SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-K/A
                                AMENDMENT NO. - 1

                                  ANNUAL REPORT
                         PURSUANT TO SECTION 13 OR 15(D)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997

                        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)

          3420 HOLLAND ROAD, SUITE 107, VIRGINIA BEACH, VIRGINIA 23452
          ------------------------------------------------------------
               (Address of Principal Executive Office) (Zip Code)

                          757-430-1400 OR 800-486-5237
                          ----------------------------
              (Registrant's Telephone Number, Including Area Code)

        Securities to be Registered Pursuant to Section 12(g) of the Act:

                                                           Name of Each Exchange
       Title of Each Class                                  on Which Resistered
Common, $1.00 par value per share                            OTC Bulletin Board
---------------------------------                          ---------------------

        Securities to be Registered Pursuant to Section 12(g) of the Act:

                                      None
                                      ----

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 [   ].

Indicate by check mark if disclosure of delinquent  filers  pursuant to item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X].

Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest  practicable date:  5,512,114 shares at March 15,
1998.

<PAGE>

                            APPROVED FINANCIAL CORP.
                          ANNUAL REPORT ON FORM 10-K/A
                                AMENDMENT NO. - 1
                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997

                      INFORMATION REQUIRED IN ANNUAL REPORT
                                TABLE OF CONTENTS

                                     PART I

ITEM 1.  BUSINESS.

General        ................................................................6
Business Strategy..............................................................8
Purchase of the Assets of Funding Center of Georgia, Inc......................11
The Company's Borrowers and its Loan Products.................................12
Underwriting Guidelines.......................................................16
Mortgage Loan Servicing.......................................................20
Marketing      ...............................................................22
Company's Sources of Funds and Liquidity......................................23
Savings Bank's Sources of Funds...............................................24
Taxation       ...............................................................27
Employees      ...............................................................28
Service Marks  ...............................................................28
Effect of Adverse Economic Conditions.........................................28
Reliance on IMC Mortgage Company..............................................29
Concentration of Operations in Seven States...................................29
Future Risks Associated with Loan Sales through Securitizations...............29
Year 2000 Issues..............................................................30
Contingent Risks..............................................................30
Competition    ...............................................................31
Regulation     ...............................................................32
OTS Regulation of the Company.................................................34
Regulation of the Savings Bank................................................36
Legislative Risk..............................................................44
Environmental Factors.........................................................44
Dependence on Key Personnel...................................................45
Control by Certain Shareholders...............................................45

                                       2
<PAGE>

ITEM 2.  PROPERTIES.

Properties     ...............................................................46


ITEM 3.  LEGAL PROCEEDINGS.

Legal Proceedings.............................................................47


ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

Submission of Matters to a Vote of Security Holders...........................47


                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY
         AND RELATED STOCKHOLDER MATTERS.

Market Price of and Cash Dividends on Company's Common Equity.................48
Absence of Active Public Trading Market and Volatility of Stock Price.........49
Transfer Agent and Registrar..................................................49
Recent Sales of Unregistered Securities.......................................49


ITEM 6.  SELECTED FINANCIAL DATA.

Selected Financial Data.......................................................51

                                       3
<PAGE>

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF
         FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General        ...............................................................54
Results of Operations - Years Ended December 31, 1997, 1996 and 1995..........54
Financial Condition - December 31, 1997, 1996 and 1995........................66
New Accounting Standards......................................................72
Hedging Activities............................................................73
Impact of Inflation and Changing Prices.......................................73
Market Risk Management - Asset/Liability Management...........................75
Interest Rate Risk............................................................77
Asset Quality  ...............................................................79
Liquidity - Negative Cash Flow................................................81


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Financial Statements and Supplementary Data...................................82


ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
         ON ACCOUNTING AND FINANCIAL DISCLOSURE.

Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure........................................82


                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

Directors and Executive Officers..............................................83
Board of Directors............................................................86

                                       4
<PAGE>

ITEM 11.  EXECUTIVE COMPENSATION.

Summary of Cash and Other Compensation........................................88
Stock Option/Stock Appreciation Right Grants in the Last Year.................89
Aggregate Option Exercises and Period-End Values..............................90
1996 Incentive Stock Option Plan..............................................90
401(k) Retirement Plan........................................................92
Employment Agreements.........................................................93
Directors' Compensation.......................................................95


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

Security Ownership of Certain Beneficial Owners...............................96
Security Ownership of Directors and Executive Officers........................97


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

Agreement with IMC Mortgage Company...........................................98
Agreement with Mills Value Advisors, Inc......................................99
Termination of Armada Residential Mortgage, LLC...............................99
Indebtedness of Management....................................................99
Promissory Notes..............................................................99


                                     PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES
          AND REPORTS ON FORM 8-K.

Financial Statements and Exhibits............................................100


Signatures     ..............................................................103

                                       5
<PAGE>

                                     PART I

                                ITEM 1 - BUSINESS

     The  statements in this report,  which are not merely reports of historical
facts,  are  forward-looking   statements,   and  actual  results  could  differ
materially due to important  factors,  including among others,  reduced consumer
demand  for  loans,  competitive  forces,  excessive  expectations  of  acquired
companies,  limitations on available  funds,  and market forces  affecting share
prices of Approved Financial Corp. (the "Company").

GENERAL

     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.  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 and other factors.  For over forty-five
years, the Company has helped its customers to satisfy their financial needs and
to improve their credit ratings.

     Incorporated in 1952 as a subsidiary of Government  Employees Insurance Co.
("GEICO"),  the Company was acquired in September 1984 by, among others, several
members of current  management.  The Company,  headquartered  in Virginia Beach,
Virginia, holds a Virginia industrial loan association charter and is subject to
the  supervision,  regulation and examination of the Virginia State  Corporation
Commission's  Bureau of Financial  Institutions.  In September  1996 the Company
acquired    Approved    Federal   Savings   Bank   (the   "Savings   Bank"),   a
federally-chartered  savings  institution.  The  Savings  Bank is subject to the
supervision, regulation and examination of the Office of Thrift Supervision (the
"OTS") and the Federal Deposit Insurance Corporation ("FDIC").  The Company is a
registered  savings and loan holding company under the federal Home Owner's Loan
Act ("HOLA")  because of its ownership of the Savings Bank. As such, the Company
is  subject to the  regulation,  supervision  and  examination  of the OTS.  The
Savings Bank is also subject to the regulations of the Board of Governors of the
Federal  Reserve System  governing  reserves  required to be maintained  against
deposits.

     The Company  derives its income from gains on loans sold through whole loan
sales to institutional  purchasers,  net warehouse interest earned on loans held
for sale, net interest income on loans held for investment,  and origination and
other fees received as part of the loan application  process. In future periods,
the Company may generate  revenue from loans sold  through  securitizations  and
non-real estate secured consumer finance lending.

                                       6
<PAGE>

     The Company  utilizes broker and retail channels to originate loans. At the
broker level, an extensive  network of independent  mortgage  brokers  generates
referrals. This loan source has been a successful and profitable mainstay of the
business for many years.  The Company began making  residential  mortgage  loans
through  retail  offices  during the fourth quarter of 1994. In 1997, the dollar
volume in the broker lending division  accounted for 54.7% of total originations
and the retail lending division accounted for 45.3% of total  originations.  The
Company is seeking to expand its broker network and its direct consumer  lending
by opening branch offices and increasing its use of advertising, direct mail and
other marketing strategies,  and through strategic acquisitions.  The Company is
also  committing  resources  to  grow  and  improve  the  profitability  of each
operating unit, and to enhance the corporate and underwriting infrastructure.

     Once loan  applications  are received from the broker and retail  networks,
the  underwriting  process is  completed  and the loans are funded,  the Company
typically  packages  the  loans  and  sells  them  on  a  whole  loan  basis  to
institutional  investors,  usually  other  mortgage and finance  companies.  The
proceeds from the sales release funds for additional lending.

     The Company has two operating subsidiaries.  Approved Residential Mortgage,
Inc. ("ARMI") was formed in April 1993 to originate  non-conforming  residential
mortgage  loans through its broker  network and retail  outlets.  ARMI initially
concentrated  on continuing the Company's  broker network  business.  During the
fourth  quarter of 1994,  the Company  opened its first retail loan  origination
center through a joint venture. The Company opened three retail centers in 1995,
seven retail  centers in 1996 and twelve retail  centers in 1997.  ARMI operates
most of its retail offices under the service mark "Armada" Residential Mortgage.

     The Company's other  operating  subsidiary is the Savings Bank. The Savings
Bank's principal  business  activities are attracting  savings deposits from the
general  public  through its  Virginia  Beach  banking  office and  originating,
investing in and selling  loans  secured by first and junior  mortgage  liens on
single-family  dwellings,  including condominium units. The Savings Bank employs
two mortgage loan broker account  representatives in the state of Tennessee.  In
future  periods,  the Savings  Bank may also lend funds to banking  customers by
means of home equity loans and also installment loans not secured by real estate
collateral,  and may originate residential  construction loans and loans secured
by  manufactured  housing  units.  The  Savings  Bank  invests in  certain  U.S.
Government and agency obligations and other investments  permitted by applicable
laws and  regulations.  The  operating  results of the  Savings  Bank are highly
dependent on net interest income,  the difference between interest income earned
on loans and  investments  and the cost of savings  deposits and borrowed funds.
The Savings Bank has one operating  subsidiary,  Global Title Insurance  Agency,
Inc.

                                       7
<PAGE>

     Following  its  acquisition  of the Savings  Bank in  September  1996,  the
Company moved quickly to change the Savings Bank's profile and  operations.  The
Company installed new management and the Savings Bank's operations were moved to
Virginia Beach,  Virginia,  to be in close proximity to the Company's  corporate
headquarters.  During 1997,  the Savings Bank's  operations  consisted of making
loans similar to those typically made by the Company. The Savings Bank's charter
gives it quick entry into new  markets,  with  reduced  legal  costs.  By taking
advantage of the flexible  provisions of the charter,  the Savings Bank has been
able to make non-conforming  real  estate-secured  loans in several states where
the Company's  retail or broker units have not yet obtained  licenses,  or where
the  Company's  current  licenses  have  restricted  it from  doing this type of
business without expensive application costs. In making these loans, the Savings
Bank has utilized the Company's existing network of brokers and retail branches,
and has utilized on a contract basis the  processing,  underwriting  and closing
capabilities of the Company. The Company has agreed to purchase all of the loans
made by the  Savings  Bank  during  this  period.  The  Company  has sold in the
secondary market most of the loans it has purchased from the Savings Bank.

     Deposit  accounts  of the Savings  Bank up to  $100,000  are insured by the
Savings Association  Insurance Fund,  administered by the FDIC. The Savings Bank
is a member of the Federal Home Loan Bank (the  "FHLB") of Atlanta.  The Company
and the Savings Bank are subject to the supervision,  regulation and examination
of the OTS and the FDIC. The Savings Bank is also subject to the  regulations of
the Board of Governors of the Federal Reserve System governing reserves required
to be maintained against deposits.

BUSINESS STRATEGY

     The Company's strategies are: (i) maintaining the strong commitment to loan
underwriting  and servicing  standards;  (ii) expanding  direct retail  lending;
(iii)  increasing the number of brokers in its network and increasing the amount
of loans  originated  from  brokers;  (iv)  building  on the  Company's  initial
investment  in the Savings  Bank;  (v)  prudent  management  of cash flow;  (vi)
acquiring  additional  loan  production   capability  through  acquisitions  and
strategic  alliances;   (vii)  broadening  its  product  offerings;  and  (viii)
diversifying loan sale strategies.

     MAINTENANCE  OF QUALITY  UNDERWRITING  AND LOAN  SERVICING.  The  Company's
underwriting  and servicing  staff have  experience in the  non-conforming  home
equity loan industry.  The Company's  management believes that the experience of
its underwriting and servicing staff provide the Company with the infrastructure
necessary  to sustain its recent  growth and  maintain  its  commitment  to high
standards in its underwriting and servicing of portfolio and warehouse loans.

     EXPANSION OF RETAIL (DIRECT TO CONSUMER)  LENDING.  The Company  intends to
expand its retail  (direct to consumer)  lending  efforts by opening  additional
retail  branch  offices  in the next  twelve  months.  The use of retail  branch
offices  allows the  Company to focus on  developing  contacts  with  individual
borrowers  and referral  sources such as  accountants,  attorneys  and financial
planners, with a view toward expanding its retail loan business.

                                       8
<PAGE>

     The  Company  generally  enters a new  target  market by way of the  broker
network.  The Company  targets cities where the population  density and economic
indicators are favorable for home equity lending, the foreclosure rate is within
normal ranges and the non-conforming  loan market has been under-served.  Before
establishing  a branch  office,  the Company may test the target  market,  where
local regulations  permit, via newspaper,  radio and direct mail advertising and
through a toll-free  telephone number which routes a borrower directly to a loan
officer in the Virginia  Beach,  Virginia  office.  The Company  will  generally
establish a small branch  office,  generally with an initial staff of one or two
business development  representatives.  These sales centers do not require heavy
investments  which  allows the  Company to exit the market  easily if the office
does not meet expectations.  The branch office network is used for marketing and
meeting with the Company's local  borrowers.  The Company has also  successfully
used targeted  outbound  telemarketing  and direct mail to reach  potential loan
customers.

