owed to the participants.

Borrowings under the Credit Facility are collateralized by all finance
receivables not subject to the securitized pool and certain other assets. The
agreement requires the maintenance of certain financial covenants which
include, among others, ratio of debt to net worth and ratio of reserves to the
finance receivable portfolio. The Company was in compliance with all financial
covenants at December 31, 1996 and 1995.

SUBORDINATED DEBT

In December 1994, the Company issued a subordinated note in the amount of
$4,000,000 to its principal shareholder. Under the terms of the agreement,
interest was payable at the end of each quarter at a fixed rate of 13.5%. The
note was unsecured and was due on September 30, 1996. The proceeds were used
to retire a junior subordinated note. Simultaneously, the Company's principal
shareholder issued a $4,000,000 secured note to a financial institution. Under
the terms of the agreement, interest was payable at the end of each quarter at
a fixed rate of 13.5% and was due on September 30, 1996. The Company issued to
the financial institution a detachable warrant to purchase 193,320 shares of
non-voting Class B common stock. The warrant was exercisable in whole or in
part at a price of $1.13 per share and expires on September 1, 1999, or earlier
as defined in the warrant. The warrant contained a put option such that after
the payment of the secured note but before the occurrence of other events
defined in the warrant, the financial institution may require the Company to
purchase the warrant from the financial institution at fair value. The put
option was terminated, under the terms of the warrant, upon the issuance of the
Company's stock in the IPO. Additionally, the warrant contained a call option
such that the Company, after September 30, 1997 but before the expiration date
or the occurrence of other events as defined in the warrant, may require the
financial institution to sell the warrant to the Company. Upon issuance, the
$150,000 fair value of the warrant was recorded as a discount against the
Company's subordinated note, which was amortized as interest expense. The
warrant was adjusted on a quarterly basis to the estimated repurchase value
through an adjustment to retained earnings.

45
46

FIRST ENTERPRISE FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996, 1995 AND 1994

NOTE D - SENIOR DEBT AND SUBORDINATED DEBT - CONTINUED

On September 21, 1995, the Company issued a subordinated note in the amount of
$4,500,000 to an investment partnership. Under the terms of the agreement,
interest was payable monthly at a fixed rate of 13%. The note was unsecured
and was due on August 31, 1998. The note contained a detachable warrant to
purchase 193,320 shares of non-voting Class B common stock. The warrant was
exercisable in whole or in part at a price of $1.56 per share and the warrant
expires on September 1, 2000, or earlier as defined in the warrant. The
warrant contained a put option such that after the earlier of August 31, 1998
or the payment of the subordinated debt, but before the occurrence of other
events defined in the warrant, the investment partnership may require the
Company to purchase the warrant from the investment partnership at fair value.
The put option was terminated, under the terms of the warrant, upon the
issuance of the Company's stock in the IPO. Additionally, the warrant
contained a call option such that the Company, after September 1, 1998 but
before the expiration date or the occurrence of other as defined in the
warrant, may require the investment partnership to sell the warrant to the
Company. Upon issuance, the $92,063 fair value of the warrant was recorded as
a discount against the subordinated note, which was amortized as interest
expense as an adjustment to yield over the term of the note. The warrant was
adjusted on a quarterly basis to the estimated repurchase value through an
adjustment to retained earnings.

On July 22, 1996, the Company completed its initial public offering of common
stock. The proceeds from the offering were used to retire the subordinated
notes. As a result of the early retirement of the subordinated notes, the
Company recognized an extraordinary charge against earnings of $149,789 arising
from the accelerated recognition of certain fees and the recognition of the
remaining unamortized discount on the notes.

NOTE E - NOTES PAYABLE - SECURITIZED POOL

The Company has entered into a securitized facility with a placement agent for
the issuance of up to $200 million of securitized notes through a wholly-owned
special purpose subsidiary. On June 18, 1996, the Company completed a
$45,087,652 million debt financing consisting of 6.84% fixed rate, unregistered,
automobile securitized notes issued by the Company's wholly-owned special
purpose subsidiary. The proceeds received by the Company were used to repay
indebtedness under the Credit Facility. Principal and interest on the notes are
payable monthly from collections and recoveries on the pool of finance
receivables. Financial Security Assurance Inc. ("FSA") issued a financial
guaranty insurance policy for the benefit of the noteholders. Interest expense,
including the amortization of debt issuance costs, was $1,702,380 for 1996.

