<PAGE>
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 March 31, 2000.
__ 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)
1716 Corporate Landing Parkway, Virginia Beach, Virginia 23454
-------------------------------------------------------------------
(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 May 1, 2000: 5,482,114 shares
<PAGE>
APPROVED FINANCIAL CORP.
<TABLE>
<CAPTION>
INDEX
<S> <C> <C>
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Balance Sheets as of
March 31, 2000 and December 31, 1999 1
Consolidated Statements of Loss and Comprehensive
Loss for the three months ended March 31, 2000
and 1999. 2
Consolidated Statements of Cash Flows for
the three months ended March 31, 2000
and 1999. 3
Notes to Consolidated Financial Statements 5
Consolidating Balance Sheet as of March 31, 2000 9
Consolidating Statement of Loss for the
three months ended March 31, 2000 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 28
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 34
Item 2. Changes in Securities 34
Item 3. Defaults Upon Senior Securities 34
Item 4. Submission of Matters to a Vote of Security Holders 34
Item 5. Other Information 34
Item 6. Exhibits and Reports on Form 8-K 34
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
<PAGE>
APPROVED FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
March 31, 2000 and December 31, 1999
(Dollars in thousands, except per share amounts)
<TABLE>
<S> <C> <C>
ASSETS (Unaudited)
2000 1999
-------------------- ----------------------
Cash $12,897 $10,656
Mortgage loans held for sale, net 39,315 66,771
Real estate owned, net 1,697 2,274
Investments 2,853 2,640
Income taxes receivable 4,665 5,644
Deferred tax asset 2,149 1,676
Premises and equipment, net 5,899 6,086
Goodwill, net 1,086 1,120
Other assets 1,535 1,733
-------------------- ----------------------
Total assets $72,096 $98,600
==================== ======================
LIABILITIES AND EQUITY
Liabilities:
Revolving warehouse loan $ 4,275 $17,465
FHLB bank advances - 4,648
Mortgage notes payable 2,323 2,341
Notes payable-related parties 2,917 2,993
Certificates of indebtedness 2,089 2,087
Certificates of deposits 45,715 55,339
Loan proceeds payable 1,545 -
Accrued and other liabilities 1,993 2,428
-------------------- ----------------------
Total liabilities 60,857 87,301
-------------------- ----------------------
Shareholders' equity:
Preferred stock series A, $10 par value; 1 1
Noncumulative, voting:
Authorized shares - 100
Issued and outstanding shares - 90
Common stock, par value - $1.00 5,482 5,482
Authorized shares - 40,000,000
Issued and outstanding shares - 5,482,114
Accumulated other comprehensive loss (16) (16)
Additional capital 552 552
Retained earnings 5,220 5,280
-------------------- ----------------------
Total equity 11,239 11,299
-------------------- ----------------------
Total liabilities and equity $72,096 $98,600
==================== ======================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
APPROVED FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS
for the three months ended March 31, 2000 and 1999
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<S> <C> <C>
2000 1999
------------------- --------------------
Revenue:
Gain on sale of loans $3,926 $ 4,396
Interest income 1,583 2,696
Other fees and income 1,202 2,290
------------------- --------------------
6,711 9,382
------------------- --------------------
Expenses:
Compensation and related 3,133 4,830
General and administrative 1,790 2,337
Advertising expense 337 363
Loan production expense 366 555
Interest expense 1,122 1,683
Provision for loan and foreclosed property losses 55 1,447
------------------- --------------------
6,803 11,215
------------------- --------------------
Loss before income taxes (92) (1,833)
Benefit from income taxes (32) (598)
------------------- --------------------
Net Loss (60) (1,235)
Other comprehensive income, net of tax:
Unrealized losses on securities:
Unrealized holding loss arising during period 0 (33)
------------------- --------------------
Comprehensive loss $ (60) $(1,268)
=================== ====================
Net loss per share:
Basic and Diluted $(0.01) $(0.23)
=================== ====================
Weighted average number of shares outstanding:
Basic and Diluted 5,482 5,482
=================== ====================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
2
<PAGE>
APPROVED FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the three months ended March 31, 2000 and 1999
(In thousands)
(Unaudited)
<TABLE>
<S> <C> <C>
2000 1999
-------------------- -------------------
Operating activities
Net loss $ (60) $ (1,235)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Depreciation of premises and equipment 218 194
Amortization of goodwill 34 119
Provision for loan losses 2 1,364
Provision for losses on real estate owned 53 83
Deferred tax expense (473) 2,272
Loss on sale of securities - 2
Gain on sale of loans (3,926) (4,396)
Proceeds from sale and prepayments of loans 100,388 87,379
Originations of loans held for sale, net (69,335) (50,760)
Changes in assets and liabilities:
Loan sale receivable 3 (344)
Other assets 196 684
Accrued and other liabilities (434) 767
Income tax payable 979 (775)
Loan proceeds payable 1,545 (2,062)
-------------------- -------------------
Net cash provided by operating activities 29,190 33,292
Cash flows from investing activities:
Purchase of securities - (125)
Sales of securities 115 -
Sales of ARM fund shares - 3,500
Purchase of premises and equipment (41) (742)
Sales of premises and equipment 10 1,270
Sales of real estate owned 924 730
Real estate owned capital improvements (74) (227)
Purchases of ARM fund shares (31) (3,539)
Purchases of FHLB stock (297) (146)
-------------------- -------------------
Net cash provided by investing activities 606 721
</TABLE>
3
<PAGE>
APPROVED FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
for the three months ended March 31, 2000 and 1999
(In thousands)
(Unaudited)
<TABLE>
<S> <C> <C>
2000 1999
------------------- -------------------
Cash flows from financing activities:
Borrowings - warehouse $ 16,158 $ 56,043
Repayments of borrowings - warehouse (29,348) (90,005)
Repayments of FHLB advances (4,648) -
Principal payments on mortgage notes payable (18) (849)
Net increase (decrease) in:
Notes payable (76) 19
Certificates of indebtedness 1 10
Certificates of deposit (9,624) 1,294
------------------- -------------------
Net cash used in financing activities (27,555) (33,488)
------------------- -------------------
Net increase in cash 2,241 525
Cash at beginning of period 10,656 6,269
------------------- -------------------
Cash at end of period $ 12,897 $ 6,794
=================== ===================
Supplemental cash flow information:
Cash paid for interest $ 1,146 $ 1,796
Cash paid for income taxes 4 -
Supplemental non-cash information:
Loan balances transferred to real estate owned $ 341 $ 260
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
APPROVED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the three months ended March 31, 2000 and 1999
Note 1. Organization and Summary of Significant Accounting Policies:
Organization: Approved Financial Corp., a Virginia corporation ("Approved"),
and its subsidiaries (collectively, the "Company") operate primarily 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 origination channels;
a network of mortgage brokers who refer mortgage customers to the Company
("broker" or "wholesale") and an internal sales staff that originate mortgages
directly with borrowers ("retail" and "direct"). Approved has three wholly
owned subsidiaries through which it originates residential mortgages: Approved
Federal Savings Bank (the "Bank") is a federally chartered thrift institution
with broker operations in seven states and eight retail offices as of March 31,
2000; Approved Residential Mortgage, Inc. ("ARMI") with one retail location at
March 31, 2000; and MOFC d/b/a ConsumerOne Financial ("ConsumerOne") with one
retail office in Michigan at March 31, 2000. Approved has a fourth wholly owned
subsidiary, Approved Financial Solutions ("AFS"), through which it offers
insurance products to its mortgage customers.