     The Company currently utilizes targeted  out-bound  telemarketing to obtain
leads for potential customers. Most of the telemarketing activity has previously
been performed in the retail branches. The Company is planning to centralize all
of its telemarketing  activities in the Virginia Beach, Virginia area to achieve
economies of scale and to obtain greater  quality  control over this  operation.
Also, in-bound telemarketing (customer responses to mailings and advertisements)
will be added in 1998.

     EXPANSION  OF  BROKER  NETWORKS.   In  1997  and  1996,  54.7%  and  62.9%,
respectively,  of  the  dollar  volume  of the  Company's  loan  production  was
originated  through  its broker  network.  The  Company  intends to  continue to
increase its loan  production  brokers by expanding  its networks to include new
brokers and  increasing  the efficiency and production of the brokers that are a
part of the Company's  network.  The Company plans to implement this strategy of
increasing its market share through  geographic  expansion,  tailored  marketing
strategies and a continued  focus on servicing  smaller  brokers in cities which
have historically  been  under-served.  The Company believes that  relationships
with brokers are  strengthened by providing  attractive  products and responsive
service in conjunction with consistent underwriting, substantial funding sources
and competitive prices.

     BUILDING ON THE  COMPANY'S  INITIAL  INVESTMENT  IN THE SAVINGS  BANK.  The
principal  reason  for the  acquisition  of the  Savings  Bank was to allow  the
Company to utilize the  opportunities  offered by the federal  thrift charter to
compliment the products and services currently being offered by the Company. The
Savings  Bank's  ability  to raise  FDIC-insured  deposits  and to  obtain  FHLB
advances  secured by its loan portfolio to finance its  activities  should serve
over time to reduce the cost of funds.

     In future  periods,  the Company  expects  the Savings  Bank to develop the
capability to originate loans in the  "conforming"  segment of the mortgage loan
market.  Most of the Savings Bank's fixed rate conforming loans would be sold in
the secondary market, while its adjustable rate conforming loans could either be
sold or held in the Savings Bank's loan portfolio. As a FHLB member, the Savings
Bank  will be able to pledge  qualifying  loans to  obtain  additional  funds to
expand its lending operations.

                                       9
<PAGE>

     On July  10,  1997,  the  Savings  Bank  formed  a title  insurance  agency
subsidiary  named  Global  Title  Insurance  Agency,  Inc.  ("Global"),  and has
obtained regulatory approval to begin title policy sales operations.  Global has
negotiated  to issue title  policies  through  First  American  Title  Insurance
Company.  It is expected that Global will  eventually be offering title policies
to all of the Company's loan customers.  However,  in 1998 Global will focus its
sales  efforts on the  Company's  retail  customers in Virginia.  The  Company's
management  believes  that Global will be  successful  in gaining a  substantial
portion of the title insurance business for the Company's retail customers whose
loans  require  such  coverage,  and should  also be  moderately  successful  in
penetrating the title insurance  market for its  originations  through  mortgage
brokers.

     The  Savings  Bank  is  expected  to  introduce  additional  products  that
compliment  the Company's  menu of offerings.  Future  product  offerings by the
Savings Bank may include consumer installment loans. There is a secondary market
for consumer finance paper, and it is expected that the Savings Bank will sell a
substantial portion of these loans rather than hold them in its portfolio.

     The  Savings  Bank may enter other  lines of  business  that could  provide
complimentary benefits, or synergies, with the Company's main strategic goals.

     At a time when banks and savings  institutions are using branch networks to
attract deposits as a primary source of funding, the Savings Bank instead relies
primarily upon  certificates of deposit obtained through direct  solicitation of
institutional  investors  and brokered  certificates  of deposit  obtained  from
customers  of Wall  Street  investment  banks.  The  Savings  Bank's  management
believes that certificates of deposit raised in this manner are a more efficient
and cost effective approach to obtain funds as compared to a branch network with
its salaries and overhead costs.

     PRUDENT  MANAGEMENT OF FINANCIAL CASH FLOW. The Company intends to maximize
its  financial  flexibility  in  a  number  of  ways,  including  maintaining  a
significant   quantity  of  mortgage  loans  for  sale  on  its  balance  sheet.
Maintenance of a substantial  amount of mortgage loans held for sale,  which the
Company can sell when  necessary  or  desirable,  permits the Company to improve
management of its cash flow by increasing its net interest  income and to reduce
its exposure to the volatility of the capital markets.

     EXPANSION THROUGH ACQUISITIONS.  The Company intends to strengthen its loan
production  capabilities not only through internal growth, but from time to time
through acquisitions and the establishment of strategic alliances. The Company's
management  believes that  acquisitions  not only accelerate the pace of growth,
but also are often the most cost-effective growth strategy, enabling the Company
to realize significant operational economies of scale. The Company will continue
to seek out candidates for  acquisition  which operate in geographic and product
areas that complement its existing businesses. These candidates may include both
brokers  and  retail  offices of other  non-conforming  lenders,  which  exhibit
management styles compatable with the Company's management team.

                                       10
<PAGE>

     The Company will also seek to develop  additional  business  units that can
compliment the current business. The Company's recent acquisition of the Savings
Bank is an example of such a strategic acquisition.

     See the discussion  below regarding the January 26, 1998 acquisition of the
assets of a Georgia-based mortgage lender, Funding Center of Georgia, Inc.

     The Company has no specific  plans for additional  acquisitions  of ongoing
businesses.


     EXPAND PRODUCT  OFFERINGS.  The Company  frequently reviews its pricing and
loan  offerings  for  competitiveness   relative  to  the  market.  The  Company
introduces  new loan products to meet the needs of its brokers and borrowers and
to expand its market share to new  customers who are not  traditionally  part of
the Company's market.


     DIVERSIFY LOAN SALE STRATEGIES.  In future periods,  the Company may sell a
portion of the loans it originates  through a securitization  program and retain
the rights to  service  the loans.  The sale of loans  through a  securitization
program would be a significant  departure from the Company's  previous  business
operations.  The Company would apply the net proceeds of the  securitizations to
pay down its  warehouse  credit  facilities  in order to make  these  facilities
available for future funding of mortgage loans. Recent operational  improvements
allow the Company to efficiently  originate,  underwrite and service securitized
loans  and meet the  requirements  of  rating  agencies,  credit  enhancers  and
investors. In order to fund its securitization program, the Company would likely
have to  obtain  an  additional  line of  credit  facility  and  other  residual
financing.  To the extent that the Company is not  successful in  maintaining or
replacing  existing  financing,  it would not be able to hold a large  volume of
loans  pending  securitization  and  therefore  would have to  curtail  its loan
production  activities  or sell  loans  either  through  whole  loan sales or in
smaller  securitizations,  thereby  having  a  material  adverse  effect  on the
Company's results of operations.

PURCHASE OF THE ASSETS OF FUNDING CENTER OF GEORGIA, INC.

     Effective January 26, 1998, ARMI purchased  substantially all of the assets
of Funding Center of Georgia,  Inc.  ("FCGI"),  a Georgia  corporation.  FCGI is
originating  approximately  $4,500,000 in mortgage  loans per month.  All of the
employees  of FCGI have  become  employees  of ARMI,  and the  business  will be
conducted  under the assumed name of "Funding  Center of Georgia."  The purchase
price for FCGI's assets was $3,300,000.  ARMI paid $600,000 at closing, will pay
$300,000 in semi-monthly installments for a period of 36 months, and the balance
of $2,400,000 is payable in three annual  installments  on January 1, 1999, 2000
and 2001, with interest at 6%. The $2,400,000 in deferred payments is subject to
reduction in the event of a failure to meet  agreed-upon  pre-tax profit targets
each year. The two principal  owners of FCGI entered into three-year  employment
agreements with ARMI, and they will manage the office.

                                       11
<PAGE>

THE COMPANY'S BORROWERS AND ITS LOAN PRODUCTS

     The Company has  committed  the  majority of its  resources  to serving the
non-conforming  residential  mortgage market.  The Company caters to individuals
who  do not  meet  the  strict  qualification  guidelines  established  by  most
government insured lending programs. These customers usually have limited access
to sources of  available  credit,  but their  financial  needs are none the less
real. By consolidating their debts with a loan from the Company, these customers
can often save several hundred dollars per month in cash flows, amounts that can
make a significant difference in a customer's financial situation and quality of
life. Personal circumstances  including divorce,  family illnesses or deaths and
temporary job loss due to layoffs and corporate  downsizing will often impair an
applicant's  credit  record.  Among the Company's  specialties is the ability to
identify  and assist  this type of  borrower  in the  establishment  of improved
credit. In this segment of the mortgage loan business, the interest rate charged
on loans is not the overriding concern of customers, who are less rate-sensitive
than conforming  loan  customers.  Rather,  what  differentiates  lenders is the
level, quality and speed of service.

     Loans made to such credit-impaired borrowers generally entail a higher risk
of delinquency and possibly  higher losses than loans made to more  creditworthy
borrowers.  No assurance can be given that the Company's  underwriting  policies
and collection  procedures  will  substantially  reduce such risks. In the event
that  warehoused  loans  or pools of loans  sold  and  serviced  by the  Company
experience higher  delinquencies,  foreclosures or losses than anticipated,  the
Company's  results of  operations  or  financial  condition  would be  adversely
affected.

     Most  loans  made  by the  Company  are  used  by the  borrowers  for  debt
consolidation, property improvement, home purchase and other purposes. Borrowers
can gain income tax advantages of real  estate-secured  debt,  instead of paying
higher-rate   credit  cards  on  which  interest   payments  are  generally  not
tax-deductible.  Most of the loans  carry fixed  interest  rates and are usually
made  for a 20-  to  30-year  term.  The  average  loan  size  during  1997  was
approximately $56,000.

     In  evaluating  loan  requests,  several  risk  management  strategies  are
employed.  Currently,  the Company  limits its credit  exposure by securing  all
loans with real  estate.  The loans are usually  for less than the  unencumbered
appraised value of the real estate.  The  loan-to-value  ratio will fluctuate in
accordance with borrower  qualifications.  Favorable credit and low risk factors
yield higher loan-to-value ratios and lower interest rates. The opposite is true
for poor  credit and high risk  factors.  Occasionally,  a loan  secured by real
estate is made for an amount greater than the collateral value.  These loans are
underwritten based on the borrower's  creditworthiness according to underwriting
criteria of lenders who  specialize  in and purchase high  loan-to-value  loans.
Such loans are immediately sold in the secondary market on a whole loan basis.

     In future periods,  the Company intends to offer products not fully secured
by real  estate  collateral.  This may include  consumer  installment  debt.  If
offered,  these future  products will be  underwritten  based on the  borrower's
credit  worthiness.  As is the case with its other loan  products,  the  Company
intends to sell these loans in the  secondary  market,  to limit its exposure to
future losses.

                                       12
<PAGE>

     In  order  to  compensate  the  Company  for  the  increased  credit  risks
associated with its borrowers, higher interest rates and more points are charged
than on conforming real estate loans.  There is an active  secondary  market for
most types of mortgage  loans  originated  by the  Company.  The majority of the
loans  originated  by the  Company  are  sold  to  other  mortgage  and  finance
companies.  The loans are sold for cash as whole  loans on a  servicing-released
basis.  Consistent  with  industry  practices,  the loans are sold with  certain
representations and warranties.  By originating loans for subsequent sale in the
secondary mortgage market, the Company is able to obtain funds which may be used
for lending and  investment  purposes.  This practice frees funds for additional
lending and increases revenues. For 1997, the weighted-average  premium realized
by the Company on its loan sales was 6.39%.

     A smaller  portion of the loans  originated  by the Company is retained for
the  Company's  loan  portfolio.  In future  periods,  the Savings  Bank will be
building a portfolio  of loans held for  investment.  The income  generated by a
loan portfolio is used to help offset overhead and operational costs.  Growing a
loan  portfolio  is an ongoing  strategy  and an  important  part of the Savings
Bank's  long-term,   income-producing   plans.  As  the  loan  portfolio  grows,
management  will address the need to hedge against  interest rate risk as deemed
prudent.

     The  Company  has  invested  in  technology  to  further   streamline  loan
processing  and  servicing  procedures.  New software has enhanced the Company's
ability to manage the loan  portfolio and analyze pools of loans for sale in the
secondary   market.   Such  investments  in  technology  have  supported  growth
objectives including originating higher loan volumes,  increasing profit margins
and reducing loan  acquisition  costs. The Company expects that it would have to
invest in additional capabilities if it enters the securitization business.

     BROKER  LOAN  ORIGINATIONS.  ARMI  originates  residential  mortgage  loans
through  a network  of  independent  mortgage  brokers  who offer the  Company's
products to their clients.

     During 1996 and 1997, the broker  division  increased the number of account
executives  and the states of  operations.  The Company began doing  business in
Illinois, Ohio, Michigan,  Wisconsin, and Tennessee in 1996. These new additions
and increased  performance  from existing  business  helped increase 1996 broker
loan originations 165.4% from 1995. The Company began doing business in Kentucky
in 1997,  and  those new  additions  and  increased  performance  from  existing
business  helped  increase  broker loan  originations  in 1997 by 57.4% over the
previous year.

