SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES ACT OF
- -- 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999.
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
COMMISSION FILE NUMBER 000-23775
APPROVED FINANCIAL CORP.
------------------------
(Exact Name of Registrant as Specified in its Charter)
VIRGINIA 52-0792752
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
3420 HOLLAND ROAD, SUITE 107, VIRGINIA BEACH, VIRGINIA 23452
------------------------------------------------------------
(Address of Principal Executive Office) (Zip Code)
757-430-1400
------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant is
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 $1.00 par value common
stock, as of August 1, 1999: 5,482,114 shares
---------
<PAGE>
APPROVED FINANCIAL CORP.
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Balance Sheets as of
June 30, 1999 and December 31, 1998 2
Consolidated Statements of Income (Loss) and
Comprehensive Income (Loss) for the three
months ended June 30, 1999 and 1998. 3
Consolidated Statements of Income (Loss) and
Comprehensive Income (Loss) for the six months
ended June 30, 1999 and 1998 4
Consolidated Statements of Cash Flows for
the six months ended June 30, 1999
and 1998. 5
Notes to Consolidated Financial Statements 7
Consolidating Balance Sheet as of June 30, 1999 9
Consolidating Statements of Loss for the
Six months ended June 30, 1999 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 32
Item 2. Changes in Securities 32
Item 3. Defaults Upon Senior Securities 32
Item 4. Submission of Matters to a Vote of Security Holders 32
Item 5. Other Information 32
Item 6. Exhibits and Reports on Form 8-K 32
<PAGE>
PART I . FINANCIAL INFORMATION
<PAGE>
APPROVED FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1999 AND DECEMBER 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS (Unaudited) 1998
1999
------------ -------------
Cash $ 6,471 $ 6,269
Mortgage loans held for sale, net 62,532 105,044
Real estate owned, net 2,161 1,707
Investments 2,524 3,472
Income taxes receivable 3,487 2,023
Deferred tax asset 1,084 3,330
Premises and equipment, net 4,921 5,579
Goodwill, net 4,047 4,554
Other assets 2,832 4,140
------------ ------------
Total assets $ 90,059 $ 136,118
============ =============
LIABILITIES AND EQUITY
Liabilities:
Revolving warehouse loan $ 31,835 $ 72,546
FHLB bank advances 1,000 0
Mortgage payable 346 1,210
Notes payable-related parties 3,680 3,628
Certificates of indebtedness 2,365 2,414
Certificates of deposits 30,026 29,728
Loan proceeds payable 271 2,565
Accrued and other liabilities 3,870 4,760
------------ ------------
Total liabilities 73,393 116,851
------------ ------------
Shareholders' equity:
Preferred stock series A, $10 par value;
Noncumulative, voting:
Authorized shares - 100
Issued and outstanding shares - 90 1 1
Common stock $1.00 par value in 1999
and 1998:
Authorized shares - 40,000,000
Issued and outstanding
shares - 5,482,114 in
1999 and 1998 5,482 5,482
Accumulated other comprehensive
income (loss) (26) 30
Additional paid in capital 552 552
Retained earnings 10,657 13,202
------------ ------------
Total equity 16,666 19,267
------------ ------------
Total liabilities and equity $ 90,059 $ 136,118
============ =============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
2
<PAGE>
APPROVED FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND
COMPREHENSIVE INCOME (LOSS)
FOR THE THREE MONTHS ENDED JUNE 30, 1999
AND 1998 (DOLLARS IN THOUSANDS, EXCEPT
SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
1999 1998
----------- ------------
Revenue:
Gain on sale of loans $ 3,127 $ 8,779
Interest income 1,943 2,653
Other fees and income 2,106 1,678
----------- ------------
7,176 13,110
----------- ------------
Expenses:
Compensation and related benefits 4,559 5,980
General and administrative 3,008 2,820
Loan production expense 472 972
Interest expense 1,212 1,535
Provision for loan and foreclosed
property losses 43 949
----------- ------------
9,294 12,256
----------- ------------
Income/(loss) before income taxes (2,118) 854
Provision for (benefit from) income taxes (808) 341
----------- ------------
Net income/(loss) (1,310) 513
Other comprehensive income, net of tax:
Unrealized losses on securities:
Unrealized holding loss arising
during period (23) (1,823)
----------- ------------
Comprehensive loss $ (1,333) $ (1,310)
=========== ============
Net income/(loss) per share:
Basic and Diluted $ (0.24) $ 0.09
=========== ============
Weighted average number of shares
outstanding:
Basic 5,482,114 5,512,114
=========== ============
Diluted 5,482,114 5,515,702
=========== ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
3
<PAGE>
APPROVED FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND
COMPREHENSIVE INCOME (LOSS) FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
1999 1998
----------- ------------
Revenue:
Gain on sale of loans $ 7,523 $ 18,533
Interest income 4,639 5,254
Other fees and income 4,398 3,161
----------- ------------
16,560 26,948
----------- ------------
Expenses:
Compensation and related benefits 9,390 11,999
General and administrative 5,710 5,832
Loan production expense 1,027 1,868
Interest expense 2,895 3,084
Provision for loan and
foreclosed property losses 1,490 838
----------- ------------
20,512 23,621
----------- ------------
Income/(loss) before income taxes (3,952) 3,327
Provision for (benefit from) income
taxes (1,407) 1,380
----------- ------------
Net income/(loss)
(2,545) 1,947
Other comprehensive income, net of tax:
Unrealized losses on securities:
Unrealized holding loss arising
during period (56) (726)
----------- ------------
Comprehensive income/(loss) $ (2,601) $ 1,221
=========== ============
Net income/(loss) per share:
Basic and Diluted $ (0.46) $ 0.35
=========== ============
Weighted average number of shares outstanding:
Basic 5,482,114 5,509,535
=========== ============
Diluted 5,482,114 5,515,072
=========== ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
4
<PAGE>
APPROVED FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(IN THOUSANDS)
(UNAUDITED)
1999 1998
------------- ------------
Operating activities
Net income/(loss) $ (2,545) $ 1,947
Adjustments to reconcile net income/
(loss) to net cash provided by
operating activities:
Depreciation of premises and
equipment 442 526
Amortization of goodwill 235 190
Provision for loan losses 1,080 720
Provision for losses on real
estate owned 165 119
Loss on sale of ARM Portfolio shares 8 1
Loss on sale of real estate owned 245 243
(Gain) on sale of loans (7,523) (18,533)
Proceeds from sale and prepayments
of loans 154,139 256,737
Originations - Loans held for sale (106,910) (227,952)
Changes in assets and liabilities:
Loan sale receivable (2) (1,794)
Other assets 1,308 (4,634)
Accrued and other liabilities (618) 884
Income tax payable (1,464) (2,874)
Deferred tax asset 2,277 1,176
Loan proceeds payable (2,294) 0
------------- ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 38,543 6,756
Cash flows from investing activities:
Purchase of securities (125) (188)
Sales of ARM Portfolio shares 4,692 0
Sales of securities 0 1,000
Purchase of premises and equipment (1,112) (590)
Sales of premises and equipment 1,328 17
Sales of real estate owned 1,172 2,305
Real estate owned capital improvements (321) 0
Recoveries on loans charged off 11 0
Purchases of ARM Portfolio shares (3,566) 0
Purchases of FHLB stock (146) 0
------------- ------------
NET CASH PROVIDED BY INVESTING ACTIVITIES 1,933 2,544
5
<PAGE>
APPROVED FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
FOR THE SIX MONTHS ENDED JUNE 30, 1999, AND 1998
(IN THOUSANDS)
(Unaudited)
1999 1998
------------- ------------
Cash flows from financing activities:
Borrowings - warehouse 107,455 206,151
Repayments of borrowings - warehouse (148,166) (221,148)
Proceeds from FHLB advances 1,000 380
Principal payments on mortgages payable (864) (40)
Net increase (decrease) in:
Notes payable 52 (146)
Certificates of indebtedness (49) (60)
Certificates of deposit 298 4,162
------------- ------------
NET CASH USED BY FINANCING ACTIVITIES (40,274) (10,701)
------------- ------------
NET INCREASE (DECREASE) IN CASH 202 (1,401)
CASH AT BEGINNING OF PERIOD 6,269 11,869
------------- ------------
CASH AT END OF PERIOD $ 6,471 $ 10,468
============= ============
Supplemental cash flow information:
Cash paid for interest $ 3,103 $ 3,094
Cash paid for income taxes 0 3,078
Supplemental non-cash information:
Loan balances transferred to
real estate owned $ 1,975 $ 2,731
Exchange of stock for acquisition
of Armada Residential
Mortgage LLC 0 669
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
6
<PAGE>
APPROVED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1999, AND 1998
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION: Approved Financial Corp., a Virginia corporation ("Approved"), and
its subsidiaries (collectively, the "Company") operate in a single operating
segment in the consumer finance business of originating, servicing and selling
mortgage loans secured primarily by first and second liens on one-to-four family
residential properties. The Company sources mortgage loans through two original
channels; a network of mortgage brokers who refer business ("broker" or
"wholesale") and a sales staff that originates mortgages directly with the
borrower ("retail" or "direct"). Approved has three wholly-owned subsidiaries,
Approved Residential Mortgage, Inc. ("ARMI") with broker operations in four
states and five retail locations at June 30, 1999, Approved Federal Savings Bank
(the "Savings Bank"), a federally chartered thrift institution with broker
operations in seven states and ten retail offices at June 30, 1999 and MOFC
d/b/a ConsumerOne Financial ("ConsumerOne") with one retail office in Michigan
on June 30, 1999. The Savings Bank has a wholly owned subsidiary operating as a
title insurance agency.
