<PAGE>
 
                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C.  20549

                                   FORM 10-Q

(Mark one)

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

     For the quarterly period ended June 30, 1998

                                       Or

[_]  Transition Report Pursuant to Section 13 or 15(d) of the Securities
     Exchange Act of 1934

     For the transition period from __________ to ___________

                        Commission File Number 000-24051


                          UNITED PANAM FINANCIAL CORP.
             (Exact name of registrant as specified in its charter)


               California                                  95-3211687
       (State or other jurisdiction of                  (I.R.S. Employer
        incorporation or organization)               Identification Number)


                           1300 SOUTH EL CAMINO REAL
                          San Mateo, California  94402
              (Address of principal executive offices) (Zip Code)


                                 (650) 345-1800
              (Registrant's telephone number, including area code)


                                 Not applicable
             (Former name, former address and former fiscal year, 
                         if changed since last report)


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


The number of shares outstanding of the Registrant's Common Stock as of August
7, 1998 was 17,275,000 shares.
<PAGE>
 
                          UNITED PANAM FINANCIAL CORP.
                                   FORM 10-Q
                                 JUNE 30, 1998

                                     INDEX



                                                                       Page
PART I.   FINANCIAL INFORMATION                                        ---- 

Item 1.   Financial Statements                                         
                                                                      
          Consolidated Statements of Financial Condition as of
            June 30, 1998 and December 31, 1997                           1

          Consolidated Statements of Operations
            for the three and six months ended June 30, 1998
            and June 30, 1997                                             2

          Consolidated Statements of Cash Flows
            for the three and six months ended June 30, 1998
            and June 30, 1997                                             3

          Notes to Unaudited Consolidated Financial Statements            5

Item 2.   Management's Discussion and Analysis of
            Financial Condition and Results of Operations                 8

Item 3.   Quantitative and Qualitative Disclosures About Market Risk     29

PART II.  OTHER INFORMATION

Item 1.   Legal Proceedings                                              30

Item 2.   Changes in Securities and Use of Proceeds                      30

Item 3.   Defaults Upon Senior Securities                                30

Item 4.   Submission of Matters to a Vote of Security Holders            31

Item 5.   Other Information                                              31

Item 6.   Exhibits and Reports on Form 8-K                               31
<PAGE>
 
PART I.                      FINANCIAL INFORMATION
                      

ITEM 1.    FINANCIAL STATEMENTS.
           -------------------- 

                 UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
                                  (Unaudited)
                                        
<TABLE>
<CAPTION>
                                                                            June 30,                December 31,
(Dollars in thousands, except per share data)                                 1998                      1997
                                                                     ---------------------     ---------------------
<S>                                                                    <C>                       <C> 
ASSETS

Cash and due from banks                                                           $  5,975                  $ 15,026
Short term investments                                                              42,430                     4,000
                                                                     ---------------------     ---------------------
 
Cash and cash equivalents                                                           48,405                    19,026
Securities available for sale, at fair value                                            --                     1,002
Residual interests in securitizations, at fair value                                    --                     8,230
Loans, net                                                                         181,485                   148,535
Loans held for sale                                                                160,963                   120,002
Federal Home Loan Bank stock, at cost                                                2,059                     1,945
Accrued interest receivable                                                          1,512                     1,494
Real estate owned, net                                                               1,209                       562
Premises and equipment, net                                                          4,522                     3,085
Deferred tax assets                                                                  3,001                     3,171
Intangible assets                                                                      395                       457
Other assets                                                                         8,247                     3,333
                                                                     ---------------------     ---------------------
     Total assets                                                                 $411,798                  $310,842
                                                                     =====================     =====================
 
LIABILITIES AND STOCKHOLDERS' EQUITY

Deposits                                                                          $300,334                  $233,194
Notes payable                                                                       10,930                    12,930
Federal Home Loan Bank advances                                                         --                    28,000
Warehouse line of credit                                                                --                     6,237
Accrued expenses and other liabilities                                              18,469                    17,472
                                                                     ---------------------     ---------------------
     Total liabilities                                                             329,733                   297,833
                                                                     ---------------------     ---------------------
 
Commitments and contingencies                                                           --                        --
Preferred stock (par value $0.01 per share):
     Authorized, 2,000,000 shares
     None issued and outstanding                                                        --                        --
Common stock (par value $0.01 per share):
    Authorized, 20,000,000 shares
    Issued and outstanding, 17,275,000 and 10,950,000 shares at
    June 30, 1998 and December 31, 1997, respectively                                  173                       110
Additional paid-in capital                                                          68,454                     5,127
Retained earnings                                                                   13,438                     7,772
                                                                     ---------------------     ---------------------
     Total stockholders' equity                                                     82,065                    13,009
                                                                     ---------------------     ---------------------
 
     Total liabilities and stockholders' equity                                   $411,798                  $310,842
                                                                     =====================     =====================
</TABLE>

See notes to unaudited consolidated financial statements.                      1
<PAGE>
 
                 UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (Unaudited)
                                        
<TABLE>
<CAPTION>
                                                              Three Months                   Six Months
(In thousands, except per share data)                        Ended June 30,                Ended June 30,
                                                     ---------------------------     ---------------------------
                                                        1998            1997           1998            1997
                                                     -----------      ---------     -----------     -----------
<S>                                                  <C>              <C>           <C>              <C>
INTEREST INCOME
   Loans                                                 $11,608        $ 5,935         $20,627         $10,739
   Accretion of discount on loans purchased                  204            231             542             353
   Short term investments and securities available
    for sale                                                 280            155             466             273
                                                     -----------      ---------     -----------     -----------
        Total interest income                             12,092          6,321          21,635          11,365
                                                     -----------      ---------     -----------     -----------

INTEREST EXPENSE
   Deposits                                                3,876          2,303           7,123           4,346
   Federal Home Loan Bank advances                           244            357             545             444
   Warehouse line of credit                                  907             --           1,466              --
   Notes payable                                             152            150             340             298
                                                     -----------      ---------     -----------     -----------
         Total interest expense                            5,179          2,810           9,474           5,088
                                                     -----------      ---------     -----------     -----------
             Net interest income                           6,913          3,511          12,161           6,277
   Provision for loan losses                               1,085            285           1,123             379
                                                     -----------      ---------     -----------     -----------
             Net interest income after provision
              for loan losses                              5,828          3,226          11,038           5,898
                                                     -----------      ---------     -----------     -----------

NON-INTEREST INCOME
   Gain on sale of loans, net                             17,294          4,697          27,191           7,077
   Loan related charges and fees                              46            112              72             194
   Service charges and fees                                  162             54             305             105
   Other income                                               31             13              63              23
                                                     -----------      ---------     -----------     -----------
         Total non-interest income                        17,533          4,876          27,631           7,399
                                                     -----------      ---------     -----------     -----------

NON-INTEREST EXPENSE
   Compensation and benefits                              10,172          3,882          18,772           7,031
   Occupancy expense                                       1,365            670           2,478           1,127
   Other expenses                                          4,430          1,944           7,514           3,138
                                                     -----------      ---------     -----------     -----------
     Total non-interest expense                           15,967          6,496          28,764          11,296
                                                     -----------      ---------     -----------     -----------

     Income before income taxes                            7,394          1,606           9,905           2,001

Income taxes                                               3,181            666           4,239             828
                                                     -----------      ---------     -----------     -----------
Net income                                               $ 4,213        $   940         $ 5,666         $ 1,173
                                                     ===========      =========     ===========     ===========

Earnings per share-basic                                 $  0.27        $  0.09         $  0.43         $  0.11
                                                     ===========      =========     ===========     ===========
Earnings per share-diluted                               $  0.26        $  0.08         $  0.40         $  0.11
                                                     ===========      =========     ===========     ===========
Weighted average shares outstanding-basic                 15,469         10,669          13,210          10,669
                                                     ===========      =========     ===========     ===========
Weighted average shares outstanding-diluted               16,376         11,154          14,060          11,140
                                                     ===========      =========     ===========     ===========
</TABLE>


See notes to unaudited consolidated financial statements.                      2
<PAGE>
 
                 UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)

<TABLE>
<CAPTION>
(Dollars in thousands)                                                   Three Months                 Six Months
                                                                        Ended June 30,               Ended June 30,
                                                                   ------------------------     -----------------------
                                                                     1998            1997         1998           1997
                                                                   ---------    ---------     ---------     ---------
<S>                                                                <C>          <C>           <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES                                          
Net income                                                         $   4,213    $     940     $   5,666     $   1,173
                                                                              
Adjustments to reconcile net income                                           
 to net cash (used in) provided by operating activities:                      
   Gain on sale of loans                                             (17,294)      (4,697)      (27,191)       (7,077)
   Origination of mortgage loans held for sale                      (334,655)    (108,712)     (598,157)     (176,488)
   Sales of mortgage loans held for sale                             359,609       97,160       562,566       139,794
   Net proceeds from sale of residual interests in                        --           --         8,302            --
    securitizations                                                           
   Provision for loan losses                                           1,085          285         1,123           379
   Accretion of discount on loans                                       (204)        (231)         (542)         (353)
   Depreciation and amortization                                         379          162           756           285
   FHLB stock dividend                                                   (29)         (21)          (56)          (41)
   (Decrease) increase in accrued interest receivable                    348          (47)          (18)         (158)
   Increase in other assets                                           (3,304)        (593)       (4,612)         (634)
   Deferred income taxes                                                 126           16           170            20
   Increase (decrease) in accrued expenses and other                          
    liabilities                                                       (1,624)       6,068           998         4,518
                                                                   ---------    ---------     ---------     ---------
                                                                              
     Net cash provided by (used in) operating activities               8,650      ( 9,670)      (50,995)      (38,582)
                                                                   ---------    ---------     ---------     ---------
                                                                              
CASH FLOWS FROM INVESTING ACTIVITIES                                          
   Proceeds from maturities of investment securities                      --           --         1,002            --
   Originations, net of repayments, of mortgage loans                 11,731        6,906        19,141        10,244
   Originations, net of repayments, of non-mortgage loans            (13,593)     (11,013)      (32,021)      (28,024)
   Purchase of securities available for sale                              --           --            --        (2,002)
   Purchase of premises and equipment                                 (1,252)        (635)       (2,103)       (1,233)
   Purchase of FHLB stock, net                                           (58)          --           (58)         (342)
   Proceeds from sale of real estate owned                                --          387           450         1,188
   Other, net                                                              5           --          (330)           --
                                                                   ---------    ---------     ---------     ---------
     Net cash used in investing activities                            (3,167)      (4,355)      (13,919)      (20,169)
                                                                   ---------    ---------     ---------     ---------
                                                                              
CASH FLOWS FROM FINANCING ACTIVITIES                                          
   Repayment of notes payable to shareholders                         (2,000)          --        (2,000)           --
   Net increase in deposits                                           12,102       22,734        67,140        36,090
   Proceeds from initial public offering of common stock, net         63,390           --        63,390            --
   Proceeds, net of repayments, from warehouse line of credit        (53,888)          --        (6,237)           --
   Proceeds, net of repayments, from FHLB advances                    (5,000)       4,000       (28,000)       16,000
                                                                   ---------    ---------     ---------     ---------
       Net cash provided by financing activities                      14,604       26,734        94,293        52,090
                                                                   ---------    ---------     ---------     ---------
                                                                              
Net increase (decrease) in cash and cash equivalents                  20,087       12,709        29,379        (6,661)
                                                                              
Cash and cash equivalents at beginning of period                      28,318        6,693        19,026        26,063
                                                                   ---------    ---------     ---------     ---------
                                                                              