     In  cultivating  this broker  network,  the Company  stresses  its superior
service, efficiency,  flexibility and professionalism.  Due to concentrated size
and  centrally-organized   operations,  the  Company  offers  one  business  day
turnaround  on  underwriting  decisions  and can  close  loans  in as few as two
business  days.  A wide  variety of loan  products  has been  designed to assist
brokers in supporting a broader spectrum of borrowers.  A team of regional sales
managers and account  executives  assist mortgage  brokers in the field, but the
majority  of the loans are  currently  underwritten  at the  Company's  Virginia
Beach, Virginia headquarters.

                                       13
<PAGE>

     The Company's geographic focus for broker operations includes the Southeast
and Midwest.  Management intends to strengthen the broker origination channel in
these  regions by  developing  new  markets  and  capturing  a greater  share of
existing  ones. The Company uses modern  technology to  accommodate  its growing
service area. This minimizes overhead without compromising  operations.  It also
allows for easy expansion through the further development of the mortgage broker
network.

     Management plans to continue to develop the broker sales force with ongoing
training programs. Management intends to continue to expand this division.

     RETAIL LOAN ORIGINATIONS.  In December 1994, ARMI formed a joint venture to
originate  mortgage loans through  retail  branches.  The joint venture,  Armada
Residential  Mortgage,  LLC ("Armada LLC "),  opened its first office in Lanham,
Maryland.  Armada  LLC's  senior  officer was a 17% owner of the joint  venture.
Armada LLC operated  from  December  1994 through  December  1996.  It generated
pretax income of $996,000 in 1996 and $664,000 in 1995.  The Company's  share of
income from the joint  venture was  $826,000 in 1996 and  $598,000 in 1995.  The
Armada LLC legal  entity was folded into ARMI  beginning in January 1997 so that
all of the  Company's  retail  branches  could be managed and accounted for in a
consistent  manner.  Concluding the joint venture structure reduced the costs of
separate   accounting  and  eliminated  the  need  to  file  federal  and  state
partnership  returns.  Armada LLC's senior officer has remained with the Company
in a management capacity.

     Using the service mark  "Armada" in most of its markets,  ARMI expanded its
retail mortgage  origination  sources in 1996, opening seven new offices,  which
brought the total retail branch network to twelve at the end of 1996.  These new
additions and increased  performance from existing business helped increase 1996
retail loan  originations  91.4% over the previous  year.  In 1997,  ARMI opened
retail locations, in South Carolina,  Illinois,  Indiana, Virginia and Maryland.
These new additions  and increased  performance  from existing  business  helped
increase 1997 retail loan originations  121.5% over the previous year. There are
currently  plans to open new  retail  centers  in  Georgia,  Indiana,  Virginia,
Kentucky  and  North  Carolina.  Management  expects  to build  the value of its
franchise by increasing the "Armada"  Residential  Mortgage name  recognition in
its markets.

     The  Company's  retail  offices  are the  result of  developing  successful
relationships  with established  industry  professionals  who want to work in an
entrepreneurial  setting and can participate in the growth and  profitability of
our retail  business.  The use of retail  branch  offices  allows the Company to
focus on developing contacts with individual borrowers and referral sources such
as accountants,  attorneys and financial planners,  with a view toward expanding
its retail loan business.

     To support the retail expansion,  integrated  marketing  programs have been
designed to generate new business.  Retail customer demand is generated  through
targeted  outbound  telemarketing,  direct mail and multimedia  advertising.  As
these  programs are tested and refined,  they will be  implemented in all retail
locations.  In future  periods,  the Company plans to market the Savings  Bank's
loan products and other services through its retail loan network.

                                       14
<PAGE>

     STRATEGIC  ALLIANCES.  In order to  increase  volume and to  diversify  its
sources  of loan  originations,  the  Company  seeks  to  enter  into  strategic
alliances with selected mortgage lenders, pursuant to which the Company provides
working  capital  and  financing  arrangements  and  a  commitment  to  purchase
qualifying  loans. In return,  the Company expects to receive a more predictable
flow of loans and, in some cases,  an option or  obligation to acquire an equity
interest in the related strategic participant.

     To date,  the Company has  completed a  strategic  alliance  with  American
Family  Services  ("American  Family"),  a mortgage  company  based in  Atlanta,
Georgia.  From April 1, 1997 through  April 30,  1998,  the Company had a verbal
agreement with American  Family to funds American  Family's  loans,  place those
loans into the Company's loan sale pools,  and pay American Family the loan sale
premium on those loans. In return,  the Company  received from American Family a
fee of 1.5% of American Family's total loan originations. Beginning May 1, 1998,
the verbal  agreement  between the Company and  American  Family was modified to
eliminate the 1.5% fee if American Family obtains its own credit line and ceases
to use the  Company's  credit  facility.  The new verbal  agreement  includes an
arrangement  by which the President of American  Family will continue to oversee
the Company's loan sales  activities with certain  investors in exchange for the
continued  ability to place  American  Family's loans in the Company's loan sale
pools and receive the loan sale premium earned on those loans.

                                       15
<PAGE>

UNDERWRITING GUIDELINES

     The  following  is a general  description  of the  underwriting  guidelines
currently  employed by the Company with respect to mortgage  loans it originates
or purchases from others.  The Company revises such guidelines from time to time
in connection with changing economic and market conditions. The Company may make
exceptions to these guidelines for special types of loans,  including loans with
loan-to-value  ratios over 80%, and for other reasons. The Company relies on the
judgment of the underwriting staff in making these exceptions. Also, the Company
will  substitute  underwriting  guidelines of other lenders to which the Company
anticipates it will sell such loans under an established buy-sell agreement.

     Loan  applications  received from retail offices and brokers are classified
according to certain characteristics including available collateral,  loan size,
debt ratio,  loan-to-value  ratio and the credit history of the applicant.  Loan
applicants with less favorable  credit ratings  generally are offered loans with
higher interest rates and lower  loan-to-value  ratios than applicants with more
favorable credit ratings. The Company's  underwriting  standards are designed to
provide a program for all qualified  applicants in an amount and for a period of
time consistent with each  applicant's  demonstrated  willingness and ability to
repay. All of the Company's underwriting  determinations are made without regard
to sex, marital status,  race,  color,  religion,  age or national origin.  Each
application is evaluated on its individual  merits,  applying the guidelines set
forth  below,  to ensure that each  application  is  considered  on an equitable
basis.

     A current credit report by an independent and nationally  recognized credit
reporting agency reflecting the applicant's complete credit history is required.
The credit report will disclose  whether any instances of adverse  credit appear
on  the  applicant's  record.  Such  information  might  include  delinquencies,
repossessions,  judgements, foreclosures,  bankruptcies and similar instances of
adverse  credit  that  can be  discovered  by a search  of  public  records.  An
applicant's  recent credit  performance weighs heavily in the evaluation of risk
by the Company. A lack of credit history will not necessarily preclude a loan if
the  borrower  has  sufficient  equity in the  property.  Slow  payments  on the
borrower's  credit  report must be  satisfactorily  explained  and will normally
reduce the amount of the loan for which the applicant can be approved.

     The Company maintains a staff of experienced underwriters,  the majority of
whom are based in its  Virginia  Beach,  Virginia  office.  The  Company's  loan
application and approval process generally is conducted via facsimile submission
of the credit application to the Company's underwriters.  An underwriter reviews
the applicant's employment history and financial status as contained in the loan
application, current bureau reports and the real estate property characteristics
as presented on the  application in order to determine if the loan is acceptable
under  the  Company's  underwriting  guidelines.   Based  on  this  review,  the
underwriter assigns a preliminary rating to the application.  The proposed terms
of the  loan  are  then  communicated  to the  retail  loan  officer  or  broker
responsible for the application who in turn discusses the proposal with the loan
applicant. When a potential borrower applies for a loan through a branch office,
the  underwriter  may discuss the  proposal  directly  with the  applicant.  The
Company  endeavors to respond with preliminary  proposed loan terms, and in most
cases does respond,  to the broker or borrower within one business day from when
the application is received.  If the applicant  accepts the proposed terms,  the
underwriter  will contact the broker or the loan applicant to gather  additional
information necessary for the closing and funding of the loan.

                                       16
<PAGE>

     All loan  applicants  must have an appraisal of their  collateral  property
prior to closing the loan. The Company requires loan officers and brokers to use
licensed  appraisers  that are listed on or qualify for the  Company's  approved
appraiser list. The Company  approves  appraisers  based upon a review of sample
appraisals,   professional   experience,   education,   membership   in  related
professional organizations, client recommendations and review of the appraiser's
experience  with the particular  types of properties  that typically  secure the
Company's loans.

     The  decision to provide a loan to an  applicant is based upon the value of
the underlying  collateral,  the applicant's  creditworthiness and the Company's
evaluation  of the  applicant's  willingness  and  ability to repay the loan.  A
number of factors determine a loan applicant's creditworthiness,  including debt
ratios (the  borrower's  average  monthly  expenses for debts,  including  fixed
monthly  expenses for housing,  taxes and  installment  debt, as a percentage of
gross monthly  income),  payment history on existing  mortgages and the combined
loan-to-value ratio for all existing mortgages on a property.

     Assessment of the applicant's  demonstrated  willingness and ability to pay
is one  of the  principal  elements  in  distinguishing  the  Company's  lending
specialty from methods employed by traditional lenders. All lenders utilize debt
ratios and loan-to-value ratios in the approval process. Many lenders simply use
software  packages to score an  applicant  for loan  approval  and fund the loan
after auditing the data provided by the borrower.  The Company  primarily relies
upon  experienced  non-conforming  mortgage loan  underwriters  to scrutinize an
applicant's credit profile and to evaluate whether an impaired credit history is
a  result  of  previous  adverse  circumstances  or a  continuing  inability  or
unwillingness  to  meet  credit   obligations  in  a  timely  manner.   Personal
circumstances  including  divorce,  family illnesses or deaths and temporary job
loss due to layoffs and corporate  downsizing  will often impair an  applicant's
credit record.  The  willingness to identify and assist this type of borrower in
establishing  and  improving  their credit gives the Company  access to a market
that has traditionally been under-served by the financial community.

     Upon completion of the loan's  underwriting and processing,  the closing of
the loan is scheduled with a closing  attorney or agent approved by the Company.
The closing attorney or agent is responsible for completing the loan transaction
in accordance with applicable law and the Company's operating procedures.

     The Company  requires title  insurance  coverage issued by an approved ALTA
title insurance company of all property securing mortgage loans it originates or
purchases.  The Company and its assignees  are  generally  named as the insured.
Title  insurance  policies  indicate the lien  position of the mortgage loan and
protect  the  Company  against  loss if the  title  or lien  position  is not as
indicated.  The  applicant  is also  required  to secure  hazard and, in certain
instances,  flood  insurance  in an  amount  sufficient  to cover  the  building
securing  the loan for the  entire  term of the loan,  for an amount  that is at
least  equal to the  outstanding  principal  balance of the loan or the  maximum
limit of coverage available under applicable law, whichever is less. Evidence of
adequate  homeowner's  insurance naming the Company as an additional  insured is
required on all loans.

                                       17
<PAGE>

     The  Company has  established  classifications  with  respect to the credit
profiles of loans based on certain of the applicant's characteristics. Each loan
applicant  is placed  into one of four  letter  ratings  "A"  through  "D," with
sub-ratings within those categories.  Ratings are based upon a number of factors
including  the  applicant's  credit  history,  the value of the property and the
applicant's  employment  status.  The Company also relies on the judgment of its
underwriting  staff,  which may make  exceptions  to the  general  criteria  and
upgrade a rating  due to  factors  considered  appropriate  to the  underwriting
staff. Terms of loans made by the Company, as well as the maximum  loan-to-value
ratio and debt service-to-income  coverage (calculated by dividing fixed monthly
debt payments by gross monthly income),  vary depending upon the  classification
of the borrower.  Borrowers with lower credit ratings generally pay higher rates
and loan origination fees.

     Subject  to the  judgment  of the  Company's  underwriting  staff  to  make
exceptions to the general criteria,  the general criteria  currently used by the
Company in classifying loan applicants are set forth below:

     "A" Risk. Under the "A" risk category, a loan applicant must have generally
     repaid installment or revolving debt according to its terms.

     o    Existing  mortgage  loans:  required  to be  current  at the  time the
          application  is  submitted,  with  a  maximum  of  one  (or  two  on a
          case-by-case  basis) 30-day late payment(s)  within the last 12 months
          being acceptable.

     o    Non-mortgage  credit: minor derogatory items are allowed, but a letter
          of explanation  is required;  any recent open  collection  accounts or
          open  charge-offs,  judgements or liens would  generally  disqualify a
          loan applicant from this category.

     o    Bankruptcy  filings:  must have been  discharged  more than four years
          prior to closing with credit re-established.

     o    Maximum  loan-to-value  ratio: up to 80% (or 90% on an exception basis
          with  compensating  factors)  is  permitted  for a loan  secured by an
          owner-occupied one- to four-family  residence;  80% for a loan secured
          by  an  owner-occupied  condominium;  and  70%  (or  up to  80%  on an
          exception  basis with  compensating  factors)  for a loan secured by a
          non-owner occupied one- to four-family residence.

     o    Debt service-to-income ratio: generally 45% or less.