PRINCIPLES OF ACCOUNTING AND CONSOLIDATION: The consolidated financial
statements of the Company include the accounts of Approved and its wholly owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated.
NOTE 2. BASIS OF PRESENTATION:
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10Q 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 have
been included. Operating results for the interim periods are not necessarily
indicative of financial results for the full year. These unaudited consolidated
financial statements should be read in conjunction with the audited consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended December 31, 1998.
NOTE 3. NEW ACCOUNTING PRONOUNCEMENTS:
In June 1998, SFAS No. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES" was issued, effective for all fiscal quarters, for all fiscal years
ending, beginning after June 15, 2000. This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that entities recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. If certain conditions are
met, a derivative may be specifically designed as (a) a hedge of the exposure to
changes in the fair value of a recognized asset or liability or an unrecognized
firm commitment, (b) a hedge of the exposure to variable cash flows of a
forecasted transaction, or (c) a hedge of the foreign currency exposure of a net
investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security, or a foreign-currency-denominated forecasted
transaction. The Company is currently evaluating the effect this statement will
have on the financial statements.
NOTE 4. SALE OF BUILDING:
In March 1999, The Company sold the administrative and executive office building
located at 3386 Holland Road, Virginia Beach, Virginia. The sales price was
$1,081,250, which resulted in a break-even transaction for the Company. The
Company had a mortgage note payable on this property in the amount of $751,674
at the time of sale. The Company also entered into a lease agreement with the
purchaser to lease back 15,574 square feet of the premises for an initial term
commencing from the closing date to September 30, 1999, with the option to renew
the lease for three additional one month terms. The lease payment will be
$15,000 per month.
7
<PAGE>
NOTE 5. PURCHASE OF LAND:
The Company purchased 7.77 acres of land for a new administrative and executive
office building from the City of Virginia Beach Development Authority on March
11, 1999. The purchase price of the land was approximately $642,000.
8
<PAGE>
<TABLE>
<CAPTION>
APPROVED FINANCIAL CORP.
CONSOLIDATING BALANCE SHEET
JUNE 30, 1999
($ IN THOUSANDS)
APPROVED MOFC,
APPROVED APPROVED FEDERAL INC. D/B/A
FINANCIAL RESIDENTIAL SAVINGS GLOBAL CONSUMER ONE
ASSETS CONSOLIDATED ELIMINATIONS CORP. MORTGAGE BANK TITLE FINANCIAL
------------ ------------ ---------- --------- -------- ------- ------------
<S> <C>
Cash $ 6,471 $ 3,268 $ 559 $ 2,538 $ 51 $ 55
Mortgage loans held for sale, net 62,532 2,139 29,441 29,505 0 1,447
Real estate owned, net 2,161 576 1,585 0 0 0
Investments 2,524 (8,962) 9,094 0 2,392 0 0
Income taxes receivable 3,487 (4,862) 8,349 0 0 0 0
Deferred tax asset 1,084 (1,162) 0 2,246 0 0 0
Premises and equipment, net 4,921 3,270 795 174 0 682
Goodwill, net 4,047 913 0 109 0 3,025
Due from affiliates 0 (3,486) 936 5 2,538 0 7
Other assets 2,832 1,369 757 477 8 221
---------- ------------ ----------- --------- --------- -------- ----------
Total Assets $ 90,059 $ (18,472) $ 29,914 $ 35,388 $ 37,733 $ 59 $ 5,437
========== ============ =========== ========= ========= ======== =========
LIABILITIES AND EQUITY
Liabilities:
Revolving warehouse loan $ 31,835 $ 3,015 $ 26,471 0 0 $ 2,349
FHLB bank advances 1,000 0 0 1,000 0 0
Deferred tax liability 0 (1,162) 1,145 0 17 0 0
Mortgage payable 346 346 0 0 0 0
Notes payable-related parties 3,680 3,680 0 0 0 0
Certificates of indebtedness 2,365 2,365 0 0 0 0
Certificates of deposits 30,026 0 0 30,026 0 0
Loan proceeds payable 271 0 271 0 0 0
Due to affiliates 0 (3,486) 441 2,094 943 3 5
Accrued and other liabilities 3,870 2,256 680 221 17 696
Income taxes payable 0 (4,862) 0 4,836 0 0 26
--------- ----------- ---------- --------- --------- -------- --------
Total Liabilities 73,393 (9,510) 13,248 34,352 32,207 20 3,076
--------- ----------- ---------- --------- --------- -------- --------
Shareholder's equity:
Preferred stock-series A 1 0 1 0 0 0
Common stock 5,482 (299) 5,482 250 32 16 1
Unrealized gain on securities (26) 9 (26) 0 (9) 0 0
Additional paid in capital 552 (6,837) 552 491 3,056 0 3,290
Retained earnings 10,657 (1,835) 10,657 295 2,447 23 (930)
--------- ----------- ---------- --------- --------- -------- ---------
Total Equity 16,666 (8,962) 16,666 1,036 5,526 39 2,361
--------- ----------- ---------- --------- --------- -------- ---------
Total liabilities and equity $ 90,059 $ (18,472) $ 29,914 $ 35,388 $ 37,733 $ 59 $ 5,437
========= ============ ========== ========= ========= ======== =========
</TABLE>
9
<PAGE>
APPROVED FINANCIAL CORP.
CONSOLIDATING STATEMENT OF INCOME/(LOSS)
FOR THE SIX MONTHS ENDING JUNE 30, 1999
($ IN THOUSANDS)
<TABLE>
<CAPTION>
MOFC, INC.
APPROVED D/B/A
APPROVED APPROVED FEDERAL CONSUMER
FINANCIAL RESIDENTIAL SAVINGS GLOBAL ONE
CONSOLIDATED ELIMINATIONS CORP. MORTGAGE BANK TITLE FINANCIAL
------------ ------------- ---------- -------- -------- -------- -----------
<S> <C>
REVENUE:
Gain on sale of loans $ 7,523 $ 450 $ 3,734 $ 2,300 0 $ 1,039
Interest income 4,639 351 2,142 1,906 1 239
Other fees and income 4,398 3 2,498 1,128 20 749
----------- ------------- --------- -------- -------- -------- ---------
16,560 804 8,374 5,334 21 2,027
----------- ------------- --------- -------- -------- -------- ---------
EXPENSES:
Compensation and related 9,390 2,407 4,459 1,784 1 739
General and administrative 5,710 1,724 1,415 1,619 5 947
Loan production expense 1,027 44 631 263 0 89
Interest expense 2,895 643 1,310 871 0 71
Provision for loan/REO losses 1,490 (728) 2,167 59 0 (8)
----------- ------------ ---------- -------- -------- -------- ---------
20,512 4,090 9,982 4,596 6 1,838
----------- ------------ ---------- -------- -------- -------- ---------
Income before income taxes (3,952) (3,286) (1,608) 738 15 189
Provision for income taxes (1,407) (1,698) 0 285 6 0
----------- ------------ ---------- -------- --------- -------- ---------
Net Income/(Loss) $ (2,545) $ (1,588) $ (1,608) $ 453 $ 9 $ 189
=========== ============ ========== ======== ========= ======== =========
</TABLE>
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following commentary discusses major components of the Company's business
and presents an overview of the Company's consolidated results of operations for
the three and six month periods ended June 30, 1999 and 1998 and its
consolidated financial position at June 30, 1999 and December 31, 1998. The
discussion includes some forward-looking statements involving estimates and
uncertainties. The Company's actual results could differ materially from those
anticipated in the forward-looking statements as a result of certain factors
such as reduced demand for loans, competitive forces, limits on available funds,
loan delinquency, default on loss rates, general economic environment, market
forces affecting the price of the Company's common stock, and other risks as
disclosed in the Company's filing on Form 10K for the year ended December 31,
1998. This discussion should be reviewed in conjunction with the consolidated
financial statements and accompanying notes and other statistical information
presented in the Company's 1998 audited financial statements.
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 1999
COMPARED TO THE THREE AND SIX-MONTH PERIODS ENDED JUNE 30, 1998.
NET INCOME
The Company's net loss for the three and six months ended June 30, 1999 was $1.3
and $2.5 million compared to net income of $0.5 and $1.9 million for the three
and six month periods ended June 30, 1998. On a per share basis (diluted),
income (loss) for the three and six months ended June 30, 1999 was $ (0.24) and
$ (0.46) compared to $0.09 and $0.35 for the three and six months ended June 30,
1998.
