<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------ -----------
Commission file number 000-23887
ROCK FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2603955
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
30600 TELEGRAPH ROAD, FOURTH FLOOR
BINGHAM FARMS, MICHIGAN
48025
(Address of principal executive offices)
(Zip Code)
(248) 540-8000
(Registrant's telephone number, including area code)
- ----------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [ ]
Number of common shares outstanding as of August 7, 1998: 13,833,500
Page 1 of 31 pages
<PAGE> 2
ROCK FINANCIAL CORPORATION
Table of Contents
-----------------
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
PART I--FINANCIAL INFORMATION...........................................................3
ITEM 1. FINANCIAL STATEMENTS..................................................3
BALANCE SHEETS........................................................3
STATEMENTS OF INCOME..................................................4
STATEMENT OF SHAREHOLDERS' EQUITY.....................................5
STATEMENTS OF CASH FLOWS..............................................6
NOTES TO FINANCIAL STATEMENTS.........................................7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..................................10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...........29
PART II--OTHER INFORMATION.............................................................29
ITEM 5. OTHER INFORMATION....................................................29
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.....................................30
SIGNATURES.............................................................................31
</TABLE>
Page 2 of 31 pages
<PAGE> 3
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ROCK FINANCIAL CORPORATION
BALANCE SHEETS
DECEMBER 31, 1997 AND JUNE 30, 1998
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
ASSETS (Audited) (Unaudited)
----------- ----------
<S> <C> <C>
Cash and cash equivalents............................................... $11,946,992 $2,080,091
Mortgage loans held for sale............................................ 121,343,814 91,668,241
Mortgage loans held for investment (net of allowance for
losses of $270,000 and $361,121 at December 31,
1997 and June 30, 1998, respectively).............................. 810,293 1,316,217
Real estate owned....................................................... 158,271 181,651
Shareholders' advances.................................................. 1,626,519 --
Property and equipment (net of accumulated depreciation of
$3,429,862 and $4,481,912 at December 31, 1997 and
June 30, 1998, respectively)....................................... 7,010,537 9,477,673
Deferred income taxes................................................... -- 1,564,850
Other assets............................................................ 1,532,471 1,469,854
----------- -----------
Total assets............................................................ $144,428,897 $107,758,576
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Warehouse line of credit........................................... $79,293,856 $27,121,026
Reverse repurchase agreement....................................... 18,161,423 2,385,774
Notes payable...................................................... 1,944,445 --
Drafts payable..................................................... 21,875,184 34,209,313
Accounts payable................................................... 3,255,503 4,825,641
Accrued expenses and other liabilities............................. 4,790,350 7,789,394
----------- -----------
Total liabilities.............................................. 129,320,761 76,281,148
----------- ----------
Shareholders' equity:
Common shares, $.01 par value. Authorized 50,000,000
shares; issued and outstanding 10,000,000 shares
and 13,829,500 shares at December 31, 1997 and
June 30, 1998, respectively.................................... 100,000 138,295
Additional paid-in capital......................................... 1,423,750 26,404,790
Retained earnings.................................................. 13,584,386 4,934,343
----------- ----------
Total shareholders' equity..................................... 15,108,136 31,477,428
----------- ------------
Total liabilities and shareholders' equity.............................. $144,428,897 $107,758,576
============ ============
</TABLE>
Page 3 of 31 pages
<PAGE> 4
ROCK FINANCIAL CORPORATION
STATEMENTS OF INCOME
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1997 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three-Month For the Six-Month
Periods Ended June 30, Periods Ended June 30,
------------------------- ------------------------
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Interest income................................. $1,522,869 $3,128,445 $2,792,689 $6,227,712
Interest expense................................ 1,069,307 1,882,191 1,933,131 3,619,827
---------- --------- ---------- ----------
Net interest margin......................... 453,562 1,246,254 859,558 2,607,885
Provision for credit losses..................... -- 135,240 -- 249,710
---------- ---------- ---------- ----------
Net interest margin after provision for
credit losses........................... 453,552 1,111,014 859,558 2,358,175
Loan fees and gains on sale of mortgages........ 10,894,441 20,976,499 18,067,051 38,639,830
Net gain (loss) on sale of marketable
securities.................................. (18,085) -- 666,974 --
Other income.................................... 50,878 7,315 100,415 17,734
---------- ---------- ---------- ----------
11,380,796 22,094,828 19,693,998 41,015,739
---------- ---------- ---------- ----------
Expenses:
Salaries, commissions and employee benefits 5,347,100 9,650,074 10,365,875 18,196,241
General and administrative expenses............. 1,728,746 3,267,659 3,044,872 6,097,754
Marketing expenses.............................. 906,013 3,560,772 1,550,217 6,460,478
Depreciation and amortization................... 179,237 509,395 392,868 1,052,050
---------- ---------- ---------- ----------
8,161,096 16,987,900 15,353,882 31,806,523
---------- ---------- ---------- ----------
Income before income taxes............................. 3,219,700 5,106,928 4,340,166 9,209,216
Income taxes due to quarterly earnings................. -- 1,123,524 -- 1,123,524
Income tax benefit due to conversion of "S" Corp. -- (950,939) -- (950,939)
---------- ---------- ---------- ----------
Net income $3,219,700 $4,934,343 $4,340,166 $9,036,631
========== ========== ========== ==========
Pro forma information (note 5):
Income before income taxes 3,219,700 5,106,928 4,340,166 9,209,216
Provision for pro forma income taxes............ 1,094,698 1,736,356 1,475,656 3,181,188
---------- ---------- ---------- ----------
Pro forma net income............................ $2,125,002 $3,370,572 $2,864,510 $6,078,088
========== ========== ========== ==========
Pro forma earnings per share:
Basic........................................... $0.15 $0.24 $0.21 $0.44
===== ===== ===== =====
Diluted......................................... $0.14 $0.23 $0.19 $0.41
===== ===== ===== =====
Dividends declared per share........................... -- $0.02 -- $0.02
== ===== == =====
Pro forma weighted average number of shares outstanding:
Basic....................................... 13,829,500 13,829,500 13,829,500 13,829,500
========== ========== ========== ==========
Diluted..................................... 14,945,181 14,945,181 14,945,181 14,945,181
========== ========== ========== ==========
</TABLE>
Page 4 of 31 pages
<PAGE> 5
STATEMENT OF SHAREHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED SHAREHOLDERS'
SHARES CAPITAL EARNINGS EQUITY
-------- ----------- -------- -------------
<S> <C> <C> <C> <C>
Balance January 1, 1998................................ $100,000 $1,423,750 $13,584,386 $15,108,136
S corporation shareholder distribution................. (5,380,500) (5,380,500)
Proceeds from initial public offering.................. 38,295 32,551,455 32,589,750
Distribution to S corporation shareholders
in connection with conversion to a
C corporation................................... (7,570,415) (12,029,585) (19,600,000)
Cash dividends to C corporation shareholders........... (276,589) (276,589)
Net income ........................................ 9,036,631 9,036,631
-------- --------- --------- -----------
Balance June 30, 1998 $138,295 $26,404,790 $4,934,342 $31,477,428
======== =========== ========== ===========
</TABLE>
Page 5 of 31 pages
<PAGE> 6
ROCK FINANCIAL CORPORATION
STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1997 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
For the Six-Month
Periods Ended June 30,
------------------------------
1997 1998
----- -----
<S> <C> <C>
Cash flows from operating activities:
Net income............................................... $4,340,166 $9,036,631
---------- ----------
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization........................ 392,868 1,052,050
Provision for credit losses.......................... -- 249,710
Net gain on sales of marketable securities........... (666,974) --
Change in assets and liabilities:
Mortgage loans held for sale - originations..... (501,562,495) (969,163,180)
Mortgage loans held for sale - sales............ 526,108,060 998,838,753
Deferred income taxes........................... -- (1,564,850)
Other assets.................................... 28,531 62,617
Drafts payable.................................. 4,831,072 12,334,129
Accounts payable................................ (263,719) 1,570,138
Accrued expenses and other liabilities.......... 1,422,333 2,949,044
----------- -----------
Total adjustments........................... 30,289,676 46,328,411
----------- -----------
Net cash provided by operating activities... 34,629,842 55,365,042
----------- -----------
Cash flows from investing activities:
Proceeds from sale of marketable securities.............. 3,755,443 --
Purchase of marketable securities........................ (3,295,180) --
Net increase in real estate owned and loans
held for investment.................................. -- (779,013)
Purchase of equipment.................................... (2,740,310) (3,519,186)
Shareholder (advances) repayments........................ (3,093,286) 1,626,519
----------- ----------
Net cash used in investing activities........... (5,373,333) (2,671,680)
----------- -----------
Cash flows from financing activities:
Net payments under warehouse
line of credit....................................... (30,077,983) (52,172,830)
Net payments under reverse
repurchase agreement................................. -- (15,775,649)
Net (payments) borrowings under notes payable............ 1,977,778 (1,944,445)
Net proceeds from initial public offering................ -- 31,045,350
Proceeds from exercised options.......................... -- 1,544,400
Cash dividends........................................... -- (276,589)
S Corporation distributions.............................. (1,995,848) (24,980,500)
----------- -----------
Net cash used in financing activities........... (30,096,053) (62,560,263)
----------- -----------
Net decrease in cash and cash equivalents..................... (839,544) (9,866,901)
Cash and cash equivalents, beginning of period................ 3,288,751 11,946,992
----------- -----------
Cash and cash equivalents, end of period...................... $2,449,207 $2,080,091
========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest................. $2,022,490 $3,686,167
========== ==========
Transfers of loans from held for sale to held
for investment....................................... $ -- $551,804
========== ==========
Transfers of loans from held for investment to
real estate owned.................................... $ -- $45,880
========== ==========
</TABLE>
Page 6 of 31 pages
<PAGE> 7
ROCK FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. FINANCIAL STATEMENT PRESENTATION:
The accompanying unaudited interim financial statements of Rock Financial
Corporation (the "Company") have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly, such
financial statements do not include all of the information and footnotes
normally included in the Company's annual financial statements prepared in
accordance with generally accepted accounting principles, although the Company
believes that the disclosures are adequate to make the information presented not
misleading.