     "B" Risk. Under the "B" risk category, a loan applicant must have generally
     repaid installment or revolving debt according to its terms.

     o    Existing  mortgage  loans:  required  to be  current  at the  time the
          application  is  submitted,  with a  maximum  of  three  (or four on a
          case-by-case  basis)  30-day late  payments  within the last 12 months
          being acceptable.

                                       18
<PAGE>

     o    Non-mortgage credit: some prior defaults may have occurred,  but major
          credit  paid or  installment  debt  paid as  agreed  may  offset  some
          delinquency; any open charge-offs, judgements or liens would generally
          disqualify a loan applicant from this category.

     o    Bankruptcy  filings:  must  have been  discharged  more than two years
          prior to closing with credit re-established.

     o    Maximum  loan-to-value  ratio: up to 80% (or 85% on an exception basis
          with  compensating  factors)  is  permitted  for a loan  secured by an
          owner-occupied  one- to four-family  residence;  and 70% (or 80% on an
          exception  basis with  compensating  factors)  for a loan secured by a
          non-owner occupied one- to four-family residence.

     o    Debt  service-to-income  ratio: generally 45% or less (up to 50% on an
          exception basis with compensating factors).

     "C"  Risk.  Under  the  "C"  risk  category,  a  loan  applicant  may  have
     experienced significant credit problems in the past.

     o    Existing  mortgage loans:  must be brought current from loan proceeds;
          applicant  is allowed a maximum of four 30-day late  payments  and one
          60-day late payment within the last 12 months.

     o    Non-mortgage   credit:   significant  prior   delinquencies  may  have
          occurred,  but major  credit  paid or  installment  debt as agreed may
          offset some delinquency; all delinquent credit must be current or paid
          off.

     o    Bankruptcy filings: must have been discharged,  and a minimum one-year
          of re-established credit is required.

     o    Maximum  loan-to-value  ratio: up to 75% (or 80% on an exception basis
          with  compensating  factors for first liens only) is  permitted  for a
          loan secured by an owner-occupied one- to four-family  residence;  65%
          for a loan  secured by an  owner-occupied  condominium;  and 65% for a
          non-owner occupied one- to four- family residence.

     o    Debt service-to-income ratio: generally 50% or less.

     "D" Risk. Under the "D" risk category a loan applicant may have experienced
     significant credit problems in the past.

     o    Existing  mortgage  loans:  must be brought current from loan proceeds
          and no more than 149 days  delinquent at closing;  an explanation  for
          such delinquency is required.

     o    Non-mortgage credit: significant prior defaults may have occurred, but
          the  applicant  must be able to  demonstrate  regularity in payment of
          some  credit  obligations;  all  charge-offs,   judgements,  liens  or
          collection accounts must be paid off.

                                       19
<PAGE>

     o    Bankruptcy  filings:  open Chapter 13 bankruptcies  will be considered
          with  evidence  that  the  plan is  being  paid  according  to  terms;
          outstanding  balance  must be paid in full and  discharged  from  loan
          proceeds.

     o    Maximum  loan-to-value  ratio:  generally  65% (or 70% on an exception
          basis  with  compensating  factors  for first  liens  only) for a loan
          secured by an owner-occupied one- to four-family residence;  60% for a
          loan secured by an owner-occupied condominium; and 60% for a non-owner
          occupied one- to four-family residence.

     o    Debt  service-to-income  ratio: generally 50% or less (up to 55% on an
          exception basis with compensating factors).

     The Company  uses the  foregoing  categories  and  characteristics  only as
guidelines.  On a case-by-case  basis, the underwriting staff may determine that
the   prospective   borrower   warrants  a  risk   category   upgrade,   a  debt
service-to-income   ratio  exception,   a  pricing  exception,  a  loan-to-value
exception  or an  exception  from  certain  requirements  of a  particular  risk
category.  An upgrade or exception may  generally be allowed if the  application
reflects certain  compensating  factors,  among others: low loan-to-value ratio;
stable employment or length of occupancy at the applicant's  current  residence.
For example,  a higher debt ratio may be acceptable  with a lower  loan-to-value
ratio.  An upgrade or exception  may also be allowed if the  applicant  places a
down  payment  in  escrow  equal to at least  20% of the  purchase  price of the
mortgaged property, or if the new loan reduces the applicant's monthly aggregate
debt load.  Accordingly,  the Company  may  classify  in a more  favorable  risk
category  certain  mortgage  loans  that,  in the  absence of such  compensating
factors,  would satisfy only the criteria of a less favorable risk category. The
foregoing examples of compensating  factors are not exclusive.  The underwriting
staff has discretion to make  exceptions to the criteria and to upgrade  ratings
on case-by-case basis.

     In future  periods the Company  intends to offer products not fully secured
by real estate collateral,  such as consumer installment debt. If offered, these
future products will nevertheless be underwritten based on the borrower's credit
worthiness.  As is the case with its other loan products, the Company intends to
sell  these  loans in the  secondary  market,  to limit its  exposure  to future
losses.

MORTGAGE LOAN SERVICING

     The Company has been  servicing its portfolio and warehouse  loans for many
years. Since January 1, 1997, the Savings Bank's portfolio of loans for sale and
for investment has been serviced by the Company under a contractual arrangement.

     The Company's loan servicing  operation has two functions:  collections and
customer  service  for  borrowers.  The  servicing  department  monitors  loans,
collects  current  payments  due from  borrowers.  The  collections  specialists
furnish reports and enforce the holder's rights, including recovering delinquent
payments,   instituting   loan   foreclosures  and  liquidating  the  underlying
collateral.

     The Company closes loans throughout the month.  Most of the Company's loans
require a first payment thirty to forty-five  days after  funding.  Accordingly,
the Company's servicing portfolio consists of loans with payments due at varying
times each month. This system  ameliorates the cyclical highs and lows that some
servicing  companies  experience  as a result of  heavily  concentrated  payment
dates.

                                       20
<PAGE>

     The Company's  collections  policy is designed to identify payment problems
sufficiently early to permit the Company to address delinquency problems quickly
and,  when  necessary,  to act to  preserve  equity  before a  property  goes to
foreclosure.  The  Company  believes  that  these  policies,  combined  with the
experience  level of  independent  appraisers  engaged by the  Company,  help to
reduce the incidence of charge-offs on a first or second mortgage loan.

     Collection procedures commence upon identification of a past due account by
the Company's  automated servicing system. Five days before the first payment is
due on every  loan,  the  borrower  is  contacted  by  telephone  to welcome the
borrower, to remind the borrower of the payment date and to answer any questions
the borrower may have. If the first payment due is delinquent,  a collector will
telephone to remind the borrower of the payment.  Five days after any payment is
due, a written notice of delinquency is sent to the borrower.  Eleven days after
payment  is  due,  the  account  is  automatically  placed  in  the  appropriate
collector's  queue and the  collector  will send a late notice to the  borrower.
During the delinquency period, the collector will continue to frequently contact
the borrower.  Company  collectors  have computer  access to telephone  numbers,
payment  histories,   loan  information  and  all  past  collection  notes.  All
collection  activity,  including  the  date  collection  letters  were  sent and
detailed notes on the substance of each  collection  telephone  call, is entered
into a permanent  collection history for each account.  Additional guidance with
respect to the collection process is derived through frequent communication with
the Company's senior management.

     The Company's loan servicing software also tracks and maintains homeowners'
insurance  information.  Expiration  reports are  generated  weekly  listing all
policies  scheduled to expire within 30 days.  When policies  lapse, a letter is
issued  advising  the  borrower  of the lapse and that the  Company  will obtain
force-placed  insurance  at the  borrower's  expense.  The  Company  also has an
insurance policy in place that provides  coverage  automatically for the Company
in the event the Company fails to obtain force-placed insurance.

     Notwithstanding  the above,  there are occasions when a charge-off  occurs.
Prior to a foreclosure  sale, the Company  performs a foreclosure  analysis with
respect  to the  mortgaged  property  to  determine  the value of the  mortgaged
property and the bid that the Company will make at the  foreclosure  sale.  This
analysis  includes:  (i) a current  valuation of the property obtained through a
drive-by appraisal  conducted by an independent  appraiser;  (ii) an estimate of
the sales  price of the  mortgaged  property  by sending  two local  realtors to
inspect the  property;  (iii) an  evaluation  of the amount  owed,  if any, to a
senior  mortgagee  and for  real  estate  taxes;  and  (iv) an  analysis  of the
marketing time, required repairs and other costs, such as for real estate broker
fees, that will be incurred in connection with the foreclosure sale.

     All  foreclosures are assigned to outside counsel located in the same state
as the secured  property.  Bankruptcies  filed by borrowers are also assigned to
appropriate  local counsel who are required to provide  monthly  reports on each
loan file.

     At the present time the Company does not service  mortgage  loans for other
investors.  However,  in future  periods the Company  may  securitize  loans and
retain the servicing  component on those securities.  In this event, the Company
would need to enhance its servicing capabilities.  The Company may engage one or
more companies to sub-service a portion of its servicing portfolio.

                                       21
<PAGE>

MARKETING

     MARKETING TO BROKER NETWORKS. Marketing to brokers is conducted through the
Company's  business  development  representatives,  who  establish  and maintain
relationships  with  the  Company's  principal  sources  of loan  purchases  and
originations,  including financial institutions and mortgage brokers. Loans made
through the broker  networks  amounted to 54.7% of total  originations  in 1997,
compared to 63.0% of total loan  originations  in 1996. See the table on page 60
for  divisional   loan   originations   by  state.   The  business   development
representatives provide various levels of information and assistance to brokers,
provide  training to the loan originators  regarding the Company's  products and
non-traditional  prospecting  strategies,  and are  principally  responsible for
maintaining the Company's  relationships with its clients.  Business development
representatives  endeavor  to  increase  the  volume of loan  originations  from
brokers located within the geographic territory assigned to that representative.
The representatives  and broker sales managers visit customers' offices,  attend
trade  shows  and  supervise  advertisements  in  broker  trade  magazines.  The
representatives  also provide the Company with information relating to borrowers
and  brokers,  and products and pricing  offered by  competitors  and new market
entrants,  all of which  assist the Company in refining its programs in order to
offer  competitive  products.  The  business  development   representatives  are
compensated with a base salary and commissions based on the volume of loans that
are purchased or originated as a result of their efforts.

     MARKETING  OF RETAIL  LENDING  PRODUCTS.  The  Company  markets  its direct
consumer lending  services through branch offices in several states.  Loans made
through the retail lending division  amounted to 45.3% of total  originations in
1997,  compared to 37.0% of total loan  originations  in 1996.  See the table on
page 60 for divisional loan  originations by state. The Company generally enters
a new target market by way of the broker  network.  The Company  targets  cities
where the  population  density and economic  indicators  are  favorable for home
equity  lending,   the  foreclosure   rate  is  within  normal  ranges  and  the
non-conforming loan market has been under-served.  When broker marketing efforts
are successful in a new geographic area, the Company will generally  establish a
small branch  office,  generally with an initial staff of three to five business
development   representatives.   These  sales   centers  do  not  require  heavy
investments  and allow the Company to exit the market  easily if the office does
not meet  expectations.  The branch office  network is used for marketing to and
meeting with the Company's local  borrowers.  The Company has also  successfully
used targeted  outbound  telemarketing  and direct mail to reach  potential loan
customers.  Occasionally,  when a potential customer applies for a loan and does
not fall within the Company's  underwriting  guidelines,  the Company may submit
the  application  to other  lending  institutions.  If the loan is  approved  by
another lending institution,  the Company will not fund the loan but will act as
a mortgage broker, receiving a broker fee at the time the loan is closed.

                                       22
<PAGE>

Company's Sources of Funds and Liquidity

     WAREHOUSE LINES OF CREDIT. The Company funds substantially all of the loans
which it originates and purchases through borrowings under warehouse facilities,
secured by pledges of its loans and through  internally  generated funds.  These
borrowings  are in turn repaid with the  proceeds  received by the Company  from
selling such loans through whole loan sales. In future periods,  other loan sale
strategies  including  securitizations  may be adopted to supplement the current
whole loan sale program.

     On December 10, 1997, the Company obtained a $100,000,000 warehouse line of
credit from a commercial bank syndicate. The syndicate's lead bank is Chase Bank
of Texas.  Other banks in the  syndicate  are  BankBoston,  National  City Bank,
Comerica Bank and Compass Bank.  The line is secured by loans  originated by the
Company and bears interest at a rate of 1.5% over the one-month LIBOR rate. This
line of credit  replaced  three  existing  lines of credit.  The line expires on
December 31, 1999 and is subject to renewal.  The Company may receive  warehouse
credit advances of 98% of the original  principal  balances on pledged  mortgage
loans for a maximum  period of 180 days after  origination.  As of December  31,
1997,  $46,734,000  was  outstanding  under this facility.  Also on December 10,
1997, the Company  obtained a $25,000,000  seasoned loan line of credit from the
commercial  bank  syndicate.  This line is  secured by loans  originated  by the
Company.  The seasoned loan line of credit bears interest at a rate of 2.5% over
the one-month  LIBOR rate, and the Company may receive credit advances of 90% of
the current  principal  balances on pledged  mortgage  loans. As of December 31,
1997, $5,754,000 was outstanding under this facility.