ORIGINATION OF MORTGAGE LOANS
The following table shows the loan originations in dollars and units for the
Company's broker and retail divisions for the three and six months ended June
30, 1999 and 1998. During the second quarter of 1999, the Company initiated
in-house funding of conforming mortgages originated by the retail division.
Additionally, the retail branches originate mortgages that are funded through
other lenders ("Brokered Loans"). Brokered Loans consist primarily of
non-conforming mortgages that do not meet the Company's underwriting criteria
and conforming loans.
11
<PAGE>
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30, June 30,
1999 1998 1999 1998
(dollars in thousands) --------------- ---------------
<S> <C>
Dollar Volume of Loans Originated:
Broker $ 31,585 $ 55,788 $ 57,310 $ 105,083
Retail - funded through other lenders 42,352 20,936 88,856 36,430
Retail - funded in-house non-conforming 17,065 63,340 42,100 122,869
Retail - funded in-house
conforming and government 7,451 0 7,451 0
---------------------- ----------------------
Total $98,453 $140,064 $ 195,717 $ 264,382
====================== ======================
Number of Loans Originated:
Broker 519 999 927 1,904
Retail - funded through other lenders 497 267 1,042 423
Retail - funded in-house
non-conforming 268 1,148 645 2,270
Retail - funded in-house
conforming and government 79 0 79 0
----------------------- ----------------------
Total 1,363 2,414 2,693 4,597
======================= ======================
</TABLE>
The decrease of 29.7% and 26.0% in dollar volume of loans, originated during the
three and six months ended June 30, 1999, compared to the same period in 1998
was due primarily to increased competition in the non-conforming mortgage
industry.
Loans originated through the Company's retail offices (including brokered
loans), decreased 20.6% and 13.1% to $66.9 million and $138.5 million for the
three and six month periods ended June 30, 1999, compared to $84.3 million and
$159.3 million during the same periods in 1998. The decrease was primarily the
result of decrease in the number of retail loan origination centers from 26 at
June 30, 1998 to 16 as of June 30, 1999.
The volume of loans originated through referrals from the Company's network of
mortgage brokers decreased 43.4% and 45.5% to $31.6 million and $57.3 million
for the three and six months ended June 30, 1999, compared to $55.8 million and
$105.1 million for the three and six months ended June 30, 1998. Contributing to
this decrease in volume from broker referrals is the refinance boom for
conforming mortgages created by the low interest rate environment and increased
competition in the non-conforming mortgage industry.
GAIN ON SALE OF LOANS
The largest component of the Company's net income is gain on sale of loans.
There is an active secondary market for most types of mortgage loans originated
by the Company. The majority of the loans originated by the Company are sold to
other financial institutions. The Company receives cash at the time loans are
sold. The loans are sold service-released on a non-recourse basis, except for
normal representations and warranties, which is consistent with industry
practices. By selling loans in the secondary mortgage market, the Company is
able to obtain funds that may be used for additional lending and investment
purposes. Gains from the sale of loans is comprised of several components, as
follows: (a) the difference between the sales price and the net carrying value
of the loan; plus (b) loan origination fee income collected at loan closing and
deferred until the loan is sold; less (c) recapture premiums and loan selling
costs.
Loan sales totaled $58.1 and $139.9 million for the three and six months ended
June 30, 1999, compared to $117.0 and $231.2 million (including seasoned loan
sales) for the same period in 1998. The decrease was caused primarily by the
decrease in loan origination volume.
Gain on the sale of loans was $3.1 and $7.5 million for the three and six months
ended June 30, 1999, which compares with $8.8 and $18.5 million (excluding the
$10 million seasoned loan sale the Company executed in June 1998) for the same
period in 1998. The decrease for the three and six months ended June 30, 1999,
was the direct result of a decrease in the weighted-average premium paid by
investors for the Company's loans and a lower volume of loans sold. Gain on the
sale of mortgage loans represented 43.6% and 45.4% of total revenue during the
three and six months ended June 30, 1999, compared to 67.0% and 68.8% of total
revenue for the same period in 1998.
12
<PAGE>
The weighted-average premium realized by the Company on its loan sales decreased
to 3.10% and 3.15%, during the three and six months ended June 30, 1999, from
4.47% and 5.30% (including seasoned loan sales) for the same period in 1998. The
decrease in premium percentage was caused by material changes in the secondary
market conditions for non-conforming mortgage loans. The Company has never used
securitization as a loan sale strategy. However, the whole-loan sale marketplace
was impacted by changes that affected companies who previously used
securitization to sell loans. Excessive competition during 1997 and 1998 and a
coinciding reduction in interest rates in general caused an increase in the
prepayment speeds for non-conforming loans. The valuation method applied to
interest-only and residual assets ("Assets"), the capitalized assets created
from securitization, include an assumption for average prepayment speed in order
to determine the average life of a loan pool. The increased prepayment speeds
experienced in the industry were greater than the assumptions previously used by
many securitization issuers and led to an impairment of Asset values for several
companies in the industry. Additionally, in September 1998, a flight to quality
among fixed income investors negatively impacted the pricing spreads for
mortgage-backed securitizations compared to earlier periods and negatively
impacted the associated economics to the issuers. Consequently, many of these
companies reported material losses, experienced reductions in liquidity sources
and diverted to whole loan sale strategies in order to generate cash. This shift
materially decreased the demand and increased the supply of non-conforming
mortgage loans in the secondary marketplace, which resulted in significantly
lower premiums on non-conforming whole-loan mortgage sales.
In addition, the premium percentage has decreased due to a decrease in the
Weighted Average Coupon ("WAC") on the Company's loan originations, which was
primarily the result of a lower interest rate market and a shift in the
Company's origination profile to a higher credit grade customer. These premiums
do not include loan origination fees collected by the Company at the time the
loans are closed, which are included in the computation of gain on sale when the
loans are sold.
The Company defers recognizing income from the loan origination fees it receives
at the time a loan is closed. These fees are deferred and recognized over the
lives of the related loans as an adjustment of the loan's yield using the
level-yield method. Deferred income pertaining to loans held for sale is taken
into income at the time of sale of the loan. Origination fee income is primarily
derived from the Company's retail lending division. Origination fee income
included in the gain on sale of loans for the three and six months ended June
30, 1999 was $1.4 and $3.3 million, compared to $3.0 and $6.0 million in the
three and six months ended June 30, 1998. The decrease is the result of a
decrease in the volume of loans sold, which were generated by the Company's
retail division. The Company's retail loan sales during the three and six months
ended June 30, 1999 comprised 57.1% and 53.9% of total loan sales, with average
loan origination fee income earned of 4.11% and 4.35%, (including conforming
loans). Excluding conforming loans the average loan origination fee income
earned was 4.44% and 4.50% for the three and six months ended June 30, 1999. For
the same period in 1998, the Company's retail loan sales were 54.0% and 54.6% of
total loan sales with average origination fee income earned of 5.25% and 4.98%.
Fees associated with selling loans were approximately six and 12 basis points of
the dollar volume of loans sold for the three and six months ended June 30, 1999
compared to 19 basis points for the three and six months ended June 30, 1998.
The Company also defers recognition of the expense it incurs, from the payment
of fees to mortgage brokers, for services rendered on loan originations. These
fees are deferred and recognized over the lives of the related loans as an
adjustment of the loan's yield using the level-yield method. The remaining
balance of expenses associated with fees paid to brokers is recognized when the
loan is sold.
INTEREST INCOME AND EXPENSE
The Company's net interest income is dependent on the difference, or "spread",
between the interest income it receives from its loans and its cost of funds,
consisting principally of the interest expense paid on the warehouse lines of
credit, the Savings Bank's deposit accounts and other borrowings.
13
<PAGE>
Interest income for the three and six months ended June 30, 1999 was $1.9
million and $4.6 million compared with $2.7 and $5.3 million for the same period
ended in 1998. The decrease in interest income for the three and six months
ended June 30, 1999 was primarily due to a lower average yield on the loans held
for sale.
Interest expense for the three and six months ended June 30, 1999 was $1.2 and
$2.9 million compared with $1.5 and $3.1 million for the three and six months
ended June 30, 1998. The decrease in interest expense for the three and six
months ended June 30, 1999, was the direct result of a decrease in the average
balance of interest-bearing liabilities.
Changes in the average yield received on the Company's loan portfolio may not
coincide with changes in interest rates the Company must pay on its revolving
warehouse loans, the Savings Bank's FDIC-insured deposits, and other borrowings.
As a result, in times of rising interest rates, decreases in the difference
between the yield received on loans and other investments and the rate paid on
borrowings and the Savings Bank's deposits usually occur.
14
<PAGE>
The following tables reflect the average yield earned and rates paid by the
Company during the six months ended June 30, 1999 and 1998. In computing the
average yields and rates, the accretion of loan fees is considered an adjustment
to yield. Information is based on average month-end balances during the
indicated periods.