Principles of accounting and consolidation: The consolidated financial
statements of the Company include the accounts of Approved and its wholly-owned
subsidiaries. All significant inter-company accounts and transactions have been
eliminated.
Use of estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and cash equivalents: Cash and cash equivalents consist of cash on deposit
at financial institutions and short-term investments that are considered cash
equivalents if they were purchased with an original maturity of three months or
less.
Loans held for sale: Loans, which are all held for sale, are carried at the
lower of aggregate cost or market value. Market value is determined by current
investor yield requirements.
Allowance for loan losses: The allowance for loan losses is maintained at a
level believed adequate by management to absorb probable losses in the loan
portfolio. Management's determination of the adequacy of the allowance is based
on an evaluation of the current loan portfolio characteristics including
criteria such as delinquency, default and foreclosure rates and trends, age of
the loans, credit grade of borrowers, loan to value ratios, current economic and
secondary market conditions, current and anticipated levels of loan volume, and
other relevant factors. The allowance is increased by provisions for loan
losses charged
5
<PAGE>
APPROVED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the three months ended March 31, 2000 and 1999
Note 1. Organization and Summary of Significant Accounting Policies,
continued:
against income. Loan losses are charged against the allowance when management
believes it is unlikely that the loan is collectable.
Origination fees: The Company accounts for origination fees on mortgage loans
held for sale in conformity with Statement of Financial Accounting Standards
("SFAS") No. 91, "Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases." The statement requires
that net origination fees be recognized over the life of the loan or upon the
sale of the loan, if earlier.
Hedging: 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 will
enter into Treasury security lock contracts, which function similarly to short
sales of U.S. Treasury securities. Gains or losses from these contracts are
deferred and recognized as an adjustment to gains on sale of loans when the
loans are sold or when the related hedge position is closed.
Real estate owned: Real estate owned is valued at the lower of cost or fair
market value, net of estimated disposal costs. Cost includes loan principal and
certain capitalized expenses. Any excess of cost over the estimated fair market
value at the time of acquisition is charged to the allowance for loan losses.
The estimated fair market value is reviewed periodically by management and any
write-downs are charged against current earnings using a valuation account which
has been netted against real estate owned in the financial statements. Income
from temporary rental of the properties is credited against the investment when
collected. Capital improvements are capitalized to the extent of net realizable
value. Additional carrying costs, including taxes, utilities and insurance, are
also capitalized to the property, to the extent of net realizable value.
Premises and equipment: Premises, leasehold improvements and equipment are
stated at cost less accumulated depreciation and amortization. The buildings
are depreciated using the straight line method over thirty years. Leasehold
improvements are amortized over the lesser of the terms of the lease or the
estimated useful lives of the improvements. Depreciation of equipment is
computed using the straight line method over the estimated useful lives of three
to five years. Expenditures for betterments and major renewals are capitalized
and ordinary maintenance and repairs are charged to operations as incurred.
Investments: The Company's investment in the stock of the Federal Home Loan Bank
("FHLB") of Atlanta is stated at cost.
All other investment securities, except the FHLB stock, are classified as
available-for-sale and reported at fair value, with unrealized gains and losses
excluded from earnings and reported as other comprehensive income in
shareholders' equity.
Realized gains and losses on sales of securities are computed using the specific
identification method.
6
<PAGE>
APPROVED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the three months ended March 31, 2000 and 1999
Note 1. Organization and Summary of Significant Accounting Policies,
continued:
Transfers of financial assets: The Company applies a financial-components
approach that focuses on control when accounting and reporting for transfers and
servicing of financial assets and extinguishments of liabilities. Under that
approach, after a transfer of financial assets, an entity recognizes the
financial and servicing assets it controls and the liabilities it has incurred,
derecognizes financial assets when control has been surrendered, and
derecognizes liabilities when extinguished. This approach provides consistent
standards for distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings.
Income recognition: Gains on the sale of mortgage loans, representing the
difference between the sales price and the net carrying value of the loan, are
recognized when mortgage loans are sold and delivered to investors.
Interest on loans is credited to income based upon the principal amount
outstanding. Interest is accrued on loans until they become 31 days or more past
due.
Advertising costs: Advertising costs are expensed when incurred.
Income taxes: Taxes are provided on substantially all income and expense items
included in earnings, regardless of the period in which such items are
recognized for tax purposes. The Company uses an asset and liability approach
that requires the recognition of deferred tax assets and liabilities for the
estimated future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. In estimating future tax
consequences, the Company generally considers all expected future events other
than enactments of changes in the tax laws or rates.
Earnings per share: The Company computes "basic earnings per share" by dividing
income available to common shareholders by the weighted-average number of common
shares outstanding for the period. "Diluted earnings per share" reflects the
effect of all potentially dilutive potential common shares such as stock options
and warrants and convertible securities.
Comprehensive Income: The Company classifies items of other comprehensive income
(loss) by their nature in a financial statement and displays the accumulated
balance of other comprehensive income (loss) separately from retained earnings
and additional capital in the equity section of the consolidated balance sheets.
The only item the Company has in Comprehensive Income (Loss) for the three month
period ended March 31, 1999, is an unrealized holding loss on securities, net of
deferred taxes.
7
<PAGE>
APPROVED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the three months ended March 31, 2000 and 1999
Note 1. Organization and Summary of Significant Accounting Policies,
continued:
Segments: A public business enterprise is required to report financial and
descriptive information about its reportable operating segments. Operating
segments are components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision-maker in deciding how to allocate and in assessing performance.
Generally, financial information is required to be reported on the basis that it
is used internally for evaluating segment performance and deciding how to
allocate resources to segments. The Company has evaluated this requirement and
determined it operates in one segment.
New accounting pronouncements:
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" as
amended by SFAS 137, is effective for fiscal year ends 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 financial statements 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. This statement should not have any
material impact on the financial statements.