The accompanying unaudited interim financial statements reflect all
adjustments which are, in the opinion of management, necessary to a fair
statement of the results for the interim periods presented. All such adjustments
are of a normal recurring nature, except those not material to the Company's
financial condition or results of operations. Operating results for the three-
and six-month periods ended June 30, 1998 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1998. The
unaudited interim financial statements should be read in conjunction with the
audited financial statements and footnotes to such financial statements for the
year ended December 31, 1997 included in the Company's Registration Statement on
Form S-1 (file no. 333-46885), effective May 1, 1998.
2. MORTGAGE LOANS HELD FOR SALE AND HELD FOR INVESTMENT:
The following summarizes mortgage loans held for sale by type at December
31, 1997 and June 30, 1998:
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
------------ -----------
<S> <C> <C>
Prime loans held for sale..................................... $74,049,209 $65,839,491
Sub-prime loans held for sale................................. 38,372,558 21,893,700
High LTV loans held for sale.................................. 9,194,343 4,134,427
---------- ----------
121,616,110 91,867,618
Net deferred loan origination costs (fees).................... (272,296) (199,377)
---------- ----------
Mortgage loans held for sale.............................. $121,343,814 $91,688,241
</TABLE>
Included in mortgage loans held for investment at December 31, 1997 was an
allowance for credit losses of $270,000, which was established in 1997 through a
provision of $300,000 offset by charge-offs of $30,000. Included in mortgage
loans held for investment at June 30, 1998 was an allowance for credit losses of
$361,121, which included a provision of $249,710 in the first six months of
1998, offset by charge-offs of $158,589.
As of December 31, 1997, there were no loans held for sale that were
greater than 90 days past due. As of June 30, 1998, there were approximately
$315,000 of loans held for sale
Page 7 of 31 pages
<PAGE> 8
ROCK FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
that were greater than 90 days past due. Subsequent to June 30, 1998,
approximately $143,000 of these loans were transferred to loans held for
investment and approximately $172,000 were transferred to real estate owned. As
of December 31, 1997, there were approximately $72,000 of loans held for
investment that were greater than 90 days past due, $25,000 of which was
classified as nonaccrual. As of June 30, 1998, there were approximately $614,008
of loans held for investment that were greater than 90 days past due, all of
which were classified as nonaccrual.
3. INITIAL PUBLIC OFFERING AND RELATED MATTERS:
On May 6, 1998, the Company completed its initial public offering (the
"Offering") of 3,829,500 Common Shares, including 330,000 Common Shares sold by
selling shareholders and 3,499,500 newly-issued Common Shares sold by the
Company, at a price of $10.00 per share, for gross proceeds to the Company of
$34,995,000, not including the $1,544,400 received by the Company upon exercise
by the selling shareholders of options to purchase 330,000 common shares at
$4.68 per share. These options were exercised by the selling shareholders to
acquire the common shares they sold in the Offering. The estimated net proceeds
to the Company from the sale of shares offered by it in the Offering, after
deducting the underwriting discount and the estimated expenses of the Offering,
were approximately $31,045,350. The Offering was underwritten by a group of
underwriters for which Bear, Stearns & Co. Inc., Prudential Securities
Incorporated and Roney & Co. served as representatives. The December 31, 1997
balance sheet includes approximately $55,000 of capitalized costs directly
associated with the Offering.
The Company's June 30, 1998 balance sheet reflects the following in
connection with the Offering: (1) the distribution from retained earnings of a
$25.0 million dividend (including the $5.4 million tax distribution to existing
shareholders on April 10, 1998) to the Company's then existing shareholders,
effective immediately before the closing of the Offering and payable out of the
proceeds of the Offering, equal to the entire amount of the Company's income
taxed or taxable to the existing shareholders while the Company was an S
corporation, but not yet distributed to them (the "Shareholder Distribution
Amount"), (2) the establishment of a deferred tax asset of $1.8 million along
with the creation of a current income tax liability of approximately $0.9
million in connection with the termination of the Company's S corporation status
as of May 6, 1998, (3) the repayment by one of the Company's shareholders of the
entire outstanding balance of shareholder advances (approximately $1.6 million)
with his share of the Shareholder Distribution Amount, and the Company's use of
that cash to repay a portion of the amounts outstanding under its warehouse line
of credit, (4) the receipt by the Company of approximately $1.5 million upon
exercise by certain of the Company's option holders of 330,000 options at $4.68
a share to acquire the Common Shares they sold in the Offering and the Company's
application of the estimated net proceeds therefrom to repay a portion of the
amounts outstanding under its warehouse line of credit, and (5) the sale of the
Common Shares offered by the Company in the Offering and the application of the
estimated net proceeds therefrom to fund the Shareholder Distribution Amount and
repay a portion of the
Page 8 of 31 pages
<PAGE> 9
ROCK FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
amounts outstanding under its warehouse line of credit. Due to the payment of
the estimated accumulated Subchapter S corporate earnings paid to the
shareholders in the Shareholder Distribution Amount of $25.0 million, the
Company does not expect to have any undistributed "S" corporation earnings. The
principal component of the Company's deferred tax asset is related to the
temporary differences between tax and book accounting for recognition of gains
on sales of mortgage loans. The amount of the deferred tax asset recorded was
based on the amount of such temporary differences at May 6, 1998, the date of
revocation of the Company's S corporation status.
For a description of the pro forma provision for income tax, see note 5.
4. RELATED PARTY TRANSACTIONS:
On May 6, 1998, the Company's short-term advances to a shareholder were
repaid in full out of the proceeds of the Shareholder Distribution Amount.
5. UNAUDITED PRO FORMA FINANCIAL INFORMATION:
The pro forma financial information has been presented to show what the
significant effects on the historical results of operations might have been had
the Company not been treated as an S corporation for income tax purposes as of
the beginning of the earliest period presented. The presentation of pro forma
net income represents the historical results of operations adjusted to recognize
federal and state income taxes as if the Company had been taxed as a C
corporation rather than an S corporation for all of the periods presented, using
a pro forma combined federal and state income tax rate of approximately 34.0%.
Pro forma basic earnings per share has been computed by dividing pro forma
net income by the 13,829,500 average shares assumed to be outstanding including
the 3,499,500 shares sold by the Company in the Offering and the 330,000 shares
sold by certain existing shareholders in the Offering (after exercising options
to purchase those shares from the Company). Pro forma diluted earnings per share
has been computed by dividing pro forma net income by the 14,945,181 average
shares assumed to be outstanding, including the 3,499,500 shares sold by the
Company in the Offering and the 330,000 shares to be sold by certain existing
shareholders in the Offering (after exercising options to purchase those shares
from the Company) as well as the number of common stock equivalent shares
assumed to be outstanding upon exercise of the Company's stock options existing
as of June 30, 1998, using the treasury stock method and the $10.25 per share
closing market price of the Company's common shares as of June 30, 1998, as
reported by The Nasdaq Stock Market.
Page 9 of 31 pages
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
With the exception of historical information, certain of the matters
discussed in this Management's Discussion and Analysis of Financial Condition
and Results of Operations are forward-looking statements that involve risks and
uncertainties and actual results could differ materially from those discussed.
The words and phrases "should be," "will be," "predicted," "believe," "expect,"
"anticipate" and similar expressions identify forward-looking statements. These
forward-looking statements reflect the Company's current views in respect to
future events in financial performance, but are subject to many risks,
uncertainties and factors relating to the Company's operations and business
environment which may cause its actual results to differ materially from
historical results or any future results expressed or implied by such
forward-looking statements. Such risks and uncertainties include the factors
described under the caption "Risk Factors" and elsewhere in the Company's
Registration Statement on Form S-1 (file no. 333-46885) effective May 1, 1998
and elsewhere in this Report.