(IN THOUSANDS)
<TABLE>
<CAPTION>
June 30, 1999 June 30, 1998
------------------------------------- ------------------------------------
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
----------- -------- ------------ ---------- --------- -----------
<S> <C>
Interest-earning assets:
Loans receivable (1) $ 83,181 $ 4,433 10.66% $ 79,802 $ 5,031 12.71%
Cash and other interest-
Earning assets 8,578 206 4.80 6,982 223 6.44
---------- --------- --------- ----------- --------- ---------
91,759 4,639 10.11% 86,784 5,254 12.21
----------- --------- --------- ----------- --------- ---------
Non-interest-earning assets:
Allowance for loan losses (3,178) (1,642)
Investment in IMC 114 12,336
Premises and equipment, net 5,271 4,689
Other 13,732 16,906
----------- -----------
Total assets $ 107,698 $ 119,073
=========== ===========
Interest-bearing liabilities:
Revolving warehouse lines $ 47,301 1,676 7.09% $ 55,169 1,978 7.23%
FDIC - insured deposits 30,716 861 5.61 19,561 585 6.03
Other interest-bearing
liabilities 7,557 358 9.47 11,350 521 9.26
----------- -------- --------- ----------- --------- ---------
85,574 2,895 6.77 86,080 3,084 7.22
----------- -------- --------- ----------- --------- ---------
Non-interest-bearing liabilities 4,451 5,957
----------- -----------
Total liabilities 90,025 92,037
Shareholders' equity 17,673 27,036
----------- -----------
Total liabilities and equity $ 107,698 $ 119,073
=========== ==========
Average dollar difference between
interest-earning assets and interest-
bearing liabilities $ 6,185 $ 704
=========== ==========
Net interest income $ 1,744 $ 2,170
========== =========
Interest rate spread (2) 3.34% 4.99%
========== ==========
Net annualized yield on
average interest-earning
assets 3.80% 5.04%
========== ==========
</TABLE>
(1) Loans shown gross of allowance for loan losses, net of premiums/discounts.
(2) Average yield on total interest-earning assets less average rate paid on
total interest-bearing liabilities.
The following table shows the change in net interest income which can be
attributed to rate (change in rate multiplied by old volume) and volume (change
in volume multiplied by old rate) for the six months ended June 30, 1999,
compared to the six months ended June 30, 1998, and for the six months ended
June 30, 1998, compared to the six months ended June 30, 1997. The changes in
net interest income due to both volume and rate changes have been allocated to
volume and rate in proportion to the relationship of absolute dollar amounts of
the change of each. The table demonstrates that the decrease of $426,000 in net
interest income for the six months ended June 30, 1999 compared to the six
months ended June 30, 1998 was primarily the result of a decrease in the average
yield on interest-earning assets.
15
<PAGE>
($ IN THOUSANDS)
<TABLE>
<CAPTION>
1999 Versus 1998 1998 Versus 1997
Increase (Decrease) due to: Increase (Decrease) due to:
Volume Rate Total Volume Rate Total
--------- -------- --------- -------- -------- --------
<S> <C>
Interest-earning assets:
Loans receivable $ 226 $ (824) $ (598) $ 568 $ (352) $ 216
Cash and other interest-
Earning assets 199 (216) (17) 135 6 141
------- --------- ---------- -------- -------- --------
425 (1,040) (615) 703 (346) 357
------- -------- --------- -------- -------- --------
Interest-bearing liabilities:
Revolving warehouse lines (279) (23) (302) (176) (181) (357)
FDIC-insured deposits 310 (34) 276 526 3 529
Other interest-
Bearing liabilities (180) 17 (163) 59 (5) 54
------- -------- --------- -------- -------- --------
(149) (40) (189) 409 (183) 226
------- -------- --------- -------- -------- --------
Net interest income (expense) $ 574 $ (1,000) $ (426) $ 294 $ (163) $ 131
======= ======== ========= ======== ======== ========
</TABLE>
OTHER INCOME
In addition to net interest income (expense), and gain on the sale of loans, the
Company derives income from origination fees earned on Brokered Loans generated
by the Company's retail offices. Also, other fees earned on the loans funded by
the Company, such as underwriting service fees, prepayment penalties, and late
charge fees for delinquent loan payments are classified as other income. Other
income for the three and six months ended June 30, 1999 was $2.1 and $4.4
million compared with $1.7 and $3.2 million for the same period ended in 1998.
The increase in other income for the three and six months ended June 30, 1999
was primarily due to an increase in brokered loan fee income. Brokered Loan fees
were $1.7 and $3.5 million for the three and six months ended June 30, 1999,
compared to $1.0 and $1.7 million for the three and six months ended June 30,
1998. The underwriting fee income decreased for the three and six months ended
June 30, 1999 compared to the same period a year earlier due to the lower unit
volume of in-house loans closed.
COMPREHENSIVE INCOME
The Company has other comprehensive income (loss) in the form of unrealized
holding gains (losses) on securities held for sale. For the three and six months
ended June 30, 1999, other comprehensive loss was $0.02 and $0.06 million
compared to other comprehensive loss of $1.82 and $0.73 million for the three
and six months ended June 30, 1998. The loss for the three and six months ended
June 30, 1999 and June 30, 1998 was related to a decrease in the market price of
IMC Mortgage Company common stock. The Company owned 435,634 shares of IMC
Mortgage Company common stock on June 30, 1999.
16
<PAGE>
COMPENSATION AND RELATED EXPENSES
The largest component of expenses is compensation and related benefits expense,
which decreased by $1.4 and $2.6 million to $4.6 and $9.4 million for the three
and six-month periods ended June 30, 1999 compared to the same period in 1998.
The 23.8% and 21.7% decreases were directly attributable to a decrease in the
number of employees. During the three and six months ended June 30, 1999 the
company had an average full time equivalent employee count of 415 and 442
compared to 596 and 569 full time equivalent employee count during the three and
six month periods ended June 30, 1998. The Company has 361 full time equivalent
employees as of June 30, 1999. The reduction in employees was part of the
Company's cost reduction initiative.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the three months ended June 30, 1999
increased by $0.2 million to $3.0 million, compared to the three month period
ended June 30, 1998. The increase is attributed to increases in advertising
expense, rent expense and depreciation expense. For the three months ended June
30, 1999 these three expense items increased $0.6 million compared to the same
period ended June 30, 1998. The increase in advertising was caused by the
Company's formation of a centralized advertising and marketing department in
order to consolidate its generation of new customer leads. The sale lease back
of the building that houses the advertising and marketing department in Virginia
Beach caused the increase in rent. Also, the Company continues to pay rent on a
majority of offices that it has closed. The Company is currently attempting to
sublease these locations. The increase in depreciation expense was caused by the
acquisition of ConsumerOne Financial Corp. ConsumerOne has depreciable equipment
of $1.0 million. Expenses in all other general and administrative categories
decreased by $0.4 million during the three month period ended June 30, 1999,
compared to the three month period ended June 30, 1998. These expenses were part
of the Company's cost reduction initiative.
General and administrative expenses for the six months ended June 30, 1999
decreased by $0.1 million to $5.7 million, compared to the six month period
ended June 30, 1998. The decrease is attributed to the company's cost reduction
initiative.
LOAN PRODUCTION EXPENSE
The largest component of loan production expense is fees paid by the Company to
mortgage brokers for services rendered in the preparation of loan packages.
Average fees paid to mortgage brokers for the three and six months ended June
30, 1999 were 0.27% and 0.51%, compared to 0.79% and 0.72% for the same periods
ended June 30, 1998. Other items that comprise loan production expenses are
appraisals, credit reports, leads research and telemarketing expenses. Loan
production expenses for the three and six months ended June 30, 1999 were $0.5
and $1.0 million compared to $1.0 and $1.9 million for the three and six months
ended June 30, 1998. The decrease was primarily the result of a decrease in
services rendered fees paid to mortgage brokers.
17
<PAGE>
PROVISION FOR LOAN LOSSES
The following table presents the activity in the Company's allowance for loan
losses and selected loan loss data for the six months ended June 30, 1999 and
the year ended December 31, 1998:
(IN THOUSANDS)
1999 1998
-------------- ------------
Balance at beginning of year $ 2,590 $ 1,687
Provision charged to expense 1,080 3,064
Acquisition of MOFC, Inc. 0 49
Loans charged off (865) (2,372)
Recoveries of loans previously charged off 11 162
-------------- ------------
Balance at end of period $ 2,816 $ 2,590
============== ============
Loans receivable at period-end, gross
of allowance for losses $ 65,349 $ 107,634
Ratio of allowance for loan losses to gross
loans receivable at period-end 4.31% 2.41%
The Company decreased its provision for loan losses $0.3 million for the three
months ended June 30, 1999 and added $1.1 million, during the six months ended
June 30, 1999 to the allowance for loan losses. This compares to additions of
$0.7 and $0.7 million for the three and six months ended June 30, 1998. The
decrease was primarily the result of the composition of loans held for sale and
the recent secondary market environment for whole loan sales. All losses
("charge offs" or "write downs") and recoveries realized on loans previously
charged off, are accounted for in the allowance for loan losses.