46
47

FIRST ENTERPRISE FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996, 1995 AND 1994

NOTE E - NOTES PAYABLE - SECURITIZED POOL - CONTINUED

The Company is required to establish and maintain cash reserve and collection
accounts with a trustee with respect to the securitized pool of finance
receivables ("restricted cash"). The amounts set aside would be used to
supplement certain shortfalls in payments, if any, to investors. These
balances are subject to an increase up to a maximum amount as specified in the
securitization indenture and are invested in certain instruments as permitted
by the trust agreement. To the extent balances on deposit exceed specified
levels, distributions are made to the Company and, at the termination of the
transaction, any remaining amounts on deposit are distributed to the Company.
The indenture requires the Company to maintain specified delinquency and credit
loss ratios. The Company was in compliance with these covenants at December
31, 1996.

NOTE F- INCOME TAXES

The Company terminated its status as an S Corporation effective January 1, 1996
and is subject to federal and state income taxes at the approximate tax rates.
As of the date of the termination, the Company has recognized, under the
provisions of SFAS No. 109, a deferred tax asset of $267,000 representing the
cumulative temporary differences between the financial reporting and tax basis
of its assets and liabilities.

The components of the income tax provisions for the year ended December 31,
1996 was as follows:

Current:
Federal ........................ $ 3,263,000
State .......................... 673,000
-----------

Total current .................. 3,936,000

Deferred:
Federal ........................ (1,666,000)
State .......................... (308,000)
-----------

Total deferred ................. (1,974,000)
-----------

Total income tax provision .. $ 1,962,000
===========

47
48

FIRST ENTERPRISE FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996, 1995 AND 1994

NOTE F - INCOME TAXES - CONTINUED

The provision for income taxes for the years ended 1994 and 1995 reflect the
Company's state tax expense as an S Corporation. There is no federal tax
expense for 1994 and 1995 when the Company filed as an S Corporation for
federal tax purposes.

Deferred tax assets and liabilities consist of the following at December 31,
1996:

Deferred tax assets:
Income accreted for tax not book .. $4,837,000
Provision for credit losses ....... 1,540,000
----------

Total deferred tax assets ......... 6,377,000

Deferred tax liabilities:
Charge-offs for tax not book ...... 4,004,000
Excess servicing rights ........... 124,000
Other, net ........................ 8,000
----------

Total deferred tax liabilities .... 4,136,000
----------

Net deferred tax assets ........ $2,241,000
==========

There was no valuation allowance for deferred taxes as of December 31, 1996 due
to the Company's ability to recover previously paid taxes through carrybacks
and future taxable income.

The income taxes provided differed from the federal statutory income tax rate
(34%) for the year ended December 31, 1996 as follows:

Statutory federal income tax .................... $1,675,600 34.0%
State income taxes, net of federal tax benefit .. 256,400 5.2
Non-deductible expenses ......................... 30,000 .6
---------- -----

Total ...................................... $1,962,000 39.8%
========== =====

In connection with certain subordinated debt financing arrangements, the
Company granted lenders warrants to acquire stock of the Company at certain
prices. These warrants were exercised by the lenders in 1996. The exercise of
these warrants results in a current tax benefit for the Company, equivalent to
the applicable tax rate multiplied by the difference between the market price
at the date of exercise and the warrant price. The current tax benefit was not
recognized as a reduction of income tax expense, but was credited directly to
additional paid-in capital. Tax benefits of $750,000 associated with the
exercise of the warrants were credited to additional paid-in capital in 1996.

48
49

FIRST ENTERPRISE FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996, 1995 AND 1994

NOTE F - INCOME TAXES - CONTINUED

In connection with the termination of its S Corporation status, the Company
distributed $2,069,812 to the S Corporation shareholders ("S Shareholders").
The distribution represents the
S Corporation earnings that have been included in the taxable income of the S
Shareholders. The Company and the S Shareholders have entered into an
indemnification agreement, relating to federal and certain state and local
income tax liabilities of the Company and the S Shareholders, for the tax years
during which the Company had elected to be treated as an S Corporation. This
agreement generally provides that the Company will indemnify the S
Shareholders, and the S Shareholders will indemnify the Company, against any
increase in the indemnified party's income tax benefits or liabilities
(including interest and penalties and all expenses, attorneys' fees and
accountants' fees incurred in connection therewith) as a result of any
adjustment associated with a return filed with respect to a period during which
the Company was an S Corporation. Payments under the agreement in favor of the
S Shareholders must be approved by a majority of the Company's independent
Directors as being consistent with the terms of the agreement.

