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THIS REPORT HAS BEEN FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION VIA EDGAR

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2003

Commission File No. 0-22910

T F C  E N T E R P R I S E S,  I N C.

(Exact name of registrant as specified in its charter)

5425 Robin Hood Road
Suite 101 B
Norfolk, Virginia 23513
(Address of principal executive offices) (zip code)

Registrant’s telephone number, including area code — (757) 858-1400

Securities registered pursuant to Section 12(b) of the Act:
None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value per share

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 o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes o No x

As of May 15, 2003, there were 11,551,033 outstanding shares of the registrant’s $.01 par value per share common stock.

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TFC ENTERPRISES, INC.
QUARTERLY REPORT ON FORM 10-Q FOR
THE THREE MONTHS ENDED MARCH 31, 2003

Table of Contents and 10-Q Cross Reference Index

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TFC ENTERPRISES, INC.
FINANCIAL HIGHLIGHTS
(Unaudited)

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Note:

Throughout this report, ratios are based on unrounded numbers and factors contributing to changes between periods are noted in descending order of materiality.

(a)

Gross contract receivables net of unearned interest revenue less restoration of net contract receivables in the amount of $16,572,000 at March 31, 2003 and $0 at March 31, 2002.

(b)

Before income (loss) from discontinued operations and cumulative effect of change in accounting principle.

(c)

Nonrefundable reserve is net of $16.6 million of reserve attributable to restoration of net contract receivables.

(d)

Includes restoration of net contract receivables in the amount of $16,572,000 at March 31, 2003 and $0 at March 31, 2002.

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TFC ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)

See accompanying Notes to Consolidated Financial Statements.

(a)

The 12/31/02 numbers were extracted from the audited financial statements.

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TFC ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

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See accompanying Notes to Consolidated Financial Statements.

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TFC ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)

(a)

There are no adjustments to net income to determine comprehensive income for the periods presented.

See accompanying Notes to Consolidated Financial Statements.

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TFC ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

See accompanying Notes to Consolidated Financial Statements.

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TFC ENTERPRISES, INC.
Notes to Consolidated Financial Statements

1. Summary of significant accounting policies

Organization and business

TFC Enterprises Inc. (“TFCE”) is a holding company with one primary wholly-owned subsidiary, The Finance Company (“TFC”). TFCE has no significant operations of its own. TFC specializes in purchasing and servicing installment sales contracts originated by automobile and motorcycle dealers involved in the sale of new and used automobiles, vans, light trucks, and motorcycles (collectively “vehicles”) on an individual basis (“point-of-sale” purchase). Based in Norfolk, Virginia, TFC also has six contract production offices throughout the United States in communities with a large concentration of military personnel.

Basis of presentation

The unaudited consolidated financial statements of the Company are prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. These financial statements should be read in conjunction with the Company’s 2002 Annual Report on Form 10-K. In the opinion of management, all normal recurring adjustments which management of the Company considers necessary for a fair presentation of the financial position and results of operations for the periods are reflected in the financial statements. Operating results for the three months ended March 31, 2003, are not necessarily indicative of the results that may be expected for the entire year ending December 31, 2003.

2. Contract receivables

The following is a summary of contract receivables at March 31, 2003 and December 31, 2002:

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TFC ENTERPRISES, INC.
Notes to Consolidated Financial Statements (continued)

2. Contract receivables (continued)

As discussed in the MD&A section, the static pool reserve methodology is used to analyze and reserve for our credit losses. This methodology allows us to stratify our portfolio into separate and identifiable annual pools. The loss performance of these annual pools is analyzed monthly to determine the adequacy of the reserves. The loss performance to date combined with estimated future losses by pool year establishes the estimated loss for each pool year. Estimates are reviewed regularly and if necessary, will be revised to reflect historical experience if it deviates materially from the estimates.