Cash and cash equivalents at end of period                         $  48,405    $  19,402     $  48,405     $  19,402
                                                                   =========    =========     =========     =========
</TABLE>

See notes to unaudited consolidated financial statements.                      3
<PAGE>
 
                 UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
                                  (UNAUDITED)
                                        
<TABLE>
<CAPTION>
(Dollars in thousands)                                                   Three Months                 Six Months
                                                                        Ended June 30,               Ended June 30,
                                                                   ------------------------     -----------------------
                                                                     1998            1997         1998           1997
                                                                   ---------      ---------     ---------     ---------
<S>                                                                <C>            <C>           <C>           <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for:

       Interest                                                       $5,669         $2,806        $9,578        $5,067
                                                                   ---------      ---------     ---------     ---------

       Taxes                                                          $  925         $  880        $2,510        $  880
                                                                   ---------      ---------     ---------     ---------

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
       ACTIVITIES

       Acquisition of real estate owned through
         foreclosure of related mortgage loans                        $1,038         $  281        $1,308        $1,030
                                                                   ---------      ---------     ---------     ---------
</TABLE>

See notes to unaudited  consolidated financial statements.                     4
<PAGE>
 
                 UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
               THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997

                                        

1.  ORGANIZATION
 
      United PanAm Financial Corp. (the "Company") was incorporated in
California on April 9, 1998 for the purpose of reincorporating its business in
that state, through the merger of United PanAm Financial Corp., a Delaware
corporation (the "Predecessor"), into the Company.  Unless the context indicates
otherwise, all references herein to the "Company" include the Predecessor.  The
Company was originally organized as a holding company for Pan American
Financial, Inc. ("PAFI") and Pan American Bank, FSB (the "Bank") to purchase
certain assets and assume certain liabilities of Pan American Federal Savings
Bank from the Resolution Trust Corporation (the "RTC") on April 29, 1994
pursuant to a whole purchase and assumption agreement.  The Company, PAFI and
the Bank are considered to be minority owned.  PAFI is a wholly-owned subsidiary
of the Company, and the Bank is a wholly-owned subsidiary of PAFI.  United PanAm
Mortgage Corporation, a California corporation, was organized in 1997 as a
wholly-owned subsidiary of the Company and is presently acting as agent for the
Bank in secondary marketing activities.

      In 1997, the Company changed its fiscal year end from June 30 to December
31 for financial reporting purposes.  For income tax purposes, the Company has
filed an application with the appropriate taxing authorities to change its
fiscal year end from June 30 to December 31.

2.  BASIS OF PRESENTATION

      Certain statements in this Quarterly Report on Form 10-Q, including
statements regarding the Company's strategies, plans, objectives, expectations
and intentions, may include forward-looking information within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended.  These forward-looking statements
involve certain risks and uncertainties that could cause actual results to
differ materially from those expressed or implied in such forward-looking
statements.  Such risks and uncertainties include, but are not limited to, the
following factors: limited operating history; loans made to credit-impaired
borrowers; need for additional sources of financing; concentration of business
in California; reliance on operational systems and controls and key employees;
competitive pressure in the banking and mortgage lending industry; changes in
the interest rate environment; rapid growth of the Company's businesses; risks
in connection with the securitization of mortgage loans; general economic
conditions; and other risks identified from time to time in the Company's
filings with the Securities and Exchange Commission (the "SEC"). See "Item 2. 
Management's Discussion and Analysis of Financial Condition and Results of 
Operations--Factors That May Affect Future Results."

      The accompanying unaudited consolidated financial statements include the
accounts of United PanAm Financial Corp., Pan American Financial, Inc., United
PanAm Mortgage Corporation and Pan American Bank, FSB.  Substantially all of the
Company's revenues are derived from the operations of the Bank and United PanAm
Mortgage Corporation and they represent substantially all of the Company's
consolidated assets and liabilities as of June 30, 1998 and December 31, 1997.
Significant inter-company accounts and transactions have been eliminated in
consolidation.

      These consolidated financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation of the Company's
financial condition and results of operations for the interim periods presented
in this Form 10-Q have been included.  Operating results for the interim periods
are not necessarily indicative of financial results for the full year.  These
unaudited consolidated financial statements should be read in conjunction with
the audited consolidated financial statements and notes thereto included in the
Company's Registration Statement on Form S-1 (File No. 333-39941), as amended,
declared effective by the SEC on April 23, 1998 in connection with its initial
public offering.
                                                                               5
<PAGE>
 
      The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes.  Actual results could differ from those estimates.

3.  EARNINGS PER SHARE

      At December 31, 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share" ("SFAS 128").
Under SFAS 128, basic EPS excludes dilution and is computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding for the period.  Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted from issuance of common
stock.

      Basic EPS and diluted EPS are calculated as follows for the three and six
months ended June 30, 1998 and 1997:

<TABLE>
<CAPTION>
                                                                    Three Months                           Six Months
(In thousands, except per share amounts)                           Ended June 30,                        Ended June 30,
                                                         ---------------------------------     --------------------------------
                                                               1998              1997               1998               1997
                                                         --------------    ---------------     -------------     --------------
<S>                                                        <C>               <C>                 <C>               <C>
Earnings per share-basic
     Net income                                                 $ 4,213            $   940           $ 5,666            $ 1,173
                                                         ==============    ===============     =============     ==============
     Average common shares outstanding                           15,469             10,669            13,210             10,669
                                                         ==============    ===============     =============     ==============
     Earnings per share-basic                                   $  0.27            $  0.09           $  0.43            $  0.11
                                                         ==============    ===============     =============     ==============
Earnings per share-diluted
     Net income                                                 $ 4,213            $   940           $ 5,666            $ 1,173
                                                         ==============    ===============     =============     ==============
     Average common shares outstanding                           15,469             10,669            13,210             10,669
     Add: Stock options                                             907                485               850                471
                                                         --------------    ---------------     -------------     --------------
     Average common shares outstanding-diluted                   16,376             11,154            14,060             11,140
                                                         ==============    ===============     =============     ==============
     Earnings per share-diluted                                 $  0.26            $  0.08           $  0.40            $  0.11
                                                         ==============    ===============     =============     ==============
</TABLE>

4.    ACCOUNTING PRONOUNCEMENTS

      In June 1997, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 130, "Reporting Comprehensive Income" ("SFAS 130"), which establishes
standards for reporting and displaying comprehensive income and its components
in the consolidated financial statements.  SFAS 130 does not, however, require a
specific format for presenting such information, but requires the Company to
display an amount representing total comprehensive income for the periods
presented in that financial statement.  For the three and six months ended June
30, 1998 and 1997, the Company had no items of comprehensive income to report
other than net income.

      In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information" ("SFAS 131"), which establishes standards
for the way that public business enterprises are to report information about
operating segments in annual financial statements and requires those enterprises
to report selected information about operating segments in interim financial
reports issued to shareholders.  SFAS 131 is effective for financial statements
for periods beginning after December 31, 1997, and the Company is in the process
of determining its preferred format for disclosure purposes.

      In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), which establishes accounting
and  reporting standards  for  derivative instruments and for hedging
activities.  SFAS 133 requires that an entity recognize all  derivatives as
either assets  or liabilities  in  the statements of financial condition  and
measure those instruments at fair value.

                                                                               6
<PAGE>
 
SFAS 133 is effective for all fiscal quarters of fiscal years beginning after
June 15, 1999.

5.  INITIAL PUBLIC OFFERING

      On April 23, 1998, the Company's Registration Statement on Form S-1 for
the initial public offering of 5,500,000 shares of its common stock at a price
of $11.00 per share was declared effective by the SEC.  The Company received
approximately $56 million from the sale of its common stock after underwriting
discount and expenses associated with the offering.  On May 22, 1998, the
Underwriters' over-allotment option for 825,000 shares of common stock was
exercised resulting in $8 million of additional proceeds being received by the
Company, after underwriting discount.

                                                                               7
<PAGE>
 
ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
           ---------------------------------------------------------------
           RESULTS OF OPERATIONS.
           --------------------- 

      Certain statements in this Quarterly Report on Form 10-Q including
statements regarding the Company's strategies, plans, objectives, expectations
and intentions, may include forward-looking information within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended.  These forward-looking statements
involve certain risks and uncertainties that could cause actual results to
differ materially from those expressed or implied in such forward-looking
statements.  For discussion of the factors that might cause such a difference,
see "Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Factors That May Affect Future Results" and other risks
identified from time to time in the Company's filings with the SEC.

GENERAL

  THE COMPANY

      The Company is a diversified specialty finance company engaged primarily
in originating and acquiring for investment or sale residential mortgage loans,
personal automobile insurance premium finance contracts and retail automobile
installment sales contracts.  The Company markets to customers who generally
cannot obtain financing from traditional lenders.  These customers usually pay
higher loan origination fees and interest rates than those charged by
traditional lenders to gain access to consumer financing.  The Company believes
that management's experience in originating, assessing, pricing and managing
credit risk enables the Company to earn attractive risk-adjusted returns.  The
Company has funded its operations to date principally through retail deposits,
Federal Home Loan Bank ("FHLB") advances, a mortgage warehouse line of credit,
loan securitizations, and whole loan sales at its federal savings bank
subsidiary, Pan American Bank, FSB (the "Bank").

      The Company commenced operations in 1994 by purchasing from the Resolution
Trust Corporation (the "RTC") certain assets and assuming certain liabilities of
the Bank's predecessor, Pan American Federal Savings Bank.  The Company has used
the Bank as a base for expansion into its current specialty finance businesses.
In 1995, the Company commenced its insurance premium finance business through a
joint venture with BPN Corporation ("BPN").  In 1996, the Company commenced its
current mortgage and automobile finance businesses.  The Company was
incorporated in California on April 9, 1998 for the purpose of reincorporating
its business in that state, through the merger of United PanAm Financial Corp.,
a Delaware corporation (the "Predecessor"), into the Company.  Unless the
context indicates otherwise, all references herein to the "Company" include the
Predecessor.

      Finance companies, such as the Company, generate income from a combination
of (i) "spread" or "net interest" income (i.e., the difference between the yield
on loans, net of loan losses, and the cost of funding) and (ii) "non-interest"
income (i.e., the fees received for various services and gain on the sale of
loans).  Income is used to cover operating expenses incurred (i.e., compensation
and benefits, occupancy and other expenses) in generating that income.  Each of
the Company's businesses, as described below, generates income from a
combination of spread and non-interest income.

  MORTGAGE FINANCE

  The Company originates and sells subprime mortgage loans secured primarily by
first mortgages on single family residences.  The Company's mortgage finance
customers are considered "subprime" because of factors such as impaired credit
history or high debt-to-income ratios compared to customers of traditional
mortgage lenders.  The Company has funded its mortgage finance business to date
primarily through the Bank's deposits, FHLB advances, a mortgage warehouse line
of credit, the sale of its mortgage loan

                                                                               8
<PAGE>
 
originations to mortgage companies and investors through whole loan packages
offered for bid several times per month and, to a lesser extent, from loan
securitizations.  The Company completed its first securitization of mortgage
loans in December 1997 and in March 1998 sold the residual interests in this
securitization for cash at a price in excess of its carrying value.
 
  The Company's mortgage lending income is generated from cash gains on sales of
loans, and a spread component resulting from loans held prior to sale.  Income
generated from this mortgage finance business covers operating costs, including
compensation, occupancy, loan origination, and administrative expenses.