GENERAL
The Company is a specialty finance company marketing conventional and
sub-prime debt consolidation and home financing loans, secured primarily by
first or second mortgages on one- to four-family, owner-occupied residences. The
Company originates loans through 27 stores and branches, one marketing center
and one call center. Founded in 1985 by its current Chief Executive Officer and
Chairman of the Board, Daniel Gilbert, the Company originates 100% of its loans
through its retail operations, marketing its loans directly to consumers.
The Company currently operates through three major divisions. The Company
originates Sub-Prime Loans to individuals with impaired credit characteristics,
high levels of debt service to income, unfavorable past credit experience,
limited credit history, limited employment history or unverifiable income
through its Fresh Start(TM) division, created in 1994. The Company originates
home equity second mortgage loans to individuals with good credit histories but
little or no equity in their homes ("High LTV Loans") through its Specialty
Lending division, which commenced its current operations in March 1997. Since
its inception in 1985, the Company has originated Conventional Loans that
generally conform to FNMA or Freddie Mac underwriting standards, or that
generally meet such standards except for maximum loan size guidelines, through
its Conventional Mortgage Lending division. In addition, the Company began to
increase its government insured lending operations in 1997, primarily making
mortgage loans that meet the underwriting standards for FHA insurance.
TERMINATION OF S CORPORATION STATUS AND INCOME TAXES
Simultaneously with the closing of the Company's initial public offering on
May 6, 1998 (the "Offering"), the Company ceased to be taxed as an S corporation
under the Internal Revenue Code of 1986, as amended (the "Code"). In connection
with the termination of its S corporation status, the Company paid the
Shareholder Distribution Amount out of the net proceeds of the Offering to the
Company's shareholders existing immediately before the
Page 10 of 31 pages
<PAGE> 11
closing of the Offering (the "Existing Shareholders"). The Shareholder
Distribution Amount (including the approximately $5.4 million tax distribution
to existing shareholders on April 10, 1998) was approximately $25.0 million, and
is subject to adjustment upon final determination of the amount of taxable
income through May 5, 1998.
As an S corporation, the Company's income, whether or not distributed, was
taxed at the shareholder level for federal and state tax purposes. As a result
of the termination of its S corporation status, the Company is subject to
federal and state income taxation and recorded a $1.8 million deferred tax asset
on its balance sheet in the second quarter of 1998. The amount of the deferred
tax asset is based on timing differences between tax and book accounting
relating principally to marking loans to market for tax purposes. The pro forma
provision for income taxes in the interim statements of income show results as
if the Company had been subject to federal and state taxation at the tax rates
effective for the periods presented.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998
VERSUS THREE MONTHS ENDED JUNE 30, 1997
The following table sets forth the revenues and expenses and net income for
the Company for the three months ended June 30, 1997 and 1998:
<TABLE>
<CAPTION>
Three Months Ended June 30,
----------------------------
1997 1998
---- ----
(In thousands)
<S> <C> <C>
Total revenue before losses on sale of marketable
securities................................ $ 11,399 $ 22,095
Net loss on sale of marketable
securities................................ (18) --
------------- -------------
Total revenue............................... 11,381 22,095
Total expenses.............................. (8,161) (16,988)
------------- -------------
Income before income taxes.................. 3,220 5,107
Income taxes due to quarterly earnings...... -- 1,124
Income tax benefit due to conversion
of "S" Corp............................... -- (951)
------------- -------------
Net income.................................. $ 3,220 $ 4,934
============= =============
</TABLE>
During the second quarter of 1998, the Company closed $512.1 million of
loans (5,428 loans), an increase of $244.5 million, or 91.3%, from the $267.6
million of loans (2,828 loans) closed in the second quarter of 1997. The
Company's total revenues increased to $22.1 million in the second quarter of
1998 from $11.4 million in the second quarter of 1997, an increase of $10.7
million, or 94.1%. The increase in revenues is primarily due to (i) an increase
of $211.4 million, or 108.3%, in the volume of Conventional Loans sold by the
Company in the second quarter of 1998 compared to the second quarter of 1997,
(ii) an
Page 11 of 31 pages
<PAGE> 12
increase of $38.1 million, or 58.9%, in the volume of Sub-Prime Loans sold by
the Company in the second quarter of 1998 compared to the second quarter of
1997, (iii) an increase of $9.8 million or 92.0% in the volume of High LTV Loans
sold by the Company in the second quarter of 1998 compared to the second quarter
of 1997, and (iv) a 21.8% increase in average loan fees and gains on sale of
Conventional Loans, partially offset by a 17.2% decrease in average loan fees
and gains on sale of High LTV Loans, in the second quarter of 1998 compared to
the second quarter of 1997.
In addition to the above factors which account for the changes in revenue
from the three months ended June 30, 1997 versus the three months ended June 30,
1998, a contributing factor in the Company's revenue for the three months ended
June 30, 1998 was the $31.5 million decrease in loans held for sale in the
second quarter. The decrease was due to the Company selling $541.0 million in
loans while disbursing $509.5 for closed loans in the second quarter. The
decrease in loans held for sale included decreases of $26.0 million in
Conventional Loans, $1.8 million in Sub-Prime Loans and $3.7 million in High LTV
Loans in the second quarter.
Total expenses increased from $8.2 million in the second quarter of 1997 to
$17.0 million in the second quarter of 1998, an increase of $8.8 million, or
108.2%, primarily due to increased commissions, increased occupancy costs for
new stores, increases in marketing and advertising expenses associated with
these new store openings, and increases in general and administrative expenses
that fluctuate with increases in volumes of loans closed and numbers of
employees.
The 17 branches and stores along with the marketing center that have
opened since July 1, 1997 (including four branches and stores in the third
quarter of 1997, four stores in the fourth quarter of 1997, five stores in
January 1998, three branches in the second quarter of 1998 and one branch in the
third quarter of 1998), contributed significantly less to the Company's revenues
and net income in the second quarter of 1998 than stores that have been in
operation for at least twelve months. The stores opened in January 1998 and some
of the stores opened late in 1997 operated at a net loss aggregating
approximately $1.0 million in the second quarter of 1998. The Company believes
that its new stores generally mature over a twelve- to eighteen-month time
period.
Page 12 of 31 pages
<PAGE> 13
The following table sets forth information regarding the components of
the Company's revenues for the three months ended June 30, 1997 and 1998:
<TABLE>
<CAPTION>
Three Months
Ended June 30,
-------------------------
1997 1998
---- ----
(in thousands)
<S> <C> <C>
Interest income........................................................ $1,523 $3,128
Interest expense....................................................... (1,069) (1,882)
------- ------
Net interest margin............................................... 454 1,246
Provision for credit losses............................................ -- (135)
------- -------
Net interest margin after provision for credit losses............. 454 1,111
Loan fees and gains on sale of mortgages............................... 10,894 20,977
Net loss on sale of marketable securities.............................. (18) --
Other income........................................................... 51 7
------- -------
Total revenue..................................................... $11,381 $22,095
======= =======
</TABLE>
Net interest margin increased to $1.2 million in the second quarter of 1998
from $0.5 million in the second quarter of 1997, an increase of $.7 million, or
174.4%. The increase was primarily due to (i) the increase in the dollar volume
of loans closed by the Company, (ii) an increase in the portion of loans sold on
a "bulk" or assignment of trade basis, rather than on a "flow" basis, resulting
in an increase in the length of time loans were held before sale, which allowed
the Company to take advantage of the positive net interest margin, (iii) a
decrease in the weighted average interest rates charged on the Company's
borrowing facilities (from 7.25% in the second quarter of 1997 to 6.95% in the
second quarter of 1998), and (v) the Company's increased use of
internally-generated cash to fund its loans.
The Company may be required to repurchase or substitute loans in the event
of a breach of representations and warranties, including any fraud or any
misrepresentation made during the loan origination process. In addition, by
increasing net interest margin by holding loans for longer periods of time, the
Company is subject to a higher risk of delinquencies and resulting foreclosure
losses. The Company did not record a provision for credit losses in the second
quarter of 1997 and recorded a provision for credit losses of approximately
$135,000 in the second quarter of 1998 for future repurchase or substitution
requirements relating to loans sold before June 30, 1997 and 1998, respectively,
and credit risk for loans held for sale and investment. During the second
quarters of 1997 and 1998, no loans were reclassified as real estate owned.
There were no charges against the reserve in the second quarter of 1997 and
charges of approximately $158,000 in the second quarter of 1998.
Loan fees and gains on sale of mortgages increased to $21.0 million in the
second quarter of 1998 from $10.9 million in the second quarter of 1997, an
increase of $10.1 million, or 92.5%. This increase is primarily due to the
increase in sales of loans by segment which was previously discussed.