NOTE G - COMMITMENTS AND CONTINGENCIES

OFFICE LEASES

The Company leases various office facilities under operating leases with
initial terms ranging from three to five years. These leases generally require
the Company to reimburse the landlord for certain common area expenses, such as
real estate taxes and maintenance; such expenses are included in rent expense.
Total minimum rentals under non-cancelable operating leases as of December 31,
1996 are as follows:

Years ending December 31,
1997 .................... $645,388
1998 .................... 513,864
1999 .................... 302,180
2000 .................... 126,095
2001 .................... 86,074
Thereafter .............. 64,800

In the normal course of business, it is expected that office leases will expire
and be renewed or replaced with leases for other locations. Rent expense for
the years ended December 31, 1996, 1995 and 1994 was $530,088, $355,420 and
$212,310, respectively.

49
50

FIRST ENTERPRISE FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996, 1995 AND 1994

NOTE G - COMMITMENTS AND CONTINGENCIES - CONTINUED

DATA PROCESSING AGREEMENT

The Company entered into a five year contract for data processing services in
December 1994. The contract, which expires December 1999, is payable monthly.
The fees are based upon servicing volume.

EMPLOYMENT AGREEMENTS

The Company has entered into employment contracts with six of its officers.
Two of the agreements expire on August 31, 1997, and three of the agreements
expire December 31, 1999. The agreements are automatically renewable for
successive one year periods and are subject to termination by the Company or
the officers.

The agreements provide for minimum annual salaries and annual incentive
compensation awards. The agreements allow the Company to apply for, and take
out, in its own name and as beneficiary, and at its own expense, life, health,
accident or other insurance or annuity contracts on the officers. In the event
of illness or incapacity of an officer, they are entitled to continue to
receive their regular compensation for a period of 180 days. The Company has
obtained long-term disability insurance which compensates them for the period
of such illness or incapacity in excess of 180 days.

GUARANTEED LOANS TO STOCKHOLDERS

The Company guaranteed loans made by a financial institution to certain
stockholders, the proceeds of which were used to exercise stock options. Upon
completion of the Company's initial public offering on July 22, 1996, the
Company was released from the guarantee and accordingly the loans are not
reflected on the Company's balance sheet at December 31, 1996. The guaranteed
loans are included in Other Liabilities and are treated as a reduction of
Stockholders' Equity on the balance sheet at December 31, 1995.

NOTE H - STOCK OPTION PLANS

The Company has established an Incentive Stock Option Plan and a Non-Qualified
Stock Option Plan. As amended, these plans reserve 2,062,080 shares of common
stock for issuance to key employees. Options may be granted at a price no less
than the fair market value of such shares on the date on which such options are
granted, and expire ten years from the date of grant. The options generally
vest over a three year period.

50
51

FIRST ENTERPRISE FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996, 1995 AND 1994

NOTE H - STOCK OPTION PLANS - CONTINUED

The Company has also established a Non-Qualified Director Stock Option Plan
(the "Director Plan") which grants options to purchase shares of common stock
to non-employee directors of the Company. The Director Plan allows for the
grant of options to acquire up to 100,000 shares of common stock. Under this
plan, 6,000 options are granted upon the date of their first election to the
Board of Directors and 2,000 options are granted annually thereafter, upon each
re-election, at a price per share equal to the fair market value of such stock.
Generally, the options expire ten years from the date granted; however, under
certain circumstances, the options may expire earlier. The options vest
ratably over a three year period.