  INSURANCE PREMIUM FINANCE

  In May 1995, the Bank entered into a joint venture with BPN under the name
"ClassicPlan" (such business, "IPF").  Under this joint venture, which commenced
operations in September 1995, the Bank underwrites and finances primarily
automobile insurance premiums in California and BPN markets the financing
program and services the loans for the Bank.  The Bank lends to individuals for
the purchase of single premium automobile insurance policies and the Bank's
collateral is the unearned insurance premium held by the insurance company.  The
unearned portion of the insurance premium is refundable to IPF in the event the
underlying insurance policy is canceled.  The Company does not sell or have the
risk of underwriting the underlying insurance policy.

  As a result of BPN performing substantially all marketing and servicing
activities, the Company's role is primarily that of an underwriter and funder of
loans.  Therefore, IPF's income is generated primarily on a spread basis,
supplemented by non-interest income generated from late payment and returned
check fees.  The Bank uses this income to cover the costs of underwriting and
loan administration, including compensation, occupancy and data processing
expenses.

  In January 1998, the Company and BPN purchased from Providian National Bank
and others for $450,000 the right to solicit new and renewal personal and
commercial insurance premium finance business from brokers who previously have
provided contracts to Commonwealth Premium Finance.  The purchase price for the
agreement was provided 60% by the Company and 40% by BPN.  The relationship
between the Company and BPN continues to be governed by the joint venture
agreement already in effect.  The Company also acquired the Commonwealth name
and certain equipment and software.  The agreement also provides that Providian
National Bank and the servicers of its insurance premium finance business may
not solicit or engage in the insurance premium finance business in California
for a period of three years.

  As a result of the Commonwealth acquisition, IPF increased its commercial
insurance premium financing to approximately 7.5% of loans outstanding at June
30, 1998, and it is expected that this business will increase to approximately
15% of loans outstanding by the end of the year.

  AUTOMOBILE FINANCE

  In 1996, the Bank commenced its automobile finance business through its
subsidiary, United Auto Credit Corporation (such business, "UACC").  UACC
acquires, holds for investment and services subprime retail automobile
installment sales contracts ("auto contracts") generated by franchised and
independent dealers of used automobiles.  UACC's customers are considered
"subprime" because they typically have limited credit histories or credit
histories that preclude them from obtaining loans through traditional sources.
As UACC provides all marketing, origination, underwriting and servicing
activities for its loans, income is generated from a combination of spread and
non-interest income and is used to cover all operating costs, including
compensation, occupancy and systems expense.

  THE BANK

  The Company has funded its operations to date primarily through the Bank's
deposits, FHLB

                                                                               9
<PAGE>
 
advances, a mortgage warehouse line of credit and loan sales and
securitizations. As of June 30, 1998, the Bank was a five-branch federal savings
bank with $300.3 million in deposits. The loans generated by the Company's
mortgage, insurance premium and automobile finance businesses currently are
funded and held by the Bank. In addition, the Bank holds a portfolio of
primarily traditional residential mortgage loans acquired from the RTC in 1994
and 1995 at a discount from the unpaid principal balance of such loans, which
loans aggregated $70.5 million in principal amount (before unearned discounts
and premiums) at June 30, 1998.
 
  The Bank generates spread income not only from loans originated or purchased
by each of the Company's principal businesses, but also from (i) loans purchased
from the RTC, (ii) its securities portfolio, and (iii) consumer loans originated
by its retail deposit branches.  This income is supplemented by non-interest
income from its branch banking activities (e.g., deposit service charges, safe
deposit box fees), and is used to cover operating costs and other expenses.

  YEAR 2000 COMPLIANCE

  Like most financial institutions, the Company's computer systems identify
dates using only the last two digits of the year.  These systems may recognize a
date using "00" as the year 1900, rather than 2000.

  The Company is using both internal and external resources to identify, correct
and test systems that may be affected by year 2000 dates.  System identification
has been completed with testing and implementation scheduled for completion
during the last half of 1998 and in 1999.  The Company believes that year 2000
compliance will not pose significant operational issues for the Company.
However, the failure to implement timely year 2000 compliant systems could have
a material adverse effect on the operations of the Company.

  Dependence on third-party vendors could adversely affect the Company's efforts
to successfully complete year 2000 compliance for all systems in a timely
manner.  The Company is requiring third-party vendors to represent that their
products are year 2000 compliant and will implement a program to test for
compliance.  Contingency plans are being developed in the event that a vendor is
not able to provide timely year 2000 compliance.

  The Company has initiated formal communications with its customers and vendors
to determine the extent to which the Company may be affected by the failure of
these parties to correct their own year 2000 issues.  No assurance can be given
that the systems of third parties on which the Company relies will be corrected
in a timely manner, or that a failure to correct the year 2000 issue by another
party, or a correction that is incompatible with the Company's systems, will not
have a material adverse effect on the Company.

  The Company has assessed the expense of year 2000 compliance and the effect on
the Company's earnings is not considered material.

                                                                              10
<PAGE>
 
  AVERAGE BALANCE SHEETS

  The following tables set forth information relating to the Company for the
three and six months ended June 30, 1998 and 1997.  The yields and costs are
derived by dividing income or expense by the average balance of assets or
liabilities, respectively, for the periods shown.  The yields and costs include
fees which are considered adjustments to yields.

<TABLE>
<CAPTION>
                                                                     Three Months Ended June 30,
                                      ----------------------------------------------------------------------------------
                                                          1998                                      1997
                                      ------------------------------------------  ------------------------------------
                                                                      Average                                 Average
(Dollars in thousands)                      Average                    Yield/       Average                    Yield/
                                           Balance(1)     Interest      Cost       Balance(1)     Interest      Cost
                                         -------------   ----------  ---------    -----------    ---------   --------- 
ASSETS                                                                      (Unaudited)       
<S>                                       <C>             <C>         <C>         <C>            <C>         <C>
Interest earning assets                                                                       
   Investment securities                   $ 20,243        $   280       5.54%     $ 10,968         $  155       5.67%
   Mortgage loans, net(2)                   299,672          7,501      10.01%      146,355          3,529       9.64%
   IPF loans, net(3)                         52,699          1,775      13.47%       48,258          1,728      14.33%
   Automobile installment                                                                     
    contracts, net(4)                        40,299          2,536      25.18%       13,771            909      26.41%
                                          ---------       --------                ---------        -------
      Total interest earning assets         412,913         12,092      11.71%      219,352          6,321      11.53%
                                                          --------                                 -------
Non-interest earnings assets                 34,880                                  10,989   
                                          ---------                               ---------   
       Total assets                        $447,793                                $230,341   
                                          =========                               =========   
                                                                                              
LIABILITIES AND EQUITY                                                                        
Interest bearing liabilities                                                                  
   Customer deposits                        296,423          3,876       5.25%      182,225          2,303       5.07%
   Notes payable                             11,430            152       5.34%       10,930            150       5.49%
   FHLB advances                             17,276            244       5.67%       24,863            357       5.76%
   Warehouse line of credit                  56,971            907       6.38%           --             --         --
                                          ---------       --------                ---------        -------
       Total interest bearing                                                                 
        liabilities                         382,100          5,179       5.44%      218,018          2,810       5.17%
                                                          --------                                 -------
Non-interest bearing liabilities             18,522                                   5,558   
                                           --------                               ---------   
       Total liabilities                    400,622                                 223,576   
Equity                                       47,171                                   6,765   
                                           --------                               ---------   
       Total liabilities and equity        $447,793                                $230,341   
                                          =========                               =========   
Net interest income before  provision                                                         
       for loan losses                                     $ 6,913                                  $3,511
                                                          ========                                 =======
Net interest rate spread(5)                                              6.27%                                   6.36%
Net interest margin(6)                                                   6.70%                                   6.40%
Ratio of interest earning assets to                                                           
       interest bearing liabilities                                     108.1%                                  100.6%
</TABLE>
_________________
(1)  Average balances are measured on a month-end basis.
(2)  Net of deferred loan origination fees, unamortized discounts, premiums and
     allowance for estimated loan losses; includes loans held for sale and non-
     performing loans.
(3)  Net of allowance for estimated losses; includes non-performing loans.
(4)  Net of unearned finance charges, and allowance for estimated losses;
     includes non-performing loans.
(5)  Net interest rate spread represents the difference between the yield on
     interest earning assets and the cost of interest bearing liabilities.
(6)  Net interest margin represents net interest income divided by average
     interest earning assets.

                                                                              11
<PAGE>
 
<TABLE>
<CAPTION>
                                                                       Six Months Ended June 30,
                                      -----------------------------------------------------------------------------------
                                                          1998                                      1997
                                      -----------------------------------------  ----------------------------------------
                                                                      Average                                 Average
(Dollars in thousands)                      Average                    Yield/       Average                    Yield/
                                           Balance(1)     Interest      Cost       Balance(1)     Interest      Cost
                                         -------------   ----------  ---------    -----------    ---------   --------- 
ASSETS                                                                      (Unaudited)        
<S>                                       <C>             <C>         <C>         <C>            <C>         <C>
Interest earning assets                                                                        
   Investment securities                   $ 15,929        $   466       5.85%     $ 10,404      $   273       5.26%
   Mortgage loans, net(2)                   264,019         13,358      10.12%      137,697        6,525       9.48%
   IPF loans, net(3)                         48,011          3,236      13.48%       43,080        3,046      14.14%
   Automobile installment                                                                      
          contracts, net(4)                  36,307          4,575      25.20%       11,551        1,521      26.34%
                                          ---------       --------     ------     ---------      -------
      Total interest earning assets         364,266         21,635      11.88%      202,732       11,365      11.21%
                                                          --------                               ------- 
Non-interest earnings assets                 35,859                                  14,460    
                                          ---------                               ---------      
       Total assets                        $400,125                                $217,192    
                                          =========                               =========    
                                                                                               
LIABILITIES AND EQUITY                                                                         
Interest bearing liabilities                                                                   
   Customer deposits                        274,196          7,123       5.24%      172,958        4,346       5.07%
   Notes payable                             12,073            340       5.68%       10,930          298       5.48%
   FHLB advances                             19,226            545       5.72%       16,072          444       5.57%
   Warehouse line of credit                  46,227          1,466       6.40%           --           --         --
                                          ---------       --------                ---------      -------
       Total interest bearing                                                                  
        liabilities                         351,722          9,474       5.43%      199,960        5,088       5.13%
                                                          --------                               -------
Non-interest bearing liabilities             15,804                                  10,737    
                                          ---------                               ---------    
       Total liabilities                    367,526                                 210,697    
Equity                                       32,599                                   6,495    
                                          ---------                               ---------    
       Total liabilities and equity        $400,125                                $217,192    
                                          =========                               =========    
Net interest income before  provision                                                          
       for loan losses                                     $12,161                               $ 6,277
                                                          ========                               =======
Net interest rate spread(5)                                              6.45%                                 6.08%
Net interest margin(6)                                                   6.73%                                 6.24%
Ratio of interest earning assets to                                     103.6%                                101.4%
       interest bearing liabilities
</TABLE>
_________________
(1)  Average balances are measured on a month-end basis.
(2)  Net of deferred loan origination fees, unamortized discounts, premiums and
     allowance for estimated loan losses; includes loans held for sale and non-
     performing loans.
(3)  Net of allowance for estimated losses; includes non-performing loans.
(4)  Net of unearned finance charges, and allowance for estimated losses;
     includes non-performing loans.
(5)  Net interest rate spread represents the difference between the yield on
     interest earning assets and the cost of interest bearing liabilities.
(6)  Net interest margin represents net interest income divided by average
     interest earning assets.
 