Page 13 of 31 pages
<PAGE> 14
During the second quarter of 1998, the Company recognized a 21.8%
increase in average loan fees and gains on sale of Conventional Loans, partially
offset by a 17.2% decrease in average loan fees and gains on sale of High LTV
Loans, in the second quarter of 1998 compared to the second quarter of 1997. The
increase in average loan fees and gains on sale of Conventional Loans was
primarily the result of changes in sales methodologies. The decrease in average
loan fees and gains on sale of High LTV Loans was due to originations expanding
beyond the State of Michigan, resulting in originations in states that impose
limitations on the loan fees paid by the borrower.
The increase in loan fees and gains on sale of mortgages was partially
offset by an increase in the Company's estimated prepayment recapture reserve in
the second quarter of 1998. Some Sub-Prime Loan sales require the Company to
return a portion of the premium received by the Company on the sale of the loan
if the loan is prepaid by the customer within the first year after sale. The
Company records a provision for this risk based on its evaluation of the terms
of its sale contracts and its assumptions concerning prepayments. The Company
increased its reserve, and decreased its loan fees and gains on sale of
mortgages, by approximately $414,000 for this risk in the second quarter of
1998, compared to an increase of approximately $210,000 in the second quarter of
1997.
Net loss on sale of marketable securities was approximately $18,000 in
the second quarter of 1997. Before the end of 1997, the Company had invested
some of its excess cash in marketable securities. During 1997, the Company sold
its remaining portfolio of marketable securities held for sale. No such
marketable securities were held by the Company at December 31, 1997 or at June
30, 1998, and, therefore, the gains and losses on sales will not continue in the
future.
The following table sets forth information regarding the components of
the Company's expenses for the three months ended June 30, 1997 and 1998:
Three Months
Ended June 30,
-------------------------
1997 1998
----- -----
(in thousands)
Salaries, commissions and employee benefits.... $5,347 $9,650
General and administrative expenses............ 1,729 3,268
Marketing expenses............................. 906 3,561
Depreciation and amortization.................. 179 509
----- -------
Total expenses............................ $8,161 $16,988
====== =======
Salaries, commissions and employee benefits increased from $5.4 million
in the second quarter of 1997 to $9.7 million in the second quarter of 1998, an
increase of $4.3 million, or 80.5%. The increase was primarily attributable to
increased commissions due to increased closings, the Company hiring additional
personnel in order to generate increased levels of loan closings and increased
compensation for new management team members. The Company employed 482 persons
as of June 30, 1997, compared to 766 persons as of June 30, 1998, a
Page 14 of 31 pages
<PAGE> 15
58.9% increase. These expenses are expected to continue to increase in 1998 in
connection with the expansion of existing operations.
General and administrative expenses consist primarily of occupancy
costs, professional services, office expenses, automobile and delivery expenses
and other expenses, many of which vary with the volume of loan closings. General
and administrative expenses increased from $1.7 million in the second quarter of
1997 to $3.3 million in the second quarter of 1998, an increase of $1.6 million,
or 89.0%. The increase was primarily attributable to an increase in occupancy
expenses as a result of opening eight new Fresh Start(TM) stores and one
marketing center in the last six months of 1997, five new Fresh Start(TM) stores
in January 1998, one new Conventional Mortgage Lending branch during 1997 and
three new Conventional Mortgage Lending branches in the second quarter of 1998.
These expenses are expected to continue to increase in 1998 as a result of
expansion of existing operations.
Marketing expenses increased from $0.9 million in the second quarter of
1997 to $3.6 million in the second quarter of 1998, an increase of $2.7 million,
or 293.0%. The increase was primarily attributable to the Company's greater
marketing of Sub-Prime Loans, both in existing markets and in new markets as an
attempt to generate higher levels of loan closings, as well as the marketing
costs associated with the Company's High LTV Loans. This increase is primarily
the result of the Company's increased focus on its Sub-Prime Loan business,
which required greater marketing related to new store openings, and ongoing
marketing. These expenses are expected to continue to increase in 1998 in
connection with expansion of existing operations into new geographic markets.
Depreciation and amortization expenses increased from $0.2 million in
the second quarter of 1997 to $0.5 million in the second quarter of 1998, an
increase of $0.3 million, or 184.2%. The increase was primarily attributable to
the Company's purchase of a front-end origination computer system in 1997 and
purchases of additional equipment and leasehold improvements during 1997 and
1998 for new stores and branches. These expenses are expected to continue to
increase in 1998 as a result of new stores and branches and expansion of
existing operations.
Effective May 6, 1998, the Company's tax status changed from that of an
S corporation to that of a C corporation. As a C corporation, the Company became
subject to federal and state income taxation in the second quarter of 1998. As
an S corporation, the Company's taxable income is included in the individual
returns of the shareholders. As a result, the Company's income taxes due to
quarterly earnings for the second quarter of 1998 represents income taxes
provided based on the Company's estimated allocation of income before income
taxes between the S corporation and the C corporation as required under IRS
regulations.
In addition, in connection with the change in the Company's tax status,
the Company recognized a net income tax benefit due to conversion of the S
corporation of approximately $0.9 million during the second quarter of 1998.
Upon conversion to a C corporation, the
Page 15 of 31 pages
<PAGE> 16
Company recorded a net deferred tax asset of approximately $1.8 million, and
recognized a corresponding deferred income tax benefit, which was somewhat
offset by the Company's recognition of a current income tax liability of
approximately $0.9 million associated with the allocation of the Company's
taxable income between the S corporation and the C corporation.
SIX MONTHS ENDED JUNE 30, 1998
VERSUS SIX MONTHS ENDED JUNE 30, 1997
The following table sets forth the revenues and expenses and net
income for the Company for the six months ended June 30, 1997 and 1998:
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------------------
1997 1998
----------- --------
(In thousands)
<S> <C> <C>
Total revenue before gains and losses
on sale of marketable securities.......... $ 19,027 $ 41,016
Net gain on sale of marketable securities... 667 --
------------- -------------
Total revenue............................... 19,694 41,016
Total expenses.............................. (15,354) (31,807)
------------- -------------
Income before income taxes.................. 4,340 9,209
Income taxes due to quarterly earnings...... -- 1,124
Income tax benefit due to conversion
of "S" corp............................... -- (951)
------------- -------------
Net income.................................. $ 4,340 $ 9,036
============= =============
</TABLE>
During the first six months of 1998, the Company closed $993.2 million
of loans (10,422 loans), an increase of $489.1 million, or 97.0%, from the
$504.1 million of loans (4,996 loans) closed in the first six months of 1997.
The Company's total revenues increased to $41.0 million in the first six months
of 1998 from $19.7 million in the first six months of 1997, an increase of $21.3
million, or 108.3%. The increase in revenues is primarily due to (i) an increase
of $336.6 million, or 83.1%, in the volume of Conventional Loans sold by the
Company in the first six months of 1998 compared to the first six months of
1997, (ii) an increase of $90.4 million, or 88.3%, in the volume of Sub-Prime
Loans sold by the Company in the first six months of 1998 compared to the first
six months of 1997, (iii) an increase of $33.6 million, or 292.3%, in the volume
of High LTV Loans sold by the Company in the first six months of 1998 compared
to the first six months of 1997, and (iv) a 16.9% increase in average loan fees
and gains on sale of Conventional Loans, partially offset by a 15.5% decrease in
average loan fees and gains on sale of High LTV Loans, in the first six months
of 1998 compared to the first six months of 1997.
In addition to the above factors which account for the changes in
revenue from the six months ended June 30, 1997 versus the six months ended June
30, 1998, a contributing factor in the Company's revenue for the six months
ended June 30, 1998 was the $29.7 million decrease in loans held for sale in the
six month period. The decrease was due to the Company selling $998.0 million in
loans while disbursing $968.3 for closed loans in the six month period
Page 16 of 31 pages
<PAGE> 17
ending June 30, 1998. The decrease in loans held for sale included decreases of
$8.2 million in Conventional Loans, $16.5 million in Sub-Prime Loans and $5.0
million in High LTV Loans in the six month period ending June 30, 1998.
Total expenses increased from $15.4 million in the first six months of
1997 to $31.8 million in the first six months of 1998, an increase of $16.4
million, or 107.2%, primarily due to increased commissions, increased occupancy
costs for new stores, increases in marketing and advertising expenses associated
with these new store openings, and increases in general and administrative
expenses that fluctuate with increases in volumes of loans closed and numbers of
employees.
The 17 branches and stores along with the one marketing center that
have opened since July 1, 1997 (including four branches and stores in the third
quarter of 1997, four stores in the fourth quarter of 1997, five stores in
January 1998, three branches in the first six months of 1998 and one branch in
the third quarter of 1998), contributed significantly less to the Company's
revenues and net income in the first six months of 1998 than stores that have
been in operation for at least twelve months. The stores that opened in 1998
and some of the stores that opened late in 1997 operated at a net loss
aggregating approximately $2.3 million in the first six months of 1998. The
Company believes that its new stores generally mature over a twelve- to
eighteen-month time period.