The Company previously determined certain contract receivables to be uncollectible. Based on events that occurred during the quarter ended March 31, 2003, the Company has determined these contract receivables may, in fact, be collectible. The Company has recorded a restoration of net contract receivables of approximately $16,572,000 and restored the corresponding discounts utilized when the net contract receivables were deemed uncollectible. Although the contract receivables are deemed collectible, they are considered impaired in conformity with FASB Statement No. 114, as amended by FASB Statement No. 118, Accounting by Creditors for Impairment of a Loan—Income Recognition and Disclosures (an amendment of FASB Statement No. 114). The total discounts restored in relation to the net contract receivables were $16,572,000 at March 31, 2003 and $0 at December 31, 2002. The average recorded investment in impaired loans was $8,286,000 in the first quarter of 2003 and $0 in 2002. No interest income was recognized on the impaired net contract receivables in the first quarter of 2003. The Company is not committed to lend additional funds to debtors whose net contract receivables have been modified.

Changes in the allowance for credit losses and nonrefundable reserve for the three months ended March 31, 2003 and 2002 were as follows:

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TFC ENTERPRISES, INC.
Notes to Consolidated Financial Statements (continued)

3. Computation of primary and fully diluted earnings per share

Basic and diluted earnings per share for the three months ended March 31, 2003 and 2002 were as follows:

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TFC ENTERPRISES, INC.
Notes to Consolidated Financial Statements (continued)

4. Segments

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision makers in deciding how to allocate resources and in assessing performance.

Due to the sale of substantially all the assets of First Community Finance, the Company redefined its segments. Previously, the Company operated with two business segments. Through TFC, the auto finance segment, the Company is engaged in purchasing and servicing installment sales contracts originated by automobile and motorcycle dealers involved in the sale of new and used automobiles, vans, light trucks, and motorcycles (collectively “vehicles”) throughout the United States. This segment consists of two business units (i) point-of-sale which contracts are acquired on an individual basis from dealers after the Company has reviewed and approved the purchasers credit application and (ii) bulk which contracts were acquired through the purchase of dealer portfolios. The bulk purchasing was phased out in March 2001. Through FCF, the consumer finance segment, the Company was involved in the direct origination and servicing of small consumer loans through a branch network in Virginia and North Carolina. The Company’s operations are now classified into one segment.

5. Discontinued Operations

The disposition of the consumer finance segment represents discontinued operations under Statement of Financial Accounting Standards Number 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Accordingly, the revenues, costs and expenses, assets and liabilities, and cash flows of First Community Finance have been segregated in the Consolidated Balance Sheets, Consolidated Statements of Income, and Consolidated Statements of Cash Flows.

In accordance with SFAS No. 144 “Accounting for the Impairment or Disposal of Long Lived Assets” (SFAS 144) which the Company adopted on January 1, 2002, net income and gain/loss on disposition of FCF are reflected in the consolidated statements of income and cash flows as discontinued operations.

6. Going Concern/Subsequent Event

TFC’s principal sources of borrowing are (i) a revolving line of credit (the “GE Facility“) in the maximum amount of $40 million, guaranteed by the Company, TFC Enterprises, Inc., with General Electric Capital Corporation (“GE Capital”) and (ii) a revolving line of credit (the “Westside Facility“) in the maximum amount of $40 million, with Westside Funding Corporation, a special purpose funding vehicle administered by WestLB. The GE Facility was scheduled to terminate on April 1, 2003. The Westside Facility is scheduled to expire on July 1, 2003 and requires TFC to have in place a $40 million revolving credit facility at all times. As of the date of this report, TFC has not replaced the GE Facility and has no material prospects available to replace the facility. TFC was not able to replace the GE Facility by April 1, 2003, thus becoming in default of the Westside Facility on April 1, 2003. Because of the uncertainties resulting in the Company not having replaced its credit facilities to comply with the Westside Facility, the Company has received a going concern explanatory paragraph in the audit report of its auditors for the year ended December 31, 2002, which is an additional default provision in the agreement. Accordingly, absent the waivers discussed in the next paragraph, both the GE Facility and the Westside Funding facility, and other facilities would have gone into default on April 1, 2003. These defaults would have caused the Company’s three securitization subsidiaries to also go into default under their terms as well.