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND
JUNE 30, 1997

  GENERAL

  Net income increased from $940,000 for the three months ended June 30, 1997 to
$4.2 million for the three months ended June 30, 1998.  This increase was due
primarily to the expansion of the Company's mortgage, insurance premium and auto
finance businesses, all of which showed improved operating results during 1997
and 1998.  Also contributing to the favorable operating results for the three
months ended June 30, 1997 compared with the same period in 1998 was an increase
of $12.6 million in gain on sale of loans from the Company's mortgage finance
operations and $3.4 million in net interest income offset by an increase in non-
interest expense of $9.5 million and an increase in provision for loan losses of
$800,000.  Net interest income was also favorably impacted during the second
quarter of 1998 by using the $63.4 million of net proceeds from the Company's
initial public offering of common stock to supplement the financing of its
mortgage operations.

                                                                              12
<PAGE>
 
  As a result of the expansion of the Company's lending operations, mortgage
loan originations increased from $108.5 million for the three months ended June
30, 1997 to $335.0 million for the three months ended June 30, 1998, while
insurance premium financing originations increased from $42.0 million to $43.9
million, respectively, and auto contracts purchased increased from $9.5 million
to $19.9 million, respectively.  Sales of mortgage loans were $344.6 million for
the three months ended June 30, 1998 and $92.5 million for the comparable period
in 1997.
 
  INTEREST INCOME

  Interest income increased from $6.3 million for the three months ended June
30, 1997 to $12.1 million for the three months ended June 30, 1998 due primarily
to a $193.6 million increase in average interest earning assets and a 0.18%
increase in the average yield on interest earning assets. The largest components
of growth in average interest earning assets were mortgage loans, insurance
premium finance loans and auto contracts, which increased $153.3 million, $4.4
million and $26.5 million, respectively. The increase in the average yield on
interest earning assets was attributable to an increase in the origination or
purchase of higher yielding loans principally related to the expansion and
growth of the mortgage, insurance premium and automobile finance businesses. The
increase in mortgage loan receivables was a result of an increase in loans held
for sale, which increased from $61.7 million at June 30, 1997 to $161.0 million
at June 30, 1998. Generally, these loans are originated for sale in the
secondary mortgage market. The increase in such loans was primarily a result of
growth in the Company's mortgage finance business and the opening of 13 retail
lending branches and two wholesale loan centers since June of 1997. The growth
in IPF loans was primarily a result of new loan originations associated with
changes in California's automobile insurance laws effective January 1, 1997,
much of which took place in the first two quarters of 1997, and the purchase of
the rights to solicit new and renewal insurance premium finance business in
connection with the Commonwealth acquisition. The increase in auto contracts
principally resulted from the opening of seven new branch offices since June of
1997 and the purchasing of additional dealer contracts in these new markets.

  INTEREST EXPENSE

  Interest expense increased from $2.8 million for the three months ended June
30, 1997 to $5.2 million for the three months ended June 30, 1998 due to a
$164.1 million increase in average interest bearing liabilities and a 0.27%
increase in the weighted average interest rate on interest bearing liabilities.
The largest component of growth in average interest bearing liabilities was
deposits of the Bank, which increased from an average balance of $182.2 million
during the quarter ended June 30, 1997 to $296.4 million during the quarter
ended June 30, 1998.  The average cost of deposits increased from 5.07% for the
three months ended June 30, 1997 to 5.25% for the comparable period in 1998.

  The increase in deposits resulted from the use of retail and wholesale
certificates of deposit ("CDs") to finance the Company's lending operations, and
the increase in the average yield on the Bank's deposits reflects the repricing
of accounts to higher rates.

  The second largest component of growth in average interest bearing liabilities
was from borrowings under the Bank's warehouse line of credit, increasing to
$57.0 million for the three months ended June 30, 1998.  In October 1997, the
Bank entered into a master repurchase agreement under which it may sell and
repurchase, at a set price, mortgage loans pending the sale or securitization of
these loans.  The weighted average interest rate on such borrowings was 6.38%
for the three months ended June 30, 1998.  There were no warehouse line of
credit advances outstanding during the quarter ended June 30, 1997.

                                                                              13
<PAGE>
 
  PROVISION FOR LOAN LOSSES

  Provision for loan losses increased from $285,000 for the three months ended
June 30, 1997 to $1.1 million for the three months ended June 30, 1998.  The
increase in provision for losses reflects the Company's loan growth over the
past 12 months and management's decision to increase general loan loss
allowances as a result of this growth.  The total allowance for loan losses was
$5.9 million at June 30, 1997 compared with $8.4 million at June 30, 1998.  The
increase in the allowance for loan losses is attributable to the additional
provision for losses and acquisition discounts related to the Company's purchase
of auto contracts.  The Company allocates the estimated amount of its
acquisition discounts attributable to credit risk to the allowance for loan
losses.  Net charge-offs to average loans were 1.67% for the three months ended
June 30, 1998 compared with 0.71% for the comparable period in 1997.
 
  A provision for loan losses is charged to operations based on the Company's
regular evaluation of its loans held for investment and the adequacy of its
allowance for loan losses.  The Company reports its loans held for sale at the
lower of cost or market value, accordingly, loan loss provisions are not
established for this portfolio.  While management believes it has adequately
provided for losses and does not expect any material loss on its loans in excess
of allowances already recorded, no assurance can be given that economic or real
estate market conditions or other circumstances will not result in increased
losses in the loan portfolio.

  NON-INTEREST INCOME

  Non-interest income increased $12.6 million, from $4.9 million for the three
months ended June 30, 1997 to $17.5 million for the three months ended June 30,
1998.  This increase resulted from cash gains on sales of mortgage loans and is
due primarily to a substantial increase in the volume of mortgage loans sold by
the Company.  During the three months ended June 30, 1997, the Company sold
$92.5 million in mortgage loans on a whole loan non-recourse basis compared to
$344.6 million in mortgage loans sold during the comparable period in 1998.  Net
gains on sales of loans, as a percentage of loans sold, were 5.08% for the three
months ended June 30, 1997 compared to 5.03% for the three months ended June 30,
1998.  The decline reflects competitive pressure in the securitization and whole
loan sale markets resulting, in part, from higher industry-wide loan prepayment
rates in the later part of 1997 and 1998 as compared to the second quarter of
1997.

  Other components of non-interest income include fees and charges for Bank
services and miscellaneous other income.  The total of all of these items
increased $60,000, from $179,000 for the three months ended June 30, 1997 to
$239,000 for the three months ended June 30, 1998.

  NON-INTEREST EXPENSE

  Non-interest expense increased $9.5 million, from $6.5 million for the three
months ended June 30, 1997 to $16.0 million for the three months ended June 30,
1998.  This increase primarily reflects an increase in salaries, loan
commissions, employee benefits and other personnel costs of $6.3 million
associated with the expansion of the Company's mortgage and automobile finance
operations.  In addition, occupancy expense increased $695,000, reflecting an
increase in the number of mortgage and automobile lending offices.  Marketing
expense was $891,000 for the three months ended June 30, 1998, compared with
$356,000 for the three months ended June 30, 1997.  This increase is
attributable to the Company's retail mortgage lending operations which use
extensive direct mail and telemarketing campaigns to target prospective
borrowers.  Also, as a result of growth in the Company's mortgage finance and
automobile lending operations, other operating expense, including stationery and
supplies, data processing, insurance, telephone and postage, increased $2.0
million during the three months ended June 30, 1998 compared with the same
period in 1997.

                                                                              14
<PAGE>
 
  During the last 12 months, the Company expanded significantly its mortgage and
automobile finance operations, resulting in an increase from 188 employees in 13
offices and 43 employees in six offices, respectively, as of June 30, 1997 to
541 employees in 28 offices and 84 employees in 13 offices, respectively, as of
June 30, 1998.

  INCOME TAXES

  Income taxes increased $2.5 million, from $666,000 for the three months ended
June 30, 1997 to $3.2 million for the three months ended June 30, 1998.  This
increase occurred as a result of a $5.8 million increase in income before income
taxes between the two periods and an increase in the effective tax rate from
41.5% for the three months ended June 30, 1997 to 43.0% for the three months
ended June 30, 1998.


COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND JUNE
30, 1997

  GENERAL

  Net income increased from $1.2 million for the six months ended June 30, 1997
to $5.7 million for the six months ended June 30, 1998.  This increase was due
primarily to the expansion of the Company's mortgage, insurance premium and auto
finance businesses in the second half of 1997 and during 1998.  Also
contributing to the favorable operating results for the six months ended June
30, 1997 compared with the same period in 1998 was in increase of  $20.1 million
in gain on sale of loans from the Company's mortgage finance operations and $5.9
million in net interest income offset by an increase in non-interest expense of
$17.5 million and an increase in provision for loan losses of  $744,000.

     As a result of the expansion of the Company's lending operations, mortgage
loan originations increased from $175.8 million for the six months ended June
30, 1997 to $598.8 million for the six months ended June 30, 1998, while
insurance premium finance originations increased from $85.3 million to $87.8
million, respectively, and auto contracts purchased increased from $17.2 million
to $37.7 million, respectively.  Sales of mortgage loans were $538.4 million for
the six months ended June 30, 1998 and $132.7 million for the comparable period
in 1997.

  INTEREST INCOME

  Interest income increased from $11.4 million for the six months ended June 30,
1997 to $21.6 million for the six months ended June 30, 1998 due primarily to a
$161.5 million increase in average interest earning assets and a 0.67% increase
in the yield on average earning assets.  The largest components of growth in
average earning assets were mortgage loans, insurance premium finance loans and
auto contracts, which increased $126.3 million, $4.9 million and $24.8 million,
respectively.  The increase in the average yield on interest earning assets was
attributable to an increase in the origination or purchase of higher yielding
loans principally related to the expansion and growth of the mortgage, insurance
premium and automobile finance businesses.  The increase in mortgage loan
receivables was a result of an increase in loans held for sale.  These loans are
generally held for sale in the secondary mortgage market and the increase in
such loans was primarily a result of growth in the Company's mortgage finance
business and the opening of additional retail lending branches and wholesale
loan centers.  The growth in IPF loans was primarily a result of new loan
originations associated with changes in California's automobile insurance laws
effective January 1, 1997 and the purchase of the rights to solicit new and
renewal insurance premium finance business in connection with the Commonwealth
acquisition.  The increase in auto contracts principally resulted from the
opening of new branch offices and the purchasing of additional dealer contracts
in these new markets.

                                                                              15
<PAGE>
 
  INTEREST EXPENSE

  Interest expense increased from $5.1 million for the six months ended June 30,
1997 to $9.5 million for the six months ended June 30, 1998 due to a $151.8
million increase in average interest bearing liabilities and a 0.18% increase in
the weighted average interest rate on interest bearing liabilities.  The largest
component of growth in interest bearing liabilities was deposits of the Bank,
which increased from an average balance of $173.0 million for the six months
ended June 30, 1997 to $274.2 million for the six months ended June 30, 1998.
The average cost of deposits increased from 5.07% for the six months ended June
30, 1997 to 5.24% for the comparable period in 1998.

     The second largest component of growth in average interest bearing
liabilities was from borrowings under the Bank's warehouse line of credit.
During the six months ended June 30, 1998, the average balance outstanding under
this warehouse line of credit was $46.2 million with an average interest rate of
6.40%.  There were no warehouse line of credit advances outstanding during the
six months ended June 30, 1997.  The increase in both deposits and the warehouse
line of credit were attributable to additional financing requirements as a
result of the growth in the Company's lending operations.