The Company has adopted only the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." It applies APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for its plans and does not recognize compensation expense for its
stock-based compensation plans. If the Company had elected to recognize
compensation expense based upon the fair value at the grant date for awards
issued after January 1, 1995, under this plan consistent with the methodology
prescribed by SFAS No. 123, the Company's net income and net income per share
would be reduced to the amounts indicated below:

1996 1995
---------- ----------

Net income (in thousands)
As reported .................................... $3,083,559 $2,373,752
Fair value method under SFAS No. 123 ........... 3,047,147 2,366,778

Net income per common and common equivalent share
As reported .................................... $ .63 $ .42
Fair value method under SFAS No. 123 ........... .62 .42

The fair value amounts may not be representative of future disclosures because
they do not take into effect fair value compensation expense related to grants
made before 1995. The fair value of options granted in 1996 and 1995 was
estimated at the date of grant using an option-pricing model at $3.85 and $.75
per option, respectively, with the following weighted-average assumptions:

1996 1995
------- -------

Dividend rate ............ - % - %
Expected volatility ...... 100.0% 100.0%
Risk-free interest rate .. 6.3% 6.4%
Expected life ............ 2 years 2 years

51
52

FIRST ENTERPRISE FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996, 1995 AND 1994

NOTE H - STOCK OPTION PLANS - CONTINUED

The following table summarizes the Company's stock option plans for the three
years ended December 31, 1996.

Weighted
Shares Average
Under Option Price
Options Per Share
--------- ------------

Options outstanding at January 1, 1994 ............................... 938,246 $ .47

Option changes - 1994
Granted ............................................................. 527,120 1.13
Exercised ........................................................... (547,740) .47
---------

Options outstanding at December 31, 1994 (none exercisable) .......... 917,626 .85

Option changes - 1995
Granted ............................................................. 83,771 1.36
Exercised ........................................................... (384,062) .47
Canceled ............................................................ (6,444) .47
---------

Options outstanding at December 31, 1995 (203,630 options
exercisable at $1.13 weighted average option price per share) ........ 610,891 1.16

Option changes - 1996
Granted ............................................................. 33,000 7.00
Exercised ........................................................... (136,609) 1.16
Canceled ............................................................ (19,332) 1.21
---------

Options outstanding at December 31, 1996 (252,611 options
exercisable at $1.14 weighted average exercise price per share) ...... 487,950 $1.56
=========

Information about stock options outstanding at December 31, 1996 is summarized
as follows:

Range of Exercise Prices
------------------------
$1.13 - $1.36 $7.00 Total
------------- ----- -----

Options outstanding
Number outstanding .................... 454,950 33,000 487,950
=======
Weighted average remaining
contractual life (years) ........... 8.10 9.59
Weighted average exercise price ....... $1.16 $7.00

Options exercisable
Exercisable ........................... 252,611 - 252,611
Weighted average exercise price ....... $1.14 $ -
=======

52
53

FIRST ENTERPRISE FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996, 1995 AND 1994

NOTE I - EMPLOYEE BENEFIT PLANS

The Company has a 401(k) plan covering substantially all employees who have
worked over 90 calendar days during which they were credited with 250 hours of
service. Employees may elect to make a salary reduction contribution in any
percentage permitted by the plan administrator up to a maximum of 15% of their
compensation or up to the maximum amount permitted by tax law per calendar
year. The Company makes matching contributions in an amount equal to 50% of
employee pretax contributions but subject to a maximum of 6% of eligible
compensation contributed to the plan.

Participants are 100% vested in employee contributions. Participants are
partially vested in their employer contributions until their sixth year of
employment when they become 100% vested. Total contributions to the plan for
the years ended December 31, 1996 and 1995 were $164,917 and $47,062,
respectively.

The Company has also established an Employee Stock Purchase Plan (the "Stock
Purchase Plan") which gives eligible employees the opportunity to purchase
common stock at 85% of the fair market value at the beginning of the option
period. (The option period began July 22, 1996 and ends on December 31, 1997
and each calendar year thereafter.) This plan is intended to qualify as an
"Employee Stock Purchase Plan" under Section 423 of the Internal Revenue Code
of 1986, as amended. A maximum of 100,000 shares of common stock are reserved
for sale under the Stock Purchase Plan. Eligible employees may elect to
contribute on an after-tax payroll deduction basis up to 10% of their base
salary. These contributions are used to purchase the common stock at the end
of the option period. Eligible employees may purchase a maximum of 500 shares
for each calendar year in which the option to purchase such shares is
outstanding.

NOTE J - LITIGATION

The Company is involved from time to time in ordinary routine litigation
incidental to its business. The litigation is generally based upon claims that
certain of the Company's business practices such as acquiring installment
contracts at a discount, force placing insurance and offering other insurance
products violate laws, including the Alabama Consumer Credit Act, the Alabama
Deceptive Practices Act and the Federal Truth in Lending Act. Management
believes that the ultimate outcome of all pending litigation will not have a
material adverse effect on the Company's financial condition or results of
operations. The Company intends to vigorously defend any such actions.