     The Company draws on its revolving  warehouse  lines of credit as needed to
fund loan  production.  As of  December  31,  1997,  the Company had issued loan
funding checks totaling  $6,364,000 which had not cleared the Company's checking
account and for which the Company had not drawn funds from its  warehouse  line.
These checks  cleared the Company's bank accounts in the first few business days
of January 1998 and most were funded with new warehouse line draws.

     Prior to December 10, 1997, the Company had three warehouse facilities. The
Company had a  $70,000,000  warehouse  and  seasoned  loan line of credit with a
commercial  bank.  The line was secured by loans  originated  by the Company and
bears interest at a rate of 1.75% over the one-month LIBOR rate. As of September
30, 1997, the outstanding  balance on this line was $33,189,000 and the interest
rate was 7.41%.  The Company could receive  warehouse  credit advances of 98% of
the original  principal  balances on pledged mortgage loans for a maximum period
of 180 days after  origination.  If a mortgage loan was not sold within 180 days
after it is originated,  it was transferred to the seasoned loan sublimit within
the line of  credit.  The  seasoned  loan  sublimit  had a maximum  capacity  of
$15,000,000  and bore interest at a rate of 2.5% over the one-month  LIBOR rate.
As of September 30, 1997, the outstanding  balance on the seasoned loan sublimit
was  $6,227,000  and the  interest  rate was 8.41%.  The Company  could  receive
advances  under  the  seasoned  loan  sublimit  up to 90% of  current  principal
balance, and loans could be financed in this manner for an indefinite period.

     The  Company  also  had a  $25,000,000  warehouse  line  of  credit  with a
commercial  bank.  The line was secured by loans  originated  by the Company and
bore  interest  at a rate of 1.75%  over the  one-month  LIBOR rate or the prime
interest  rate. As of September 30, 1997, the  outstanding  balance on this line
was  $3,788,000  and the  interest  rate was 7.41%.  The Company  could  receive
warehouse credit advances of 98% of the original  principal  balances on pledged
mortgage loans for a maximum period of 120 days after origination.

                                       23
<PAGE>

     The Company also had an $8,000,000  warehouse  line of credit with IMC. The
line was secured by loans  originated by the Company and bore interest at a rate
of 1.75% over the one-month LIBOR rate. There was no outstanding balance on this
line at September 30, 1997. The Company could receive  warehouse credit advances
of 100% of the  original  principal  balances  on pledged  mortgage  loans for a
maximum period of 30 days after origination.

     DEPENDENCE ON FUNDING SOURCES.  As described in the previous  section,  the
Company is dependent upon a few lenders to provide the primary credit facilities
for its loan  originations.  At December 31, 1997, the Company had warehouse and
other  credit  facilities  with  five  financial   institutions  with  aggregate
commitments of $125,000,000. The Company's warehouse and other credit facilities
expire on December 31, 1999. In addition,  the Company's  growth  strategies are
expected  to  require  significant  increases  in the  amount  of the  Company's
warehouse  and  other  credit  facilities.  The  Company  expects  to be able to
maintain   existing   warehouse  and  other  credit  facilities  (or  to  obtain
replacement or additional  financing) as current  arrangements  expire or become
fully utilized;  however,  there can be no assurance that such financing will be
obtainable on favorable  terms.  Any failure to renew or obtain adequate funding
under  these  warehouse  facilities  or  other  financings,  or any  substantial
reduction  in the size of or pricing in the  markets  for the  Company's  loans,
could have a material adverse effect on the Company's operations.

     The Company's  management is currently  considering the  securitization  of
some of its  mortgage  loan  production.  In order  to fund  its  securitization
program,  the Company would likely have to obtain an  additional  line of credit
facility  and other  residual  financing.  To the extent that the Company is not
successful in maintaining or replacing existing financing,  it would not be able
to hold a large volume of loans pending  securitization and therefore would have
to curtail its loan  production  activities  or sell loans either  through whole
loan  sales or in smaller  securitizations,  thereby  having a material  adverse
effect on the Company's results of operations.  While a possible  securitization
program is being  considered,  no decision  has been made  whether to do so, and
management has no specific time frame for such a program.

SAVINGS BANK SOURCES OF FUNDS

     DEPOSITS.  The  primary  source of deposits  for the Savings  Bank has been
brokered  certificates of deposit obtained through national  investment  banking
firms,  which,  pursuant to agreements with the Savings Bank, solicit funds from
their  customers for deposit with the Savings Bank ("brokered  deposits").  Such
deposits  amounted to $4,443,000,  or 24.9%,  of the Savings Bank's  deposits at
December 31, 1997.  The Savings Bank solicits  deposits via a computer  bulletin
board  where  the  rates  of many  other  banks  and  savings  institutions  are
advertised.  At December 31, 1997, the Savings Bank had deposits of $12,876,000,
or 72.3%,  of total  deposits  from this source.  The Savings Bank also directly
solicits certificates of deposit from institutional  investors.  At December 31,
1997,  $496,000,  or 2.8%,  of the Savings  Bank's total  deposits  consisted of
deposits obtained by the Savings Bank from such efforts.

     The fees paid to deposit  brokers are amortized  using the interest  method
and included in interest expense on certificates of deposit.

     The Savings Bank's management  believes that the effective cost of brokered
and other  wholesale  deposits is more  attractive  than deposits  obtained on a
retail basis from branch  offices after the general and  administrative  expense
associated  with the  maintenance  of  branch  offices  is taken  into  account.
Moreover,

                                       24
<PAGE>

brokered  and other  wholesale  deposits  generally  give the Savings  Bank more
flexibility  than retail sources of funds in  structuring  the maturities of its
deposits  and in  matching  liabilities  with  comparable  maturing  assets.  At
December 31, 1997,  $13,268,000  of the Savings Bank's  certificates  of deposit
were scheduled to mature within one year (74.5% of total deposits).

     Although  management  of the Savings Bank  believes that brokered and other
wholesale  deposits are advantageous in certain respects,  such funding sources,
when  compared  to  retail  deposits  attracted  through a branch  network,  are
generally  more  sensitive to changes in interest  rates and  volatility  in the
capital  markets and are more likely to be compared by the investor to competing
instruments.  In  addition,  such  funding  sources  may be  more  sensitive  to
significant  changes in the financial  condition of the Savings Bank.  There are
also various regulatory  limitations on the ability of all but  well-capitalized
insured financial institutions to obtained brokered deposits; see "Regulation of
the Savings  Bank - Brokered  Deposits."  These  limitations  currently  are not
applicable because the Savings Bank is a well-capitalized  financial institution
under applicable laws and regulations. There can be no assurances, however, that
the Savings Bank will not become subject to such  limitations in the future.  In
addition,  the Company's  reliance on wholesale  deposits effects its ability to
rollover  deposits as they mature due to the fact that in general the  wholesale
customer is highly interest  rate-sensitive.  Since the total deposit asset size
of the  Savings  Bank since it was  acquired by the Company was under $4 million
prior to  October  of  1997,  the rate at  which  the  Savings  Bank was able to
rollover maturing deposits does not represent a meaningful  measurement,  nor is
it useful in  assessing  the  Company's  ability or  likelihood  to do so in the
future.  However,  management  is of the opinion that it will be able to readily
obtain  funding from the wholesale  deposit market in future periods at the then
current competitive interest rates being offered by other institutions.


     As a result of the Savings Bank's  reliance on brokered and other wholesale
deposits,  significant changes in the prevailing  interest rate environment,  in
the  availability of alternative  investments  for individual and  institutional
investors or in the Savings  Bank's  financial  condition,  among other factors,
could affect the Savings  Bank's  liquidity and results of operations  much more
significantly than might be the case with an institution that obtained a greater
portion of its funds from  retail or core  deposits  attracted  through a branch
network.

                                       25
<PAGE>

     The following  table sets forth various  interest rate  categories  for the
certificates of deposit of the Savings Bank as of the dates indicated.


(Dollars in thousands)
                         December 31, 1997        December 31, 1996
                       --------------------     --------------------
                       Weighted                 Weighted
                       Average                  Average
                        Rate        Amount       Rate        Amount
                       ------      --------     ------      --------
     5.24% or less        --       $    --       5.18%      $   396
     5.25 - 5.49%       5.30%          198       5.34           495
     5.50 - 5.74        5.56           300       5.65           288
     5.75 - 5.99        5.91         8,318       5.93           397
     6.00 - 6.24        6.11         8,010         --            --
     6.25 - 6.49        6.32           989         --            --
                        ----       -------       ----       -------
                        6.01%      $17,815       5.50%      $ 1,576
                        ====       =======       ====       =======

     The  following   table  sets  forth  the  amount  and   maturities  of  the
certificates of deposit of the Savings Bank at December 31, 1997.

(Dollars in thousands)
<TABLE>
<CAPTION>

                                   Over Six Months      Over One         Over
                      Six Months    and Less than    Year and Less        Two
                       Or Less         One Year      Than Two Years      Years          Total
                      ----------   ---------------   --------------     -------        -------
<S>                    <C>              <C>              <C>            <C>            <C>    
     5.25 - 5.49%      $    99          $    99          $    --        $    --        $   198
     5.50 - 5.74           300               --               --             --            300
     5.75 - 5.99         5,945            2,373               --             --          8,318
     6.00 - 6.24            99            4,353            3,558             --          8,010
     6.25 - 6.49            --               --              791            198            989
                       -------          -------          -------        -------        -------
                       $ 6,443          $ 6,825          $ 4,349        $   198        $17,815
                       =======          =======          =======        =======        =======
</TABLE>

     At  December  31,  1997,  twenty-four   certificates  of  deposit  totaling
$2,400,000 were in amounts of $100,000.

                                       26
<PAGE>

     BORROWINGS.  The Savings Bank is able to obtain  advances  from the FHLB of
Atlanta upon the security of certain of its  residential  first mortgage  loans,
and other assets,  including FHLB stock,  provided certain  standards related to
the  creditworthiness  of the  Savings  Bank have been met.  FHLB  advances  are
available to member  institutions  such as the Savings Bank for  investment  and
lending activities and other general business  purposes.  FHLB advances are made
pursuant  to  several  different  credit  programs,  each of  which  has its own
interest rate, which may be fixed or adjustable,  and which has its own range of
maturities. FHLB members are required to hold shares of the capital stock of the
regional  FHLB in which  they are a member in an  amount  at least  equal to the
greater of 1% of the member's home mortgage loans or 5% of the member's advances
from the FHLB.  The Savings  Bank did not obtain any  advances  from the FHLB of
Atlanta  during the period  September  12, 1996 through  December  15, 1997.  On
December 16, 1997, the Savings Bank borrowed  $1,000,000 from the FHLB, and this
amount was  outstanding  at December 31, 1997.  The Savings Bank held $50,000 of
the FHLB stock at December 31, 1997. Management expects to utilize FHLB advances
as the Savings Bank builds a portfolio of loans.

TAXATION

     GENERAL. The Company and all of its subsidiaries currently file, and expect
to  continue  to file,  a  consolidated  federal  income tax  return  based on a
calendar year. Consolidated returns have the effect of eliminating  intercompany
transactions, including dividends, from the computation of taxable income.

     The Company's income is subject to tax in most of the states in which it is
making loans. The Company's taxable income in most states is determined based on
certain apportionment factors.

     For taxable years beginning prior to January 1, 1996, a savings institution
such as the Savings  Bank that met certain  definitional  tests  relating to the
composition of its assets and the sources of its income (a  "qualifying  savings
institution")  was  permitted to  establish  reserves for bad debts and to claim
annual tax  deductions  for  additions to such  reserves.  A qualifying  savings
institution was permitted to make annual additions to such reserves based on the
institution's loss experience.  Alternatively,  a qualifying savings institution
could elect,  on an annual  basis,  to use the  "percentage  of taxable  income"
method to  compute  its  addition  to its bad debt  reserve on  qualifying  real
property  loans  (generally,  loans  secured by an  interest  in  improved  real
estate).  The percentage of taxable income method  permitted the  institution to
deduct a specified  percentage  of its  taxable  income  before such  deduction,
regardless of the institution's  actual bad debt experience,  subject to certain
limitations.

     The Small  Business  Job  Protection  Act  repealed  the reserve  method of
accounting  for bad debts for savings  institutions  effective for taxable years
beginning  after 1995 and  provides  for  recapture of a portion of the reserves
existing at the close of the last taxable year beginning before January 1, 1996.
As of December 31, 1997,  the retained  earnings of the Savings Bank were deemed
to include  $143,000  of bad debt  reserves  for income tax  purposes  for which
deferred  taxes of $49,000 have been  provided.  The deferred  taxes are payable
over a six-year period, or are subject to immediate tax if removed from such bad
debt reserve status for purposes other than absorbing losses.  For its tax years
beginning on or after  January 1, 1996,  the Savings Bank is required to account
for its bad debts  under the  specific  charge-off  method.  Under this  method,
deductions  may be claimed only as and to the extent that loans become wholly or
partially worthless.