  PROVISION FOR LOAN LOSSES

  Provision for loan losses increased from $379,000 for the six months ended
June 30, 1997 to $1.1 million for the six months ended June 30, 1998.  The
increase in provision for loan losses reflects management's decision to increase
general valuation allowances as a result of the increase in loans made by the
Company.   Net charge-offs to average loans were 1.36% for the six months ended
June 30, 1998 compared with 0.71% for the comparable period in 1997.

     A provision for loan losses is charged to operations based on the Company's
regular evaluation of its loan portfolio and the adequacy of its allowance for
loan losses.  While management believes it has adequately provided for losses
and does not expect any material loss on its loans in excess of allowances
already recorded, no assurance can be given that economic or real estate market
conditions or other circumstances will not result in increased losses in the
loan portfolio.

  NON-INTEREST INCOME

  Non-interest income increased $20.2 million, from $7.4 million for the six
months ended June 30, 1997 to $27.6 million for the six months ended June 30,
1998.  This increase resulted from cash gains on sales of mortgage loans and is
due to a substantial increase in the volume of loans sold.  During the six
months ended June 30, 1997, the Company sold $132.7 million in mortgage loans
compared with $538.4 million in mortgage loans sold during the comparable period
in 1998.  Net gains on sales of loans, as a percentage of loans sold, were 5.05%
for the six months ended June 30, 1998 compared with 5.33% for the six months
ended June 30, 1997.   All loans sold during the six months ended June 30, 1998
and 1997 were sold as whole loans with servicing released to the investor.

     Other components of non-interest income include fees and charges for Bank
services and miscellaneous other income.  The total of all of these items
increased $118,000, from $322,000 for the six months ended June 30, 1997 to
$440,000 for the six months ended June 30, 1998.

  NON-INTEREST EXPENSE

  Non-interest expense increased $17.5 million, from $11.3 million for the six
months ended June 30, 1997 to $28.8 million for the six months ended June 30,
1998.  This increase reflects an increase in salaries, loan commissions,
employee benefits and other personnel costs of $11.7 million associated with the
growth and expansion of the Company's mortgage and automobile finance
operations.  Also, as a result of this growth, occupancy expense increased from
$1.1 million for the six months ended June 30, 1997 to $2.5

                                                                              16
<PAGE>
 
million for the six months ended June 30, 1998.  Marketing expense was $1.7
million for the six months ended June 30, 1998, compared with $498,000 for the
comparable period in 1997.   This increase is attributable to the Company's
retail mortgage lending operations, which use extensive direct mail and
telemarketing campaigns to target prospective borrowers.  Other operating
expense, including stationery and supplies, data processing, insurance,
telephone and postage, increased $3.2 million during the six months ended June
30, 1998 compared with the same period in 1997.
 
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1998 AND DECEMBER 31, 1997

  Total assets increased $101.0 million, from $310.8 million at December 31,
1997 to $411.8 million at June 30, 1998.  This increase occurred primarily as a
result of a $73.9 million increase in loans, from $268.5 million at December 31,
1997 to $342.4 million as of June 30, 1998.  The increase in loans was comprised
of a $53.7 million increase in subprime mortgage loans, a $16.7 million increase
(net of unearned finance charges) in auto contracts and a $16.2 million increase
in insurance premium finance loans, offset by a $11.5 million decrease in loans
purchased from the RTC as a result of scheduled principal amortization and
prepayments.

  Cash and cash equivalents increased $29.4 million, from $19.0 million at
December 31, 1997 to $48.4 million at June 30, 1998, primarily as a result of an
increase in short-term investments.

  Residual interests in securitizations were $8.2 million at December 31, 1997
which were entirely attributable to the Company's first securitization in
December 1997.  In March 1998, the Company sold its residual interests from the
December securitization for $8.3 million in cash and recorded a gain on sale of
approximately $100,000.  Accordingly, as of June 30, 1998, the Company had no
remaining residual interests in securitizations reflected on its balance sheet.

  Premises and equipment increased from $3.1 million at December 31, 1997 to
$4.5 million at June 30, 1998 as a result of purchases of furniture and
equipment for the Company's new branch offices and the continued growth in
lending operations.

  Deposits increased $67.1 million, from $233.2 million at December 31, 1997 to
$300.3 million at June 30, 1998, due primarily to an increase in CDs of $64.2
million, from $197.1 million at December 31, 1997 to $261.3 million at June 30,
1998.  Included in deposits at June 30, 1998 and December 31, 1997 are $17.5
million in brokered CDs.  The growth in deposits reflects the continued
financing of the Company's mortgage, insurance premium finance and auto lending
activities with retail and wholesale deposits through the Bank's five-branch
network.

  Other interest bearing liabilities include the RTC notes payable which
remained unchanged at $10.9 million between the period ends, FHLB advances which
were $28.0 million as of December 31, 1997 at a weighted average interest rate
of 7.07%, notes payable to shareholders which were $2.0 million at December 31,
1997 and a warehouse line of credit which was $6.2 million at December 31, 1997.
At June 30, 1998, there were no FHLB advances or warehouse line of credit
advances outstanding.  In addition, the notes payable to shareholders were paid
off.

  Net deferred tax assets were $3.0 million at June 30, 1998 due principally to
temporary differences in the recognition of gain on sale of loans for federal
and state income tax reporting and financial statement reporting purposes.  For
income tax purposes, loans held for sale are marked-to-market.

  Shareholders' equity increased from $13.0 million at December 31, 1997 to
$82.1 million at June 30, 1998, solely as a result of the Company's net income
of $5.7 million during the six months ended June 30, 1998 and the net proceeds
received of $63.4 million from the Company's initial public offering completed
in the second quarter of 1998.

                                                                              17
<PAGE>
 
MANAGEMENT OF INTEREST RATE RISK

  The principal objective of the Company's interest rate risk management
activities is to evaluate the interest rate risk inherent in the Company's
business activities, determine the level of appropriate risk given the Company's
operating environment, capital and liquidity requirements and performance
objectives and manage the risk consistent with guidelines approved by the Board
of Directors.  Through such management, the Company seeks to reduce the exposure
of its operations to changes in interest rates.  The Board of Directors reviews
on a quarterly basis the asset/liability position of the Company, including
simulation of the effect on capital of various interest rate scenarios.
 
  The Company's profits depend, in part, on the difference, or "spread," between
the effective rate of interest received on the loans it originates and the
interest rates paid on deposits and other financing facilities which can be
adversely affected by movements in interest rates.  In addition, between the
time the Company originates loans and investors' sales commitments are received,
the Company may be exposed to interest rate risk to the extent that interest
rates move upward or downward during the time the loans are held for sale.  The
Company mitigates these risks somewhat by purchasing or originating ARMs that
reprice frequently in an increasing or declining interest rate environment.
Also, the Company sells substantially all of its loans held for sale on a
regular basis, thereby reducing significantly the amount of time these loans are
held by the Company.

  The Bank's interest rate sensitivity is monitored by the Board of Directors
and management through the use of a model which estimates the change in the
Bank's net portfolio value ("NPV") over a range of interest rate scenarios.  NPV
is the present value of expected cash flows from assets, liabilities and off-
balance sheet instruments, and "NPV Ratio" is defined as the NPV in that
scenario divided by the market value of assets in the same scenario.  The
Company reviews a market value model (the "OTS NPV model") prepared quarterly by
the Office of Thrift Supervision (the "OTS"), based on the Bank's quarterly
Thrift Financial Reports filed with the OTS.  The OTS NPV model measures the
Bank's interest rate risk by approximating the Bank's NPV under various
scenarios which range from a 400 basis point increase to a 400 basis point
decrease in market interest rates.  The OTS has incorporated an interest rate
risk component into its regulatory capital rule for thrifts. Under the rule, an
institution whose sensitivity measure, as defined by the OTS, in the event of a
200 basis point increase or decrease in interest rates exceeds 20% would be
required to deduct an interest rate risk component in calculating its total
capital for purposes of the risk-based capital requirement.

  At March 31, 1998, the most recent date for which the relevant OTS NPV model
is available, the Bank's sensitivity measure resulting from (i) a 200 basis
point decrease in interest rates was 138 basis points and would result in a $6.6
million increase in the NPV of the Bank and (ii) a 200 basis point increase in
interest rates was 143 basis points and would result in a $6.7 million decrease
in the NPV of the Bank.  At March 31, 1998, the Bank's sensitivity measure was
below the threshold at which the Bank could be required to hold additional risk-
based capital under OTS regulations.

  Although the NPV measurement provides an indication of the Bank's interest
rate risk exposure at a particular point in time, such measurement is not
intended to and does not provide a precise forecast of the effect of changes in
market interest rates on the Bank's net interest income and will differ from
actual results.  Management monitors the results of this modeling, which are
presented to the Board of Directors on a quarterly basis.

  The following table shows the NPV and projected change in the NPV of the Bank
at March 31, 1998 assuming an instantaneous and sustained change in market
interest rates of 100, 200, 300 and 400 basis points ("bp").  This table is
based on data prepared by the OTS.  The Company makes no representation as to
the accuracy of this data.

                                                                              18
<PAGE>
 
                INTEREST RATE SENSITIVITY OF NET PORTFOLIO VALUE

<TABLE>
<CAPTION>
                                                                                                    NPV as % of Portfolio
                                                  Net Portfolio Value                                  Value of Assets
                               ------------------------------------------------------     ---------------------------------------
        Change in Rates            $ Amount           $ Change             % Change            NPV Ratio             % Change
        ---------------        --------------     --------------      ---------------     ----------------      -----------------
<S>                              <C>                <C>                 <C>                 <C>                   <C>
                                                                    (Dollars in thousands)
+400 bp                               $39,279           $(22,427)                 (36)%                9.81%               (498)bp
+300 bp                               $48,086           $(13,620)                 (22)%               11.83%               (296)bp
+200 bp                               $54,970           $ (6,736)                 (11)%               13.36%               (143)bp
+100 bp                               $59,211           $ (2,495)                  (4)%               14.26%                (53)bp
0 bp                                  $61,706                 --                   --                 14.79%                    --
-100 bp                               $64,281           $  2,575                   +4 %               15.32%                +53 bp
-200 bp                               $68,345           $  6,639                  +11 %               16.17%               +138 bp
-300 bp                               $73,626           $ 11,920                  +19 %               17.27%               +248 bp
-400 bp                               $80,307           $ 18,601                  +30 %               18.63%               +384 bp
</TABLE>
                                                                               

LIQUIDITY AND CAPITAL RESOURCES

  GENERAL

  The Company's primary sources of funds have been deposits at the Bank, FHLB
advances, financing under a secured warehouse line of credit, principal and
interest payments on loans, cash proceeds from the sale or securitization of
loans and, to a lesser extent, interest payments on securities and proceeds from
the maturation of securities.  While maturities and scheduled amortization of
loans are a predictable source of funds, deposit flows and loan prepayments are
greatly influenced by general interest rates, economic conditions and
competition.  However, the Company has continued to maintain the required
minimum levels of liquid assets as defined by OTS regulations.  This
requirement, which may be varied at the direction of the OTS depending upon
economic conditions and deposit flows, is based upon a percentage of deposits
and short-term borrowings.  The required  ratio is currently 4%,  and the
Company  has always met or exceeded this requirement.  Management, through its
Asset and Liability Committee, which meets monthly or more frequently if
necessary, monitors rates and terms of competing sources of funds to use the
most cost-effective source of funds wherever possible.

  Sales and securitizations of loans have been one of the primary sources of
funds for the Company.  During the six months ended June 30, 1998 and 1997, cash
flows from sales of loans were $562.6 million, and $139.8 million, respectively.