The following table sets forth information regarding the components
of the Company's revenues for the six months ended June 30, 1997 and 1998:
<TABLE>
<CAPTION>
Six Months
Ended June 30,
-------------------------
1997 1998
------- -------
(in thousands)
<S> <S> <S>
Interest income........................................................ $2,793 $6,228
Interest expense....................................................... (1,933) (3,620)
------- ------
Net interest margin............................................... 860 2,608
Provision for credit losses............................................ -- (250)
------- ------
Net interest margin after provision for credit losses............. 860 2,358
Loan fees and gains on sale of mortgages............................... 18,067 38,640
Net gain on sale of marketable securities.............................. 667 --
Other income........................................................... 100 18
------- ------
Total revenue..................................................... $19,694 $41,016
======= =======
</TABLE>
Net interest margin increased to $2.6 million in the first six months
of 1998 from $0.9 million in the first six months of 1997, an increase of $1.7
million, or 203.4%. The increase was primarily due to (i) the increase in the
dollar volume of loans closed by the Company, (ii) an increase in the portion of
loans sold on a "bulk" or assignment of trade basis, rather than on a "flow"
basis, resulting in an increase in the length of time loans were held before
sale, which allowed the Company to take advantage of the positive net interest
margin, (iii) a decrease in the weighted average interest rates charged on the
Company's borrowing facilities (from 7.16% in the first six months of 1997 to
6.94% in the first six months of 1998), and (iv) the Company's increased use of
internally-generated cash to fund its loans. The Company did not
Page 17 of 31 pages
<PAGE> 18
record a provision for credit losses in the first six months of 1997 and
recorded a provision for credit losses of approximately $250,000 in the first
six months of 1998 for future repurchase or substitution requirements relating
to loans sold before June 30, 1997 and 1998, respectively, and credit risk for
loans held for sale and investment. During the first six months of 1997 and
1998, zero and two loans, respectively, were reclassified as real estate owned.
There were no charges against the reserve in the first six months of 1997 and
charges of approximately $159,000 in the first six months of 1998.
Loan fees and gains on sale of mortgages increased to $38.6 million in
the first six months of 1998 from $18.1 million in the first six months of 1997,
an increase of $20.5 million, or 113.9%. This increase is primarily due to the
increase in loan sales by segment previously discussed.
During the first six months of 1998, the Company recognized a 16.9%
increase in average loan fees and gains on sale of Conventional Loans, partially
offset by a 15.5% decrease in average loan fees and gains on sale of High LTV
Loans, compared to the second quarter of 1997. The increase in average loan fees
and gains on sale of Conventional Loans was primarily the result of changes in
sales methodologies, as previously described. The decrease in average loan fees
and gains on sale of High LTV Loans was due to originations expanding beyond
the State of Michigan, resulting in originations in states that impose
limitations on the loan fees paid by the borrower.
The increase in loan fees and gains on sale of mortgages was partially
offset by an increase in the Company's recapture reserve in the first six months
of 1998. The Company increased its reserve, and decreased its loan fees and
gains on sale of mortgages, by approximately $638,000 for this risk in the first
six months of 1998, compared to an increase of approximately $350,000 in the
first six months of 1997.
Net gain on sale of marketable securities was approximately $667,000 in
the first six months of 1997. Before the end of 1997, the Company had invested
some of its excess cash in marketable securities. During 1997, the Company sold
its remaining portfolio of marketable securities held for sale. No such
marketable securities were held by the Company at December 31, 1997 or at June
30, 1998, and, therefore, the gains on sales will not continue in the future.
The following table sets forth information regarding the components of
the Company's expenses for the six months ended June 30, 1997 and 1998:
<TABLE>
<CAPTION>
Six Months
Ended June 30,
----------------------------
1997 1998
------- -------
(in thousands)
<S> <C> <C>
Salaries, commissions and employee benefits............ $10,366 $18,196
General and administrative expenses.................... 3,045 6,098
Marketing expenses..................................... 1,550 6,461
Depreciation and amortization.......................... 393 1,052
------- -------
Total expenses.................................... $15,354 $31,807
======= =======
</TABLE>
Page 18 of 31 pages
<PAGE> 19
Salaries, commissions and employee benefits increased from $10.4
million in the first six months of 1997 to $18.2 million in the first six months
of 1998, an increase of $7.8 million, or 75.5%. The increase was primarily
attributable to increased commissions due to increased closings, the Company
hiring additional personnel in order to generate increased levels of loan
closings, and increased compensation for new management team members. The
Company employed 482 persons as of June 30, 1997, compared to 766 persons as of
June 30, 1998, a 58.9% increase. These expenses are expected to continue to
increase in 1998 in connection with the expansion of existing operations.
General and administrative expenses consist primarily of occupancy
costs, professional services, office expenses, automobile and delivery expenses
and other expenses, many of which vary with the volume of loan closings. General
and administrative expenses increased from $3.0 million in the first six months
of 1997 to $6.1 million in the first six months of 1998, an increase of $3.1
million, or 100.3%. The increase was primarily attributable to an increase in
occupancy costs, office expenses, and automobile and delivery expenses as a
result of opening eight new Fresh Start(TM) stores and one marketing center in
the last six months of 1997, five new Fresh Start(TM) stores in January 1998,
one new Conventional Mortgage Lending branch during 1997 and three new
Conventional Mortgage Lending branches in the first six months of 1998. These
expenses are expected to continue to increase in 1998 as a result of expansion
of existing operations.
Marketing expenses increased from $1.6 million in the first six months
of 1997 to $6.5 million in the first six months of 1998, an increase of $4.9
million, or 316.8%. The increase was primarily attributable to the Company's
greater marketing of Sub-Prime Loans, both in existing markets and in new
markets to generate higher levels of loan closings, as well as the marketing
costs associated with the Company's High LTV Loans. This increase is primarily
the result of the Company's increased focus on its Sub-Prime Loan business,
which required greater marketing related to new store openings, and ongoing
marketing. These expenses are expected to continue to increase in 1998 in
connection with expansion of existing operations into new geographic markets.
Depreciation and amortization expenses increased from $0.4 million in
the first six months of 1997 to $1.1 million in the first six months of 1998, an
increase of $0.7 million, or 167.8%. The increase was primarily attributable to
the Company's purchase of a front-end origination computer system in 1997 and
purchases of additional equipment and leasehold improvements during 1997 and
1998 for new stores. These expenses are expected to continue to increase in 1998
as a result of new stores and expansion of existing operations.
Effective May 6, 1998, the Company's tax status changed from that of an
S corporation to that of a C corporation. As a C corporation, the Company became
subject to federal and state income taxation in the first six months of 1998. As
an S corporation, the Company's taxable income is included in the individual
returns of the shareholders. As a result, the Company's income taxes due to
quarterly earnings for the first six months of 1998 represents
Page 19 of 31 pages
<PAGE> 20
income taxes provided based on the Company's estimated allocation of income
before income taxes between the S corporation and the C corporation as required
under IRS regulations.
In addition, in connection with the change in the Company's tax status,
the Company recognized a net income tax benefit due to conversion of the S
corporation of approximately $0.9 million during the first six months of 1998.
Upon conversion to a C corporation, the Company recorded a net deferred tax
asset of approximately $1.8 million, and recognized a corresponding deferred
income tax benefit, which was somewhat offset by the Company's recognition of a
current income tax liability of approximately $0.9 million associated with the
allocation of the Company's taxable income between the S corporation and the C
corporation.
SEGMENT ANALYSIS
The Company's recent and rapid growth may have a distortive impact on
some of the Company's ratios and financial statistics and may make
period-to-period comparisons difficult. In light of the Company's growth,
historical performance of the Company's earnings may be of little relevance in
predicting future performance. Furthermore, the Company's financial statistics
may not be indicative of the Company's results in future periods. Additionally,
the sensitivity of Conventional Loans to interest rates and the effect of
interest rates on the volume of loan production will impact period to period
comparisons.