                                       27
<PAGE>

     ALTERNATIVE  MINIMUM TAX. In addition to the regular  corporate income tax,
corporations,  including qualifying savings  institutions,  can be subject to an
alternative  minimum tax. The 20% tax is computed on Alternative Minimum Taxable
Income  ("AMTI")  and applies if it exceeds the regular tax  liability.  AMTI is
equal to regular  taxable  income with certain  adjustments.  For taxable  years
beginning  after  1989,  AMTI  includes an  adjustment  for 75% of the excess of
"adjusted  current  earnings" over regular  taxable  income.  Net operating loss
carrybacks  and  carryforwards  are  permitted  to  offset  only  90%  of  AMTI.
Alternative  minimum tax paid can be credited  against  regular tax due in later
years. The Company is not currently subject to the AMT.

EMPLOYEES

     As of December 31, 1997,  the Company and its  subsidiaries  had a total of
443  full-time  employees.  None of the  Company's  employees  were covered by a
collective  bargaining  agreement.  The Company considers its relations with its
employees  to be good.  Several  members of senior  management  have  previously
worked  as a team at  other  lending  institutions.  Many  employees  have  been
associated  with  senior  management  in  previous  employment  positions.   The
Company's  management  believes that these long-term working  relationships will
continue to contribute to its growth and success.

SERVICE MARKS

     The Company has two service  marks that have become  federally  registered.
They are  "Armada,"  which became  registered  on July 23, 1996,  and  "Approved
Residential Mortgage," which became registered on May 15, 1995. The Company also
has two  service  marks  that  are in the  process  of  registration;  they  are
"Approved Financial Corp." and "Approved Federal Savings Bank."

EFFECT OF ADVERSE ECONOMIC CONDITIONS

     The  Company's  business may be  adversely  affected by periods of economic
slowdown or recession which may be accompanied by decreased  demand for consumer
credit and declining  real estate  values.  Any material  decline in real estate
values reduces the ability of borrowers to use home equity to support borrowings
and increases the loan-to-value  ratios of loans previously made by the Company,
thereby weakening  collateral  coverage and increasing the possibility of a loss
in the event of default.  In addition,  delinquencies,  foreclosures  and losses
generally increase during economic slowdowns or recessions.

                                       28
<PAGE>

RELIANCE ON IMC MORTGAGE COMPANY

     During 1997 and 1996,  the Company sold 55.9% and 43.7%,  respectively,  of
its loans to IMC. The Company's contract with IMC requires the Company to sell a
minimum  of $2.0  million  of loans  to IMC each  month  subject  to  prevailing
secondary market terms for pools of non-conforming mortgage loans. Historically,
these  transactions have resulted in the payment of a cash premium by IMC to the
Company.  From time to time, various other purchasers  purchase more than 10% of
the Company's loan production. While there are several other major purchasers of
non-conforming mortgage loans as large or larger than IMC, the Company maintains
a good  working  relationship  with IMC.  IMC  offers to buy a wide range of the
Company's  loan  products  at  competitive  prices.  However,  there  can  be no
assurance  that IMC will be in a position to continue to purchase the  Company's
loan  production  at  margins  favorable  to  the  Company.  The  Company  owned
approximately  3.2% of the outstanding common stock of IMC at December 31, 1997,
and the Company's  Chairman and Chief  Executive  Officer,  Allen D. Wykle, is a
member of IMC's Board of Directors.  Mr. Wykle  beneficially owns  approximately
0.07% of IMC common stock,  including  12,992 issuable upon the exerise of stock
options.  Also,  Jean S. Schwindt,  a member of the Company's Board of Directors
and  Executive  Committee,  is an officer of IMC and owns  18,020  shares of IMC
common stock issuable upon the exercise of vested stock  options.  (See Item 13,
"Certain  Relationships  and Related  Transactions - Agreement with IMC Mortgage
Company").

CONCENTRATION OF OPERATIONS IN SEVEN STATES

     During  1997,  81.6%  of the  aggregate  principal  balance  of  the  loans
originated  by the Company  were secured by  properties  located in seven states
(Florida,  Georgia,  South  Carolina,  North  Carolina,  Virginia,  Maryland and
Delaware).  Although the Company has expanded its wholesale and retail  mortgage
origination networks outside this region, the Company's  origination business is
likely  to remain  concentrated  in those  states  for the  foreseeable  future.
Consequently,  the Company's  results of operations and financial  condition are
dependent  upon general  trends in the economy and the  residential  real estate
markets in those states.

FUTURE RISKS ASSOCIATED WITH LOAN SALES THROUGH SECURITIZATIONS

     In  future  periods,  the  Company  may  sell a  portion  of the  loans  it
originates through a securitization program and retain the rights to service the
loans. The sale of loans through a securitization program would be a significant
departure  from the Company's  previous  business  operations.  While a possible
securitization program is being considered, no decision has been made whether to
do so, and management has no specific time frame for such a program.

                                       29
<PAGE>

     Adverse  changes in the  securitization  market could impair the  Company's
ability to originate  and sell loans through  securitizations  on a favorable or
timely basis.  Any such impairment could have a material adverse effect upon the
Company's  results of  operations  and  financial  condition.  Furthermore,  the
Company's   quarterly   operating   results  in  future  periods  may  fluctuate
significantly  as a  result  of the  timing  and  level of  securitizations.  If
securitizations do not close when expected,  the Company's results of operations
may be adversely affected for that period.

YEAR 2000 ISSUES

     The Company's  management is aware of the Year 2000 issues and is currently
assessing   how  these   issues  will   affect  the   Company.   The   Company's
"mission-critical"  applications  are supplied by outside vendors with which the
Company maintains current relationships.  Most of the Company's mission-critical
systems already  accommodate  four-digit year values. The most recent release of
the mortgage loan origination and processing system is being used by the Company
and has been certified by the vendor as Year 2000  compliant.  The Company is in
the process of  implementing a new accounting  system that has been certified by
the vendor as Year 2000  compliant.  The  Company  is  currently  reviewing  its
hardware  systems,  and will  upgrade  as needed for Year 2000  compliance.  The
Company is also  working  with key loan sale  customers,  vendors,  brokers  and
service  providers to determine  whether data systems  utilized by these parties
are Year  2000  compliant.  The  Company  is  developing  lists  of  alternative
providers  in the event any of the  current  customers  or  providers  cannot be
certified  as Year 2000  compliant.  The cost of  compliance  is not expected to
exceed $100,000.

CONTINGENT RISKS

     In the ordinary  course of its  business,  the Company is subject to claims
made against it by borrowers and private  investors  arising  from,  among other
things,  losses  that are  claimed to have been  incurred as a result of alleged
breaches of fiduciary obligations,  misrepresentations,  errors and omissions of
employees,  officers,  and agents of the  Company  (including  its  appraisers),
incomplete documentation and failures by the Company to comply with various laws
and  regulations  applicable  to its  business.  Management  is not aware of any
material claims.

     Although the Company sells  substantially  all loans that it originates and
purchases on a non-recourse basis, during the period of time that loans are held
pending sale, the Company is subject to the various  business  risks  associated
with lending, including the risk of borrower default, loan foreclosure and loss,
and the risk that an increase in interest rates would result in a decline in the
value of loans to potential purchasers.

                                       30
<PAGE>

COMPETITION

     The  Company  faces  intense   competition   from  other  mortgage  banking
companies,  commercial banks, credit unions,  thrift  institutions,  credit card
issuers,  and finance  companies.  Many of these  competitors  in the  financial
services business are  substantially  larger and have more capital and financial
resources than the Company.  Also,  the larger  national  finance  companies and
originators of conforming  mortgage  loans have been adapting  their  conforming
origination  programs to expand into the  non-conforming  loan  business and are
targeting the Company's prime customer base.  There can be no assurance that the
Company will not face increased  competition from such institutions.  Further, a
number of the Company's  competitors have recently increased their access to the
capital  markets,  which  helps  foster  their  growth and  therefore  increases
competition.

     Competition  can take on many forms,  including  convenience in obtaining a
loan,  service,  marketing and  distribution  channels and interest  rates.  The
current level of loan sale gains realized by the Company and its  competitors is
attracting   additional   potential   competitors,   including   at  least   one
quasi-governmental   agency,  to  this  market  segment,   and  this  additional
competition may lower the gains that the Company can realize in future periods.

     The  quantity  and  quality  of  competition  for the  Company  may also be
affected by  fluctuations  in interest  rates and general  economic  conditions.
During periods of rising rates, competitors which have "locked in" low borrowing
costs may have a competitive  advantage.  During  periods of declining  interest
rates,  competitors  may solicit the  Company's  borrowers  to  refinance  their
mortgage  loans.  During  an  economic  slowdown  or  recession,  the  Company's
borrowers may have new financial  difficulties and may be receptive to offers by
the Company's competitors.

     The  Company  depends  largely  on  mortgage  brokers,  for  purchases  and
originations  of new loans.  The  Company's  competitors  also seek to establish
relationships  with the  brokers  with  which the  Company  does  business.  The
Company's  future results may become more exposed to  fluctuations in the volume
and  costs  of  its  wholesale  loans  resulting  from  competition  from  other
purchasers of such loans, market conditions and other factors.

                                       31
<PAGE>

REGULATION

     The Company's business is subject to extensive regulation,  supervision and
licensing by federal,  state and local government  authorities and is subject to
various laws and judicial and administrative decisions imposing requirements and
restrictions  on part or all of its operations.  Regulated  matters include loan
origination,  credit  activities,  maximum  interest rates and finance and other
charges,  disclosure  to  customers,  the  terms of  secured  transactions,  the
collection, repossession and claims-handling procedures utilized by the Company,
multiple  qualification and licensing requirements for doing business in various
jurisdictions  and other trade  practices.  The following  discussion  and other
references  to and  descriptions  of the  regulation  of financial  institutions
contained in this document  constitute  brief  summaries of the  regulations  as
currently in effect.  This  discussion  is not intended to constitute a complete
statement  of all the legal  restrictions  and  requirements  applicable  to the
Company and the Savings Bank and all such  descriptions  are  qualified in their
entirety by reference to applicable  statutes,  regulations and other regulatory
pronouncements.

     The  Company's   consumer  lending   activities  are  subject  the  federal
Truth-in-Lending Act ("TILA") and Regulation Z (including the Home Ownership and
Equity  Protection Act of 1994);  the federal Equal Credit  Opportunity  Act and
Regulation B, as amended (the "ECOA");  the Home Mortgage Disclosure Act and the
Fair Credit Reporting Act of 1970, as amended ("FCRA");  the federal Real Estate
Settlement  Procedures Act ("RESPA") and Regulation X; the federal Home Mortgage
Disclosure Act; and the federal Fair Debt Collection  Practices Act. The Company
is also subject to state statutes and regulations affecting its activities.

     TILA  and   Regulation  Z   promulgated   thereunder   contain   disclosure
requirements   designed  to  provide  consumers  with  uniform,   understandable
information  with  respect  to the terms  and  conditions  of loans  and  credit
transactions  in order to give them the ability to compare  credit  terms.  TILA
also   guarantees   consumers  a  three-day   right  to  cancel  certain  credit
transactions  including loans of the type originated by the Company.  Management
of the  Company  believes  that it is in  compliance  with TILA in all  material
respects.

     In  September  1994,  the  Riegle  Community   Development  and  Regulatory
Improvement Act of 1994 (the "Riegle Act") was enacted.  Among other things, the
Riegle Act made certain  amendments to TILA. The TILA  Amendments,  which became
effective  in October  1995,  generally  apply to mortgage  loans with (i) total
points and fees upon  origination  in excess of the greater of eight  percent of
the loan  amount  or $424 or (ii) an  annual  percentage  rate of more  than ten
percentage  points higher than  comparable  maturing U.S.  Treasury  securities.
Loans covered by the TILA Amendments are known as "Section 32 Loans."

     The TILA Amendments  impose additional  disclosure  requirements on lenders
originating  Section 32 Loans and prohibit lenders from  originating  Section 32
Loans that are  underwritten  solely on the basis of the borrower's  home equity
without regard to the borrower's  ability to repay the loan. In accordance  with
TILA  Amendments,  the  Company  applies  underwriting  criteria  that take into
consideration the borrower's ability to repay all Section 32 Loans.

                                       32
<PAGE>

     The TILA  Amendments  also prohibit  lenders from including  prepayment fee
clauses in Section 32 loans to borrowers with a  debt-to-income  ratio in excess
of 50%. In addition,  a lender that refinances a Section 32 Loan previously made
by such  lender  will  not be able to  enforce  any  prepayment  penalty  clause
contained  in such  refinanced  loan.  The  Company  will  continue  to  collect
prepayment  fees on  loans  originated  prior to the  effectiveness  of the TILA
Amendments  and on  non-Section  32  Loans  as well as on  Section  32  Loans in
permitted circumstances following the effectiveness of the TILA Amendments.  The
TILA  Amendments  impose  other  restrictions  on  Section  32 Loans,  including
restrictions on balloon payments and negative amortization  features,  which the
Company believes will not have a material impact on its operations.