53
54

FIRST ENTERPRISE FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996, 1995 AND 1994

NOTE K - SUBSEQUENT EVENTS

On March 7, 1997, the Company completed a $44,104,106 debt financing
transaction consisting of 6.45% fixed rate, unregistered, automobile
securitized notes. The notes were issued by First Enterprise Securitization
Co. II, a wholly-owned special purpose subsidiary of First Enterprise Financial
Group, Inc., formed in February, 1997. The proceeds received by the Company
were used to repay indebtedness under the Credit Facility. Principal and
interest on the notes are payable monthly from collections and recoveries on
the pool of financed receivables. Financial Security Assurances Inc. ("FSA")
issued a financial guaranty insurance policy for the benefit of the
noteholders.

NOTE L - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

The following table sets forth certain unaudited operating results for each of
the twelve quarters ended December 31, 1996. This information has been
prepared on the same basis as the audited financial statements and includes all
adjustments (which consist solely of normal recurring adjustments) necessary to
present fairly the financial information for such periods.

First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------------ ---------- ---------- ---------- -----------

YEAR ENDED DECEMBER 31,
1996
Net interest income .. $1,898,373 $2,227,110 $3,213,258 $4,044,936 $11,383,677
Other income ......... 2,543,586 2,632,297 2,856,024 2,303,235 10,335,142
Net income ........... 929,322 882,599 1,002,710 268,928 3,083,559

YEAR ENDED DECEMBER 31,
1995
Net interest income .. 1,290,419 1,125,495 1,422,941 1,766,731 5,605,586
Other income ......... 849,639 1,391,371 1,565,573 1,193,670 5,000,253
Net income ........... 489,918 614,007 774,375 495,452 2,373,752

YEAR ENDED DECEMBER 31,
1994
Net interest income .. 515,497 804,393 1,097,113 1,212,224 3,629,227
Other income ......... 761,079 625,869 507,440 235,155 2,129,543
Net income (loss) .... 346,683 301,751 278,332 (265,742) 661,024

54
55
FIRST ENTERPRISE FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996, 1995 AND 1994

NOTE M - PRO FORMA DATA (UNAUDITED)

The pro forma net income per share computations reflect the issuance of
1,886,640 shares of common stock on July 22, 1996 in connection with the
Company's IPO (1,500,000 shares issued at a price of $7 per share and 386,640
shares issued for $520,000 in connection with the warrant exercised). The pro
forma computations also reflect the issuance of 282,996 shares of common stock
on August 20, 1996, at a price of $7 per share in connection with the exercise
of the over-allotment option by the underwriters.

Weighted Pro Forma
Average Net Income
Shares Net Income Per Share
--------- ---------- ----------

YEAR ENDED DECEMBER 31, 1996
Before pro forma effect of the offering ........ 3,513,705 $3,083,559

Adjustments for reduction in interest expense
and effect of shares required to repay
offering costs and debt of $11,527,000 .... 2,169,636 494,000
--------- ----------

Pro forma ...................................... 5,683,341 $3,577,559 $ 0.63
========= ========== ==========

YEAR ENDED DECEMBER 31, 1995
Income before income taxes ..................... $2,433,752
Pro forma provision for income taxes at 39% .... 948,000
----------

Before pro forma effect of the offering ........ 3,238,073 1,485,752

Adjustments for reduction in interest expense
and shares required to repay offering costs
and debt of $11,527,000 ................... 2,169,636 799,000
--------- ----------

Pro forma ...................................... 5,407,709 $2,284,752 $ 0.42
========= ========== ==========

55
56

ITEM 9 - CHANGES IN ACCOUNTANTS

Not applicable.

PART III

ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information with respect to directors of the Company is incorporated
herein by reference to the information under the captions entitled "Board of
Directors--Members and Nominees for Election" on pages 5, 6 and 7 and the
information under the caption "Section 16(a) Beneficial Ownership Reporting
Compliance" on page 13 of the Company's proxy statement for the 1997 Annual
Meeting of Shareholders (SEC File No. 0-21075).

Information with respect to executive officers of the Company is
included in Item 1, Part I hereof under the caption "Executive Officers."