In October 1998, SFAS No. 134, "Accounting for Mortgage-Backed Securities
Retained After the Securitization of Mortgage Loans Held for Sale by a Mortgage
Banking Enterprise," was issued, effective for the first fiscal quarter
beginning after December 15, 1998. The new statement requires that after an
entity that is engaged in mortgage banking activities has securitized mortgage
loans that are held for sale, it must classify the resulting retained mortgage-
backed securities or other retained interests based on its ability and intent to
sell or hold those investments. Any retained mortgage-backed securities that
are committed for sale before or during the securitization process must be
classified as trading. This statement does not have any impact on the Company's
financial statements since the Company has never securitized loans.
8
<PAGE>
Approved Financial Corp.
Consolidating Balance Sheet
March 31, 2000
(dollars in thousands)
<TABLE>
<CAPTION>
MOFC, Inc.
Approved d/b/a
Approved Approved Federal Approved Consumer
Financial Residential Savings Financial One
ASSETS Consolidated Eliminations Corp. Mortgage Bank Solutions Financial
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Cash $12,897 $ 0 $11,826 $ 318 $ 736 $ 44 $ (27)
Mortgage loans held for 39,315 0 2,629 6,752 27,691 0 2,243
sale, net
Real estate owned, net 1,697 0 117 1,532 0 0 48
Investments 2,853 (5,253) 5,378 0 2,728 0 0
Income taxes receivable 4,665 (2,655) 7,002 0 4 11 303
Deferred tax asset 2,149 0 1,212 241 578 0 118
Premises and equipment, net 5,899 0 4,847 117 509 0 426
Goodwill, net 1,086 0 485 0 98 0 503
Due from affiliates 0 (41,962) 2,348 15,072 24,464 63 15
Other assets 1,535 0 689 352 431 9 54
--------------------------------------------------------------------------------------------
Total assets $72,096 $(49,870) $36,533 $24,384 $57,239 $127 $ 3,683
============================================================================================
LIABILITIES AND EQUITY
Liabilities:
Revolving warehouse loan $ 4,275 $ 0 $ 2,001 $ 429 $ 0 $ 0 $ 1,845
FHLB bank advances 0 0 0 0 0 0 0
Mortgage payable 2,323 0 2,323 0 0 0 0
Notes payable-related 2,917 0 2,917 0 0 0 0
parties
Certificates of 2,089 0 2,089 0 0 0 0
indebtedness
Certificates of deposits 45,715 0 0 0 45,715 0 0
Due to affiliates 0 (41,962) 15,182 24,373 2,328 79 0
Loan proceeds payable 1,545 0 0 0 1,545 0 0
Accrued and other 1,993 O 782 428 330 19 434
liabilities
Income taxes payable 0 (2,655) 0 2,655 0 0 0
--------------------------------------------------------------------------------------------
Total liabilities 60,857 (44,617) 25,294 27,885 49,918 98 2,279
--------------------------------------------------------------------------------------------
Shareholder's equity:
Preferred stock-series A 1 0 1 0 0 0 0
Common stock 5,482 (299) 5,482 250 32 16 1
Unrealized loss on securities (16) 16 (16) 0 (16) 0 0
Additional paid in capital 552 (6,837) 552 492 3,056 0 3,289
Retained earnings (deficit) 5,220 1,867 5,220 (4,243) 4,249 13 (1,886)
--------------------------------------------------------------------------------------------
Total equity 11,239 (5,253) 11,239 (3,501) 7,321 29 1,404
--------------------------------------------------------------------------------------------
Total liabilities and $72,096 $(49,870) $36,533 $24,384 $57,239 $127 $ 3,683
equity
============================================================================================
</TABLE>
9
<PAGE>
Approved Financial Corp.
Consolidating Statement of Income (Loss)
For the three months ended March 31, 2000
(dollars in thousands)
<TABLE>
<CAPTION>
Approved MOFC, Inc.
Approved Approved Federal Approved d/b/a
Financial Residential Savings Financial ConsumerOne
Consolidated Eliminations Corp. Mortgage Bank Solutions Financial
-------------------------------------------------------------------------------------------------------
Revenue:
<S> <C> <C> <C> <C> <C> <C> <C>
Gain on sale of loans $3,926 0 $ (247) $ 223 $3,615 $ 0 $ 335
Interest income 1,583 0 85 (269) 1,730 1 36
Other fees and income 1,202 0 (31) 150 865 42 176
----------------------------------------------------------------------------------------------------
6,711 0 (193) 104 6,210 43 547
Expenses:
Compensation and $3,133 0 $ 728 $ 155 $1,991 42 217
related
General and 1,790 0 218 70 1,240 5 257
administrative
Advertising expense 337 0 (23) 17 282 0 61
Loan production expense 366 0 (50) 100 288 0 28
Interest expense 1,122 0 285 0 831 0 6
Provision for loan/REO 55 0 36 (90) 0 0 109
losses
----------------------------------------------------------------------------------------------------
6,803 0 1,194 252 4,632 47 678
Income (loss) before income (92) 0 (1,387) (148) 1,578 (4) (131)
taxes
Provision for income taxes (32) 0 (537) (57) 613 (2) (49)
----------------------------------------------------------------------------------------------------
Net income (loss) $ (60) 0 $ (850) $ (91) $ 965 $(2) $ (82)
====================================================================================================
</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 month periods ended March 31, 2000 and 1999 and its consolidated
financial position at March 31, 2000 and December 31, 1999. 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, availability of adequate capital funding,
loan delinquency, default and loss rates, general economic environment, market
forces affecting the value of the loans originated by the Company and the price
of the Company's common stock. This discussion should be reviewed in conjunction
with the consolidated financial statements and accompanying notes and other
statistical information presented in the Company's 1999 audited financial
statements.
Results of Operations for the three months ended March 31, 2000 compared to the
three months ended March 31, 1999.
Net Loss
The Company's net loss for the three month period ended March 31, 2000 was $0.06
million compared to a net loss of $1.2 million for the three month period ended
March 31, 1999. On a per share basis, the net loss for the three month period
ended March 31, 2000 was $0.01 compared to a net loss of $0.23 for the three
month period ended March 31, 1999.
11
<PAGE>
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 months ended March 31, 2000
and 1999. During the second quarter of 1999, the Company initiated in-house
funding of conforming and government 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.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
(dollars in millions) 2000 1999
--------------- -----------------
<S> <C>
Dollar Volume of Loan Originated:
Broker Referrals $ 41.0 $ 27.5
Retail - brokered loans 13.7 46.5
Retail - funded in-house non-conforming 18.3 23.2
Retail - funded in-house conforming and
government 9.6 0
------ ------
Total Retail 41.6 69.7
------ ------
Total $ 82.6 $ 97.2
====== ======
Number of Loans Originated:
Broker Referrals 547 429
Retail - brokered loans 178 545
Retail - funded in-house non-conforming 260 356
Retail - funded in-house conforming and
government 85 0
Total Retail 523 901
------ ------
Total 1,070 1,330
====== ======
</TABLE>
The dollar volume of loans, originated during the three months ended March 31,
2000, decreased 15.0% when compared to the same period in 1999. The decrease
was primarily the result of increased pricing competition in the non-conforming
mortgage area and a decrease in the number of retail loan origination centers
from 17 at March 31, 1999 to 10 at March 31, 2000.