Management expects that the factors enumerated above will continue and
expects segment contributions to vary from period to period. In order to
demonstrate the effect these varying factors have on loan production, revenue
and profits, management has elected, where appropriate, to show the results of
its divisions. The following table shows the contribution to revenues and
expenses and the loan closings of each of the Company's divisions for the three
and six month periods ended June 30, 1997 and 1998:
<TABLE>
<CAPTION>
For the Three-Month For the Six-Month
Periods Ended June 30, Periods Ended June 30,
--------------------------------- ---------------------------------
1997 1998 1997 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
FRESH START(TM):
Revenue..................... $ 6,365.9 $ 10,585.6 $ 9,936.7 $ 19,841.8
Expenses.................... (3,033.3) (7,363.1) (5,512.7) (13,266.5)
------------ ------------ ------------ ------------
Division contribution..... 3,332.6 3,222.5 4,424.0 6,575.3
------------ ------------ ------------ ------------
SPECIALTY LENDING:
Revenue..................... 1,267.1 2,250.8 1,346.6 5,004.5
Expenses.................... (593.9) (1,618.9) (782.4) (3,460.0)
------------ ------------ ------------ ------------
Division contribution..... 673.2 631.9 564.2 1,544.5
------------ ------------ ------------ ------------
</TABLE>
Page 20 of 31 pages
<PAGE> 21
<TABLE>
<CAPTION>
CONVENTIONAL MORTGAGE LENDING:
<S> <C> <C> <C> <C>
Revenue..................... 3,548.4 8,850.6 7,344.9 15,813.8
Expenses.................... (2,128.5) (4,729.7) (4,389.5) (8,536.8)
------------ ------------- ------------- ------------
Division contribution..... 1,419.9 4,120.9 2,955.4 6,977.0
------------- -------------- -------------- ------------
OTHER REVENUE................. 200.5 407.8 1,068.0 655.6
OTHER EXPENSES................ (2,405.5) (3,276.2) (4,669.4) (6,543.2)
------------ ------------- ------------- ------------
Pre-tax income.............. 3,220.7 5,106.9 4,342.2 9,209.2
PROVISION FOR PRO FORMA
INCOME TAX.................. 1,160.0 1,736.4 1,564.0 3,131.1
------------ -------------- ------------- ------------
PRO FORMA NET INCOME.......... $ 2,060.7 $ 3,370.6 $ 2,778.2 $ 6,078.1
============ ============= ============= ============
LOAN CLOSINGS:
Fresh Start(TM)............. $ 57,499 $ 101,806 $ 105,711 $ 182,300
Specialty Lending........... 12,575 16,365 13,693 39,568
Conventional Mortgage
Lending................... 193,629 384,057 377,776 752,291
Other....................... 3,938 9,824 6,893 19,053
------------ ------------- ------------- ------------
Total Loan Closings....... $ 267,641 $ 512,052 $ 504,073 $ 993,212
============ ============= ============= ============
</TABLE>
THREE MONTHS ENDED JUNE 30, 1998
VERSUS THREE MONTHS ENDED JUNE 30, 1997
Although revenues increased in the second quarter of 1998 compared to
the second quarter of 1997, the contribution by segment differed from quarter to
quarter. In the second quarter of 1998, the Conventional Mortgage Lending
division contributed $8.9 million, or 40.1%, of revenues, compared to $3.5
million, or 31.2%, in the second quarter of 1997. The Fresh Start(TM) division
contributed $10.6 million, or 47.9%, of revenues in the second quarter of 1998,
compared to $6.4 million, or 55.9%, in the second quarter of 1997. The Specialty
Lending division contributed $2.3 million, or 10.2%, of revenues in the second
quarter of 1998 compared to $1.3 million, or 11.1%, of revenues in the second
quarter of 1997. The Company's pro forma net income increased from $2.1 million
in the second quarter of 1997 to $3.4 million in the second quarter of 1998, an
increase of $1.3 million, or 58.6%.
FRESH START(TM): The Fresh Start(TM) division generated $10.6 million
in revenue in the second quarter of 1998 versus $6.4 million of revenue in the
second quarter of 1997. The 66.3% increase in revenue is mainly attributable to
a 58.9% increase in sales of Sub-Prime Loans in the second quarter of 1998
compared to the second quarter of 1997, and to the division beginning to sell
loans by bulk sales in the second quarter of 1997, which generate higher
premiums than sales of individual loans. The greater loan sales are primarily
attributable to (i) an increase in Sub-Prime Loan closings as a result of more
stores open in the second quarter of 1998 than in the second quarter of 1997,
and (ii) the sale of $1.8 million more Sub-Prime Loans in the second quarter of
1998 than were disbursed, compared to $7.2 million more in the second quarter of
1997. Stores that were open before January 1, 1997 closed an average of $10.4
million of Sub-Prime Loans during the second quarter of 1998
Page 21 of 31 pages
<PAGE> 22
compared to $10.8 million in the second quarter of 1997. The Company moved some
higher producing loan officers to new stores either as new store managers or to
help develop those stores' local presence. Management expects that the personnel
relocations will result in short-term decreases in loan closings at the mature
stores from which these new store managers were moved, but believes that these
moves will generally enable the new stores to mature and reach full productivity
more quickly.
Direct expenses of the Fresh Start(TM) division were $7.4 million on
closings of $101.8 million (7.2%) in the second quarter of 1998 compared to $3.0
million on closings of $57.5 million (5.3%) in the second quarter of 1997. The
142.7% increase in expenses is partially attributable to the 77.1% increase in
the volume of closed Sub-Prime Loans and the opening of 13 new stores and one
marketing center since July 1, 1997. Due to these new store openings (including
four stores in the fourth quarter of 1997 and five stores in January 1998), the
Company expects these stores to contribute significantly less to its revenues
and net income and more to its expenses in the third and possibly fourth
quarters of 1998 than stores that have been in operation for at least twelve
months. The stores opened in 1998 and some of the stores opened late in 1997
operated at a net loss aggregating approximately $0.8 million in the second
quarter of 1998. The new store expenses, net of revenue, were approximately $1.1
million in the second quarter of 1998.
SPECIALTY LENDING: The Specialty Lending division commenced its current
operations in the second quarter of 1997. The Specialty Lending division
generated $2.3 million in revenue in the second quarter of 1998 versus $1.3
million of revenue in the second quarter of 1997. The 77.6% increase in revenue
is mainly attributable to a 30.1% increase in sales of High LTV Loans in the
second quarter of 1998 compared to the second quarter of 1997, partially offset
by a 17.2% decrease in average loan fees and gains on sales of High LTV Loans in
the second quarter of 1998 compared to the second quarter of 1997. The higher
loan sales are primarily attributable to (i) an increase in High LTV Loan
closings as a result of expansion of the states in which the Specialty Lending
division solicits loans, partially offset by the conscious decision to shift
part of the Company's Specialty Lending division's sales force to handle the
high demand for Conventional Loans during the second quarter of 1998, and (ii)
the sale of $3.6 million more High LTV Loans in the second quarter of 1998 than
were disbursed, compared to $2.0 million fewer in the second quarter of 1997.
The Company expects that it will continue to shift part of the Specialty Lending
division's sales force to handle Conventional Loans into the third quarter of
1998 and management believes this practice will reduce third quarter High LTV
Loan closings from first quarter and second quarter levels. The decrease in
average loan fees and gains on sale of High LTV Loans is mainly attributable to
the expansion of originations into other states, as previously described.
Direct expenses of the Specialty Lending division were $1.6 million on
closings of $16.4 million (9.9%) in the second quarter of 1998 compared to $0.6
million on closings of $12.6 million (4.7%) in the second quarter of 1997. The
110.6% increase in expenses as a percentage of closings is primarily
attributable to increased marketing expenses.
Page 22 of 31 pages
<PAGE> 23
CONVENTIONAL MORTGAGE LENDING: The Conventional Mortgage Lending
division generated $8.9 million in revenue in the second quarter of 1998 versus
$3.5 million of revenue in the second quarter of 1997. The 149.4% increase in
revenue is mainly attributable to (i) a 98.4% increase in sales of Conventional
Loans in the second quarter of 1998 compared to the second quarter of 1997, and
(ii) a 21.8% increase in average loan fees and gains on sale of Conventional
Loans in the second quarter of 1998 compared to the second quarter of 1997. The
greater loan sales are primarily attributable to an increase in Conventional
Loan closings as a result of (i) a more favorable interest rate environment,
(ii) the sale of $26.0 million more Conventional Loans in the second quarter of
1998 than were disbursed, compared to $1.6 million more sold in the second
quarter of 1997 than were disbursed, (iii) the hiring of additional loan
officers, and (iv) to some extent, the significant efficiencies gained through
the implementation of automated underwriting systems and other proprietary
technology. Management believes that a significant increase in interest rates
could reduce the volume of Conventional Loans closed by the division as a result
of a decrease in refinancing of existing mortgages by consumers. The increase in
average loan fees and gains on sale of Conventional Loans was the result of
changes in sales methodologies, as previously described in the "Results of
Operations" section.
Direct expenses of the Conventional Mortgage Lending division were $4.7
million on closings of $384.1 million (1.2%) in the second quarter of 1998
compared to $2.1 million on closings of $193.6 million (1.1%) in the second
quarter of 1997. The 122.2% increase in expenses is primarily attributable to
the 98.4% increase in the volume of closed Conventional Loans. The Company
believes that increased incentive compensation was the primary reason for the
increase in expenses as a percentage of closings (1.2% in the second quarter of
1998 verses 1.1% in the second quarter of 1997), partially offset by economies
of scale resulting from greater loan volume and, to some extent, efficiencies
resulting from the implementation of automated underwriting systems and other
proprietary technology. Management believes that a significant increase in
interest rates could reduce the volume of Conventional Loans closed by the
division and, therefore, increase its per loan cost to originate Conventional
Loans, reducing its profitability.