ITEM 11 - EXECUTIVE COMPENSATION

Information with respect to executive compensation is incorporated
herein by reference to the information under the captions "Executive
Compensation," on pages 8, 9, and 10, "Board of Directors--Compensation of
Directors" on page 7 and "Stock Price Performance Graph" on page 11 of
the Company's proxy statement for the 1997 Annual Meeting of Shareholders (SEC
File No. 0-21075).

ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information with respect to security ownership of certain beneficial
owners and management of the Company is incorporated herein by reference to the
information under the caption "Principal Shareholders" on pages 3 and 4 of the
Company's proxy statement for the 1997 Annual Meeting of Shareholders. (SEC
File No. 0-21075).

ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information with respect to certain relationships and transactions is
incorporated herein by reference to the information under the caption "Certain
Transactions" on pages 12 and 13 of the Company's proxy statement for the 1997
Annual Meeting of the Shareholders (SEC File No. 0-21075).

PART IV

ITEM 14 - EXHIBITS, FINANCIAL STATEMENT
SCHEDULES, AND REPORTS ON FORM 8-K

(a)(1) and (2) The response to this section of Item 14 is submitted as a
separate section of this report.

(a)(3) The exhibits, as listed in the Exhibit Index set forth on pages E-1
through E-3, are submitted as a separate section of this report.

(b) No current reports on Form 8-K were filed during the quarter ended
December 31, 1996.

(d) The response to this portion of Item 14 is submitted as a separate
section of this report.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.

Dated: March 28, 1997 FIRST ENTERPRISE FINANCIAL
GROUP, INC.

By: /s/ Michael P. Harrington Michael
-----------------------------------
P. Harrington Chairman of the
Board and President
(Principal Executive Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.

SIGNATURE TITLE DATE
- --------- ----- ----

Michael P. Harrington* Chairman of the March 28, 1997
Board of Directors
and President (Principal
Executive Officer)

Louis J. Glunz* Director March 28, 1997

M. William Isbell* Director March 28, 1997

Thomas G. Parker* Director and President March 28, 1997
First Enterprise Acceptance
Company

Joseph H. Stegmayer* Director March 28, 1997

Paul A. Stinneford* Director, Vice President March 28, 1997
and Secretary

Kenneth L. Stucky* Director and Vice March 28, 1997
President First Enterprise
Acceptance Company

Jan W. Erfert* Vice President (Principal March 28, 1997
Financial Officer)

Robert J. Harker* Vice President (Principal March 28, 1997
Accounting Officer)

*By: /s/ Michael P. Harrington Individually and as March 28, 1997
-------------------------- Attorney-in-Fact
Michael P. Harrington

EXHIBIT INDEX

Exhibit
Number Document Description
- -------- --------------------

3.1 Articles of Incorporation of First Enterprise Financial Group, Inc. [Incorporated by reference to Exhibit 3.1 to
Quarterly Report on Form 10-Q for quarter ended September 30, 1996 File No. 0-21075]

3.2 Bylaws of First Enterprise Financial Group, Inc. [Incorporated by reference to Exhibit 3.2 to Quarterly Report on
Form 10-Q for quarter ended September 30, 1996 File No. 0-21075]

4 Specimen Common Stock Certificate of First Enterprise Financial Group, Inc. [Incorporated by reference to Exhibit 4
to Registration Statement No. 33-80217]

10.1 Form of Director Indemnification Agreement [Incorporated by reference to Exhibit 10.1 to Registration Statement No.
33-80217]

10.2 1992 Stock Option Plan, as Amended and Restated [Incorporated by reference to Exhibit 10.2 to Registration
Statement No. 33-80217]

10.3 1995 Nonqualified Director Stock Option Plan [Incorporated by reference to Exhibit 10.3 to Registration Statement
No. 33-80217]

10.4 1995 Employee Stock Purchase Plan [Incorporated by reference to Exhibit 10.4 to Registration Statement No.
33-80217]

10.5.1 Employment Agreement by and between First Enterprise Financial Group, Inc. and Michael P. Harrington [Incorporated
by reference to Exhibit 10.5.1 to Registration Statement No. 33-80217]

10.5.2 Amendment No. 1 to Employment Agreement by and between First Enterprise Financial Group, Inc. and Michael P.
Harrington [Incorporated by reference to Exhibit 10.5.2 to Registration Statement No. 33-80217]