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TFC ENTERPRISES, INC.
Notes to Consolidated Financial Statements (continued)

6. Going Concern/Subsequent Event (continued)

On March 31, 2003, the Company, Consumer Portfolio Services, Inc. (“CPS”) and a wholly-owned subsidiary of CPS (the “CPS Subsidiary”) entered into a merger agreement whereby, subject to the approval of TFCE’s shareholders, the CPS Subsidiary will merge with and into TFCE, and TFCE will become a wholly owned subsidiary of CPS (the “CPS Merger”). The completion of a term transaction is (a) contingent on completion of the merger and (b) required by the merger agreement. The merger will be completed simultaneously with the closing of TFC’s 2003-1 securitization.

As mentioned above, GE Capital and Westside Funding have waived certain defaults under each of these facilities, as have the insurers of the three securitizations, premised on the closing of the recently announced CPS Merger. Should the CPS Merger not close, the Company will be forced to attempt to negotiate additional waivers and extensions with its existing lenders, and attempt to find alternative financing sources. During this process, management would be forced to consider the possibility of seeking protection under state and federal bankruptcy laws under certain circumstances.

TFC obtained waivers of the events of default existing under the Westside Facility and the GE Facility described in the immediately preceding paragraph until the earliest of (x) the closing of the CPS Merger, (y) the failure of the CPS Merger to close and (z) May 31, 2003 (the “Extension Period”). TFC’s 2003-1 securitization will not close unless the CPS Merger is completed. The Westside Facility is presently scheduled to expire on July 1, 2003 and the GE Facility is scheduled to expire at the end of the Extension Period. GE has informed TFC that it will not renew or extend the GE Facility beyond the expiration of the Extension Period. In part to repay GE and Westside, TFC intends to close on a new securitization contemporaneous with the closing of the CPS Merger. Proceeds of the issuance of the notes in the planned securitization would be applied, among other things, to repay all amounts due under the GE Facility and the Westside Facility. Upon such repayment, the GE Facility and the Westside Facility will be terminated.

Contemporaneous with the CPS Merger, TFC expects to enter into a new $25 million revolving line of credit with Westside Funding Corporation to fund purchases of installment contracts (the “New Westside Facility“), in which event, TFC’s principal sources of liquidity will consist of the New Westside Facility and any additional resources made available by CPS. If the New Westside Facility is not entered into, there can be no assurance that alternative sources of financing would be available and, in such event, TFC might consider the possibility of seeking protection under state and federal bankruptcy laws. The Insurer of the Securitization has reserved the right not to issue the Note Policy (in which event the Notes will not be issued) unless the Insurer is reasonably confident at the time of issuance that the New Westside Facility will be consummated shortly thereafter.

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TFC ENTERPRISES, INC.
Management’s Discussion And Analysis Of Financial Condition
And Results Of Operations

Cautionary statement under the “Safe-Harbor” provisions of the Private Securities Litigation Reform Act of 1995: included in this Report and other written and oral information presented by management from time to time, including but not limited to, reports to shareholders, quarterly shareholder letters, filings with the Commission, news releases, discussions with analysts and investor presentations, are forward-looking statements about business strategies, market potential, potential for future point-of-sale purchases, delinquency and charge-off rates, future financial performance and other matters that reflect management’s expectations as of the date made. Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “expects,” “seeks,” and similar expressions are intended to identify forward-looking statements. Future events and the Company’s actual results could differ materially from the results reflected in these forward-looking statements. The following are factors that could cause the Company’s actual results to differ materially from those expressed or implied by such forward-looking statements: the going concern explanatory paragraph in our 10-K, our ability to issue notes in the planned securitization, enter into the New Westside Facility, close the recently announced merger with Consumer Portfolio Services, Inc. (“CPS”), our dependence on our lines of credit; our ability to continue to obtain adequate funding under similar terms to purchase contracts; intense competition within our markets; the fluctuating interest rates associated with our lines of credit; our reliance on estimates of future recoveries based on historical recoveries from prior and future years charge-offs, and the impact of retail installment contract defaults. Please refer to a discussion of these and other factors in this report and our other filings with the Securities and Exchange Commission. The Company disclaims any intent or obligation to update these forward-looking statements, whether as a result of new information, future events or otherwise.