     The  Company is also  required  to comply  with the ECOA,  which  prohibits
creditors from  discriminating  against  applicants on the basis of race, color,
sex,  age or marital  status.  Regulation  B  promulgated  under ECOA  restricts
creditors from obtaining  certain types of information from loan applicants.  It
also requires certain  disclosures by the lender  regarding  consumer rights and
requires lenders to advise  applicants of the reasons for any credit denial.  In
instances  where the applicant is denied credit or the rate or charge for a loan
increases as a result of  information  obtained from a consumer  credit  agency,
another  statute,  the FCRA requires the lender to supply the  applicant  with a
name and address of the  reporting  agency.  The Company is also  subject to the
Real Estate  Settlement  Procedures Act and is required to file an annual report
with the  Department  of  Housing  and Urban  Development  pursuant  to the Home
Mortgage Disclosure Act.

     The  Company  is  also  subject  to  the  rules  and  regulations  of,  and
examinations by, the U.S.  Department of Housing and Urban Development and state
regulatory  authorities with respect to originating,  processing,  underwriting,
selling and servicing loans.  These rules and  regulations,  among other things,
impose licensing obligations on the Company,  establish eligibility criteria for
mortgage loans, prohibit discrimination,  provide for inspections and appraisals
of properties,  require credit reports on loan applicants,  regulate assessment,
collection, foreclosure and claims handling, investment and interest payments on
escrow balances and payment features, and mandate certain loan amounts.

     Failure to comply  with  these  requirements  can lead to loss of  approved
status, termination or suspension of servicing contracts without compensation to
the servicer, demands for indemnifications or mortgage loan repurchases, certain
rights  of   rescission   for  mortgage   loans,   class  action   lawsuits  and
administrative  enforcement actions.  There can be no assurance that the Company
will  maintain   compliance  with  these  requirements  in  the  future  without
additional  expenses,  or that more  restrictive  federal,  state or local laws,
rules and  regulations  will not be  adopted  that would  make  compliance  more
difficult for the Company. Management believes that the Company is in compliance
in all material respects with applicable federal and state laws and regulations.

     The  Company  is also  subject  to  various  other  federal  and state laws
regulating  the issuance and sale of  securities,  relationships  with  entities
regulated by the Employee  Retirement  Income  Security Act of 1974, as amended,
and other aspects of its business.

                                       33
<PAGE>

     The laws,  rules and  regulations  applicable to the Company are subject to
regular  modification  and change.  There are currently  proposed  various laws,
rules and regulations which, if adopted,  could impact the Company. There can be
no assurance  that these  proposed laws,  rules and  regulations,  or other such
laws,  rules or regulations,  will not be adopted in the future which could make
compliance much more difficult or expensive,  restrict the Company's  ability to
originate,  purchase, broker or sell loans, further limit or restrict the amount
of commissions, interest and other charges earned on loans originated or sold by
the  Company,  or  otherwise  adversely  affect the business or prospects of the
Company.

OTS REGULATION OF THE COMPANY

     GENERAL. The Company is a registered savings and loan holding company under
the federal  Home  Owner's  Loan Act  ("HOLA")  because of its  ownership of the
Savings Bank. As such, the Company is subject to the regulation, supervision and
examination of the OTS.

     ACTIVITIES  RESTRICTION.   There  are  generally  no  restrictions  on  the
activities  of a savings and loan holding  company,  such as the Company,  which
holds only one subsidiary savings  institution.  However, if the Director of the
OTS determines that there is reasonable  cause to believe that the  continuation
by a savings and loan holding company of an activity  constitutes a serious risk
to the  financial  safety,  soundness  or stability  of its  subsidiary  savings
institution,  the Director may impose such  restrictions as deemed  necessary to
address such risk,  including the limitation of: (i) payment of dividends by the
savings  institution;  (ii) transactions between the savings institution and its
affiliates;  and (iii) any  activities  of the  savings  institution  that might
create a serious  risk  that the  liabilities  of the  holding  company  and its
affiliates may be imposed on the savings institution.  Notwithstanding the above
rules as to the  permissible  business  activities  of unitary  savings and loan
holding  companies,  if the  savings  institution  subsidiary  of such a holding
company fails to meet a qualified  thrift  lender  ("QTL") test set forth in OTS
regulations,  then such unitary  holding  company  shall  become  subject to the
activities  and  regulations  applicable  to multiple  savings and loan  holding
companies and,  unless the savings  institution  requalifies as a QTL within one
year  thereafter,  shall  register  as,  and become  subject to the  restriction
applicable  to, a bank holding  company.  See  "Regulation of the Savings Bank -
Qualified Thrift Lender Test."

                                       34
<PAGE>

        If the Company were to acquire  control of another  savings  institution
other than through merger or other business  combination  with the Savings Bank,
the Company  would become a multiple  savings and loan holding  company.  Except
where such acquisition is pursuant to the authority to approve  emergency thrift
acquisition and where each subsidiary savings institution meets the QTL test, as
set forth  below,  the  activities  of the Company  and any of its  subsidiaries
(other than the Savings Bank or other  subsidiary  savings  institutions)  would
thereafter be subject to further  restrictions.  Among other things, no multiple
savings and loan holding  company or  subsidiary  thereof which is not a savings
institution  generally  shall  commence or continue for a limited period of time
after becoming a multiple savings and loan holding company or subsidiary thereof
any business  activity,  other than:  (i)  furnishing or  performing  management
services for a subsidiary  savings  institution;  (ii)  conducting  an insurance
agency or escrow business; (iii) holding,  managing, or liquidating assets owned
by or acquired from a subsidiary savings  institution;  (iv) holding or managing
properties used or occupied by a subsidiary savings  institution;  (v) acting as
trustee under deeds of trust; (vi) those activities  authorized by regulation as
of  March  5,  1987 to be  engaged  in by  multiple  savings  and  loan  holding
companies;  or (vii) unless the Director of the OTS by  regulation  prohibits or
limits such activities for savings and loan holding companies,  those activities
authorized  by the  Federal  Reserve  Board  as  permissible  for  bank  holding
companies.  Those  activities  described  in  clause  (vii)  above  also must be
approved  by the  Directors  of the OTS prior to being  engaged in by a multiple
savings and loan holding company.

     RESTRICTIONS ON ACQUISITIONS.  Except under limited circumstances,  savings
and loan holding  companies such as the Company are prohibited  from  acquiring,
without  prior  approval of the  Director  of the OTS,  (i) control of any other
savings institution or savings and loan holding company or substantially all the
assets  thereof  or  (ii)  more  than  5% of  the  voting  shares  of a  savings
institution or holding  company  thereof which is not a subsidiary.  Except with
the proper  approval  of the  Director  of the OTS,  no director or officer of a
savings and loan holding  company or person  owning or  controlling  by proxy or
otherwise  more than 25% of such  company's  stock,  may acquire  control of any
savings  institution,  other than a subsidiary  savings  institution,  or of any
other savings and loan holding company.

     The Director of the OTS may approve acquisitions resulting in the formation
of  a  multiple   savings  and  loan  holding  company  which  controls  savings
institutions  in more than one state only if (i) the  multiple  savings and loan
holding company involved controls a savings institution which operated a home or
branch office located in the state of the institution to be acquired as of March
5, 1987;  (ii) the  acquirer  is  authorized  to acquire  control of the savings
institution  pursuant  to the  emergency  acquisition  provision  of the Federal
Deposit Insurance Act ("FDIA");  or (iii) the statutes of the state in which the
institution to be acquired is located  specifically  permit  institutions  to be
acquired by state-chartered  savings institutions located in the state where the
acquiring  entity  is  located  (or by a  holding  company  that  controls  such
state-chartered savings institutions).

     RESTRICTIONS  ON TRANSACTIONS  WITH  AFFILIATES.  Transactions  between the
Company or any of its non-bank  subsidiaries and the Savings Bank are subject to
various  restrictions,  which are  described  under  "Regulation  of the Savings
Bank-Affiliate Transactions."

                                       35
<PAGE>

REGULATION OF THE SAVINGS BANK

     GENERAL.  The Savings Bank is a federally  chartered savings bank organized
under the HOLA. As such, the Savings Bank is subject to regulation,  supervision
and examination by the OTS. The deposit accounts of the Savings Bank are insured
up to applicable  limits by the SAIF  administered by the FDIC and, as a result,
the Savings Bank also is subject to regulation,  supervision  and examination by
the FDIC.  The Savings Bank is also subject to the  regulations  of the Board of
Governors  of the  Federal  Reserve  System  governing  reserves  required to be
maintained  against  deposits.  The  Savings  Bank is a  member  of the  FHLB of
Atlanta.

     The business and affairs of the Savings Bank are  regulated in a variety of
ways.  Regulations apply to, among other things,  insurance of deposit accounts,
capital ratios,  payment of dividends,  liquidity  requirements,  the nature and
amount of the  investments  that the Savings  Bank may make,  transactions  with
affiliates, community and consumer lending laws, internal policies and controls,
reporting by and  examination  of the Savings Bank and changes in control of the
Savings Bank.

     INSURANCE OF ACCOUNTS.  Deposit accounts of the Savings Bank up to $100,000
are insured by the Savings Association Insurance Fund (the "SAIF"), administered
by the FDIC.  Pursuant to legislation  enacted in September 1996, a fee was paid
by all SAIF insured institutions at the rate of $0.657 per $100 of deposits held
by such  institutions at March 31, 1995. The money collected  recapitalized  the
SAIF  reserve to the level of 1.25% of insured  deposits  as required by law. In
1996, the Savings Bank paid $23,000 for this assessment.

     The new  legislation  also  provides  for the  merger,  subject  to certain
conditions,  of the SAIF into the Bank  Insurance  Fund ("BIF") by 1999 and also
requires  BIF-insured  institutions  to share in the  payment of interest on the
bonds issued by a specially created government entity ("FICO"),  the proceeds of
which were applied toward resolution of the thrift industry crisis in the 1980s.
Beginning on January 1, 1997, in addition to the insurance  premium that is paid
by SAIF-insured  institutions to maintain the SAIF reserve at its required level
pursuant to the current risk classification  system,  SAIF-insured  institutions
pay deposit  insurance  premiums at the annual rate of 6.4 basis points of their
insured  deposits  and  BIF-insured  institutions  will  pay  deposit  insurance
premiums  at the  annual  rate of 1.3  basis  points of their  insured  deposits
towards  the payment of  interest  on the FICO  bonds.  Under the  current  risk
classification system,  institutions are assigned on one of three capital groups
which  are  based  solely  on the  level  of an  institution's  capital  - "well
capitalized,"  "adequately  capitalized"  and  "undercapitalized"  -  which  are
defined in the same manner as the regulations establishing the prompt corrective
action  system under  Section 38 of the FDIA,  as discussed  below.  These three
groups are then  divided  into three  subgroups  which are based on  supervisory
evaluations by the institution's  primary federal  regulator,  resulting in nine
assessment  classifications.  Assessment  rates  currently range from zero basis
points  for  well  capitalized,  healthy  institutions  to 27 basis  points  for
undercapitalized institutions with substantial supervisory concerns.

     The  recapitalization  of the SAIF is expected  to result in lower  deposit
insurance premiums in the future for most SAIF-insured  financial  institutions,
including the Savings Bank.

                                       36
<PAGE>

     The FDIC may  terminate  the deposit  insurance  of any insured  depository
institution,  including the Savings Bank, if it determines  after a hearing that
the institution has engaged or is engaging in unsafe or unsound practices, is in
an unsafe or unsound  condition  to continue  operations,  or has  violated  any
applicable law, regulation,  order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance  temporarily  during the hearing
process for the permanent  termination of insurance,  if the  institution has no
tangible  capital.  If insurance of accounts is terminated,  the accounts at the
institution at the time of the termination,  less subsequent withdrawals,  shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances which would result in
termination of the Savings Bank's deposit insurance.


     REGULATORY CAPITAL REQUIREMENTS. Federally-insured savings associations are
required to maintain  minimum  levels of  regulatory  capital.  These  standards
generally must be as stringent as the comparable capital requirements imposed on
national  banks.  The OTS also is authorized to impose capital  requirements  in
excess of these standards on individual associations on a case-by-case basis. At
December 31, 1997, the Savings Bank's  regulatory  capital  exceeded  applicable
requirements for categorization as "well-capitalized."

     Federally-insured   savings  associations  are  subject  to  three  capital
requirements:  a  tangible  capital  requirement,  a core  or  leverage  capital
requirement  and a  risk-based  capital  requirement.  All savings  associations
currently are required to maintain tangible capital of at least 1.5% of adjusted
total  assets  (as  defined in the  regulations),  core  capital  equal to 3% of
adjusted total assets and total capital (a combination of core and supplementary
capital) equal to 8% of  risk-weighted  assets (as defined in the  regulations).
For  purposes  of the  regulation,  tangible  capital is core  capital  less all
intangibles other than qualifying  purchased mortgage servicing rights, of which
the Savings  Bank had none at December 31, 1997.  Core capital  includes  common
stockholders'  equity,  non-cumulative  perpetual  preferred  stock and  related
surplus,  minority  interest  in  the  equity  accounts  of  fully  consolidated
subsidiaries and certain  nonwithdrawable  accounts and pledged  deposits.  Core
capital generally is reduced by the amount of a savings association's intangible
assets, other than qualifying mortgage servicing rights.