10.5.3 Employment Agreement by and between First Enterprise Financial Group, Inc. and Thomas G. Parker [Incorporated by
reference to Exhibit 10.5.3 to Registration Statement No. 33-80217]

10.5.4 Amendment No. 1 to Employment Agreement by and between First Enterprise Financial Group, Inc. and Thomas G. Parker
[Incorporated by reference to Exhibit 10.5.4 to Registration Statement No. 33-80217]

E-1

Exhibit
Number Document Description
- -------- --------------------

10.5.5 Employment Agreement by and between First Enterprise Financial Group, Inc. and Kenneth L. Stucky [Incorporated by
reference to Exhibit 10.5.5 to Registration Statement No. 33-80217]

10.5.6 Amendment No. 1 to Employment Agreement by and between First Enterprise Financial Group, Inc. and Kenneth L.
Stucky [Incorporated by reference to Exhibit 10.5.6 to Registration Statement No. 33-80217]

10.5.7 Employment Agreement by and between First Enterprise Financial Group, Inc. and Paul A. Stinneford [Incorporated by
reference to Exhibit 10.5.7 to Registration Statement No. 33-80217]

10.5.8 Employment Agreement by and between First Enterprise Financial Group, Inc. and Robert J. Harker [Incorporated by
reference to Exhibit 10.5.8 to Registration Statement No. 33-80217]

10.5.9 Employment Agreement by and between First Enterprise Financial Group, Inc. and Jan W. Erfert [Incorporated by
reference to Exhibit 10.5.9 to Registration Statement No. 33-80217]

10.6.1 Fourth Amended and Restated Revolving Credit Agreement

10.6.2 First Amendment to the Fourth Amended and Restated Revolving Credit Agreement

10.7 Amended and Restated Asset Purchase Agreement by and between General Electric Capital Corporation and First
Enterprise Financial Group, Inc. [Incorporated by reference to Exhibit 10.8 to Registration Statement No. 33-80217]

10.7.1 Amendment #1 to Amended and Restated Asset Purchase Agreement by and between General Electric Capital Corporation
and First Enterprise Financial Group, Inc. [Incorporated by reference to Exhibit 10.8.1 to Registration Statement
No. 33-80217]

10.8 Amended and Restated Servicing Agreement by and between General Electric Capital Corporation and First Enterprise
Financial Group, Inc. [Incorporated by reference to Exhibit 10.9 to Registration Statement No. 33-80217]

E-2

Exhibit
Number Document Description
- -------- --------------------

10.8.1 Amendment #1 to Servicing Agreement by and between General Electric Capital Corporation and First Enterprise
Financial Group, Inc. [Incorporated by reference to Exhibit 10.9.1 to Registration Statement No. 33-80217]

10.9 Asset Purchase Agreement by and between Liberty Bank and First Enterprise Financial Group, Inc. [Incorporated by
reference to Exhibit 10.10 to Registration Statement No. 33-80217]

10.10 Servicing Agreement by and between Liberty Bank and First Enterprise Financial Group, Inc. [Incorporated by
reference to Exhibit 10.11 to Registration Statement No. 33-80217]

10.11 Information Processing Agreement by and between Florida Informanagement Services, Inc. and First Enterprise
Financial Group, Inc. [Incorporated by reference to Exhibit 10.12 to Registration Statement No. 33-80217]

10.12 Asset Purchase Agreement by and between Liberty Bank and First Enterprise Financial Group, Inc. [Incorporated by
reference to Exhibit 10.15 to Registration Statement No. 33-80217]

10.13 Servicing Agreement by and between Liberty Bank and First Enterprise Financial Group, Inc. [Incorporated by
reference to Exhibit 10.16 to Registration Statement No. 33-80217]

10.14 Sale and Servicing Agreement by and between First Enterprise Financial Group, Inc., First Enterprise Securitization
Corp. and LaSalle National Bank [Incorporated by reference to Exhibit 10.17 to Registration Statement No. 33-80217]

10.15 Form of Tax Indemnification Agreement [Incorporated by reference to Exhibit 10.18 to Registration Statement No.
33-80217]

11 Statement Regarding Computation of Per Share Earnings

21 Subsidiaries of First Enterprise Financial Group, Inc.

23 Consent of Grant Thornton LLP

24 Power of Attorney

27 Financial Data Schedule

E-3