The allowance is established at a level that management considers adequate
relative to the composition of the current portfolio of loans held for sale.
Management considers current characteristics of the portfolio such as credit
quality, the weighted average coupon, the weighted average loan to value ratio,
the age of the loan portfolio and the portfolio's delinquency status in the
determination of an appropriate allowance. Other criteria such as trends in the
demand for non-conforming mortgage loans in the secondary market and general
economic conditions, including interest rates, are also considered when
establishing the allowance. Adjustments to the reserve for loan losses may be
made in future periods due to changes in the factors mentioned above and any
additional factors that may effect anticipated loss levels in the future.
18
<PAGE>
PROVISION FOR FORECLOSED PROPERTY LOSSES
The provision for foreclosed property losses increased by $0.3 and $0.2 million
for the three and six months ended June 30, 1999, compared to an increase of
$0.3 and 0.1 million for the three and six months ended June 30, 1998.
Sales of real estate owned yielded net losses of $77,000 and $245,000 for the
three and six months ended June 30, 1999 versus $100,000 and $370,000 for the
three and six months ended June 30, 1998.
The following table presents the activity in the Company's allowance for
foreclosed property losses and selected real estate owned data for the six
months ended June 30, 1999 and the year ended December 31, 1998:
(IN THOUSANDS)
Six Months Year Ended
Ended December 31,
June 30,1999 1998
-------------- ------------
Balance at beginning of year $ 503 $ 671
Provision charged to expense 166 (168)
-------------- ------------
Balance at end of period $ 669 $ 503
============== ============
Real estate owned at period-end, gross
of allowance for losses $ 2,829 $ 2,211
Ratio of allowance for foreclosed property losses
to gross real estate owned at period-end 23.65% 22.75%
The Company maintains a reserve on its real estate owned ("REO") based upon
management's assessment of appraised values at the time of foreclosure. The
increase in the provision for foreclosed property losses relates to an increase
in the dollar amount of outstanding REO at June 30, 1999 when compared to
December 31, 1998. While the Company's management believes that its present
allowance for foreclosed property losses is adequate, future adjustments may be
necessary.
FINANCIAL CONDITION AT JUNE 30, 1999 AND DECEMBER 31, 1998
ASSETS
The total assets of the Company were $90.1 million at June 30, 1999, compared to
total assets of $136.1 million at December 31, 1998. The decrease was primarily
due to a decrease in net mortgage loans receivable.
Cash and cash equivalents increased by $.2 million to $6.5 million at June 30,
1999, from $6.3 million at December 31, 1998. The principal reason for the
increase for the period ending June 30, 1999 was the receipt of proceeds from
loan sales in the final week of June 1999. These proceeds were used to fund new
loans in the first week of July 1999.
Net mortgage loans receivable decreased by $42.5 million to $62.5 million at
June 30, 1999. The 40.5% decrease in 1999 is primarily due to the Company
selling more loans than were originated in-house during the first six months of
1999.
19
<PAGE>
Real estate owned ("REO") increased by $.5 million to $2.2 million at June 30,
1999. The 26.6% increase in REO resulted from the sale of $1.4 million in REO
properties and additions of $2.0 million to REO during the six months ended June
30, 1999.
Investments decreased by $.9 million to $2.5 million at June 30, 1999. The 27.3%
decrease in Investments in 1999 is primarily due to the sale of shares in the
Asset Management Fund, Inc. Adjustable Rate Mortgage Portfolio. Investments
consist primarily of an Asset Management Fund, Inc. Adjustable Rate Mortgage
Portfolio and FHLB stock owned by the Savings Bank. Also, included in
Investments is a $.13 million investment pursuant to the Company's joint venture
with a conforming mortgage company located in Virginia Beach.
Premises and equipment decreased by $.7 million to $4.9 million at June 30,
1999. The primary reason for the 1999 decrease was the sale of one of the
Company's office buildings in Virginia Beach for $1.1 million. This decrease was
offset by the $0.6 million acquisition of 7.77 acres of land designated for the
future location of the Company's administrative and executive headquarters. In
addition, the disposition of equipment located in the retail branches recently
closed by the Company contributed to the decrease.
Goodwill (net) decreased by $.5 million to $4.0 million at June 30, 1999. The
1999 decrease is due to amortization of the intangible asset as well as the
reversal of $.3 million in goodwill attributed to the 1998 acquisition of an
Atlanta Georgia based loan origination office. The goodwill was reversed because
the Atlanta office did not reach its profit goal on an earnout provision.
The income tax receivable increased by $1.5 million to $3.5 million at June 30,
1999. The 72.4% increase can be attributed to the Company's before tax net loss
of $4.0 million for the first six months of 1999.
The deferred tax asset decreased by $2.2 million to $1.1 million at June 30,
1999. The change was the result of a combination of a reduction of the state tax
rate from 8.75% in 1998 to 7.0% in 1999 and the elimination of unearned loan
fees (FAS 91) as a timing difference in the calculation of the Company's tax
provision.
Other assets decreased by $1.3 million to $2.8 million at June 30, 1999. Other
assets consist of accrued interest receivable, prepaid assets, Brokered Loan
fees receivable, deposits, and various other assets. Accrued interest receivable
decreased by $.5 million, which was due to a lower average balance of loans held
for sale at June 30, 1999. In addition, the Company had a $.6 million prepaid
loan funding on the books in 1998 and at June 30, 1999 the balance was $.04
million. The remainder of the decrease is due to a lower Brokered Loan fee
receivable for the first six months of 1999 in comparison with 1998.
LIABILITIES
Outstanding balances for the Company's revolving warehouse lines of credit
decreased by $40.7 million to $31.8 million at June 30, 1999. The 56.1% decrease
in 1999 was primarily attributable to the decrease in loans receivable.
The Company draws on its revolving warehouse lines of credit as needed to fund
loan production. As of June 30, 1999, the Company had issued loan funding checks
totaling $.8 million which had not cleared the Company's checking account and
for which the Company had not drawn funds from its warehouse lines. These checks
cleared the Company's bank accounts in the first few business days of July 1999
and most were funded with cash on hand or new warehouse line draws.
The Savings Bank's deposits totaled $30.0 million at June 30, 1999, compared to
$29.7 million at December 31, 1998. Of the certificate accounts as of June 30,
1999, a total of $16.2 million was scheduled to mature in the twelve-month
period ending June 30, 2000.
20
<PAGE>
Promissory notes and certificates of indebtedness totaled $6.0 million at June
30, 1999, compared to $6.0 million at December 31, 1998. The Company has
utilized promissory notes and certificates of indebtedness to help fund its
operations. These borrowings are subordinated to the Company's warehouse lines
of credit. Promissory notes outstanding carry terms of one to five years and
interest rates between 8.00% and 10.25%, with a weighted-average rate of 9.66%
at June 30, 1999. Certificates of indebtedness are uninsured deposits authorized
for financial institutions chartered as a Virginia industrial loan association.
The certificates of indebtedness carry terms of one to five years and interest
rates between 6.75% and 10.00%, with a weighted-average rate of 9.70% at June
30, 1999. The promissory notes and certificates of indebtedness with terms
exceeding twelve months as of June 30, 1999 totaled $4.9 million.
Mortgage loans payable decreased by $.9 million to $.3 million at June 30, 1999.
The decrease is due to the sale on one of the Company's headquarters buildings
which the Company was carrying a mortgage note payable of $.8 million.
Accrued and other liabilities decreased by $.9 million to $3.9 million at June
30, 1999. This category includes accounts payable, accrued interest payable,
deferred income, accrued bonuses, and other payables. The decrease in the first
six months of 1999 is primarily attributable to payment of year end accrued
payables as well as the elimination of the $.3 million investment payable
attributed to the 1998 acquisition of the Atlanta, Georgia based loan
origination office.
SHAREHOLDERS' EQUITY
Total shareholders' equity at June 30, 1999 was $16.7 million compared to $19.3
million at December 31, 1998. The $2.6 million decrease in the first six months
of 1999 was due to the $2.6 million loss for the first six months of 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations require access to short- and long-term sources of cash.
The Company uses cash flow from the sale of loans through whole loan sales, loan
origination fees, processing and underwriting fees, net interest income, and
borrowings under its warehouse facilities, certificates of indebtedness issued
by Approved Financial Corp. and certificates of deposit issued by the Savings
Bank to meet its working capital needs. The Company's primary operating cash
requirements include the funding of mortgage loan originations pending their
sale, operating expenses, income taxes and capital expenditures.
Adequate credit facilities and other sources of funding, including the ability
to sell loans in the secondary market, are essential to the Company's ability to
continue to originate loans. The Company has historically operated, and expects
to operate in the future on a negative cash flow basis from operations due to
the fact that originations normally exceed loan sales. For the six months ended
June 30, 1999 and 1998, the Company was provided cash from operating activities
of $38.5 million and $6.8 million, respectively. The net cash used from
operating activities was primarily used to fund mortgage loan originations.