The 41.0% decrease in retail loan origination centers resulted in a 40.3%
decrease in the Company's retail loan volume for the three period ending March
31, 2000 when compared to the three months ended March 31, 1999.
Brokered loans generated by the retail division were $13.7 million during the
three month period ended March 31, 2000 which was a 70.5% decrease compared to
$46.5 million during the same period in 1999. The decrease was the result of a
company initiative to close more in-house loans. Also, the three month period
12
<PAGE>
ended March 31, 1999 included brokered conforming loans compared to the three
month period ended March 31, 2000 in which conforming loans were closed in
house.
The volume of loans originated through broker referrals from the Company's
network of mortgage brokers increased 49.1% to $41.0 million for the three month
period ended March 31, 2000, compared to $27.5 million for the three month
period ended March 31, 1999. The increase was the result of a decrease in the
number of non-conforming mortgage lenders using broker referrals.
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. Gain on 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) loan sale recapture premiums and loan
selling costs.
Non-conforming loan sales totaled $84.25 million for the three-month period
ended March 31, 2000, compared to $81.8 million for the same period in 1999.
Conforming and government loan sales were $10.7 million for the three month
period ended March 31, 2000. The Company did not fund conforming or government
loans during the same period ended in 1999.
The combined gain on the sale of loans was $3.9 million for the three month
period ended March 31, 2000, which compares with $4.4 million for the same
period in 1999. The decrease for the three month period ended March 31, 2000,
was the direct result of a decrease in the weighted-average premium paid by
investors for the Company's non-conforming mortgage loans and the addition of
conforming and government loan sales that normally carry lower loan sale
premiums. Also, there was a decrease in loan origination fee income due to a
lower volume of loans sold that were generated by the Company's retail division.
Gain on the sale of mortgage loans represented 58.5% of total revenue for the
three months ended March 31, 2000, compared to 46.9% of total revenue for the
same period in 1999.
The weighted-average premium, realized by the Company on its non-conforming loan
sales decreased to 2.81%, during the three month period ended March 31, 2000,
from 3.19% for the same period in 1999. The decrease in premium percentage was
caused by material changes in the secondary market conditions for non-conforming
mortgage loans. The weighted-average premium realized by the Company on its
conforming and government loans sales was 0.93% during the three month period
ended March 31, 2000.
The Company has never used securitization as a loan sale strategy. However, the
whole-loan sale marketplace for non-conforming mortgage loans was impacted by
changes that affected companies who previously used securitizations to sell
loans. Excessive competition during 1998 and 1999 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
13
<PAGE>
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 of 1998, due to the Russian crisis, and again in the
fourth quarter of 1999, due to Y2K concerns, 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 have
experienced terminal liquidity problems. and others have diverted to whole loan
sale strategies in order to generate cash. This shift has materially decreased
the demand for 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 beginning in the fourth quarter of 1998 and
continuing throughout the first quarter 2000 when compared to earlier periods.
Furthermore, the loan sale 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 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 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 month period ended March 31, 2000 was $1.7
million, compared to $1.9 million for the three month period ended March 31,
1999. 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 for the three month period ended March 31, 2000 comprised 33.4% of
total loan sales, with average loan origination fee income earned of 4.72%,
including conforming loans. Excluding conforming loans the average loan
origination fee income earned was 5.23% for the three months ended March 31,
2000. For the three months ended March 31, 1999, the Company's retail loan
sales were 46.1% of total loan sales with average origination fee income of
5.08%. Fees associated with selling loans were approximately 34 basis points
for the three months ended March 31, 2000 compared to 16 basis points for the
three months ended March 31, 1999.
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
costs 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. Average fees paid to mortgage brokers for the three months ended
March 31, 2000 was 42 basis points compared to 21 basis points for the three
months ended March 31, 1999.
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 Bank's deposit accounts and other borrowings.
14
<PAGE>
Interest income for the three months ended March 31, 2000 was $1.6 million
compared with $2.7 million for the same period ended in 1999. The decrease in
interest income for the three months ended March 31, 2000 was due to a lower
average balance of loans held for sale.
Interest expense for the three months ended March 31, 2000 was $1.1 million
compared with $1.7 million for the three months ended March 31, 1999. The
decrease in interest expense for the three months ended March 31, 2000, 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 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 Bank's deposits usually occur.
15
<PAGE>
The following tables reflect the average yields earned and rates paid by the
Company during the three month periods end March 31, 2000 and 1999. 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.
<TABLE>
<CAPTION>
(In thousands) March 31, 2000 March 31, 1999
------------------------------------------------------------------------------
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loan receivable (1) $52,506 $1,421 10.83% $ 96,006 $2,585 10.77%
Cash and other interest-
Earning assets 13,404 162 4.82 9,758 111 4.55
------- ------ ----- -------- ------ -----
65,910 1,583 9.61% 105,764 2,696 10.20%
------ ----- ------ -----
Non-interest-earning assets:
Allowance for loan losses (1,288) (2,839)
Investment in IMC 0 162
Premises and equipment, net 6,031 5,626
Other 11,961 14,021
------- --------
Total assets $82,614 $122,734
======= ========
Interest-bearing liabilities:
Revolving warehouse lines $ 7,662 123 6.45% $ 60,617 1,065 7.03%
FDIC - insured deposits 52,340 776 5.93 30,926 434 5.61
Other interest-bearing
Liabilities 8,920 223 9.99 7,692 184 9.57
------- ------ ----- -------- ------ -----
68,922 1,122 6.51% 99,235 1,683 6.78%
------ ----- -------- ------ -----
Non-interest-bearing liabilities 2,254 4,971
------- --------
Total liabilities 71,176 104,206
Shareholders' equity 11,438 18,528
------- --------
Total liabilities and equity $82,614 $122,734
======= ========
Average dollar difference between
Interest-earning assets and
interest-
Bearing liabilities $(3,013) $ 6,529
======= ========
Net interest income $ 461 $1,013
====== ======
Interest rate spread (2) 3.09% 3.42%
===== =====
Net annualized yield on average
Interest-earning assets 2.80% 3.83%
===== =====
</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.
16
<PAGE>
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 three months ended March 31, 2000
compared to the three months ended March 31, 1999. 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 $0.6 million in net
interest income for the three months ended March 31, 2000 compared to the three
months ended March 31, 1999 was primarily the result of a decrease in the
average balance on interest-earning assets.