OTHER REVENUE: Most of the other revenue in the second quarter of 1998
and the second quarter of 1997 consisted of the activity of government insured
lending, including the gain on sale of government insured loans.
OTHER EXPENSES: Other expenses include expenses not directly allocable
to a particular division, such as the costs associated with the Company's legal,
marketing, accounting, information systems, facilities management, servicing and
general and administrative support teams. The direct expenses of government
insured lending are also reflected within these expenses.
Page 23 of 31 pages
<PAGE> 24
SIX MONTHS ENDED JUNE 30, 1998
VERSUS SIX MONTHS ENDED JUNE 30, 1997
While revenues increased in the first six months of 1998 compared to
the first six months of 1997, the contribution by segment did not vary
significantly from period to period. In the first six months of 1998, the
Conventional Mortgage Lending division contributed $15.5 million, or 37.8%, of
revenues, compared to $7.3 million, or 37.3%, in the first six months of 1997.
The Fresh Start(TM) division contributed $19.8 million, or 48.4%, of revenues in
the first six months of 1998, compared to $9.9 million, or 50.5%, in the first
six months of 1997. The Specialty Lending division contributed $5.0 million, or
12.2%, of revenues in the first six months of 1998 compared to $1.3 million, or
6.8%, of revenues in the first six months of 1997. The Company's pro forma net
income increased from $2.9 million in the first six months of 1997 to $6.1
million in the first six months of 1998, an increase of $3.2 million, or 112.2%.
FRESH START(TM): The Fresh Start(TM) division generated $19.8 million
in revenue in the first six months of 1998 versus $9.9 million of revenue in the
first six months of 1997. The 99.7% increase in revenue is mainly attributable
to a 88.3% increase in sales of Sub-Prime Loans in the first six months of 1998
compared to the first six months of 1997, and to the division beginning to sell
loans by bulk sales in the second quarter of 1997, which generate higher
premiums than sales of individual loans. The greater loan sales are primarily
attributable to (i) an increase in Sub-Prime Loan closings as a result of more
stores open in the first six months of 1998 than in the first six months of
1997, partially offset by the Company moving some of its higher producing loan
officers into new stores and by a decrease in same store loan closings in the
first six months of 1998, and (ii) the sale of $16.5 million more Sub-Prime
Loans in the first six months of 1998 than were disbursed, compared to $3.3
million fewer in the first six months of 1997. Stores that were open before
January 1, 1997 closed an average of $20.3 million of Sub-Prime Loans during the
first six months of 1998 compared to $20.5 million in the first six months of
1997.
Direct expenses of the Fresh Start(TM) division were $13.3 million on
closings of $182.3 million (7.3%) in the first six months of 1998 compared to
$5.5 million on closings of $105.7 million (5.2%) in the first six months of
1997. Management believes that the increase in expenses as a percentage of
closings is primarily due to the continuing absorption of the start-up expenses
of the four new stores opened in the fourth quarter of 1997 and the five new
stores opened in January 1998. A new store opening requires the Company to incur
monthly expenses in excess of revenues generated by the new store until enough
loans are closed for the store to reach break even. The Company expects these
stores to contribute significantly less to its revenues and net income and more
to its expenses in the third and possibly fourth quarters of 1998. The new store
expenses, net of revenue, were approximately $2.3 million through the six months
ended June 30, 1998. The increase in expenses as a percentage of closings is
also attributable to increased marketing expenses.
SPECIALTY LENDING: The Specialty Lending division generated $5.0
million in revenue in the first six months of 1998 versus $1.3 million of
revenue in the first six months of 1997.
Page 24 of 31 pages
<PAGE> 25
The 271.6% increase in revenue is mainly attributable to a 189.0% increase in
sales of High LTV Loans in the first six months of 1998 compared to the first
six months of 1997, partially offset by a 15.5% decrease in average loan fees
and gains on sales of High LTV Loans in the first six months of 1998 compared to
the first six months of 1997. Management believes that the higher loan sales are
primarily attributable to (i) an increase in High LTV Loan closings as a result
of the expansion of the Company's call center operations into additional states
along with full operation of the call center beginning March of 1997, partially
offset by the conscious decision to shift part of the Company's Specialty
Lending division's sales force to handle the high demand for Conventional Loans
during the first six months of 1998, and (ii) the sale of $5.0 million more High
LTV Loans in the first six months of 1998 than were disbursed, compared to $2.2
million fewer in the first six months of 1997. The Company expects that it will
continue to shift part of the Specialty Lending division's sales force to handle
Conventional Loans into the third quarter of 1998 and management believes this
practice will reduce third quarter High LTV Loan closings from first quarter and
second quarter levels.
Direct expenses of the Specialty Lending division were $3.5 million on
closings of $39.6 million (8.7%) in the first six months of 1998 compared to
$0.8 million on closings of $13.7 million (5.7%) in the first six months of
1997. The 52.6% increase in expenses as a percentage of closings is primarily
attributable to increased marketing expenses.
CONVENTIONAL MORTGAGE LENDING: The Conventional Mortgage Lending
division generated $15.5 million in revenue in the first six months of 1998
versus $7.3 million of revenue in the first six months of 1997. The 111.2%
increase in revenue is mainly attributable to (i) a 99.1% increase in sales of
Conventional Loans in the first six months of 1998 compared to the first six
months of 1997, and (ii) a 16.9% increase in average loan fees and gains on sale
of Conventional Loans in the first six months of 1998 compared to the first six
months of 1997. The greater loan sales are primarily attributable to an increase
in Conventional Loan closings as a result of a more favorable interest rate
environment, which caused a significant increase in loan refinancings, and, to
some extent, the significant efficiencies gained through the implementation of
automated underwriting systems and other proprietary technology, partially
offset by the sale of $8.2 million fewer Conventional Loans in the first six
months of 1998 than were disbursed, compared to $27.4 million more in the first
six months of 1997. Management believes that a significant increase in interest
rates could reduce the volume of Conventional Loans closed by the division as a
result of a decrease in refinancing of existing mortgages by consumers.
Direct expenses of the Conventional Mortgage Lending division were $8.5
million on closings of $752.3 million (1.1%) in the first six months of 1998
compared to $4.4 million on closings of $377.8 million (1.1%) in the first six
months of 1997. The 94.5% increase in expenses is primarily attributable to the
99.1% increase in the volume of closed Conventional Loans. The Company believes
its consistent expense ratio resulted from increased incentive compensation
which was substantially offset by economies of scale resulting from greater loan
volume and, to some extent, efficiencies resulting from the implementation of
automated underwriting systems and other proprietary technology. Management
believes that a significant increase in interest rates could reduce the volume
of Conventional Loans closed by
Page 25 of 31 pages
<PAGE> 26
the division and, therefore, increase its per loan cost to originate
Conventional Loans, reducing its profitability.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth information concerning the Company's
financial condition as of December 31, 1997 and June 30, 1998:
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
------------ ---------
(In thousands)
<S> <C> <C>
Cash and cash equivalents................................. $ 11,947 $ 2,080
Mortgage loans held for sale.............................. 121,344 91,123
Property and equipment, net............................... 7,011 9,478
Other assets.............................................. 4,127 5,078
-------------- --------------
Total assets.......................................... $ 144,429 $ 107,759
============== ==============
Warehouse borrowings...................................... $ 97,455 $ 29,507
Drafts payable............................................ 21,875 34,209
Other liabilities......................................... 9,991 12,565
Shareholders' equity...................................... 15,108 31,478
-------------- --------------
Total liabilities and shareholders' equity............ $ 144,429 $ 107,759
============== =============
</TABLE>
On May 6, 1998, the Company completed its Offering of 3,829,500 Common
Shares, including 330,000 Common Shares sold by selling shareholders and
3,499,500 newly-issued Common Shares sold by the Company, at a price of $10.00
per share, for gross proceeds to the Company of $34,995,000, not including the
$1,544,400 received by the Company upon exercise by the selling shareholders of
options to purchase 330,000 common shares at $4.68 per share. These options were
exercised by the selling shareholders to acquire the common shares they sold in
the Offering. The estimated net proceeds to the Company from the sale of shares
offered by it in the Offering, after deducting the underwriting discount and the
estimated expenses of the Offering, were approximately $31,045,350. The Offering
was underwritten by a group of underwriters for which Bear, Stearns & Co. Inc.,
Prudential Securities Incorporated and Roney & Co. served as representatives.
The December 31, 1997 balance sheet includes approximately $55,000 of
capitalized costs directly associated with the Offering.
Cash and cash equivalents decreased in the first six months of 1998
primarily due to the proceeds of the Company's Offering and cash generated from
operations being used to pay the Shareholder Distribution Amount and to pay down
warehouse borrowings. Mortgage loans held for sale decreased due to more loans
being sold than were closed in the first six months of 1998. See "Results of
Operations." Property and equipment increased due to new Fresh Start(TM) store
and Conventional Mortgage Lending branch openings. Other assets at June 30, 1998
include approximately $1.3 million of loans held for investment, net of
approximately $360,000 of allowances for losses on these loans, approximately
$180,000 of real estate owned
Page 26 of 31 pages
<PAGE> 27
as a result of foreclosures, approximately $1.6 million of deferred income
taxes, and approximately $1.5 million of miscellaneous assets.