  Another source of funds consists of deposits obtained through the Bank's five
retail branches in California.  The Bank offers checking accounts, various money
market accounts, regular passbook accounts, fixed interest rate certificates
with varying maturities and retirement accounts.  Deposit account terms vary by
interest rate, minimum balance requirements and the duration of the account.
Interest rates paid, maturity terms, service fees and withdrawal penalties are
established by the Bank periodically based on liquidity and financing
requirements, rates paid by competitors, growth goals and federal regulations.
At June 30, 1998, such retail deposits were $215.1 million or 71.62% of total
deposits.

  The Bank uses wholesale and broker-originated deposits to supplement its
retail deposits and, at June 30, 1998, wholesale deposits were $67.7 million or
22.55% of total deposits while broker-originated deposits were $17.5 million or
5.83% of total deposits.  The Bank solicits wholesale deposits by posting its
interest rates on a national on-line service which advertises the Bank's
wholesale products to investors.  Generally, most of the wholesale deposit
account holders are institutional investors, commercial businesses or public
sector entities.  Broker deposits are originated through major dealers
specializing in such products.

                                                                              19
<PAGE>
 
  The following table sets forth the balances and rates paid on each category of
deposits for the dates indicated.
<TABLE>
<CAPTION>
                                                                                    December 31,
                                          June 30,             -------------------------------------------------------
                                            1998                         1997                         1996
                                  -----------------------      -------------------------      ------------------------
                                                 Weighted                       Weighted                      Weighted
                                                 Average                        Average                       Average
                                  Balance          Rate         Balance          Rate         Balance           Rate
                                  -------        --------      --------         --------      -------         --------
<S>                               <C>            <C>           <C>              <C>           <C>            <C>
                                                             (Dollars in thousands)
Passbook accounts                 $ 29,431       3.84%         $ 26,095         3.76%        $ 17,054        2.84%
Checking accounts                    9,567       1.44%            9,959         1.33%          10,642        1.32%
Certificates of deposit
   Under $100,000                  174,221       5.54%          144,926         5.56%         123,914        5.47%
   $100,000 and over                87,115       5.83%           52,214         5.89%           7,451        5.89%
                                  --------                     --------                      --------
     Total                        $300,334       5.32%         $233,194         5.25%        $159,061        4.68%
                                  ========                     ========                      ========
</TABLE>



  The following table sets forth the time remaining until maturity for all CDs
at June 30, 1998, December 31, 1997 and 1996.
<TABLE>
<CAPTION>
                                                          June 30,                December 31,                December 31,
                                                            1998                      1997                        1996
                                                  -----------------------    --------------------       ----------------------
                                                                                 (In thousands)
<S>                                                 <C>                        <C>                        <C>
Maturity within one year                                         $229,973                $181,858                     $103,369
Maturity within two years                                          31,256                  14,984                       26,819
Maturity within three years                                           107                     298                        1,177
                                                  -----------------------    --------------------       ----------------------
Total certificates of deposit                                    $261,336                $197,140                     $131,365
                                                  =======================    ====================       ======================
</TABLE>


  Although the Bank has a significant amount of deposits maturing in less than
one year, the Company believes that the Bank's current pricing strategy will
enable it to retain a significant portion of these accounts at maturity and that
it will continue to have access to sufficient amounts of CDs which, together
with other funding sources, will provide the necessary level of  liquidity to
finance its lending businesses.  However, as a result of these shorter-term
deposits, the rates on these accounts may be more sensitive to movements in
market interest rates which may result in a higher cost of funds.

  At June 30, 1998, the Bank exceeded all of its regulatory capital requirements
with (i) tangible capital of $28.9 million, or 7.08% of total adjusted assets,
which is above the required level of $6.1 million, or 1.50%; (ii) core capital
of $28.9 million, or 7.08% of total adjusted assets, which is above the required
level of $12.2 million, or 3.00%; and (iii) risk-based capital of $32.7 million,
or 10.96% of risk-weighted assets, which is above the required level of $23.9
million, or 8.00%.

  Under the Federal Deposit Insurance Corporation Act of 1991 ("FDICIA"), the
Bank is deemed to be "well capitalized" at June 30, 1998.

  The Company has other sources of liquidity, including FHLB advances, a
warehouse line of credit and securities maturing within one year.  Through the
Bank, the Company obtains advances from the FHLB, collateralized by its
portfolio of mortgage loans purchased from the RTC and the Bank's FHLB stock.
The FHLB functions as a central reserve bank providing credit for thrifts and
certain other member financial institutions.  Advances are made pursuant to
several programs, each of which has its own interest rate and range of
maturities.  Limitations on the amount of advances are based generally on a
fixed percentage of net worth or on the FHLB's assessment of an institution's
credit-worthiness.  As of June 30, 1998, the Bank's available borrowing capacity
under this credit facility was $31.6 million.

  The Bank has a $150 million master repurchase agreement under which it may
sell and repurchase at a set price mortgage loans pending the sale or
securitization of such loans.  The arrangement provides for an advance rate
approximating 100% of the outstanding principal balance of qualifying mortgage
loans and a

                                                                              20
<PAGE>
 
rate of interest to be determined by the parties upon each such sale of mortgage
loans, but which shall not exceed LIBOR plus 0.90%.  Qualifying mortgage loans
consist of first and second mortgage loans with an LTV that does not exceed 90%,
subject to certain restrictions.  This agreement may be terminated at any time
at the option of either party.   At June 30, 1998, there were no balances
outstanding under this warehouse line of credit.

  Other borrowings of the Company at June 30, 1998 consist of the RTC Notes
Payable (as defined below) which mature in 1999.
 
  The following table sets forth certain information regarding the Company's
short-term borrowed funds (consisting of FHLB advances and its warehouse line of
credit) at or for the periods ended on the dates indicated.

<TABLE>
<CAPTION>
                                                                                         December 31,
                                                           June 30,        ---------------------------------------
                                                             1998                  1997                  1996
                                                     -----------------     -----------------     -----------------
<S>                                                    <C>                 <C>                   <C>
                                                                          (Dollars in thousands)
FHLB advances
     Maximum month-end balance                                 $34,500               $40,900                $4,000
     Balance at end of period                                       --                28,000                 4,000
     Average balance for period                                 20,876                18,526                 1,170
   Weighted average interest rate on
     Balance at end of period                                       --%                 7.07%                 5.70%
     Average balance for period                                   5.27%                 5.95%                 6.15%
Warehouse line of credit
     Maximum month-end balance                                 $83,441               $64,359                $   --
     Balance at end of period                                       --                 6,237                    --
     Average balance for period                                 53,348                 8,914                    --
  Weighted average interest rate on
     Balance at end of period                                       --%                 6.70%                   --%
     Average balance for period                                   5.54%                 6.10%                   --%
</TABLE>

  The Company had no material contractual obligations or commitments for capital
expenditures at June 30, 1998.  However, the Company is in the process of
expanding its mortgage and auto finance operations, which will entail lease
commitments and expenditures for leasehold improvements and furniture, fixtures
and equipment.  At June 30, 1998, the Company had outstanding commitments to
originate loans of $364.9 million, compared to $117.4 million at December 31,
1997.  The Company anticipates that it will have sufficient funds available to
meet its current origination commitments.

  RTC NOTES PAYABLE

  In connection with its acquisition of certain assets from the RTC, the Bank
obtained loans (the "RTC Notes Payable") from the RTC in the aggregate amount of
$10.9 million under the RTC's Minority Interim Capital Assistance Program
provided for in Section 21A(u) of the Federal Home Loan Bank Act, as amended
(the "FHLBA").  The FHLBA gives the RTC authority to provide interim capital
assistance to minority-owned institutions, defined in the FHLBA as more than
fifty percent (50%) owned or controlled by one or more minorities.  The Bank,
PAFI and the RTC entered into an Interim Capital Assistance Agreement on April
29, 1994 with respect to a loan of $6,930,000 and a second Interim Capital
Assistance Agreement on September 9, 1994 with respect to a loan of $4,000,000
(together, the "RTC Agreements").  The RTC Agreements provide for repayment of
the entire principal amount, plus any accrued, previously unpaid interest
thereon, in a single lump sum installment on April 28, 1999 and September 8,
1999, respectively.  The RTC Notes Payable may be prepaid at the option of the
Bank and must be prepaid in the event that PAFI obtains all or any material
portion of its permanent financing prior to maturity of the RTC

                                                                              21
<PAGE>
 
Notes Payable.  The RTC is entitled to declare the entire principal amount of
the RTC Notes Payable, plus all interest accrued and unpaid thereon, immediately
due and payable upon the occurrence of certain events of default.

  The rate at which interest accrues on the RTC Notes Payable is based on the
RTC's "Cost of Funds," defined in the RTC Agreements at the end of the calendar
quarter Monday auction yield price for 13 week United States Treasury Bills plus
12.5 basis points, and adjusts annually, in the case of the $6.9 million loan
due April 1999, and quarterly, in the case of the $4 million loan due September
1999.  Interest accrues on any amount of principal or interest not paid when due
at the rate of the RTC's Cost of Funds plus 300 basis points, beginning on the
date such unpaid amount became due.

  In connection with the RTC Agreements, PAFI and the RTC have entered into
Stock Pledge Agreements pursuant to which PAFI has pledged to the RTC all of the
issued and outstanding shares of the capital stock of the Bank as security for
the repayment of the RTC Notes Payable.

LENDING ACTIVITIES

  To date, the Company has sold most of its loan originations to mortgage
companies and other investors through whole loan packages on a non-recourse,
servicing released basis.  As a result, upon sale, all risks and rewards of
ownership, including those associated with loan payments and prepayments,
transfer to the buyer.  In December 1997, the Company completed its first
securitization of mortgage loans and in March 1998 sold its residual interests
in this securitization to a third-party.  Accordingly, to date, prepayments have
not had a significant effect on the Company's operations.

  Summary of Loan Portfolio.  At June 30, 1998, the Company's loan portfolio
  -------------------------
constituted $342.4 million, or 83.2% of the Company's total assets, of which
$181.5 million, or 53.0%, were held for investment and $161.0 million, or 47.0%,
were held for sale.  Loans held for investment are reported at cost, net of
unamortized discounts or premiums and allowance for losses.  Loans held for sale
are reported at the lower of cost or market value.

  The following table sets forth the composition of the Company's loan portfolio
at the dates indicated.
<TABLE>
<CAPTION>
                                                           June 30,                December 31,                December 31,
                                                             1998                      1997                        1996
                                                    --------------------      --------------------      -----------------------
                                                                                  (In thousands)
<S>                                                   <C>                       <C>                       <C>
MORTGAGE LOANS
Mortgage loans (purchased primarily from RTC)                   $ 70,533                  $ 81,995                     $102,733
                                                    --------------------      --------------------      -----------------------
Subprime mortgage loans
     Held for sale                                               160,963                   120,002                       20,766
     Held for investment                                          18,109                     5,375                        1,294
                                                    --------------------      --------------------      ----------------------- 
     Total subprime mortgage loans                               179,072                   125,377                       22,060
                                                    --------------------      --------------------      -----------------------
     Total mortgage loans                                        249,605                   207,372                      124,793
                                                    --------------------      --------------------      -----------------------
CONSUMER LOANS
Automobile installment contracts                                  61,273                    40,877                       10,830
Insurance premium financing                                       56,208                    39,990                       32,058
Other consumer loans                                                 344                       267                          230
                                                    --------------------      --------------------      -----------------------
     Total consumer loans                                        117,825                    81,134                       43,118
                                                    --------------------      --------------------      -----------------------
     Total loans                                                 367,430                   288,506                      167,911
Unearned discounts and premiums                                   (2,335)                   (2,901)                      (3,697)
Unearned finance charges                                         (14,290)                  (10,581)                      (3,271)
Allowance for loan losses                                         (8,357)                   (6,487)                      (5,356)
                                                    --------------------      --------------------      -----------------------
     Total loans, net                                           $342,448                  $268,537                     $155,587
                                                    ====================      ====================      =======================
</TABLE>

                                                                              22
<PAGE>
 
  Loan Maturities.  The following table sets forth the dollar amount of loans
  ---------------
maturing in the Company's loan portfolio at June 30, 1998 based on scheduled
contractual amortization.  Loan balances are reflected before unearned discounts
and premiums, unearned finance charges and allowance for losses.