($ In thousands)
<TABLE>
<CAPTION>
2000 Versus 1999
Increase (Decrease) due to:
Volume Rate Total
------------- ------------ -------------
<S> <C> <C> <C>
Interest-earning assets:
Loan receivable $(1,177) $ 13 $(1,164)
Cash and other interest- 44 7 51
earning assets ------------- ------------ -------------
(1,133) 20 (1,113)
------------- ------------ -------------
Interest-bearing liabilities:
Revolving warehouse lines (857) (85) (942)
FDIC-insured deposits 316 26 342
Other interest- 30 9 39
bearing liabilities ------------- ------------ -------------
(511) (50) (561)
------------- ------------ -------------
Net interest income (expense) $ (622) $ 70 $ (552)
============= ============ =============
</TABLE>
Other Income
In addition to net interest income (expense), and gain on sale of loans, the
Company derives income from origination fees earned on brokered loans generated
by the Company's retail offices and 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. For the three month period ended March 31,
2000, other income totaled $1.2 million compared to $2.3 million for the same
period in 1999. The decrease was primarily the result of the decrease in
brokered loan fees which was the result of a decrease in brokered loan volume.
Brokered loan fees were $0.6 million for the three month period ended March 31,
2000, compared to $1.8 million for the three months ended March 31, 1999.
17
<PAGE>
Comprehensive Loss
For the three month period ended March 31, 1999, the Company had other
comprehensive losses of $0.03 million in the form of unrealized holding losses
on securities held for sale. This loss related to a decrease in the market price
of IMC Mortgage Company common stock. For the three months ended March 31, 2000
the Company did not have other comprehensive losses or income.
Compensation and Related Expenses
The largest component of expenses is compensation and related expenses, which
decreased by $1.7 million to $3.1 million for the three month period ended March
31, 2000 from 1999. The decrease was directly attributable to a decrease in the
number of employees and lower commissions expense caused by the decrease in loan
volume. Salary expense decreased by $0.9 million and payroll related benefits
decreased by $0.5 million. The decrease was caused by a lower average number of
employees, which was attributed to the Companies cost cutting initiative. For
the three month period ended March 31, 1999 the average full time equivalent
employee count was 292 compared to 499 for the three month period ended March
31, 1999. Commissions to loan officers decreased by $0.3 million due to lower
loan volume.
General and Administrative Expenses
General and administrative expenses are comprised of various expenses such as
rent, postage, printing, general insurance, travel & entertainment, telephone,
utilities, depreciation, professional fees and other miscellaneous expenses.
General and administrative expenses for the three month period ended March 31,
2000 decreased by $0.5 million to $1.8 million, compared to the three month
period ended March 31, 1999. The decrease was the result of a reduction in
retail loan origination offices, a decline in the Company employee count, and
the Company's cost cutting initiative.
Loan Production Expense
Loan production expenses are comprised of expenses for appraisals, credit
reports, and payment of fees to mortgage brokers, for services rendered on loan
originations, and verification of mortgages. Loan production expenses for the
three month period ended March 31, 2000 were $0.4 million compared to $0.6
million for the three month period ended March 31, 1999. The decrease was
primarily the result of decreases in appraisal and credit report expenses, which
resulted from lower loan volume. The Company also eliminated payments to
outside consultants for research of customer leads due to the creation of the
centralized advertising and marketing departments. The expenses for those leads
were classified in loan production expenses for the three month period ended
March 31, 1999.
Advertising Expense
The Company has a centralized telemarketing and advertising department in
Virginia Beach Virginia. Advertising expenses are comprised of newspaper
advertising, yellow page advertising, postage & printing associated with
mailers, the purchase of telemarketing lists, and marketing supplies for trade
shows. Advertising expenses for the three month period ended March 31, 2000
were $0.3 million compared to $0.4 million for the three month period ended
March 31, 1999. The decrease was the result of the reduction in retail loan
origination offices.
18
<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 three months ended March 31, 2000 and
the year ended December 31, 1999:
(In thousands)
<TABLE>
<CAPTION>
2000 1999
------- -------
<S> <C>
Balance at beginning of year $ 1,382 $ 2,590
Provision charged to expense 2 2,042
Loans charged off (178) (3,286)
Recoveries of loans previously charged off 21 36
------- -------
Balance at end of Period $ 1,227 $ 1,382
======= =======
Loans receivable at the end of period, gross $41,049 $69,054
of allowance for losses
Ratio of allowance for loan losses to gross 2.99% 2.00%
loans receivable at the end of period
</TABLE>
The Company added $2,000 during the three months ended March 31, 2000 to the
allowance for loan losses, compared to an increase of $1.4 million for the three
month period ended March 31, 1999. For the three months ended March 31, 2000
there was only a minimal amount added to the provision because there was a
$28.0 million decrease in loans receivable and the composition of loans held for
sale remained unchanged. For the three months ended March 31, 1999 there was a
large increase in the provision as a result of changes in the secondary market
environment for whole loan sales which changed the composition of loans held for
sale. 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 characteristics of the Company's current loan 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
covenants associated with the Company's credit facilities, trends in the demand
for and pricing for loans sold in the secondary market for non-conforming
mortgages 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.
19
<PAGE>
Provision for Foreclosed Property Losses
The Company increased its provision for foreclosed property losses by $53,000
for the the three months ended March 31, 2000, compared to an increase of
$83,000 for the three months ended March 31, 1999.
Sales of real estate owned yielded net losses of $244,000 for the year ended
March 31, 2000 versus $168,000 for the three months ended March 31, 1999.
The following table presents the activity in the Company's allowance for
foreclosed property losses and selected real estate owned data for the three
months ended March 31, 2000 and for the year ended December 1999:
(In thousands)
<TABLE>
<CAPTION>
2000 1999
------ ------
<S> <C>
Balance at beginning of year $ 718 $ 503
Provision charged to expense 53 863
Loss on sale of foreclosures (244) (648)
------ ------
Balance at end of period $ 527 $ 718
====== ======
Real estate owned at the end of period, gross
of allowance for losses $2,224 $2,992
Ratio of allowance for foreclosed property losses
to gross real estate owned at the end of period 23.69% 24.00%
</TABLE>
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 losses on
real estate owned sales for the three month periods ended March 31, 2000 and
1999. While the Company's management believes that its present allowance for
foreclosed property losses is adequate, future adjustments may be necessary.
20
<PAGE>
Financial Condition at March 31, 2000 and December 31, 1999
Assets
The total assets of the Company were $72.1 million at March 31, 2000 compared to
total assets of $98.6 million at December 31, 1999.
Cash and cash equivalents increased by $2.2 million to $12.9 million at March
31, 2000, from $10.7 million at December 31, 1999. The principal reason for the
increase for the period ending March 31, 2000 was the receipt of proceeds from
loan sales in the final week of March 2000. These proceeds were used to fund
new loans in the first week of April 2000.