The Company finances its operating cash requirements primarily through warehouse
and other credit facilities, and the issuance of other debt. For the six months
ended June 30, 1999 and 1998, the Company used cash from financing activities of
$40.3 million and $10.7 million, respectively.
The Company's borrowings (revolving warehouse loans, FDIC-insured deposits,
mortgage loans on Company office buildings, FHLB advances, subordinated debt and
loan proceeds payable) at June 30, 1999 were 77.2%, compared to 82.3% of assets
at December 31, 1998.
WAREHOUSE AND OTHER CREDIT FACILITIES
On December 8, 1997, the Company obtained a $100.0 million warehouse line of
credit from a commercial bank syndicate. The syndicate's lead bank is Chase Bank
of Texas. Other banks in the syndicate are BankBoston, National City Bank,
Comerica Bank and Compass Bank. The line is secured by loans originated by the
Company and bears interest at a rate of 1.5% over the one-month LIBOR rate. The
line expires on December 7, 1999 and is subject to renewal of which there can be
no assurance. The Company may receive warehouse credit advances of 98% of the
original principal balances on pledged mortgage loans for a maximum period of
180 days after origination. As of June 30, 1999, $21.5 million was outstanding
under this facility.
21
<PAGE>
Also on December 8, 1997, the Company obtained a $25.0 million seasoned loan
line of credit from certain members of the commercial bank syndicate. This line
is secured by loans originated by the Company. The line expires on December 7,
1999 and is subject to renewal of which there can be no assurance. The seasoned
loan line of credit bears interest at a rate of 2.5% over the one-month LIBOR
rate, and the Company may receive credit advances of 90% of the current
principal balances on pledged mortgage loans. There is not a time limit as to
the number of days from origination for the loans pledged to secure this line of
credit. As of June 30, 1999, $10.3 million was outstanding under this facility.
WHOLE LOAN SALE PROGRAM
The Company's most important source of liquidity and capital resources is the
ability to profitably sell conforming and non-conforming loans in the secondary
market. The market value of the loans funded by the Company is dependent on a
number of factors, including but not limited to loan delinquency and default
rates, the original term and current age of the loan, the interest rate and loan
to value ratio, whether or not the loan has a prepayment penalty, the credit
grade of the loan, the credit score of the borrower, the geographic location of
the real estate, the type of property, the supply and demand for conforming and
non-conforming loans in the secondary market, general economic and market
conditions, market interest rates and governmental regulations. Adverse changes
in these conditions may affect the Company's ability to sell mortgages in the
secondary market for acceptable prices, which is essential to the continuation
of the Company's mortgage origination operations.
OTHER CAPITAL RESOURCES
The Savings Bank's deposits totaled $30.0 million at June 30, 1999, compared to
$29.7 million at December 31, 1998. The Savings Bank currently utilizes funds
from the deposits and a line of credit with the FHLB of Atlanta to fund first
lien and junior lien mortgage loans.
The Company has utilized promissory notes and certificates of indebtedness to
help funds its operations. Promissory notes and certificates of indebtedness
totaled $6.0 million at June 30, 1999, compared to $6.0 million at December 31,
1998. These borrowings are subordinated to the Company's warehouse lines of
credit.
The Company had cash and cash equivalents of $6.5 million at June 30, 1999. The
Company has sufficient resources to fund its current operations. Alternative
sources for future liquidity and capital resource needs may include the issuance
of debt or equity securities and new lines of credit. Each alternative source of
liquidity and capital resources will be evaluated with consideration for
maximizing shareholder value. Management expects that the Company and the
industry will continue to be challenged by a limited availability of capital, a
reduction in premiums received on non-conforming mortgage loans sold in the
secondary market compared to premiums realized in recent years, new competition
and a rise in loan delinquency and the associated loss rates.
SAVINGS BANK REGULATORY LIQUIDITY
Liquidity is the ability to meet present and future financial obligations,
either through the acquisition of additional liabilities or from the sale or
maturity of existing assets, with minimal loss. Regulations of the OTS require
thrift associations and/or savings banks to maintain liquid assets at certain
levels. At present, the required ratio of liquid assets to savings and
borrowings, which can be withdrawn and are due in one year or less is 4.0%.
Penalties are assessed for noncompliance. In 1998 and in the first six months of
1999, the Savings Bank maintained liquidity in excess of the required amount,
and management anticipates that it will continue to do so.
22
<PAGE>
SAVINGS BANK REGULATORY CAPITAL
At June 30, 1999, the Savings Bank's book value under generally accepted
accounting principles ("GAAP") was $5.5 million. OTS Regulations require that
savings institutions maintain the following capital levels: (1) tangible capital
of at least 1.5% of total adjusted assets, (2) core capital of 4.0% of total
adjusted assets, and (3) overall risk-based capital of 8.0% of total
risk-weighted assets. As of June 30, 1999, the Savings Bank satisfied all of the
regulatory capital requirements, as shown in the following table reconciling the
Savings Bank's GAAP capital to regulatory capital:
Tangible Core Risk-Based
(IN THOUSANDS) Capital Capital Capital
GAAP capital $ 5,526 $ 5,526 $ 5,526
Add: unrealized loss on
securities 10 10 10
Nonallowable asset: goodwill (109) (109) (109)
Additional capital item:
general allowance 0 0 336
---------- ----------- -----------
Regulatory capital - computed 5,427 5,427 5,763
Minimum capital requirement 565 1,130 2,211
---------- ----------- -----------
Excess regulatory capital $ 4,862 $ 4,297 $ 3,552
========== =========== ============
Ratios:
Regulatory capital - 14.41% 14.41% 20.85%
computed
Minimum capital 1.50% 4.00% 8.00%
requirement =========== ============ ============
Excess regulatory capital 12.91% 10.41% 12.85%
=========== ============ ============
Management believes that the Savings Bank can remain in compliance with its
capital requirements.
The Company is not aware of any other trends, events or uncertainties other than
those discussed in the section concerning Gain on Sale of loans on page 12 which
will have or that are likely to have a material effect on the Company's or the
Savings Bank's liquidity, capital resources or operations. The Company is not
aware of any current recommendations by regulatory authorities, which if they
were implemented would have such an effect.
HEDGING ACTIVITIES
The Company originates mortgage loans for sale as whole loans. The Company
mitigates its interest rate exposure by selling most of the loans within sixty
days of origination. However, the Company may choose to hold certain loans for a
longer period prior to sale in order to increase net interest income. The
majority of loans held by the Company beyond the normal sixty-day holding period
are fixed rate instruments. Since most of the Company's borrowings have variable
interest rates, the Company has exposure to interest rate risk. For example, if
market interest rates were to rise between the time the Company originates the
loans and the time the loans are sold, the original interest rate spread on the
loans narrows, resulting in a loss in value of the loans. To offset the effects
of interest rate fluctuations on the value of its fixed rate mortgage loans held
for sale, the Company in certain cases may enter into Treasury security lock
contracts, which function similar to short sales of U.S. Treasury securities.
The Company may in the future enter into similar transactions with government
and quasi-government agency securities in relation to its origination and sale
of conforming mortgage loans. Prior to entering into a hedge transaction, the
Company performs an analysis of its loans, taking into account such factors as
interest rates and maturities, to determine the proportion of contracts to sell
so that the risk value of the loans will be most effectively hedged. The Company
had no hedge contracts outstanding at June 30, 1999.
23
<PAGE>
If the value of a hedge decreases, offsetting an increase in the value of the
hedged loans, the Company, upon settlement with its counter-party, will pay the
hedge loss in cash and realize the corresponding increase in the value of the
loans. Conversely, if the value of a hedge increases, offsetting a decrease in
the value of the hedged loans, the Company will receive the hedge gain in cash
at settlement.
The Company's management believes that its current hedging strategy using
Treasury rate lock contracts is an effective way to manage interest rate risk on
fixed rate loans prior to sale.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related data presented in this
document have been prepared in accordance with generally accepted accounting
principles, which require the measurement of the financial position and
operating results of the Company in terms of historical dollars, without
considering changes in the relative purchasing power of money over time due to
inflation.
Virtually all of the assets of the Company are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effects of general levels of inflation. Interest rates do
not necessarily move in the same direction or with the same magnitude as the
prices of goods and services. Inflation affects the Company most significantly
in the area of loan originations and can have a substantial effect on interest
rates. Interest rates normally increase during periods of high inflation and
decrease during periods of low inflation.
The Company intends to sell a significant portion of the loans it originates
therefore, inflation and interest rates should have a diminishing effect on the
Company's results of operations. However, the Savings Bank is expected to
continue to build its portfolio of loans held for investment, and this portfolio
will be more sensitive to the effects of inflation and changes in interest
rates.