The combination of warehouse borrowings and drafts payable decreased
due to the use of a portion of the proceeds of the Company's Offering and
related transactions to repay warehouse borrowings, partially offset by
borrowings to finance the increase in volumes of originations and holding loans
for longer periods of time. See "Results of Operations." The increase in other
liabilities is due to increased trade payables relating to increases in the
volume of loans closed and financing for equipment acquisitions. Shareholders'
equity reflects the increase due to the receipt of approximately $31.0 million
in net proceeds from the Company's Offering that closed on May 6, 1998 and
approximately $1.5 million in proceeds from the exercise of stock options by
selling shareholders in the Offering, and pre-tax income, less distributions to
shareholders of the Shareholder Distribution Amount, other distributions to pay
tax liabilities they incur as a result of the Company's status as an S
corporation until May 6, 1998 and cash dividends paid to C corporation
shareholders.
Net cash provided by operating activities during the first six months
of 1998 was approximately $55.4 million, compared to approximately $34.6 million
in the first six months of 1997. Cash was provided primarily by (i) the
Company's net income for the first six months of 1998 (approximately $10.3
million before depreciation and amortization, provision for credit losses and
net gain on sales of marketable securities in 1998, compared to approximately
$4.1 million in 1997), (ii) a decrease in mortgage loans held for sale
(approximately $30.0 million in 1998, compared to approximately $24.5 million in
1997), (iii) an increase in drafts payable, which represent funds advanced for
loan closings that have not yet been drawn against the warehouse line of credit
(approximately $12.3 million in 1998, compared to approximately $4.8 million in
1997), and (iv) an increase in accounts payable and accrued expenses and other
liabilities, primarily as a result of the increase in loan closings and the
number of stores and branches opened during 1998 (approximately $4.5 million in
1998, compared to approximately $1.2 million in 1997).
These sources of cash were partially offset primarily by cash used
during the first six months of 1998 to purchase equipment for new stores
(approximately $3.5 million in 1998, compared to approximately $2.7 million in
1997), and for real estate owned and loans held for investment (approximately
$0.8 million in 1998, compared to zero in 1997). The Company also used cash to
pay the Shareholder Distribution Amount (approximately $19.6 million), to pay a
tax distribution to existing shareholders in April 1998 (approximately $5.4
million), to decrease borrowings under the Company's warehouse financing
facilities (approximately $67.9 million in 1998, compared to approximately $30.1
million in the first six months of 1997), to repay all loans payable
(approximately $1.9 million in 1998, compared to borrowings of approximately
$2.0 million in the first six months of 1997), and to pay a dividend to
shareholders (approximately $0.3 million). These uses of cash were financed
primarily by cash generated by operations and the proceeds of its Offering, the
repayment of shareholder advances and the proceeds of option exercises. During
the first six months of 1997, cash was also used to purchase marketable
securities (approximately $3.3 million) and to fund advances to shareholders
(approximately $3.1 million).
Page 27 of 31 pages
<PAGE> 28
The Company has $350 million of warehouse financing facilities, an
increase from $190 million of warehouse financing facilities as of June 30,
1997. The Company's warehouse line of credit currently provides for up to $150
million principal amount of demand loans secured by loans held for sale and
other assets of the Company. Loans under the warehouse line of credit bear
interest at rates that vary depending on the type of underlying loan, and the
loans are subject to sublimits, advance rates and warehouse terms that vary
depending on the type of underlying loan. The effective weighted average
interest rate for this arrangement in the first six months of 1998 was 7.11%.
As of August 6, 1998, the Company had borrowed $55.8 million under this
facility and had a maximum of $94.2 million available for additional borrowings.
In addition to the $150 million warehouse line of credit, the Company's
reverse repurchase arrangement provides that the lender, an affiliate of one of
the representatives of the underwriters in the Company's Offering, will purchase
from the Company at par, subject to the Company's agreement to repurchase on a
daily basis, up to $200 million of fully-amortizing, first or junior lien
residential mortgage loans and home equity loans that comply with the Company's
origination guidelines and conform to whole and bulk loan sale requirements.
This agreement is not a committed facility and the lender may elect to
discontinue the repurchase agreement at any time. The term of any financing
under the repurchase agreement matures and may be renewed on a daily basis. In
any event, the arrangement terminates in March 1999. The effective weighted
average interest rate to the Company of this arrangement in the first six months
of 1998 was 6.84%. The Company uses this facility as a supplemental borrowing
facility to fund loans closed by the Company until they are sold. As of August
6, 1998, the Company had financed $23.3 million of loans under this facility and
an additional $176.7 million was available for future financings.
The net proceeds of the Offering, together with cash flows from
operations, are expected to be sufficient to fund the Company's liquidity
requirements for the next 12 months, if the Company's future operations are
consistent with management's expectations. The Company, however, expects to
continue its expansion and expects that eventually it will need to arrange for
additional sources of capital through the issuance of debt, equity or additional
bank borrowings. The Company has no commitments for any such additional
financings, and there can be no assurance that the Company will be able to
obtain any such additional financing at the times required and on terms and
conditions acceptable to the Company. In such event, the Company's growth and
operations could be curtailed. If the Company begins to securitize its assets or
significantly increases its retained mortgage servicing rights, the Company's
liquidity could be materially adversely affected.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("Statement
133"). Statement 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging
Page 28 of 31 pages
<PAGE> 29
activities. Statement 133 requires companies to record derivatives on the
balance sheet as assets or liabilities, measured at fair value. Gains or losses
resulting from changes in the values of those derivatives would be accounted for
depending on the use of the derivative and whether it qualifies for hedge
accounting. Statement 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Upon initial application, hedging relationships
must be designated anew and documented pursuant to the provisions of Statement
133. Statement 133 may not be applied retroactively to financial statements for
prior periods. Management has not yet evaluated the impact of the implementation
of this statement at this time.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
PART II--OTHER INFORMATION
ITEM 5. OTHER INFORMATION
Proposals of shareholders that are intended to be presented at the
Company's 1999 Annual Meeting of Shareholders must be received by the Company's
Secretary at the Company's offices, 30600 Telegraph Road, Fourth Floor, Bingham
Farms, Michigan 48025, no later than December 2, 1998 to be considered for
inclusion in the Company's Proxy Statement and Proxy related to that meeting.
Such proposals should be sent by certified mail, return receipt requested.
The Company must also receive notice of any proposals of shareholders
that are intended to be presented at the Company's 1999 Annual Meeting of
Shareholders, but that are not intended to be considered for inclusion in the
Company's Proxy Statement and Proxy related to that meeting, no later than
February 15, 1998 to be considered timely. Such proposals should be sent to the
Company's Secretary at the Company's offices, 30600 Telegraph Road, Fourth
Floor, Bingham Farms, Michigan 48025 by certified mail, return receipt
requested. If the Company does not have notice of the matter by that date, the
Company's form of proxy in connection with that meeting may confer discretionary
authority to vote on that matter, and the persons named in Company's form of
proxy will vote the shares represented by such proxies in accordance with their
best judgment.
Page 29 of 31 pages
<PAGE> 30
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Registrant during the
quarter for which this report is filed.
Page 30 of 31 pages
<PAGE> 31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ROCK FINANCIAL CORPORATION
(Registrant)
Date: August 14, 1998 By: /s/ DANIEL GILBERT
----------------------------------
DANIEL GILBERT
Its: Chairman of the Board and
Chief Executive Officer
(Duly Authorized Officer)
Date: August 14, 1998 By: /s/ FRANK E. PLENSKOFSKI
----------------------------------
FRANK E. PLENSKOFSKI
Its: Chief Financial Officer
(Principal Accounting Officer)
Page 31 of 31 pages
<PAGE> 32
EXHIBIT INDEX
Exhibit Description
- ------- -----------
27.1 Financial data schedule.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF ROCK FINANCIAL CORPORATION AS OF, AND FOR THE SIX MONTHS
ENDED, JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS AND ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 2,080,091
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 91,668,241
<CURRENT-ASSETS> 0
<PP&E> 13,959,585
<DEPRECIATION> 4,481,912
<TOTAL-ASSETS> 107,758,576
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 138,295
<OTHER-SE> 31,339,133
<TOTAL-LIABILITY-AND-EQUITY> 107,758,576
<SALES> 0
<TOTAL-REVENUES> 41,015,739
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 249,710
<INTEREST-EXPENSE> 3,619,827
<INCOME-PRETAX> 9,209,216
<INCOME-TAX> 172,585
<INCOME-CONTINUING> 9,036,631
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,036,631
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