<TABLE>
<CAPTION>
                                                                      June 30, 1998
                          --------------------------------------------------------------------------------------------------------
                                         More Than 1     More Than 3   More Than 5     More Than 10
                          One Year or     Year to         Years to      Years to       Years to 20     More Than 20       Total
                            Less          3 Years         5 Years       10 Years         Years            Years           Loans
                          -------         -------         -------        ------         -------         --------         --------
<S>                       <C>             <C>             <C>            <C>            <C>             <C>              <C>
                                                                               (In thousands)
Mortgage loans held
   for investment         $    28         $   545         $ 1,867        $6,642         $24,109         $ 55,451         $ 88,642
Mortgage loans held
   for sale                    --              --              --            --           9,135          151,828          160,963
Consumer loans             57,444          29,262          31,119            --              --               --          117,825
                          -------         -------         -------        ------         -------         --------         --------
     Total                $57,472         $29,807         $32,986        $6,642         $33,244         $207,279         $367,430
                          =======         =======         =======        ======         =======         ========         ========
</TABLE>


  CLASSIFIED ASSETS AND ALLOWANCE FOR LOAN LOSSES

  The Company maintains an asset review and classification process for purposes
of assessing loan portfolio quality and the adequacy of its loan loss
allowances.  The Company's Asset Review Committee reviews for classification all
problem and potential problem assets and reports the results of its review to
the Board of Directors quarterly.  The Company has incorporated the OTS internal
asset classifications as a part of its credit monitoring systems and in order of
increasing weakness, these designations are "substandard," "doubtful" and
"loss."  Substandard assets have one or more defined weaknesses and are
characterized by the distinct possibility that some loss will be sustained if
the deficiencies are not corrected.  Doubtful assets have the weaknesses of
substandard assets with the additional characteristic that the weaknesses make
collection or liquidation in full, on the basis of currently existing facts,
condition and values, questionable and there is a high possibility of loss.
Loss assets are considered uncollectible and of such little value that
continuance as an asset is not warranted.  Assets which do have weaknesses but
do not currently have sufficient risk to warrant classification in one of the
categories described above are designated as "special mention."

  At June 30, 1998, the Company had $1.3 million in assets classified as special
mention, $11.8 million of assets classified as substandard, $70,000 in assets
classified as doubtful and no assets classified as loss.

  The following table sets forth the remaining balances of all loans (before
specific reserves for losses) that were more than 30 days delinquent at June 30,
1998, December 31, 1997 and 1996.

<TABLE>
<CAPTION>
Loan                June 30,     % of Total    December 31,     % of Total     December 31,    % of Total
Delinquencies        1998          Loans          1997             Loans          1996           Loans
                  ----------      -------       ---------         -------       ---------       --------
                                                 (Dollars in thousands)
<S>                 <C>           <C>           <C>              <C>            <C>             <C>
30 to 59 days        $ 4,251         1.2%          $  356            0.1%          $1,941           1.2%
60 to 89 days          2,411         0.7%             994            0.4%             109           0.1%
90+ days              10,520         3.0%           7,101            2.6%           6,430           3.9%
                  ----------      -------       ---------         -------       ---------       --------
Total                $17,182         4.9%          $8,451            3.1%          $8,480           5.2%
                  ==========      =======       =========         =======       =========       ========
</TABLE>

  Nonaccrual and Past Due Loans.  The Company's general policy is to discontinue
  -----------------------------
accrual of interest on a mortgage loan when it is delinquent 90 days or more,
and on a non-mortgage loan when it is delinquent for 120 days or more.  When a
loan is reclassified from accrual to nonaccrual status, all previously accrued
interest is reversed.  Interest income on nonaccrual loans is subsequently
recognized only to the extent that cash payments are received or the borrower's
ability to make periodic interest and principal payments is in accordance with
the loan terms, at which time the loan is returned to accrual status.  Accounts
which are deemed fully or partially uncollectible by management are generally
fully reserved or charged off for the amount that exceeds the estimated fair
value (net of selling costs) of the underlying

                                                                              23
<PAGE>
 
collateral.  The Company does not generally modify, extend or rewrite loans and
at June 30, 1998 had no troubled debt restructured loans.  The following table
sets forth the aggregate amount of nonaccrual loans (net of unearned discounts
and premiums, unearned finance charges and specific allowances) at June 30,
1998, December 31, 1997 and 1996.

<TABLE>
<CAPTION>
                                                                                          December 31,
                                                             June 30,       ----------------------------------------
                                                               1998                  1997                  1996
                                                       -----------------    -------------------    -----------------
<S>                                                      <C>                  <C>                    <C>
                                                                           (Dollars in thousands)
Nonaccrual loans
     Single-family residential                                    $8,769                 $5,219               $5,044
     Multi-family residential                                         80                     81                   81
     Consumer and other loans                                        496                  1,333                  710
                                                       -----------------    -------------------    -----------------
          Total                                                   $9,345                 $6,633               $5,835
                                                       =================    ===================    =================
 
Nonaccrual loans as a percentage of
     Total loans held for investment                                5.15%                  4.31%                4.19%
     Total assets                                                   2.27%                  2.13%                3.09%
General allowance for loan losses as a percentage of
     Total loans held for investment                                3.43%                  3.54%                3.14%
     Nonaccrual loans                                              66.71%                 82.33%               74.90%
</TABLE>
                                                                               

  Real Estate Owned.  Real estate acquired through foreclosure or by deed in
  -----------------
lieu of foreclosure ("REO") is recorded at the lower of cost or fair value at
the time of foreclosure.  Subsequently, an allowance for estimated losses is
established when the recorded value exceeds fair value less estimated selling
costs.  Holding and maintenance costs related to real estate owned are recorded
as expenses in the period incurred.  At June 30, 1998, December 31, 1997 and
1996, real estate owned was $1.2 million, $562,000 and $988,000, respectively,
and consisted entirely of one to four family residential properties.
  

                                                                              24
<PAGE>
 
  Allowance for Loan Losses.  The following is a summary of the changes in the
  -------------------------
consolidated allowance for loan losses of the Company for the periods indicated.

<TABLE>
<CAPTION>
                                                                                                At or For the
                                                                                                  Year Ended 
                                                           At or For the Six                     December 31, 
                                                        Months Ended June 30,     ----------------------------------------
                                                                  1998                     1997                  1996
                                                        ---------------------     -------------------    ----------------- 
<S>                                                     <C>                       <C>                    <C>
                                                                               (Dollars in thousands)
ALLOWANCE FOR LOAN LOSSES
Balance at beginning of period                                        $ 6,487                 $ 5,356               $5,250
     Provision for loan losses                                          1,123                     507                  194
     Charge-offs
          Mortgage loans held for investment                             (212)                   (373)                (285)
          Mortgage loans held for sale                                     --                      --                   --
          Consumer loans                                               (1,617)                 (2,101)                (433)
                                                        ---------------------     -------------------    -----------------
                                                                       (1,829)                 (2,474)                (718)
     Recoveries
          Mortgage loans held for investment                               --                      77                   --
          Mortgage loans held for sale                                     --                      --                   --
          Consumer loans                                                  709                   1,068                  274
                                                        ---------------------     -------------------    -----------------  
                                                                          709                   1,145                  274
                                                        ---------------------     -------------------    -----------------  
     Net charge-offs                                                   (1,120)                 (1,329)                (444)
                                                        ---------------------     -------------------    ----------------- 
     Acquisition discounts allocated to loss allowance                  1,867                   1,953                  356
                                                        ---------------------     -------------------    ----------------- 
Balance at end of period                                              $ 8,357                 $ 6,487               $5,356
                                                        =====================     ===================    =================
     Annualized net charge-offs to average loans                         1.36%                   0.60%                0.30%
     Ending allowance to period end loans, net                           4.61%                   4.37%                3.97%
</TABLE>

  The Company's policy is to maintain an allowance for loan losses to absorb
future losses which may be realized on its loan portfolio.  These allowances
include specific reserves for identifiable impairments of individual loans and
general valuation allowances for estimates of probable losses not specifically
identified.

  The determination of the adequacy of the allowance for loan losses is based on
a variety of factors, including an assessment of the credit risk inherent in the
portfolio, prior loss experience, the levels and trends of non-performing loans,
the concentration of credit, current and prospective economic conditions and
other factors.

  The Company's management uses its best judgment in providing for possible loan
losses and establishing allowances for loan losses.  However, the allowance is
an estimate which is inherently uncertain and depends on the outcome of future
events.  In addition, regulatory agencies, as an integral part of their
examinations process, periodically review the Bank's allowance for loan losses.
Such agencies may require the Bank to increase the allowance based upon their
judgment of the information available to them at the time of their examination.

CASH EQUIVALENTS AND SECURITIES PORTFOLIO

  The Company's cash equivalents and securities portfolios are used primarily
for liquidity purposes and secondarily for investment income.  Cash equivalents
and securities, which generally have maturities of less than 90 days, satisfy
regulatory requirements for liquidity.

                                                                              25
<PAGE>
 
  The following is a summary of the Company's cash equivalents and securities
portfolios as of the dates indicated.
<TABLE>
<CAPTION>
                                                                                                  December 31,
                                                             June 30,           ------------------------------------------------
                                                               1998                       1997                       1996
                                                     ---------------------      ---------------------      --------------------- 
<S>                                                  <C>                        <C>                        <C>
                                                                                (Dollars in thousands)
Balance at end of period
     Overnight deposits                                            $22,500                     $4,000                    $21,000
     Commercial paper                                               19,930                         --                         --
     U.S. agency securities                                             --                      1,002                         --
                                                     ---------------------      ---------------------      --------------------- 
     Total                                                         $42,430                     $5,002                    $21,000
                                                     =====================      =====================      =====================
 
Weighted average yield at end of period
     Overnight deposits                                               5.50%                      3.50%                      5.02%
     Commercial paper                                                 5.60%                        --                         --
     U.S. agency securities                                             --                       6.54%                        --
Weighted average maturity at end of period
     Overnight deposits                                              1 day                      1 day                      1 day
     Commercial paper                                              22 days                         --                         --
     U.S. agency securities                                             --                  24 months                         --
</TABLE>


FACTORS THAT MAY AFFECT FUTURE RESULTS

  LIMITED OPERATING HISTORY

  The Company purchased certain assets and assumed certain liabilities of Pan
American Federal Savings Bank from the RTC in 1994.  In 1995, the Company
commenced its insurance premium finance business through a joint venture with
BPN, and in 1996 the Company commenced its subprime mortgage and automobile
finance businesses.  Accordingly, the Company has only a limited operating
history upon which an evaluation of the Company and its prospects can be based.

  CREDIT-IMPAIRED BORROWERS

  Loans made to borrowers who cannot obtain financing from traditional lenders
generally entail a higher risk of delinquency and default and higher losses than
loans made to borrowers with better credit.  Substantially all of the Company's
mortgage and auto loans are made to individuals with impaired or limited credit
histories, limited documentation of income or higher debt-to-income ratios than
are permitted by traditional lenders.  If the Company experiences higher losses
than anticipated, the Company's financial condition, results of operations and
business prospects would be materially and adversely affected.