Profitability may be directly affected by the level and fluctuation of interest
rates, which affect the Company's ability to earn a spread between interest
received on its loans and the costs of its borrowings. The profitability of the
Company is likely to be adversely affected during any period of unexpected or
rapid changes in interest rates. A substantial and sustained increase in
interest rates could adversely affect the ability of the Company to originate
and purchase loans and affect the mix of first and junior lien mortgage loan
products. Generally, first mortgage production increases relative to junior lien
mortgage production in response to low interest rates and junior lien mortgage
loan production increases relative to first mortgage loan production during
periods of high interest rates. A significant decline in interest rates could
decrease the size of the Company's future loan portfolio by increasing the level
of loan prepayments and it therefore may also affect the net interest income
earned by the Company resulting from the difference between the yield to the
Company on loans held pending sales and the interest paid by the Company for
funds borrowed under the Company's warehouse facilities. Additionally, to the
extent servicing rights and interest-only and residual assets are capitalized on
the Company's books in the future from loan sales through securitization, higher
than anticipated rates of loan prepayments or losses could require the Company
to write down the value of such servicing rights and interest-only and residual
certificates, adversely affecting earnings. Conversely, lower than anticipated
rates of loan prepayments or lower losses could allow the Company to increase
the value of interest-only and residual assets, if created in the future which
could have a favorable effect on the Company's results of operations and
financial condition.
24
<PAGE>
YEAR 2000 ISSUES
The Year 2000 issue relates to the way computer systems and programs define and
handle calendar issues. Non-compliant systems could fail or make miscalculations
due to interpretations of dates that fall past the millennium. For example, the
year value "00" could be interpreted to mean the year "1900", rather than
"2000". Other systems not normally thought of as computer related may also
contain embedded hardware or software that may contain a date or time element.
Approved, similar to other financial service institutions, is sensitive and
subject to the potential impact of the Year 2000 issue.
Approved initiated a Year 2000 project in late 1997 under the direction of a
project leader, supervised by the Company's Board of Directors. Management has
placed a high priority on Year 2000 issues, in recognition of the business risk
inherent in non-compliance. The project is proceeding on schedule, with expected
completion by the end of third quarter 1999.
PROJECT. The Approved Year 2000 project generally follows suggested OTS and
FFIEC guidelines. The scope of the project includes: ensuring the compliance of
all systems and applications of significance, operating systems and hardware of
the Company's LAN and PC platforms; addressing issues related to other systems
not normally thought of as computer related, and addressing the compliance of
key business partners.
There are five (5) phases of the project: Awareness, Assessment, Renovation,
Validation and Implementation. During the Assessment phase, the Company
determined to concentrate physical upgrades to those computers representing
"current technologies". Older units may still be used in non-critical
applications, but would be phased out and replaced before the Year 2000. The
Assessment phase also identified several systems that are classified as
"mission-critical" and represent the Company's core business of mortgage
lending. Project efforts have focused on getting these systems to year 2000
compliance levels.
Approved has no internally generated programmed software to correct, as
substantially all of the software utilized by the Company is purchased or
licensed from external providers. The Company is currently completing the
Renovation phase of the project. Virtually all "mission-critical" applications
and hardware have been upgraded to Year 2000 compliance release levels.
The Company contracted for a new Human Resource and Payroll system, which is
certified by the vendor as being Year 2000 compliant. Installation of these
systems occurred in the fourth quarter 1998. All PC equipment located at
corporate headquarters, including hardware BIOS, and software, have been
upgraded to Year 2000 compliance release levels.
The final portion of the Renovation phase consists of field upgrades of systems
and software located in our branch offices, which was substantially complete as
of December 31, 1998.
The Company has initiated formal communications with significant outside vendors
and business partners to determine the extent to which the Company is vulnerable
to those third parties' failure to remedy their own Year 2000 issues. Approved
is requesting that third party vendors represent their products and services to
be Year 2000 compliant and that they have a program to test for that compliance.
The majority of the Company's mission-critical systems are already certified by
their respective vendors to being Year 2000 compliant. Certified compliant
systems include mortgage loan origination and processing, closing, servicing,
secondary marketing, and account systems. All named systems are installed at
current release levels.
The majority of the Company's non-computer-related systems and equipment are
currently Year 2000 compliant, based primarily upon verbal and written
communication with vendors. Compilation of written documentation regarding this
compliance is virtually complete.
Validation of internal mission-critical applications has begun upon those
applications certified by their vendors as being fully Year 2000 compliant.
Validations of several of the Company's mission-critical systems have been
completed. Approved Financial has met the FFIEC milestone of having "internal
testing of mission-critical systems substantially complete" by the end of the
first quarter 1999.
25
<PAGE>
Although the critical systems are expected to be compliant well before December
31, 1999, the Company is developing a contingency plan to address the possible
failure of critical systems. This plan will address the Company's strategy in
dealing with an unlikely event such as a system not performing as expected, or
if there is non-compliance by a major third party provider. The Company expects
to complete its contingency plan by the end of the third quarter of 1999.
COSTS. The total cost associated with required modifications and testing to
become Year 2000 compliant has been budgeted at $200,000, and is not considered
material to the Company's financial position. Costs are expensed as incurred in
the current period. This estimate does not include Approved Financial's
potential share of Year 2000 costs that may be incurred by partnerships or
ventures in which the company may participate but is not the operator.
RISKS. The failure to correct a material Year 2000 problem could result in
interruption in, or failure of certain normal business activities or operations.
Such failures could materially and adversely affect the company's results of
operations, liquidity and financial position.
The Company's Year 2000 project has resulted in a significantly reduced level of
uncertainty about the Company's mission-critical systems and software. The
Company believes that the completion of the Year 2000 project as scheduled will
vastly reduce the possibility of significant interruptions of normal business
operations.
Due to the general uncertainty inherent in the Year 2000 problem, resulting in
part from the uncertainty of the Year 2000 readiness of third-party suppliers,
the Company is unable to determine at this time whether the consequences of Year
2000 failures will have a material impact on the company's results of
operations, liquidity or financial condition.
All statements made herein relating to our Year 2000 efforts are "Year 2000
Readiness Disclosures" made pursuant to the Year 2000 Information and Readiness
Disclosures Act, and to the extent applicable, are entitled to the protection of
such act.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ASSET/LIABILITY MANAGEMENT
The Company's primary market risk exposure is interest rate risk. Fluctuations
in interest rates will impact both the level of interest income and interest
expense and the market value of the Company's interest-earning assets and
interest-bearing liabilities.
Management strives to manage the maturity or repricing match between assets and
liabilities. The degree to which the Company is "mismatched" in its maturities
is a primary measure of interest rate risk. In periods of stable interest rates,
net interest income can be increased by financing higher yielding long-term
mortgage loan assets with lower cost short-term Savings Bank deposits and
borrowings. Although such a strategy may increase profits in the short run, it
increases the risk of exposure to rising interest rates and can result in
funding costs rising faster than asset yields. The Company attempts to limit its
interest rate risk by selling a majority of the fixed rate mortgage loans that
it originates.
Contractual principal repayments of loans do not necessarily reflect the actual
term of the Company's loan portfolio. The average lives of mortgage loans are
substantially less than their contractual terms because of loan prepayments and
because of enforcement of due-on-sale clauses, which gives the Company the right
to declare a loan immediately due and payable in the event, among other things,
the borrower sells the real property subject to the mortgage and the loan is not
repaid. In addition, certain borrowers increase their equity in the security
property by making payments in excess of those required under the terms of the
mortgage.
26
<PAGE>
The majority of the loans originated by the Company are sold through the
Company's loan sale strategies in an attempt to limit its exposure to interest
rate risk in addition to generating cash revenues. The Company sold, during 1998
and the first six months in 1999, approximately 93.3% of the total loans
originated and funded in-house during the year ended December 31,1998. Also, the
Company sold, during the first six months in 1999, approximately 84.0% of loans
originated and funded in-house during the period beginning January 1999 and
ending May 31, 1999. The Company expects to sell the majority of its loan
originations within the twelve-month period following the closing date of the
loan. On average, loans are held for less than 12 months in the Company's
portfolio of Loans Held for Sale. The "gap position", defined as the difference
between interest-earning assets and interest-bearing liabilities maturing or
repricing in one year or less, was negative at June 30, 1999, as anticipated,
and is expected to remain negative in future periods. The Company has no
quantitative target range for past gap positions, nor any anticipated ranges for
future periods due to the fact that the Company sells the majority of its loans
within a twelve month period while the gap position is a static illustration of
the contractual repayment schedule for loans.