Net mortgage loans receivable decreased by $27.5 million to $39.3 million at
March 31, 2000. The 41.1% decrease in 2000 is primarily due to the Company
selling more loans than were originated in-house during the first quarter of
2000. The Company generally sells loans within sixty days of origination.
Real estate owned ("REO") decreased by $0.6 million to $1.7 million at March 31,
2000. The 25.4% decrease in REO resulted from the sale of $1.2 million in REO
properties and additions of $0.3 million to REO during the three months ended
March 31, 2000.
Investments increased by $0.2 million to $2.9 million at March 31, 2000.
Investments consist primarily of an Asset Management Fund, Inc. Adjustable Rate
Mortgage Portfolio and FHLB stock owned by the Bank. The 8.1% increase in
investments in the first quarter of 2000 is primarily due to the purchase of
shares of FHLB stock.
Premises and equipment decreased by $0.2 million to $5.9 million at March 31,
2000. The decrease is due to the depreciation of these assets for the first
quarter of 2000.
Goodwill (net) decreased by $0.03 million to $1.1 million at March 31, 2000. The
decrease is due to the amortization of the intangible asset for the first
quarter of 2000.
Income tax receivable decreased by $1.0 million to $4.7 million at March 31,
2000. The 17.3% decrease represents a reclassification to the deferred tax
asset based upon actual tax return filing.
The deferred tax asset increased by $0.5 million to $2.1 million at March 31,
2000. There was an increase in the deferred tax asset of $1.0 million due to
the reclassification from the income tax receivable. This was offset by a $0.5
million decrease in deferred tax assets.
Other assets decreased by $0.2 million to $1.5 million at March 31, 2000. Other
assets consist of accrued interest receivable, prepaid assets, brokered loan
fees receivable, deposits, and various other assets. The majority of the
decrease was in accrued interest receivable, which was due to a lower average
loans held for sale at March 31, 2000.
21
<PAGE>
Liabilities
Outstanding balances for the Company's revolving warehouse loans decreased by
$13.2 million to $4.3 million at March 31, 2000. The 75.5% decrease in the
first quarter of 2000 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 March 31, 2000, the Company had issued loan funding
checks totaling $0.4 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 April 2000 and most were funded with cash on hand or new warehouse line
draws.
The Bank's deposits totaled $45.7 million at March 31, 2000 compared to $55.3
million at December 31, 1999. Of the certificate accounts as of March 31, 2000,
a total of $36.7 million was scheduled to mature in the twelve-month period
ending March 31, 2001.
As of December 31, 1999 the Bank borrowed $4.6 million from the Federal Home
Loan Bank (FHLB) to fund loan production. There were no borrowings at March 31,
2000.
Promissory notes and certificates of indebtedness totaled $5.0 million at March
31, 2000 compared to $5.1 million at December 31, 1999. The 1.5% decrease is
primarily due to the redemption of maturing promissory notes and certificates.
In the first quarter of 2000 and for the year of 1999 the Company was not
soliciting new promissory notes or certificates of indebtedness. The Company has
utilized promissory notes and certificates of indebtedness to help fund its
operations since 1984, which 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 9.75%
at March 31, 2000. Certificates of indebtedness are uninsured deposits
authorized for financial institutions like the Company, which have Virginia
industrial loan association charters. 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 8.92% at March 31, 2000.
Mortgage loans payable totaled $2.3 million at March 31, 2000 compared to $2.3
million at December 31, 1999. There was a minimal decrease in mortgage loans
payable due to the normal principal reduction with payments made on the note
payable.
Accrued and other liabilities decreased by $0.4 million to $2.0 million at March
31, 2000. This category includes accounts payable, accrued interest payable,
deferred income, accrued bonuses, and other payables. The 17.9% decrease is the
result of various payments of year end accrued expenses.
Shareholders' Equity
Total shareholders' equity at March 31, 2000 was $11.2 million compared to $11.3
million at December 31, 1999. The $0.1 million decrease in 1999 was due to the
$0.1 million loss for the three months ended March 31, 2000.
22
<PAGE>
Liquidity and Capital Resources
The Company's operations require access to short and long-term sources of cash.
The Company's primary sources of cash flow result from the sale of loans through
whole loan sales, loan origination fees, processing, underwriting and other fees
associated with loan origination and servicing, net interest income, and
borrowings under its warehouse facilities, certificates of indebtedness issued
by Approved Financial Corp. and certificates of deposit issued by the 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 origination's normally exceed loan sales. However, for the three
months ended March 31, 2000, the Company was provided cash from operating
activities of $29.4 million, due to the fact that the Company sold a greater
volume of loans than it funded during the period. The net cash provided by
operating activities was primarily used to fund mortgage loan originations. For
the three months ended March 31, 1999 the Company was provided cash from
operating activities of $33.3 million.
The Company finances its operating cash requirements primarily through warehouse
and other credit facilities, and the issuance of other debt. For the three
months ended March 31, 2000, the Company paid down debt from financing
activities of $27.6 million, due to the fact that the Company had repayments of
debt in excess of borrowings, which was the result of loan sales exceeding loan
origination's. For the three months ended March 31, 1999 the Company paid down
debt from financing activities of $33.5 million.
The Company's borrowings (revolving warehouse loans, FDIC-insured deposits,
mortgage loans on Company office buildings, FHLB advances, subordinated debt and
loan proceeds payable) were 81.6% of assets at March 31, 2000 compared to 86.1%
at December 31, 1999.
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.
Bank Sources of Capital
The Bank's deposits totaled $45.7 million at March 31, 2000, compared to $55.3
million at December 31, 1999. The Bank currently utilizes funds from deposits
and a $15 million line of credit with the FHLB of Atlanta to fund first lien and
23
<PAGE>
junior lien mortgage loans. The Company plans to increase the use of credit
facilities and funding opportunities available to the Bank.
Warehouse and Other Credit Facilities
On November 10, 1999 the Company obtained a $20.0 million sub-prime line of
credit from Regions Bank. The line is secured by loans originated by the Company
and bears interest at a rate of 3.25% over the one-month LIBOR rate. The
Company may receive warehouse credit advances of 100% of the net loan value
amount on pledged mortgage loans for a period of 90 days after origination. As
of March 31, 2000 there were no borrowings outstanding under this facility. The
line of credit is scheduled to expire on November 10, 2001. The line of credit
is subject to financial covenants for a current ratio, tangible net worth and a
leverage ratio. As of March 31, 2000 the Company is in compliance with all
financial covenants.