  NEED FOR ADDITIONAL FINANCING

  The Company's ability to maintain or expand its current level of lending
activity will depend on the availability and terms of its sources of financing.
The Company has funded its operations to date principally through deposits, FHLB
advances, a mortgage warehouse line of credit, loan securitizations, and whole
loan sales at the Bank.  The Bank competes for deposits primarily on the basis
of interest rates and, accordingly, the Bank could experience difficulty in
attracting deposits if it does not continue to offer rates that are competitive
with other financial institutions.  Federal regulations restrict the Bank's
ability to lend to affiliated companies and limit the amount of non-mortgage
consumer loans that may be held by the Bank.  Accordingly, the growth of the
Company's mortgage, insurance premium and automobile finance businesses will
depend to a significant extent on the availability of additional sources of
financing.  There can be no assurance that the Company will be able to develop
additional financing sources on acceptable terms or at all.  To the extent the
Bank is unable to maintain its deposits and the Company is unable to develop
additional sources of financing, the Company will have to restrict its lending
activities which would materially and adversely affect the Company's financial
condition, results of operations and business prospects.  See "Item 2.
Management's Discussion and Analysis of Financial Condition and Results of

                                                                              26
<PAGE>
 
Operations  Liquidity and Capital Resources."

  CONCENTRATION OF BUSINESS IN CALIFORNIA

  The Company's lending activities are concentrated primarily in California and
are likely to remain so for the foreseeable future.  The occurrence of adverse
economic conditions or natural disasters in California could have a material
adverse effect on the Company's financial condition, results of operations and
business prospects.

  RELIANCE ON SYSTEMS AND CONTROLS

  The Company depends heavily upon its systems and controls, some of which have
been designed specifically for a particular business, to support the evaluation,
acquisition, monitoring, collections and administration of that business.  There
can be no assurance that these systems and controls, including those specially
designed and built for the Company, are adequate or will continue to be adequate
to support the Company's growth.  A failure of the Company's automated systems,
including a failure of data integrity or accuracy, could have a material adverse
effect upon the Company's financial condition, results of operations and
business prospects.

  RELIANCE ON KEY EMPLOYEES AND OTHERS
 
  The Company is dependent upon the continued services of its key employees as
well as the key employees of BPN.  The loss of the services of any key employee,
or the failure of the Company to attract and retain other qualified personnel,
could have a material adverse effect on the Company's financial condition,
results of operations and business prospects.

  COMPETITION

  Each of the Company's businesses is highly competitive.  Competition in the
Company's markets can take many forms, including convenience in obtaining a
loan, customer service, marketing and distribution channels, amount and terms of
the loan, loan origination fees and interest rates.  Many of the Company's
competitors are substantially larger and have considerably greater financial,
technical and marketing resources than the Company.  The Company's competitors
in subprime mortgage finance include other consumer finance companies.  The
Company competes in the insurance premium finance business with other specialty
finance companies, independent insurance agents who offer premium finance
services, captive premium finance affiliates of insurance companies and direct
bill plans established by insurance companies.  The Company competes in the
subprime automobile finance industry with commercial banks, the captive finance
affiliates of automobile manufacturers, savings associations and companies
specializing in subprime automobile finance, many of which have established
relationships with automobile dealerships and may offer dealerships or their
customers other forms of financing, including dealer floor plan financing and
lending, which are not offered by the Company.  In attracting deposits, the Bank
competes primarily with other savings institutions, commercial banks, brokerage
firms, mutual funds, credit unions and other types of investment companies.

  CHANGES IN INTEREST RATES

  The Company's results of operations depend to a large extent upon its net
interest income, which is the difference between interest income on interest-
earning assets, such as loans and investments, and interest expense on interest-
bearing liabilities, such as deposits and other borrowings.  When interest-
bearing liabilities mature or reprice more quickly than interest-bearing assets
in a given period, a significant increase in market rates of interest could have
a material adverse effect on the Company's net income.  Further, a significant
increase in market rates of interest could adversely affect demand for the
Company's financial products and services.  Interest rates are highly sensitive
to many factors, including governmental monetary

                                                                              27
<PAGE>
 
policies and domestic and international economic and political conditions, which
are beyond the Company's control.   The Company's  liabilities generally  have
shorter  terms and are  more  interest  rate  sensitive than its assets.
Accordingly, changes in interest rates could have a material adverse effect on
the profitability of the Company's lending activities.

  MANAGEMENT OF GROWTH

  The Company has experienced rapid growth in each of its businesses and intends
to pursue growth for the foreseeable future, particularly in its mortgage and
automobile finance businesses.  In addition, the Company intends to broaden its
product offerings to include additional types of consumer or, in the case of
IPF, commercial loans.  Further, the Company may enter other specialty finance
businesses.  This growth strategy will require additional capital, systems
development and human resources.  The failure of the Company to implement its
planned growth strategy would have a material adverse effect on the Company's
financial condition, results of operations and business prospects.

  SECURITIZATIONS

  The Company completed its first securitization of mortgage loans in December
1997 and expects to sell or securitize mortgage loans on a periodic basis in the
future.  The Company will, in the future, consider the securitization of other
financial assets.  In March 1998, the Company sold its residual interests in
this securitization for cash in the amount of $8.3 million which exceeded the
carrying value of approximately $8.2 million at the date of sale.  The Company
believes that the gain on sale from such securitizations could represent a
significant portion of the Company's future revenues and net income.  The
Company's ability to complete securitizations will depend on a number of
factors, including conditions in the securities markets generally, conditions in
the asset-backed securities market specifically, the performance of the
Company's portfolio of securitized loans and the Company's ability to obtain
credit enhancement for its securitized loans.  If securitizations represented a
significant portion of the Company's revenues and net income and the Company
were unable to securitize profitably a sufficient number of loans in a
particular quarter, then the Company's revenues for the quarter could decline,
which could result in lower earnings or a loss reported for the quarter.  In
addition, delays in closing a securitization could require the Company to seek
additional alternative funding under current and future credit facilities in
order to finance additional loan originations and purchases and could increase
the Company's interest rate risk by increasing the period during which newly
originated loans are held prior to sale and could increase the Company's
interest expense.

  The Company may rely on credit enhancements to guarantee or otherwise support
senior certificates issued in securitizations.  If the Company is unable to
obtain credit enhancement in connection with the senior certificates, the
Company might be unable to securitize its loans, which could have a material
adverse effect on the Company's results of operations, financial condition and
business prospects.  Although alternative structures to securitizations may be
available, there can be no assurance that the Company will be able to use these
structures or that these structures will be economically viable for the Company.
The Company's ability to obtain credit enhancement for its securitizations also
may be adversely affected by poor performance of the Company's securitizations
or the securitizations of others.  The inability of the Company to complete
securitizations for any reason could have a material adverse effect on the
Company's results of operations, financial condition and business prospects.

  CHANGE IN GENERAL ECONOMIC CONDITIONS

  Each of the Company's businesses is affected directly by changes in general
economic conditions, including changes in employment rates, prevailing interest
rates and real wages.  During periods of economic slowdown or recession, the
Company may experience a decrease in demand for its financial products and
services, an increase in its servicing costs, a decline in collateral values and
an increase in

                                                                              28
<PAGE>
 
delinquencies and defaults. A decline in collateral values and an increase in
delinquencies and defaults increase the possibility and severity of losses.
Although the Company believes that its underwriting criteria and collection
methods enable it to manage the higher risks inherent in loans made to such
borrowers, no assurance can be given that such criteria or methods will afford
adequate protection against such risks. Any sustained period of increased
delinquencies, defaults or losses would materially and adversely affect the
Company's financial condition, results of operations and business prospects.

  IMPACT OF INFLATION AND CHANGING PRICES

  The financial statements and notes thereto presented herein have been prepared
in accordance with Generally Accepted Accounting Principles ("GAAP"), which
require the measurement of financial position and operating results in terms of
historical dollar amounts without considering the changes in the relative
purchasing power of money over time due to inflation.  The impact of inflation
is reflected in the increased cost of the Company's operations.  Unlike
industrial companies, nearly all of the assets and liabilities of the Company
are monetary in nature.  As a result, interest rates have a greater impact on
the Company's performance than do the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or to the same
extent as the price of goods and services.


ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
           ---------------------------------------------------------- 

  See "Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Management of Interest Rate Risk."

                                                                              29
<PAGE>
 
PART II.        OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS.
           ----------------- 

  NOT APPLICABLE


ITEM 2.    CHANGES IN SECURITIES AND USE OF PROCEEDS.
           ----------------------------------------- 

     Use of proceeds - As discussed in Note 5 to Unaudited Notes to Consolidated
     Financial Statements under "Item 1. Financial Information" of this
     Quarterly Report, the Company completed an initial public offering of
     common stock.  In connection therewith:

     1.  The effective date of the Company's Registration Statement on Form S-1,
         as amended (File No. 333-39941) ("Registration Statement"), was April
         23, 1998.

     2.  The offering commenced on April 23, 1998 and was terminated on May 28,
         1998 with the sale of all of the registered securities at a price to 
         the public of $11.00 per share.

     3.  NationsBanc Montgomery Securities LLC and Piper Jaffray Inc. acted as
         managing underwriters for the Company.

     4.  The class of securities registered pursuant to the Registration 
         Statement was common stock, no par value per share. The aggregate
         amount of such securities registered and sold was 6,325,000 shares for
         an aggregate dollar amount of $69.6 million. There were no selling
         shareholders.

     5.  Expenses incurred by the Company in connection with the sale of the 
         shares of common stock, none of which were paid directly or indirectly
         to directors or officers of the Company or their associates, included
         the following (dollars in thousands):

                  Underwriting discounts and commissions      $4,870
                  Finders' fees                                   --
                  Expenses paid to or for underwriters            --
                  Other expenses                               1,314
                                                             -------
                                                              $6,184
                                                             =======

     6.  The net offering proceeds to the Company after deduction of the above
         expenses were approximately $63.4 million and were used for general
         corporate purposes, including financing the growth of the Company's
         mortgage and automobile finance operations, and to repay $2.0 million
         in indebtedness to certain shareholders. Such use of proceeds did not
         represent a material change in the use of proceeds described in the
         Company's Registration Statement.



ITEM 3.    DEFAULTS UPON SENIOR SECURITIES.
           ------------------------------- 

  Not applicable

                                                                              30
<PAGE>
 
ITEM 4.      SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
             --------------------------------------------------- 

       Not applicable


ITEM 5.    OTHER INFORMATION.
           ----------------- 

       Not applicable


ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K.
           -------------------------------- 

           (a)  Exhibits

                10.86         Mortgage Loan Purchase and Interim Servicing
                              Agreement, dated June 23, 1998, between Pan
                              American Bank, FSB and Countrywide Home Loans,
                              Inc.

                27.1          Financial Data Schedule


           (b)  Reports on Form 8-K

                None

                                                                              31
<PAGE>
 
                                   SIGNATURES

                                        
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.



                                    UNITED PANAM FINANCIAL CORP.



DATE:    August 7, 1998             By:  /s/ Lawrence J. Grill
                                         ------------------------------------
                                         Lawrence J. Grill
                                         President and Chief Executive Officer
                                         (Principal Executive Officer)



         August 7, 1998             By:  /s/ Carol M. Bucci
                                         ------------------------------------
                                         Carol M. Bucci
                                         Senior Vice President
                                         and Chief Financial Officer
                                         (Principal Financial and Accounting
                                         Officer)

                                                                              32