The Company's one-year gap was a negative 27.12% of total assets at June 30,
1999, as illustrated in the following table:
<TABLE>
<CAPTION>
One Year Two Three to More Than
Description Total Or Less Years Four Years Four Years
- ------------------------------------------- ---------- --------- ----------- ----------
<S> <C>
Interest earning assets:
Loans receivable (1) 65,349 $ 18,550 $ 1,458 $ 3,473 $ 41,868
Cash and other 8,824 8,824
Interest-earning assets
---------- ---------- --------- ----------- ----------
Interest-earning assets 74,173 27,374 1,458 3,473 41,868
---------- --------- ----------- ----------
Allowance for loan losses (2,816)
Investment in IMC 46
Premises and equipment, net 4,921
Other 13,735
----------
Total assets $90,059
==========
Interest-bearing liabilities:
Revolving warehouse lines 31,835 31,835
FDIC - insured deposits 30,026 16,250 6,649 5,049 2,078
Other interest-bearing 7,825 3,710 1,397 2,431 287
Liabilities
---------- ---------- --------- ----------- ----------
69,686 $ 51,795 $ 8,046 $ 7,480 $ 2,365
========== ========= =========== ==========
Non-interest-bearing liabilities 3,707
----------
Total liabilities 73,393
Shareholders' equity 16,666
----------
Total liabilities and equity $ 90,059
==========
Maturity/repricing gap $ (24,421) $ (6,588) $ (4,007) $ 39,503
========== ========= =========== ==========
Cumulative gap $ (24,421) $ (31,009) $ (35,016) $ 4,487
========== ========== =========== ==========
As percent of total assets (27.12%) (34.43%) (38.88%) 4.98%
========== =========== =========== ==========
Ratio of cumulative interest
earning Assets to cumulative
interest earning Liabilities .53x .48x .48x 1.06x
========== =========== =========== ==========
</TABLE>
(1) Loans shown gross of allowance for loan losses, net of premiums/discounts.
27
<PAGE>
INTEREST RATE RISK
The principal quantitative disclosure of the Company's market risks is the gap
table on page 28. The gap table shows that the Company's one-year gap was a
negative 27.12% of total assets at June 30, 1999. The Company primarily
originates fixed-rate, fixed-term mortgage loans for sale in the secondary
market. While most of these loans are sold within a month or two of origination,
for purposes of the gap table the loans are shown based on their contractual
scheduled maturities. As of June 30, 1999, 64.1% of the principal on the loans
was expected to be received more than four years from that date. However, the
Company's activities are financed with short-term loans and credit lines, 74.3%
of which reprice within one year of June 30, 1999. The Company attempts to limit
its interest rate risk by selling a majority of the fixed rate loans that it
originates. If the Company's ability to sell such fixed-rate, fixed-term
mortgage loans on a timely basis were to be limited, the Company could be
subject to substantial interest rate risk.
Profitability may be directly affected by the levels of and fluctuations in
interest rates, which affect the Company's ability to earn a spread between
interest received on its loans and the costs of borrowings. The profitability of
the Company is likely to be adversely affected during any period of unexpected
or rapid changes in interest rates. For example, a substantial or sustained
increase in interest rates could adversely affect the ability of the Company to
originate loans and would reduce the value of loans held for sale. A significant
decline in interest rates could decrease the size of the Company's loan
portfolio by increasing the level of loan prepayments. Additionally, to the
extent that interest only , residual or mortgage servicing assets are
capitalized on the books of the Company in the future, higher than anticipated
rates of loan prepayments or losses could require the Company to write down the
value of these assets, adversely affecting earnings.
In an environment of stable interest rates, the Company's gains on the whole
loan sale of mortgage loans would generally be limited to those gains resulting
from the yield differential between the interest rate on the mortgage loan and
the interest rates required by secondary market purchasers. A loss from the sale
of a loan may occur if interest rates increase between the time the Company
establishes the interest rate on a loan and the time the loan is sold.
Fluctuating interest rates also may affect the net interest income earned by the
Company, resulting from the difference between the yield to the Company on loans
held pending sale and the interest paid by the Company for funds borrowed,
including the Company's warehouse facilities and the Savings Bank's FHLB
advances and FDIC-insured customer deposits. Because of the uncertainty of
future loan origination volume and the future level of interest rates, there can
be no assurance that the Company will realize gains on the sale of financial
assets in future periods.
The Savings Bank normally holds a portfolio of loans for a short period of time
immediately following the closing of the loan during which it earns net interest
income. The sale of fixed rate product is intended to protect the Savings Bank
from precipitous changes in the general level of interest rates. The valuation
of adjustable rate mortgage loans is not as directly dependent on the level of
interest rates as is the value of fixed rate loans. As with other investments,
the Savings Bank regularly monitors the appropriateness of the level of mortgage
loans in its portfolio.
28
<PAGE>
ASSET QUALITY
The following table summarizes all of the Company's delinquent loans at June 30,
1999 and December 31, 1998:
(IN THOUSANDS)
June 30, December 31,
1999 1998
------------ -----------
Delinquent 31 to 60 days $ 919 $ 697
Delinquent 61 to 90 days 1,273 1,115
Delinquent 91 to 120 days 914 1,460
Delinquent 121 days or more 2,523 2,658
------------ -----------
Total delinquent loans (1) $ 5,629 $ 5,930
============ ===========
Total loans receivable
outstanding (gross) (1)
$ 66,191 $ 109,500
============ ===========
Delinquent loans as a
percentage of total loans
outstanding:
Delinquent 31 to 60 days 1.39% .64%
Delinquent 61 to 90 days 1.92 1.02
Delinquent 91 to 120 days 1.38 1.33
Delinquent 121 days or more 3.81 2.43
------------ -----------
Total delinquent loans as a
percentage of total loans
outstanding 8.50% 5.42%
============ ===========
- -------------
(1) Includes loans in foreclosure proceedings and delinquent loans to borrowers
in bankruptcy proceedings, but excludes real estate owned.
Interest on most loans is accrued until they become 31 days or more past due.
Interest on loans held for investment by the Savings Bank is accrued until the
loans become 90 days or more past due. Nonaccrual loans were $4.7 million and
$5.2 million at June 30, 1999 and December 31, 1998, respectively. The amount of
additional interest that would have been recorded had the loans not been placed
on non-accrual status was approximately $247,000 and $212,000 for the six months
ended June 30, 1999 and for the year ended December 31, 1998, respectively. The
amount of interest income on the nonaccrual loans, that was included in net
income for the six months ended June 30, 1999 was $67,000. The data for interest
income on nonaccrual loans, that was included in net income for the six months
ended June 30, 1998 was not available.
29
<PAGE>
Loans delinquent 31 days or more as a percentage of total loans outstanding
increased to 8.50% at June 30, 1999 from 5.42% at December 31, 1998. The
increase was primarily a result of a decrease in the dollar amount of total
loans outstanding. The dollar amount of total loans outstanding decreased
because the amount of loans sold or prepaid was greater than the amount of loans
originated during the six-month period ended June 30, 1999.
At June 30, 1999 and December 31, 1998 the recorded investment in loans for
which impairment has been determined in accordance with SFAS 114 totaled $3.4
million and $4.1 million, respectively. The average recorded investment in
impaired loans for the six months ended June 30, 1999 and the year ended
December 31, 1998 was approximately $4.1 million and $2.6 million, respectively.
SFAS 118 allows a creditor to use existing methods for recognizing interest
income on an impaired loan. Consistent with the Company's method for nonaccrual
loans, interest receipts for impaired loans are recognized as interest income or
are applied to principal when the ultimate collectibility of principal is in
doubt. Due to the homogenous nature and the collateral securing these loans,
there is no corresponding valuation allowance.
30
<PAGE>
PART II. OTHER INFORMATION
<PAGE>
Item 1. LEGAL PROCEEDINGS - The Company is party to various legal
proceedings arising out of the ordinary course of its business. Management
believes that none of these actions, individual or in the aggregate, will have a
material adverse effect on the results of operations or financial condition of
the Company.
Item 2. CHANGES IN SECURITIES - None
Item 3. DEFAULTS UPON SENIOR SECURITIES - None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None
Item 5. OTHER INFORMATION - None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K -
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K have been filed during the six (6)
months ending June 30, 1999.
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.
Date: ______________________ APPROVED FINANCIAL CORP.
By: ________________________________
Allen D. Wykle,
Chairman, President, and
Chief Executive Officer
By: ________________________________
Eric S. Yeakel,
Its Treasurer and Chief
Financial Officer
32
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS FRO THE PERIOD ENDED JUNE 30, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 6,015
<INT-BEARING-DEPOSITS> 456
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 2,107
<INVESTMENTS-CARRYING> 417
<INVESTMENTS-MARKET> 417
<LOANS> 65,348
<ALLOWANCE> 2,816
<TOTAL-ASSETS> 90,059
<DEPOSITS> 30,026
<SHORT-TERM> 33,966
<LIABILITIES-OTHER> 4,487
<LONG-TERM> 4,914
0
1
<COMMON> 5,482
<OTHER-SE> 11,183
<TOTAL-LIABILITIES-AND-EQUITY> 90,059
<INTEREST-LOAN> 4,433
<INTEREST-INVEST> 206
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 4,639
<INTEREST-DEPOSIT> 861
<INTEREST-EXPENSE> 2,034
<INTEREST-INCOME-NET> 1,744
<LOAN-LOSSES> 1,080
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 16,525
<INCOME-PRETAX> (3,952)
<INCOME-PRE-EXTRAORDINARY> (3,952)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,545)
<EPS-BASIC> (0.46)
<EPS-DILUTED> (0.46)
<YIELD-ACTUAL> 3.80
<LOANS-NON> 5,630
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,590
<CHARGE-OFFS> 865
<RECOVERIES> 11
<ALLOWANCE-CLOSE> 2,816
<ALLOWANCE-DOMESTIC> 2,816
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