On November 10, 1999 the Company obtained a $20.0 million conforming loan line
of credit from Regions Bank. The line is secured by loans originated by the
Company and bears interest ranging from 2.25% to 2.75% over the one-month LIBOR
rate based upon the monthly advance levels. The Company may receive warehouse
credit advances of 100% of the net loan value amount on pledged mortgage loans
for a period of 90 days after origination. As of March 31, 2000 there were no
borrowings outstanding under this facility. The line of credit is scheduled to
expire on November 10, 2001. The line of credit is subject to financial
covenants for a current ratio, tangible net worth and a leverage ratio. As of
March 31, 2000 the Company is in compliance with all financial covenants.
Effective on December 8, 1999, the Company obtained an amendment to their
warehouse line of credit agreement with Chase Bank of Texas. Since the
utilization of the credit line has been very low in 1999, the amendment reduced
the size of the warehouse facility to $15.0 million, and all bank syndicate
members other than Chase were released from the commitment. The line is secured
by loans originated by the Company and bears interest at a rate of 1.75% over
the one-month LIBOR rate. The Company may receive warehouse credit advances of
95% of the original principal balances on pledged mortgage loans for a maximum
period of 180 days after origination. As of March 31, 2000, $4.3 million was
outstanding under this facility. The line is scheduled to expire on June 7, 2000
and will not be renewed. The line of credit is subject to financial covenants
for tangible net worth and a leverage ratio. As of March 31, 2000 the Company is
in compliance with all financial covenants.
Other Capital Resources
Promissory notes and certificates of indebtedness have been a source of capital
for the Company since current management acquired the Company in 1984.
Promissory notes and certificates of indebtedness totaled $5.0 million at March
31, 2000 compared to $5.1 million at December 31, 1999. These borrowings are
subordinated to the Company's warehouse lines of credit.
The Company had cash and cash equivalents of $12.9 million at March 31, 2000.
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, increase in Saving Bank deposits and new lines of
credit. Each alternative source of liquidity and capital resources will be
evaluated with consideration for maximizing shareholder value, regulatory
requirements, the terms and covenants associated with the alternative capital
source. 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.
24
<PAGE>
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 banks to maintain liquid assets at certain levels.
At present, the required ratio of liquid assets to and borrowings, which can be
withdrawn and are due in one year or less is 4.0%. Penalties are assessed for
noncompliance. In 1999 and the first quarter of 2000, the Bank maintained
liquidity in excess of the required amount, and management anticipates that it
will continue to do so.
Bank Regulatory Capital
At March 31, 2000, the Bank's book value under generally accepted accounting
principles ("GAAP") was $7.3 million. OTS Regulations require that 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
March 31, 2000, the Bank satisfied all of the regulatory capital requirements,
as shown in the following table reconciling the Bank's GAAP capital to
regulatory capital:
<TABLE>
<CAPTION>
Tangible Core Risk-Based
(In thousands) Capital Capital Capital
<S> <C> <C> <C>
GAAP capital $7,321 $7,321 $7,321
Add: unrealized loss on securities 16 16 16
Nonallowable asset: goodwill (98) (98) (98)
Additional capital item: general allowance - - 339
-------------------------------------
Regulatory capital - computed 7,239 7,239 7,578
Minimum capital requirement 857 1,715 3,580
-------------------------------------
Excess regulatory capital $6,382 $5,524 $3,998
=====================================
Ratios:
Regulatory capital - computed 12.67% 12.67% 16.93%
Minimum capital requirement 1.50% 4.00% 8.00%
-------------------------------------
Excess regulatory capital 11.17% 8.67% 8.93%
=====================================
</TABLE>
Management believes that the 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 "Gain on Sale of Loans" which will have or that
are likely to have a material effect on the Company's or the 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
25
<PAGE>
a longer period prior to sale in order to increase net interest income.
Currently loans held for investment by the Bank are primarily composed of
adjustable rate mortgages in order to minimize the Bank's interest rate risk
exposure. However, excluding the Bank's loans held for investment 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. If
the value of an interest rate hedge position decreases in value, 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
position 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. 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 or similar forward loan sale
commitments concerning non-conforming mortgages. Prior to entering into any
type of hedge transaction or forward loan sale commitment, the Company performs
an analysis of the loan associated with the transaction or commitment taking
into account such factors as credit quality of the loans, interest rate and term
of the loans, as well as current economic market trends, in order to determine
the appropriate structure and/or size of a hedge transaction or loan sale
commitment that will to limit the Company's exposure to interest rate risk. The
Company had no hedge contracts or forward commitments outstanding at March 31,
2000. The Company has not entered into any hedge contracts since the fourth
quarter of 1997. That commitment expired during the first quarter of 1998.
New Accounting Standards
As amended, SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" is effective for fiscal years beginning after June 15, 2000. This
statement establishes the accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contract, (collectively referred to as derivatives) and for hedging activities.
It requires that entities recognize all derivative 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
designated as (a) a hedge of the exposure to changes in the fair value of
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 foreign-
currency-denominated forecasted transaction. This statement should not have any
material impact on the financial statements.
In October 1998, SFAS No. 134, "Accounting for Mortgage-Backed Securities
Retained After the Securitization of Mortgage Loans Held for Sale by a Mortgage
Banking Enterprise" was issued, effective for the first fiscal quarter beginning
after December 15, 1998. The new statement requires that after an entity that
engaged in mortgage banking activities has securitized mortgage loans that it
held for sale, it must classify the resulting retained mortgage-backed
securities or other retained interest based on its ability and intent to sell or
26
<PAGE>
hold those investments. Any retained mortgage-backed securities that are
committed for sale before or during the securitization process must be
classified as trading. This statement did not have any impact on the Company's
financial statements since the Company has never securitized loans.
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.
Because the Company sells a significant portion of the loans it originates,
inflation and interest rates have a diminished effect on the Company's results
of operations. The 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 servicing portfolio by increasing
the level of loan prepayments and it 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 classes of certificates
are capitalized on the Company's books from future 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
certificates, which could have a favorable effect on the Company's results of
operations and financial condition.
27
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk Management - 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 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.
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 1999
and the first three months of 2000 approximately 96.8% of the total loans
originated and funded in-house during the year ended December 31, 1999. The
Company expects to sell the majority of its loan originations during the same
twelve-month period in which they are funded by the Company in future periods.
Also, the Company sold, during the first three months in 2000, approximately
85.8% of loans originated and funded in-house during January and February 2000.
As a result, loans are held on average 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 March 31, 2000, 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.
28
<PAGE>
The Company's one-year gap was a negative 22.00% of total assets at March 31,
2000, as illustrated in the following table:
<TABLE>
<CAPTION>
One Year Two Three to More Than Four
Description Total Or Less Years Four Years Years
Interest earning assets:
<S> <C> <C> <C> <C> <C>
Loans receivable (1) $40,543 $ 11,972 $ 993 $ 2,305 $25,273
Cash and other
Interest-earning assets 15,037 15,037
--------------- ------------- ------------- --------------- ---------------
55,580 $ 27,009 $ 993 $ 2,305 $25,273
============= ============= =============== ===============
Allowance for loan losses (1,288)
Investment in IMC 0
Premises and equipment, net 6,031
Other 11,773
---------------
Total assets $72,096
===============
Interest-bearing liabilities:
Revolving warehouse lines $ 4,275 4,275
FDIC - insured deposits 45,715 36,704 5,941 3,070 0
Other interest-bearing 7,516 1,893 566 1,681 3,376
Liabilities
--------------- ------------- ------------- --------------- ---------------
57,506 $ 42,872 $ 6,507 $ 4,751 $ 3,376
============= ============= =============== ===============
Non-interest-bearing liabilities 3,352
---------------
Total liabilities 60,858
Shareholders' equity 11,238
---------------
Total liabilities and equity $72,096
===============
Maturity/repricing gap $(15,863) $ (5,514) $ (2,446) $21,897
============= ============= =============== ===============
Cumulative gap $(15,863) $(21,377) $(23,823) $(1,926)
============= ============= =============== ===============
As percent of total assets (22.00) (29.65) (33.04) (2.67)
Ratio of cumulative interest 0.63 0.57 0.56 0.97
earning
Assets to cumulative interest
earning
Liabilities
============================================================================================================================
</TABLE>
(1) Loans shown gross of allowance for loan losses, net of premiums/discounts.
29
<PAGE>
Interest Rate Risk
The principal quantitative disclosure of the Company's market risks are the gap
table on page 29. The gap table shows that the Company's one-year gap was a
negative 22.00% of total assets at March 31, 2000. The Company 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 March 31, 2000, 62.3% 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, 74.5% of which reprice
within one year of March 31, 2000. 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
purchase and 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 servicing portfolio by increasing the level of loan prepayments.
Additionally, to the extent mortgage loan servicing rights in future periods
have been capitalized on the books of the Company, 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 sale of
mortgage loans would generally be limited to those gains resulting from the
yield differential between mortgage loan interest rates and 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 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 Bank is building a portfolio of loans to be held for net interest income.
The sale of fixed rate product is intended to protect the 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. Decisions to hold or sell adjustable rate
mortgage loans are based on the need for such loans in the Bank's portfolio,
which is influenced by the level of market interest rates and the Bank's
asset/liability management strategy. As with other investments, the Bank
regularly monitors the appropriateness of the level of adjustable rate mortgage
loans in its portfolio and may decide from time to time to sell such loans and
reinvest the proceeds in other adjustable rate investments.
30
<PAGE>
Asset Quality
The following table summarizes all of the Company's delinquent loans at March
31, 2000 and December 31, 1999:
(in thousands)
<TABLE>
<S> <C> <C>
2000 1999
------- --------
Delinquent 31 to 60 days $ 1,062 $ 864
Delinquent 61 to 90 days 796 264
Delinquent 91 to 120 days 65 513
Delinquent 121 days or more 1,415 1,466
------- --------
Total delinquent loans (1) $ 3,338 $ 3,106
======= ========
Total loans receivable outstanding, gross $41,049 $69,054
======= ========
Delinquent loans as a percentage of
Total loans outstanding:
Delinquent 31 to 60 days 2.59% 1.25%
Delinquent 61 to 90 days 1.94 0.39
Delinquent 91 to 120 days .16 0.74
Delinquent 121 days or more 3.44 2.12
------- --------
Total delinquent loans as a percentage
of total loans outstanding 8.13% 4.50%
======= ========
</TABLE>
_____________
(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 Bank is accrued until the loans
become 90 days or more past due. Non-accrual loans were $2.3 million and $2.2
million at March 31, 2000 and December 31, 1999 respectively. The amount of
additional interest that would have been recorded had the loans not been placed
on non-accrual status was approximately $23,000 and $235,000 for the three
months ended March 31, 2000 and the year ended December 31, 1999, respectively.
The amount of interest income on the non-accrual loans, that was included in net
income for the three months ended March 31, 2000 and the twelve months ended
December 31, 1999 was $6,000 and $109,000, respectively.
Loans delinquent 31 days or more as a percentage of total loans outstanding
increased to 8.13% at March 31, 2000 from 4.50% at December 31, 1999.
At March 31, 2000 and December 31, 1999 the recorded investment in loans for
which impairment has been determined in accordance with SFAS 114 totaled $1.5
million and $2.0 million, respectively. The average recorded investment in
impaired loans for the three months ended March 31, 2000 and the year ended
December 31, 1999 was approximately $2.0 million and $3.5 million respectively.
31
<PAGE>
SFAS 118 allows a creditor to use existing methods for recognizing interest
income on an impaired loan. Consistent with the Company's method for non-accrual
loans, interest receipts for impaired loans are recognized as interest income or
are applied to principal when the principal is in doubt of being collected. Due
to the homogenous nature and the collateral securing these loans, there is no
corresponding valuation allowance.
32
<PAGE>
PART II. OTHER INFORMATION
33
<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 three (3) months
ending March 31, 2000.
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: May 15, 2000 APPROVED FINANCIAL CORP.
-------------------
By: /s/ Allen D. Wykle
-------------------------------
Allen D. Wykle,
Chairman, President, and
Chief Executive Officer
By: /s/ Eric S. Yeakel
-------------------------------
Eric S. Yeakel,
Its Treasurer and Chief
Financial Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS FOR THE PERIOD ENDED MARCH 31, 2000 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<PERIOD-START> JAN-01-2000
<CASH> 12,465
<INT-BEARING-DEPOSITS> 432
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 2,139
<INVESTMENTS-CARRYING> 714
<INVESTMENTS-MARKET> 714
<LOANS> 40,542
<ALLOWANCE> 1,227
<TOTAL-ASSETS> 72,096
<DEPOSITS> 45,715
<SHORT-TERM> 5,942
<LIABILITIES-OTHER> 5,861
<LONG-TERM> 3,339
0
1
<COMMON> 5,482
<OTHER-SE> 5,756
<TOTAL-LIABILITIES-AND-EQUITY> 72,096
<INTEREST-LOAN> 1,421
<INTEREST-INVEST> 162
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 1,583
<INTEREST-DEPOSIT> 776
<INTEREST-EXPENSE> 346
<INTEREST-INCOME-NET> 461
<LOAN-LOSSES> 55
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,626
<INCOME-PRETAX> (92)
<INCOME-PRE-EXTRAORDINARY> (92)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (60)
<EPS-BASIC> (0.01)
<EPS-DILUTED> (0.01)
<YIELD-ACTUAL> 2.80
<LOANS-NON> 3,338
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,382
<CHARGE-OFFS> 178
<RECOVERIES> 21
<ALLOWANCE-CLOSE> 1,227
<ALLOWANCE-DOMESTIC> 1,227
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