Results of Operations

Net income (loss) and earnings per basic common share

Income from continuing operations for the first quarter of 2003 was $0.3 million, or $0.03 per basic common share, compared to income from continuing operations of $1.0 million before cumulative effect of change in accounting principle, or $0.09 per basic common share, in the first quarter of 2002. Net income for the first quarter of 2003 increased to $0.3 million, or $0.03 per basic common share, compared to net income (loss) of $(5.7) million, or $(0.50) per basic common share for the first quarter of 2002.

Volume

Gross contracts purchased or originated totaled $23.5 million in the first quarter of 2003, compared to $31.4 million purchased in the first quarter of 2002. As previously announced, we phased out new Bulk Acquisitions from “Buy Here Pay Here” automobile dealers in March 2001. Point-of-sale contract purchases volume is down as a result of increased competition for the military contract purchases, fewer stateside military due to increased overseas deployments, and a more selective buying program in the company’s military and non-military purchases.

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TFC ENTERPRISES, INC.

Gross contracts purchased or originated were as follows for the three months ended March 31, 2003 and 2002:

Net interest revenue

Net interest revenue for the first quarter of 2003 decreased to $4.1 million, or 27%, from $5.6 million for the first quarter of 2002. The decrease was attributable to a lower yield on average interest-earning assets, a decrease in average interest-earning assets, and an increase in the cost of interest-bearing liabilities.

The yield on interest-earning assets was 17.36% in the first quarter of 2003, compared to 18.63% in the first quarter of 2002. The decrease in yield reflects a more competitive program for our military dealers while continuing to maintain prudent underwriting standards as well as a decrease in the bulk portfolio, which carried a higher yield. During the first quarter of 2003 and 2002, $0.2 million and $0.5 million respectively was not accreted to income but rather reclassified to nonrefundable reserve. This reclassification allows the Company to maintain reserves at adequate levels. The operations of the Company have been favorably impacted by new programs directed at higher quality loans with lower APR’s.

The cost of interest-bearing liabilities increased to 9.45% for the first quarter of 2003 from 8.91% for the first quarter of 2002. The increase in the cost of interest-bearing liabilities is primarily related to a monthly line extension fee related to one of our revolving lines of credit.

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TFC ENTERPRISES, INC.

Net interest revenue, net interest spread, and net interest margin were as follows for the three months ended March 31, 2003 and 2002:

(a)

Gross contract receivables net of unearned interest revenue less restoration of net contract receivables in the amount of $16,572,000 at March 31, 2003 and $0 at March 31, 2002.

(b)

Net interest margin is annualized net interest revenue divided by average interest-earning assets.

Operating expense

Operating expense as a percentage of interest-earning assets, calculated on an annualized basis, increased to 9.30% for the first quarter of 2003 from 8.52% for the first quarter of 2002.

Provision for income taxes

The effective tax rate for the first quarter of 2003 and 2002 of approximately 38.8% and 39.5%, respectively, for book purposes is higher than the expected statutory rate primarily due to the effect of state income taxes.

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TFC ENTERPRISES, INC.

Financial Condition

Assets

Total assets decreased by $8.3 million to $173.3 million, or 5%, at March 31, 2003, from $181.6 million at December 31, 2002.

Net contract receivables were as follows at March 31, 2003 and December 31, 2002: