<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 September 30, 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
Incorporation or Organization) Identification Number)
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 November 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
September 30, 2000 and December 31, 1999 1
Consolidated Statements of Loss and Comprehensive
Loss for the three months ended September 30, 2000 2
and 1999.
Consolidated Statements of Loss and Comprehensive
Loss for the nine months ended September 30, 2000
and 1999. 3
Consolidated Statements of Cash Flows for
the nine months ended September 30, 2000
and 1999. 4
Notes to Consolidated Financial Statements 6
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 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
</TABLE>
<PAGE>
PART I . FINANCIAL INFORMATION
<PAGE>
APPROVED FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
September 30, 2000 and December 31, 1999
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
ASSETS (Unaudited) 1999
2000
--------- -----------
<S> <C> <C>
Cash $12,593 $10,656
Mortgage loans held for sale, net 29,150 62,628
Mortgage loans held for yield, net 6,292 4,143
Real estate owned, net 1,417 2,274
Investments available for sale 2,923 2,640
Income taxes receivable 2,027 5,644
Deferred tax asset 1,106 1,676
Premises and equipment, net 5,580 6,086
Goodwill, net 1,017 1,120
Other assets 1,317 1,733
--------- -----------
Total assets $63,422 $98,600
========= ===========
LIABILITIES AND EQUITY
Liabilities:
Revolving warehouse loan $ 3,151 $17,465
FHLB bank advances - 4,648
Mortgage notes payable 2,556 2,341
Notes payable-related parties 2,855 2,993
Certificates of indebtedness 1,956 2,087
Certificates of deposits 39,041 55,339
FDIC - insured money market account 2,967 -
Accrued and other liabilities 1,681 2,428
--------- -----------
Total liabilities 54,207 87,301
--------- -----------
Commitments and contingencies - -
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 (19) (16)
Additional capital 552 552
Retained earnings 3,199 5,280
--------- -----------
Total shareholders' equity 9,215 11,299
--------- -----------
Total liabilities and equity $63,422 $98,600
========= ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
1
<PAGE>
APPROVED FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS
for the three months ended September 30, 2000 and 1999
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
-------- ---------
<S> <C> <C>
Revenue:
Gain on sale of loans $ 2,280 $ 2,920
Interest income 1,154 1,695
Other fees and income 1,164 1,971
-------- ---------
4,598 6,586
-------- ---------
Expenses:
Compensation and related 2,763 4,189
General and administrative 1,379 2,290
Advertising expense 331 585
Loan production expense 267 460
Interest expense 880 1,039
Provision for loan and foreclosed property losses 396 327
-------- ---------
6,016 8,890
-------- ---------
Loss before income taxes (1,418) (2,304)
Benefit from income taxes (176) (901)
-------- ---------
Net loss (1,242) (1,403)
Other comprehensive loss, net of tax:
Unrealized gain (losses) on securities:
Unrealized holding gain (loss) arising during period 3 (12)
-------- ---------
Comprehensive loss $(1,239) $(1,415)
======== =========
Net loss per share:
Basic and Diluted $ (0.23) $ (0.26)
======== =========
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 LOSS AND COMPREHENSIVE LOSS
for the nine months ended September 30, 2000 and 1999
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
--------- ----------
<S> <C> <C>
Revenue:
Gain on sale of loans $ 8,708 $10,443
Interest income 4,054 6,333
Other fees and income 3,564 6,370
--------- ----------
16,326 23,146
--------- ----------
Expenses:
Compensation and related 8,985 13,579
General and administrative 4,706 7,295
Advertising expense 985 1,286
Loan production expense 907 1,491
Interest expense 2,961 3,934
Provision for loan and foreclosed
property losses 543 1,816
--------- ----------
19,087 29,401
--------- ----------
Loss before income taxes (2,761) (6,255)
Benefit from income taxes (681) (2,307)
--------- ----------
Net loss (2,080) (3,948)
Other comprehensive loss, net of tax:
Unrealized losses on securities:
Unrealized holding loss arising during period (2) (68)
--------- ----------
Comprehensive loss $(2,082) $(4,016)
========= ==========
Net loss per share:
Basic and Diluted $ (0.38) $ (0.72)
========= ==========
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.
3
<PAGE>
APPROVED FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the nine months ended September 30, 2000 and 1999
(In thousands)
(Unaudited)
<TABLE>
<S> <C> <C>
2000 1999
----------- --------------------
Operating activities
Net loss $ (2,081) $ (3,948)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Depreciation of premises and equipment 510 685
Amortization of goodwill 103 345
Provision for loan losses 126 1,227
Provision for losses on real estate owned 417 589
Loss on sale of ARM Portfolio shares - 8
Deferred tax benefit 569 2,225
Gain on sale of loans (8,708) (10,443)
Proceeds from sale and prepayments of loans 214,226 226,796
Originations of loans held for sale, net of (175,664) (156,443)
allowance for loan losses
Changes in assets and liabilities:
Loan sale receivable 3 (279)
Other assets 412 2,205
Accrued and other liabilities (847) (1,056)
Income tax payable 3,617 (2,314)
Loan proceeds payable 99 (2,565)
----------- --------------------
Net cash provided by operating activities 32,782 57,032
Cash flows from investing activities:
Purchase of available for sale securities - (125)
Sales of available for sale securities 115 -
Sales of ARM fund shares - 4,692
Purchase of premises and equipment (185) (1,210)
Proceeds from sales of premises and equipment 181 1,410
Proceeds from sales of real estate owned 2,176 1,850
Real estate owned capital improvements (387) (408)
Purchases of ARM fund shares (101) (3,594)
Purchases of FHLB stock (297) (146)
----------- --------------------
Net cash provided by investing activities 1,502 2,469
</TABLE>
4
<PAGE>
APPROVED FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
for the nine months ended September 30, 2000 and 1999
(In thousands)
(Unaudited)
<TABLE>
<S> <C> <C>
2000 1999
--------- ---------
Cash flows from financing activities:
Borrowings - warehouse $ 41,268 $ 134,511
Repayments of borrowings - warehouse (55,581) (193,171)
Repayments of FHLB advances (4,648) -
Principal payments (borrowings) on mortgage notes 215 (879)
payable
Net increase (decrease) in:
Notes payable (138) (72)
Certificates of indebtedness (132) (89)
Certificates of deposit (16,298) 598
FDIC - insured money market account 2,967 -
--------- ---------
Net cash used in financing activities (32,347) (59,102)
--------- ---------
Net increase in cash 1,937 399
Cash at beginning of period 10,656 6,269
--------- ---------
Cash at end of period $ 12,593 $ 6,668
========= =========
Supplemental cash flow information:
Cash paid for interest $ 3,043 $ 4,190
Supplemental non-cash information:
Loan balances transferred to real estate owned $ 1,735 $ 2,978
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE>
APPROVED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the nine months ended September 30, 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 two wholly owned
subsidiaries through which it originates residential mortgages: Approved Federal
Savings Bank (the "Bank"), a federally chartered thrift institution with broker
operations in seven states and nine retail offices as of September 30, 2000; and
Approved Residential Mortgage, Inc. ("ARMI") with one retail location at
September 30, 2000. Approved has a third wholly owned subsidiary, Approved
Financial Solutions ("AFS"), through which it offers other financial products
such as Debt Free Solutions, Mortgage Acceleration Program and insurance
products to its mortgage customers. On April 1, 2000 the Company, as part of its
expense reduction initiatives, transferred all assets of MOFC d/b/a ConsumerOne
Financial ("ConsumerOne"), a wholly owned subsidiary of Approved, to Approved
Federal Savings Bank, also a wholly owned subsidiary of Approved.
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 fair value as estimated by management. The fair
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 against income.
6
<PAGE>
APPROVED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the nine months ended September 30, 2000 and 1999
Note 1. Organization and Summary of Significant Accounting Policies,
continued:
Loan losses are charged against the allowance when management believes it is
unlikely that the loan is collectable.
Origination fees: Net origination fees are recognized over the life of the loan
or upon the sale of the loan, if earlier.
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.
7
<PAGE>
APPROVED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the nine months ended September 30, 2000 and 1999
Note 1. Organization and Summary of Significant Accounting Policies,
continued:
Loan originations and income recognition: 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. Gains on the sale of mortgage loans,
representing the difference between the sales price and the net carrying value
of the loans, 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 potential dilution of common shares from 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 and
nine month periods ended September 30, 2000 and 1999, is an unrealized holding
loss on securities, net of deferred taxes.
Goodwill recognition policy: Goodwill represents the excess of purchase price
and related costs over the value assigned to the net tangible assets of
businesses acquired. Goodwill is amortized on a straight-line basis over 10
years. Periodically, the company reviews the recoverability of goodwill. The
measurement of possible impairment is based primarily on the ability to recover
the balance of the goodwill from expected future operating cash flows on an
undiscounted basis. In management's opinion, no material impairment exists at
September 30, 2000.
8
<PAGE>
APPROVED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the nine months ended September 30, 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.
Securities and Exchange Commission Staff Accounting Bulletin 101 (SAB 101),
"Revenue Recognition in Financial Statements", as amended by SAB 101B, must be
adopted no later than the fourth calendar quarter of the year 2000. Adoption of
SAB101 is not expected to have any material impact on the recognition,
presentation, and disclosure of revenue.
In March 2000, the Financial Accounting Standards Board, (FASB) issued
Interpretation No. 44, Accounting for Certain Transactions involving Stock
Compensation - an interpretation of APB Opinion No. 25 (FIN 44), providing new
accounting rules for stock-based compensation under APB Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25). FIN 44 does not change FASB
Statement No. 123, Accounting for Stock-Based Compensation (FAS 123). The new
rules are significant and could result in compensation expense in several
situations in which no expense is typically recorded under current practice.
FIN 44 is generally effective for transactions occurring after July 1, 2000,
however, the accounting must be applied prospectively to certain transactions
consummated after December 15, 1998. The Company does not expect that FIN 44
will have a material effect on its financial condition or results of operations.
In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, a replacement
of SFAS No. 125. It revises the standards for accounting for securitizations
and other transfers of financial assets and collateral and requires certain
disclosures, but it carries over most of provisions of SFAS No. 125 without
reconsideration. The Statement requires a debtor to reclassify financial assets
pledged as collateral and report these assets separately in the statement of
financial position. It also requires a secured
9
<PAGE>
Note 1. New accounting pronouncements, continued:
party to disclose information, including fair value, about collateral that it
has accepted and is permitted by contract or custom to sell or repledge. The
Statement includes specific disclosure requirements for entities with
securitized financial assets and entities that securitize assets. This
Statement is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2000 and is effective
for recognition and reclassification of collateral and for disclosures relating
to securitization transactions and collateral for fiscal years ending after
December 15, 2000. The Company does not expect that FAS 140 will have a
material effect on financial condition or results of operation.
Note 2. Basis of Presentation
The accompanying unaudited condensed 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 three and nine month periods ended
September 30, 2000 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2000. For further information, refer
to the consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended December 31, 1999.
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 nine month periods ended September 30, 2000 and 1999 and its
consolidated financial position at September 30, 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 the company's loan products, 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.
The Company is a Virginia-chartered financial institution, principally involved
in originating, purchasing, servicing and selling loans secured primarily by
first and junior liens on owner-occupied, one- to four-family residential
properties. The Company offers both fixed-rate and adjustable-rate loans for
debt consolidation, home improvements and other purposes. The Company's
specialty is lending to the "non-conforming" borrower who does not meet
traditional "conforming" or government agency credit qualification guidelines,
but who exhibits both the ability and willingness to repay the loan. The
Company focuses on lending to individuals whose borrowing needs are generally
not being served by traditional financial institutions due to such individuals'
impaired credit profiles often resulting from personal issues such as divorce,
family illness or death and a temporary loss of employment due to corporate
downsizing as well as other factors. Operating under current management for the
past sixteen years, the Company has helped non-conforming mortgage customers
satisfy their financial needs and in many cases has helped them improve their
credit profile. During 1999 the Company initiated the in-house funding of
traditional conforming mortgage products and government mortgage products such
as VA and FHA.
Results of Operations for the three and nine months ended September 30, 2000
compared to the three and nine months ended September 30, 1999.
Net Loss
The Company's net loss decreased by 11% and 47% for the three and nine months
ended September 30, 2000 was $1.2 million and $2.1 million compared to a net
loss of $1.4 and $3.9 million for the three and nine-month periods ended
September 30, 1999. On a per share basis, the net loss for the three and nine
month periods ended September 30, 2000 was $0.23 and $0.38 compared to a net
loss of $0.26 and $0.72 for the three and nine month periods ended September 30,
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 and nine months ended
September 30, 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.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
(dollars in thousands) 2000 1999 2000 1999
----------------------------- -----------------------------
<S> <C>
Dollar Volume of Loans Originated:
Broker $29,465 $ 22,912 $ 99,449 $ 80,222
Retail - funded through other lenders 9,861 37,017 36,835 125,873
Retail - funded in-house non-conforming 9,916 15,526 40,910 57,675
Retail - funded in-house conforming and government 12,377 11,114 34,901 18,565
----------------------------- -----------------------------
Total $61,619 $ 86,569 $212,095 $282,335
============================= =============================
Number of Loans Originated:
Broker 424 409 1,384 1,336
Retail - funded through other lenders 160 453 546 1,495
Retail - funded in-house non-conforming 159 248 618 893
Retail - funded in-house conforming and government 124 114 339 193
----------------------------- -----------------------------
Total 867 1,224 2,887 3,917
============================= =============================
</TABLE>
The dollar volume of loans, originated during the three and nine months ended
September 30, 2000, decreased 28.8% and 24.9% when compared to the same period
in 1999. The decrease in loan originations was primarily the result of the
reduction in the number of retail loan origination centers from 15 at September
30, 1999 to 10 at September 30, 2000.
The 33.3% decrease in retail loan origination centers resulted in a 49.5% and
44.3% decrease in the Company's retail loan volume for the three and nine month
periods ending September 30, 2000 when compared to the same period in 1999.
Brokered loans generated by the retail division were $9.8 and $36.8 million
during the three and nine month periods ended September 30, 2000 which was a
73.4% and 70.7% decrease compared to $37.0 and $125.9 million during the same
period in 1999. The decrease was the result of a company initiative to close
more in-house loans.
The volume of loans originated through broker referrals from the Company's
network of mortgage brokers increased 28.6% and 24.0% to $29.5 and $99.4 million
for the three and nine month periods ended September 30, 2000, compared to $22.9
and $80.2 million for the three and nine month periods ended September 30, 1999.
The increase was primarily the result of an expanded product line and the
streamlining of the Company's service to brokers. Average fees paid to mortgage
brokers for loans originated during the three and nine months ended September
30, 2000 was 48 and 46 basis points compared to 36 and 33 basis points for the
three and nine months ended September 30, 1999.
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
12
<PAGE>
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 $41.7 and $168.3 million including loans owned
by the Company in excess of 180 days ("seasoned loans") for the three and nine
month periods ended September 30, 2000, compared to $55.1 and $192.8 million for
the same period in 1999.
During the three month period ended September 30, 2000, the Company sold $2.9
million of seasoned loans, at a weighted average discount to par value of 18.4%.
The loss was fully reserved for in prior periods. For the three month period
ended September 30, 1999, the Company sold $10.9 million of seasoned loans, at a
weighted average discount to par value of 7.0%.
Conforming and government loan sales were $10.3 million and $33.8 million for
the three and nine month periods ended September 30, 2000, compared to $11.0
million and $16.5 million for the three and nine month periods ended September
30, 1999. The Company began originating conforming loans in May 1999.
The combined gain on the sale of loans was $2.3 and $8.7 million for the three
and nine month periods ended September 30, 2000, which compares with $2.9 and
$10.4 million for the same period in 1999. The decrease for the three and nine
month periods ended September 30, 2000, was primarily the result of fewer loans
being sold when compared to the same period ended September 30, 1999. Gain on
the sale of mortgage loans represented 49.6% and 53.3% of total revenue for the
three and nine months ended September 30, 2000, compared to 44.3% and 45.1% of
total revenue for the same period in 1999. This was primarily a result of the
Company's initiative to decrease brokered loans, revenues from which are
reported in other income, and to increase the percentage of retail loan
originations funded in-house, revenues from which are reported in gain on sale
of loans.
The weighted-average premium, realized by the Company on its non-conforming loan
sales was 3.46% and 3.05% (excluding seasoned loans), during the three and nine
month periods ended September 30, 2000, compared to 3.07% and 3.14% for the same
period in 1999. The weighted-average premium realized by the Company on its
conforming and government loans sales was 1.56% and 1.27% during the three and
nine month periods ended September 30, 2000, compared to 1.88% and 1.91% for the
three and nine month periods ended September 30, 1999.
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 this loan sale strategy.
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
an assumption for average prepayment speed in order to determine the average
life of a loan pool and an assumption for loan losses. The increased prepayment
speeds as well as the magnitude of loan losses experienced in the industry were
greater than the assumptions previously used by many securitization issuers and
has resulted in an impairment or write down 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
13
<PAGE>
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 third 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 of 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 and nine month periods ended September 30, 2000
was $0.9 and $3.7 million, compared to $1.7 and $4.6 million for the three and
nine month periods ended September 30, 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 non-conforming retail loan sales for the three
and nine month periods ended September 30, 2000 comprised 25.3% and 31.7% of
total non-conforming loan sales, with average loan origination fee income earned
of 4.25% and 4.73%. For the three and nine months ended September 30, 1999,
the Company's non-conforming retail loan sales were 50.1% and 43.6% of total
non-conforming loan sales with average origination fee income of 4.44% and
4.60%. Average origination fee income from conforming and government loans was
3.98% and 3.38% for the three and nine months ended September 30, 2000 compared
to 3.71% and 4.46% for the three and nine months ended September 30, 1999. Fees
associated with selling loans were approximately 17 and 22 basis points for the
three and nine months ended September 30, 2000 compared to 12 and 11 basis
points for the three and nine months ended September 30, 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.
Interest Income and Expense
Interest income for the three and nine months ended September 30, 2000 was $1.2
and $4.1 million compared with $1.7 and $6.3 million for the same period ended
in 1999. The decrease in interest income for the three and nine months ended
September 30, 2000 was due to a lower average balance of loans held for sale.
Interest expense for the three and nine months ended September 30, 2000 was $0.9
and $3.0 million compared with $1.0 and $3.9 million for the three and nine
months ended September 30, 1999. The decrease in interest expense for the three
and nine months ended September 30, 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.
14
<PAGE>
The following tables reflect the average yields earned and rates paid by the
Company during the nine month periods ended September 30, 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) September 30, 2000 September 30, 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) $44,934 $3,586 10.64% $73,958 $6,019 10.85%
Cash and other interest-
earning assets 12,481 468 5.00 8,627 314 4.86
------- -------- ---------- ------- -------- ----------
57,415 4,054 9.42% 82,585 6,333 10.23%
-------- ---------- -------- ----------
Non-interest-earning assets:
Allowance for loan losses (1,227) (2,867)
Investment in IMC 0 87
Premises and equipment, net 5,844 5,130
Other 9,516 13,709
------- -------
Total assets $71,548 $98,644
======= =======
Interest-bearing liabilities:
Revolving warehouse lines $ 4,885 265 7.24% $40,029 2,132 7.10%
FDIC - insured deposits 45,888 2,042 5.93 30,314 1,279 5.62
Other interest-bearing
liabilities 8,240 653 10.57 7,347 523 9.49
------- -------- ---------- ------- -------- ----------
59,013 2,960 6.69% 77,690 3,934 6.75%
-------- ---------- -------- ----------
Non-interest-bearing liabilities 1,946 4,038
------- -------
Total liabilities 60,959 81,728
Shareholders' equity 10,589 16,916
------- -------
Total liabilities and equity $71,548 $98,644
======= =======
Average dollar difference between
Interest-earning assets and
interest-
bearing liabilities $(1,598) $ 4,895
======= =======
Net interest income $1,094 $2,399
======== ========
Interest rate spread (2) 2.73% 3.48%
========= ==========
Net annualized yield on average
Interest-earning assets 2.54% 3.87%
========= ==========
</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.
15
<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 nine months ended September 30, 2000
compared to the nine months ended September 30, 1999, and for the nine months
ended September 30, 1999, compared to the nine months ended September 30, 1998.
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 $1.3 million in net interest income for the nine months ended September 30,
2000 compared to the nine months ended September 30, 1999 was primarily the
result of a decrease in the average balance on interest-earning assets.
($ In thousands)
<TABLE>
<CAPTION>
2000 Versus 1999 1999 Versus 1998
Increase (Decrease) due to: Increase (Decrease) due to:
Volume Rate Total Volume Rate Total
------------- ------------ ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable $(2,318) $(115) $(2,433) $(403) $(738) $(1,141)
Cash and other interest-
earning assets 144 10 154 59 (144) (85)
------------- ------------ ------------ ------------ ----------- ------------
(2,174) (105) (2,279) (344) (882) (1,226)
------------- ------------ ------------ ------------ ----------- ------------
Interest-bearing liabilities:
Revolving warehouse lines (1,907) 40 (1,867) (745) 34 (711)
FDIC-insured deposits 690 73 763 392 (46) 346
Other interest-
bearing liabilities 67 63 130 (290) 28 (262)
------------- ------------ ------------ ------------ ----------- -------------
(1,150) 176 (974) (643) 16 (627)
------------- ------------ ------------ ------------ ----------- ------------
Net interest income (expense) $(1,024) $(281) $(1,305) $ 299 $(898) $ (599)
============= ============ ============ ============ =========== ============
</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. Revenues associated with the financial
products marketed by Approved Financial Solutions, while not material during the
first nine months of 2000, are also recorded in other income. For the three and
nine month periods ended September 30, 2000, other income totaled $1.2 and $3.6
million compared to $2.0 and $6.4 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
$0.5 and $1.9 million for the three and nine month period ended September 30,
2000, compared to $1.6 and $5.1 million for the three and nine months ended
September 30, 1999.
16
<PAGE>
Comprehensive Loss
For the three and nine months ended September 30, 2000 the Company had other
comprehensive gains/(losses) of $3,000 and ($2,000) in the form of unrealized
holding gains/losses on an Asset Management Fund investment. For the three and
nine month periods ended September 30, 1999, the Company had other comprehensive
losses of $12,000 and $68,000 in the form of unrealized holding losses on
securities available for sale. This loss related to a decrease in the market
price of IMC Mortgage Company common stock.
Compensation and Related Expenses
The largest component of expenses is compensation and related expenses, which
decreased by $1.4 and $4.6 million to $2.8 and $9.0 million for the three and
nine month periods ended September 30, 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. For the three and nine month
periods ended September 30, 2000, salary expense decreased by $0.8 million and
$2.7 million when compared to the same periods ended 1999. Also the payroll and
related benefits decreased by $0.1 million and $0.9 million for the three and
nine month periods ended September 30, 2000 when compared to the same periods in
1999. The decrease was caused by a lower average number of employees, which was
attributed to the Companies cost cutting initiative. For the three and nine
month period ended September 30, 2000, the average full time equivalent employee
count was 214 and 249.5 compared to 335 and 412 for the three and nine month
periods ended September 30, 1999. For the three and nine month periods ended
September 30, 2000 the commissions to loan officers decreased by $0.5 million
and $1.0 million when compared to the same periods ended September 30, 1999.
The decrease was primarily 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 and nine month periods ended
September 30, 2000 decreased by $0.9 and $2.6 million to $1.4 and $4.7 million,
from $2.3 and $7.3 the three and nine month periods ended September 30, 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 and nine month periods ended September 30, 2000 were $0.3 and $0.9 million
compared to $0.5 and $1.5 million for the three and nine month periods ended
September 30, 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 and nine month periods ended September 30, 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 and nine month periods ended
September 30, 2000 were $0.3 and $1.0 million compared to $0.6 and $1.3 million
for the three and nine month periods ended September 30, 1999. The decrease was
the result of the reduction in retail loan origination offices.
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 nine months ended September 30, 2000
and the year ended December 31, 1999:
(In thousands)
2000 1999
-------- --------
Balance at beginning of year $ 1,382 $ 2,590
Provision (benefit) charged to expense 126 2,042
Loans charged off (844) (3,286)
Recoveries of loans previously charged off 447 36
-------- --------
Balance at end of period $ 1,111 $ 1,382
======== ========
Loans receivable at the end of period, gross $37,050 $69,054
of allowance for losses
Ratio of allowance for loan losses to gross
loans receivable at the end of period 3.00% 2.00%
The Company increased its provision for loan losses by $0.2 for the three month
period ended September 30, 2000 and increased $0.1 during the nine months ended
September 30, 2000 to the allowance for loan losses, compared to an increase of
$0.1 million for the three month period ended September 30, 1999 and added $1.2
million, during the nine months ended September 30, 1999. For the three and nine
month periods ended September 30, 2000, there was an increase in the provision
based upon the composition of loans held for sale. For the nine months ended
September 30, 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.
18
<PAGE>
Provision for Foreclosed Property Losses
The Company increased its provision for foreclosed property losses by $0.2 and
$0.4 million for the three and nine months ended September 30, 2000, compared to
an increase of $0.3 and $0.2 million for the three and nine months ended
September 30, 1999.
Sales of real estate owned yielded net losses of $218,000 and $670,000 for the
three and nine months ended September 30, 2000 versus $148,000 and $393,000 for
the three and nine months ended September 30, 1999.
The following table presents the activity in the Company's allowance for
foreclosed property losses and selected real estate owned data for the nine
months ended September 30, 2000 and for the year ended December 1999:
(In thousands)
2000 1999
--------- ---------
Balance at beginning of year $ 718 $ 503
Provision charged to expense 417 863
Loss on sale of foreclosures (670) (648)
--------- ---------
Balance at end of period $ 465 $ 718
========= =========
Real estate owned at the end of period, gross $1,882 $2,992
of allowance for losses
Ratio of allowance for foreclosed property losses 24.71% 24.00%
to gross real estate owned at the end of period
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 and nine month periods ended September 30,
2000 and 1999. While the Company's management believes that its present
allowance for foreclosed property losses is adequate, future adjustments may be
necessary.
19
<PAGE>
Financial Condition at September 30, 2000 and December 31, 1999
Assets
The total assets of the Company were $63.4 million at September 30, 2000
compared to total assets of $98.6 million at December 31, 1999.
Cash and cash equivalents increased by $1.9 million to $12.6 million at
September 30, 2000, from $10.7 million at December 31, 1999. The cash position
increased because the loan origination volume was less than anticipated for the
level of certificate of deposit borrowings.
Net mortgage loans receivable decreased by $31.3 million to $35.4 million at
September 30, 2000. The 46.9% decrease in 2000 is primarily due to the Company
selling more loans than were originated in-house during the first nine months of
2000. The Company generally sells loans within sixty days of origination.
Real estate owned ("REO") decreased by $0.9 million to $1.4 million at September
30, 2000. The 37.7% decrease in REO resulted from the sale of $2.8 million in
REO properties compared to additions of $1.8 million to REO during the nine
months ended September 30, 2000.
Investments increased by $0.3 million to $2.9 million at September 30, 2000.
Investments consist primarily of an Asset Management Fund, Inc. Adjustable Rate
Mortgage Portfolio and FHLB stock owned by the Bank. The 10.7% increase in
investments in the first nine months of 2000 is primarily due to the purchase of
shares of FHLB stock.
Premises and equipment decreased by $0.5 million to $5.6 million at September
30, 2000. The decrease is due to the depreciation of these assets for the first
nine months of 2000.
Goodwill (net) decreased by $0.1 million to $1.0 million at September 30, 2000.
The decrease is due to the amortization of the intangible asset for the first
nine months of 2000.
Income tax receivable decreased by $3.6 million to $2.0 million at September 30,
2000. The 64.1% decrease represents the receipt of a refund due on federal
taxes based upon actual tax return filing.
The deferred tax asset decreased by $0.6 million to $1.1 million at September
30, 2000. The decrease related to the establishment of a $0.4 million valuation
allowance for future unrealizable benefits for the deferred tax asset. The
valuation allowance is based upon an assessment by management of future taxable
income and its relationship to realizability of deferred tax assets. The
remainder of the decrease relates to changes in timing differences of the
deferred tax asset.
Other assets decreased by $0.4 million to $1.3 million at September 30, 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 September 30, 2000.
Liabilities
Outstanding balances for the Company's revolving warehouse loans decreased by
$14.3 million to $3.1 million at September 30, 2000. The 82.0% decrease in the
first nine months of 2000 was primarily attributable to the decrease in loans
receivable.
The Bank's deposits totaled $39.0 million at September 30, 2000 compared to
$55.3 million at December 31, 1999. Of the certificate accounts on hand as of
September 30, 2000, a total of $32.5 million was scheduled to mature in the
twelve-month period ending September 30, 2001.
During the three and nine month periods ended September 30, 2000, the Company
received $3.0 million in money market deposits through an arrangement with a
local NYSE member broker/dealer. There were no money market deposits for the
three and nine month periods ended September 30, 1999.
20
<PAGE>
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 September
30, 2000.
Promissory notes and certificates of indebtedness totaled $4.8 million at
September 30, 2000 compared to $5.1 million at December 31, 1999. The 5.3%
decrease is primarily due to the redemption of maturing promissory notes and
certificates. In the first nine months 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,
which are subordinated to the Company's warehouse lines of credit, to help fund
its operations since 1984. Promissory notes outstanding carry terms of one to
five years and interest rates between 8.00% and 10.00%, with a weighted-average
rate of 9.76% at September 30, 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 9.28% at September 30, 2000.
Mortgage loans payable totaled $2.6 million at September 30, 2000 compared to
$2.3 million at December 31, 1999. The $0.2 million increase is a combination of
a $0.3 first mortgage payable on one of its REO properties as well as 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 $0.7 million to $1.7 million at
September 30, 2000. This category includes accounts payable, accrued interest
payable, deferred income, accrued bonuses, and other payables. The 30.8%
decrease is the result of various payments of year end accrued expenses.
Shareholders' Equity
Total shareholders' equity at September 30, 2000 was $9.2 million compared to
$11.3 million at December 31, 1999. The $2.1 million decrease in 2000 was due to
the $2.1 million loss for the nine months ended September 30, 2000.
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, revenues generated by Approved
Financial Solutions, 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 based
upon the timing of proceeds used to fund loan originations and the subsequent
receipt of cash from the sale of the loan. Loan sales normally occur 30 to 45
days after proceeds are used to fund the loan. However, for the nine months
ended September 30, 2000, the Company generated cash from operating activities
of $32.8 million, due largely 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 nine
months ended September 30, 1999 the Company generated cash from operating
activities of $57.0 million.
21
<PAGE>
The Company finances its operating cash requirements primarily through warehouse
and other credit facilities, and the issuance of other debt. For the nine
months ended September 30, 2000, the Company paid down debt from financing
activities of $32.3 million, this was primarily the result of proceeds from loan
sales in excess of new borrowings for funding loan originations. For the nine
months ended September 30, 1999, the Company paid down debt from financing
activities of $59.1 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 82.8% of assets at September 30, 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 and lien position, 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 $39.0 million at September 30, 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 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
In addition to the Company's $15 million line of credit with the FHLB of
Atlanta, it has available funding from warehouse facilities with other non-
affiliated financial institutions.
On July 21, 2000, the Company obtained a $40.0 million line of credit from Bank
United. The credit line can be used for prime and sub-prime mortgage loans and
is secured by loans originated by the Company. The line bears interest at a
rate of 2.00% and 2.75% over the one-month LIBOR rate for prime and sub-prime
loans respectively. The Company may receive warehouse credit advances of 98%,
97%, and 90% for prime, sub-prime, and high LTV loans (loans with LTV's greater
than 90%), respectively, of the collateral value amount on pledged mortgage
loans for a period of 90 days after advance of funds on each loan. If a loan
has not been purchased by an investor within 90 days of such advance, the
interest rate on the loan increases to 3.75% over the one-month LIBOR and the
Company has an additional 30 days to sell the loan or purchase the loan back
from the warehouse. The aged loan sublimit is $2.0 million. As of September
30, 2000, $3.2 million was outstanding under this facility. The line of credit
is scheduled to expire on July 21, 2001. The line of credit is subject to
financial covenants for a current ratio, tangible net worth and a leverage
ratio. As of September 30, 2000 the Company is in compliance with all financial
covenants.
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
22
<PAGE>
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 September 30, 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 September 30, 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 September 30, 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
September 30, 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 was 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. This line expired on June 7, 2000 and will
not be renewed.
Other Capital Resources
Promissory notes and certificates of indebtedness, have been a source of capital
for the Company since management acquired the Company in 1984 and are issued
primarily according to an exemption from security registration available to the
Company under its industrial loan association charter. Promissory notes and
certificates of indebtedness totaled $4.8 million at September 30, 2000 compared
to $5.1 million at December 31, 1999. These borrowings are subordinated to the
Company's warehouse lines of credit. The Company cannot issue subordinated debt
to new investors under the exemption since the state of Virginia is no longer
its primary state of operation. The Company is currently preparing an S-1
registration statement to be presented to the Company's Board of Directors for
approval for the registration of unsecured subordinated investment certificates
and money market accounts. Subject to the Board of Director's approval, the
offering will only be made through a prospectus on a delayed and continuous
basis under rule 415 under the Securities Act of 1933.
The Company had cash and cash equivalents of $12.6 million at September 30,
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.
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 nine months of 2000, the Bank maintained
liquidity in excess of the required amount, and management anticipates that it
will continue to do so.
23
<PAGE>
Bank Regulatory Capital
At September 30, 2000, the Bank's book value under generally accepted accounting
principles ("GAAP") was $9.4 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
September 30, 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 $9,304 $9,304 $9,304
Add: unrealized loss on securities 16 16 16
Nonallowable asset: goodwill (564) (564) (564)
Additional capital item: general allowance - - 230
------------ ------------ -------------
Regulatory capital - computed 8,756 8,756 8,986
Minimum capital requirement 779 2,077 3,034
------------ ------------ -------------
Excess regulatory capital $7,977 $6,679 $5,952
============ ============ =============
Ratios:
Regulatory capital - computed 16.87% 16.87% 23.69%
Minimum capital requirement 1.50% 4.00% 8.00%
------------ ------------ -------------
Excess regulatory capital 15.37% 12.87% 15.69%
============ ============ =============
</TABLE>
Recently an FDIC discussion draft proposal has been made public regarding
requirements for subprime lenders. Under the proposal, regulatory capital
required to be held for certain loan classes included in the institution's
portfolio could be increased. The ultimate resolution of this proposal is
uncertain at this time. However, 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 this document, 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 other current recommendations by
regulatory authorities, which if they were implemented would have such an
effect.
Interest Rate Risk Management
The Company originates mortgage loans for sale as whole loans. The Company
mitigates its interest rate exposure, and the related need for hedging activity,
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. 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
24
<PAGE>
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 September 30, 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
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
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.
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.
The majority of the assets of the Company are monetary in nature. As a result,
interest rates have a more significant impact on our performance than the
effects of general levels of inflation. Inflation affects the Company most
significantly in the area of residential real estate values and inflation's
effect on interest rates. Real estate values generally increase during periods
of high inflation and are stagnant during periods of low inflation. While,
interest rates do not necessarily move in the same direction or with the same
magnitude as the prices of goods and services, normally interest rates increase
during periods of high inflation and decrease during periods of low inflation.
Loan origination volume generally increases as residential real estate values
increase because homeowners have new home equity values against which they can
borrow. A large portion of the Company's loan volume is related to refinancing
and debt consolidation mortgages, therefore, an increase in real estate values
enhances the marketplace for this type of loan origination. Conversely, as
residential real estate values decrease, the market for home equity and debt
consolidation loan origination decreases. Additionally, an increase or decrease
in residential real estate values may have a positive or negative effect,
respectively, on the Company's liquidation of foreclosed property.
Because the Company sells a significant portion of the loans it originates, the
effect that inflation has on interest rates has a diminished effect on the
Company's results of operations. However, the Company holds a portfolio of loans
held for investment, the size of which varies from time to time 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
25
<PAGE>
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. (See: "Interest Rate
Risk Management").
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.
While the Company has no plans to adopt a Securitization loan sale strategy at
this time, if it were to do so in the future, then 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. A significant decline in interest
rates could increase the level of loan prepayments. 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.
26
<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 nine months of 2000 approximately 98.1% 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, other than loans
specifically originated to hold for investment and yield, during the same
twelve-month period in which they are funded by the Company in future periods.
Also, the Company sold, during the first nine months in 2000, approximately
92.8% of loans originated and funded in-house during the period beginning
January 1, 2000 and ending August 31, 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 September 30, 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.
27
<PAGE>
The Company's one-year gap was a negative 22.38% of total assets at September
30, 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
----------- ----- ------- ----- ---------- -----
<S> <C>
Interest earning assets:
Loans receivable (1) $36,553 $ 12,757 $ 756 $ 1,782 $21,258
Cash and other interest-bearing assets 12,593 12,593
--------------- ----------- ------------ ---------- ------------
49,146 $ 25,350 $ 756 $ 1,782 $21,258
=========== ============ ========== ============
Allowance for loan losses (1,111)
Premises and equipment, net 5,580
Other 9,807
---------------
Total assets $63,422
===============
Interest-bearing liabilities:
Revolving warehouse lines $ 3,151 3,151
FDIC - insured deposits 39,041 32,508 3,860 2,673
FDIC - insured money market account 2,967 2,967
Other interest-bearing liabilities 7,494 920 711 2,680 3,183
--------------- ----------- ------------ ---------- ------------
52,653 $ 39,546 $ 4,571 $ 5,353 $ 3,183
=========== ============ ========== ============
Non-interest-bearing liabilities 1,554
---------------
Total liabilities 54,207
Shareholders' equity 9,215
---------------
Total liabilities and equity $63,422
===============
Maturity/repricing gap $(14,196) $ (3,815) $ (3,571) $18,075
=========== ============ ========== ============
Cumulative gap $(14,196) $(18,011) $(21,582) $(3,507)
=========== ============ ========== ============
As percent of total assets (22.38)% (28.40)% (34.03)% (5.53)%
Ratio of cumulative interest 0.64 0.59 0.56 .93
earning
Assets to cumulative interest
earning
liabilities
=====================================================================================================================
</TABLE>
(1) Loans shown gross of allowance for loan losses, net of premiums/discounts.
28
<PAGE>
Interest Rate Risk
The principal quantitative disclosure of the Company's market risks is the gap
table on page 29. The gap table shows that the Company's one-year gap was a
negative 22.38% of total assets at September 30, 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 September 30, 2000, 58.2% 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, 75.1%
of which reprice within one year of September 30, 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, subordinated debt, 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.
29
<PAGE>
Asset Quality
The following table summarizes all of the Company's delinquent loans at
September 30, 2000 and December 31, 1999:
(in thousands)
<TABLE>
<S> <C> <C>
2000 1999
---------- -----------
Delinquent 31 to 60 days $ 960 $ 864
Delinquent 61 to 90 days 435 264
Delinquent 91 to 120 days 500 513
Delinquent 121 days or more 1,505 1,466
---------- -----------
Total delinquent loans (1) $ 3,400 $ 3,106
========== ===========
Total loans receivable outstanding, gross $37,050 $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 1.17 0.39
Delinquent 91 to 120 days 1.35 0.74
Delinquent 121 days or more 4.06 2.12
---------- -----------
Total delinquent loans as a percentage
of total loans outstanding 9.17% 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 $2.4 million and $2.2
million at September 30, 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 $268,000 and $235,000 for the nine
months ended September 30, 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 nine months ended September 30, 2000 and the
twelve months ended December 31, 1999 was $98,000 and $109,000, respectively.
Loans delinquent 31 days or more as a percentage of total loans outstanding
increased to 9.17% at September 30, 2000 from 4.50% at December 31, 1999. The
increase in percentage of delinquent loans resulted primarily from a 46%
decrease in the size of the serviced loan portfolio and also from a management
conversion in the collections department.
At September 30, 2000 and December 31, 1999 the recorded investment in loans for
which impairment has been determined, which includes loans delinquent in excess
of 90 days, totaled $2.0 million and $2.0 million, respectively. The average
recorded investment in impaired loans for the nine months ended September 30,
2000 and the year ended December 31, 1999 was approximately $1.4 million and
$3.5 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 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.
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:
10 Employment Contract between the Company and Barry Epstein
dated September 18,2000
27 Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K have been filed during the nine (9) months
ending September 30, 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: November 14, 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
31