     A  savings  association  is  allowed  to  include  both  core  capital  and
supplementary  capital in the  calculation  of its total capital for purposes of
the risk-based capital  requirements,  provided that the amount of supplementary
capital  included  does not  exceed  the  savings  association's  core  capital.
Supplementary  capital  consists  of  certain  capital  instruments  that do not
qualify as core  capital,  including  subordinated  debt which  meets  specified
requirements,  and  general  valuation  loan and lease loss  allowances  up to a
maximum of 1.25% of risk-weighted  assets. In determining the required amount of
risk-based capital, total assets, including certain off-balance sheet items, are
multiplied  by a risk weight based on the risks  inherent in the type of assets.
The  risk  weights  assigned  by the  OTS for  principal  categories  of  assets
currently range from 0% to 100%, depending on the type of asset.

                                       37
<PAGE>

     OTS policy  imposes a  limitation  on the amount of net deferred tax assets
under SFAS No. 109 that may be included in regulatory capital. (Net deferred tax
assets represent deferred tax assets,  reduced by any valuation  allowances,  in
excess of deferred tax  liabilities.)  Application  of the limit  depends on the
possible  sources of  taxable  income  available  to an  institution  to realize
deferred tax assets. Deferred tax assets that can be realized from the following
generally  are not  limited:  taxes  paid in prior  carryback  years and  future
reversals  of existing  taxable  temporary  differences.  To the extent that the
realization  of deferred tax assets depends on an  institution's  future taxable
income (exclusive of reversing temporary differences and carryforwards),  or its
tax-planning  strategies,  such  deferred tax assets are limited for  regulatory
capital  purposes to the lesser of the amount  that can be  realized  within one
year  of the  quarter-end  report  date or 10% of core  capital.  The  foregoing
considerations  did not affect the calculation of the Savings Bank's  regulatory
capital at December 31, 1997.

     In August 1993, the OTS adopted a final rule incorporating an interest-rate
risk  component  into the  risk-based  capital  regulation.  Under the rule,  an
institution  with a greater than  "normal"  level of interest  rate risk will be
subject to a deduction of its inherent  rate risk  component  from total capital
for purposes of calculating  the risk-based  capital  requirement.  As a result,
such an institution will be required to maintain  additional capital in order to
comply with the  risk-based  capital  requirement.  Although  the final rule was
originally  scheduled to be effective as of January 1994,  the OTS has indicated
that it will delay invoking its interest rate risk rule  requiring  institutions
with above normal interest rate risk exposure to adjust their regulatory capital
requirement until appeal  procedures are implemented and evaluated.  The OTS has
not yet established an effective date for the capital  deduction.  Management of
the Company  does not believe  that the OTS'  adoption of an interest  rate risk
component  to the  risk-based  capital  requirement  will  adversely  affect the
Savings Bank if it becomes effective in its current form.

     In April 1991,  the OTS proposed to modify the 3% of adjusted  total assets
core capital  requirement  in the same manner as was done by the  Comptroller of
the Currency for national  savings banks.  Under the OTS proposal,  only savings
associations  rated  composite 1 under the CAMEL rating system will be permitted
to operate at the  regulatory  minimum core  capital  ratio of 3%. For all other
savings associations, the minimum core capital ratio will be 3% plus at least an
additional  100 to 200 basis  points,  which will  increase  the 4% core capital
ratio  requirement to 5% of adjusted  total assets or more. In  determining  the
amount of  additional  capital,  the OTS will  assess  both the  quality of risk
management  systems  and the level of overall  risk in each  individual  savings
association through the supervisory process on a case-by-case basis.

                                       38
<PAGE>

     PROMPT  CORRECTIVE  ACTION.   Federal  law  provides  the  federal  banking
regulators  with broad power to take "prompt  corrective  action" to resolve the
problems of undercapitalized  institutions. The extent of the regulators' powers
depends  on  whether  the   institution  in  question  is  "well   capitalized,"
"adequately capitalized," "under-capitalized,"  "significantly undercapitalized"
or  "critically  undercapitalized."  Under  regulations  adopted by the  federal
banking regulators,  an institution shall be deemed to be (i) "well capitalized"
if it has a total  risk-based  capital  ratio of  10.0%  or  more,  has a Tier I
risk-based capital ratio of 6.0% or more, has a Tier I leverage capital ratio of
5.0% or more and is not subject to specified requirements to meet and maintain a
specific capital level for any capital measure; (ii) "adequately capitalized" if
it has a total  risk-based  capital  ratio of 8.0% or more,  a Tier I risk-based
capital  ratio of 4.0% or more and a Tier I  leverage  capital  ratio of 4.0% or
more (3.0% under  certain  circumstances)  and does not meet the  definition  of
"well  capitalized,"  (iii)  "undercapitalized"  if it  has a  total  risk-based
capital ratio that is less than 8.0%, a Tier I risk-based  capital ratio that is
less than 4.0% or a Tier I leverage  capital  ratio that is less than 4.0% (3.0%
under certain circumstances),  (iv) "significantly undercapitalized" if it has a
total  risk-based  capital  ratio  that is less than 6.0%,  a Tier I  risk-based
capital ratio that is less than 3.0% or a Tier I leverage  capital ratio that is
less  than  3.0%,  and (v)  "critically  undercapitalized"  if it has a ratio of
tangible equity to adjusted total assets that is equal to or less than 2.0%. The
regulations  also permit the appropriate  federal  Savings Banking  regulator to
downgrade  an  institution   to  the  next  lower  category   (provided  that  a
significantly  undercapitalized  institution may not be downgraded to critically
undercapitalized)  if the regulator  determines (i) after notice and opportunity
for hearing or response,  that the institution is an unsafe or unsound condition
or  (ii)   that  the   institution   has   received   (and  not   corrected)   a
less-than-satisfactory  rating  for  any of the  categories  of  asset  quality,
management, earnings or liquidity in its most recent exam. At December 31, 1997,
the  Savings  Bank  was  a  "well  capitalized"  institution  under  the  prompt
corrective action regulations of the OTS.

     Depending  upon the capital  category to which an  institution is assigned,
the  regulators'  corrective  powers,  many of which are  mandatory  in  certain
circumstances,  include  prohibition  on capital  distributions;  prohibition on
payment of management fees to controlling persons; requiring the submission of a
capital restoration plan; placing limits on asset growth; limiting acquisitions,
branching  or  new  lines  of  business;  requiring  the  institution  to  issue
additional capital stock (including  additional voting stock) or to be acquired;
restricting  transactions  with affiliates;  restricting the interest rates that
the institution may pay on deposits; ordering a new election of directors of the
institution; requiring that senior executive officers or directors be dismissed;
prohibiting the institution from accepting  deposits from  correspondent  banks;
requiring  the  institution  to divest  certain  subsidiaries;  prohibiting  the
payment  of  principal  or  interest  on  subordinated  debt;  and,  ultimately,
appointing a receiver for the institution.

                                       39
<PAGE>

     QUALIFIED THRIFT LENDER TEST. All savings associations are required to meet
the QTL test set forth in the HOLA and regulations to avoid certain restrictions
on their operations.  A savings  association that does not meet the QTL test set
forth in the HOLA and  implementing  regulations  must either  convert to a bank
charter or comply with the following  restrictions  on its  operations:  (i) the
association  may not  engage  in any new  activity  or make any new  investment,
directly or indirectly,  unless such activity or investment is permissible for a
national bank; (ii) the branching powers of the association  shall be restricted
to those of a national  bank;  (iii) the  association  shall not be  eligible to
obtain  any  advances  from its  FHLB;  and (iv)  payment  of  dividends  by the
association  shall be subject to the rules  regarding  payment of dividends by a
national bank.  Upon the expiration of three years from the date the association
ceases to be a QTL, it must cease any activity and not retain any investment not
permissible  for a national  bank and  immediately  repay any  outstanding  FHLB
advances (subject to safety and soundness considerations).  The Savings Bank met
the QTL test throughout 1997.

     RESTRICTIONS ON CAPITAL DISTRIBUTIONS. The OTS has promulgated a regulation
governing  capital  distributions  by savings  associations,  which include cash
dividends,  stock  redemption's  or  repurchases,   cash-out  mergers,  interest
payments  on  certain  convertible  debt and other  transactions  charged to the
capital account of a savings association as a capital  distribution.  Generally,
the regulation creates three tiers of associations based on regulatory  capital,
with the top two tiers  providing a safe harbor for specified  levels of capital
distributions from associations so long as such associations  notify the OTS and
receive no objection to the distribution from the OTS.  Associations that do not
qualify for the safe harbor provided for the top two tiers of  associations  are
required to obtain prior OTS approval before making any capital distributions.

     Tier 1 associations  may make the highest amount of capital  distributions,
and are  defined  as savings  associations  that  before and after the  proposed
distribution   meet  or  exceed  their  fully   phased-in   regulatory   capital
requirements.  Tier 1  associations  may make capital  distributions  during any
calendar  year equal to the  greater of (i) 100% of net income for the  calendar
year-to-date  plus 50% of its "surplus  capital  ratio" at the  beginning of the
calendar  year and (ii) 75% of its net income over the most recent  four-quarter
period.  The "surplus  capital ratio" is defined to mean the percentage by which
the  association's  ratio of total  capital to assets  exceeds  the ratio of its
"fully phased-in  capital  requirement" to assets,  and "fully phased-in capital
requirement" is defined to mean an association's  capital  requirement under the
statutory and regulatory  standards applicable on December 31, 1994, as modified
to reflect any applicable  individual minimum capital  requirement  imposed upon
the association. At December 31, 1997, the Savings Bank was a Tier 1 association
under the OTS capital distribution regulation.

     In December  1994,  the OTS  published a notice of proposed  rulemaking  to
amend its capital distribution regulation.  Under the proposal, the three tiered
approach  contained in existing  regulations  would be replaced and institutions
would be permitted to make capital  distributions that would not result in their
capital  being  reduced   below  the  level   required  to  remain   "adequately
capitalized," as defined above under "Prompt Corrective Action."

                                       40
<PAGE>

     LOAN-TO-ONE  BORROWER.  Under applicable laws and regulations the amount of
loans and  extensions  of credit which may be extended by a savings  institution
such as the  Savings  Bank  to any one  borrower,  including  related  entities,
generally  may not  exceed  the  greater of  $500,000  or 15% of the  unimpaired
capital and unimpaired  surplus of the institution.  Loans in an amount equal to
an additional 10% of unimpaired  capital and unimpaired surplus also may be made
to a borrower if the loans are fully secured by readily  marketable  securities.
An institution's  "unimpaired  capital and unimpaired  surplus" includes,  among
other things, the amount of its core capital and supplementary  capital included
in its total capital under OTS regulations.

     At December 31, 1997,  the Savings  Bank's  unimpaired  capital and surplus
amounted to $3,242,000,  resulting in a general loans-to-one borrower limitation
of $500,000 under applicable laws and regulations.

     BROKERED  DEPOSITS.  Under  applicable  laws and  regulations,  an  insured
depository  institution may be restricted in obtaining,  directly or indirectly,
funds by or through any  "deposit  broker," as defined,  for deposit into one or
more deposit  accounts at the institution.  The term "deposit broker"  generally
includes any person engaged in the business of placing deposits, or facilitating
the placement of deposits, of third parties with insured depository institutions
or the business of placing deposits with insured depository institutions for the
purpose of selling interest in those deposits to third parties. In addition, the
term  "deposit  broker"  includes any insured  depository  institution,  and any
employee of any  insured  depository  institution,  which  engages,  directly or
indirectly,  in the solicitation of deposits by offering rates of interest (with
respect to such  deposits)  which are  significantly  higher than the prevailing
rates of interest on deposits offered by other insured  depository  institutions
have the same type of charter in such  depository  institution's  normal  market
area.  As a result of the  definition  of "deposit  broker,"  all of the Savings
Bank's  brokered  deposits,  as well as possibly its deposits  obtained  through
customers  of  regional  and local  investment  banking  firms and the  deposits
obtained from the Savings Bank's direct  solicitation  efforts of  institutional
investors  and  high net  worth  individuals,  are  potentially  subject  to the
restrictions   described  below.   Under  FDIC   regulations,   well-capitalized
institutions   are   subject  to  no   brokered   deposit   limitations,   while
adequately-capitalized  institutions  are able to  accept,  renew  or roll  over
brokered  deposits  only (i) with a waiver from the FDIC and (ii) subject to the
limitation  that they do not pay an effective  yield on any such  deposit  which
exceeds by more than (a) 75 basis points the effective yield paid on deposits of
comparable  size and  maturity  in such  institution's  normal  market  area for
deposits  accepted in its normal market area or (b) by 120% for retail  deposits
and  130%  for  wholesale  deposits,  respectively,  of  the  current  yield  on
comparable maturity U.S. Treasury  obligations for deposits accepted outside the
institution's  normal  market  area.   Undercapitalized   institutions  are  not
permitted to accept brokered  deposits and may not solicit  deposits by offering
any effective  yield that exceeds by more than 75 basis points,  the  prevailing
effective yields on insured deposits of comparable maturity in the institution's
normal  market  area or in the  market  area in which  such  deposits  are being
solicited.  At  December  31,  1997,  the  Savings  Bank was a  well-capitalized
institution  which was not subject to  restrictions  on brokered  deposits.  See
"Business - Savings Bank Sources of Funds - Deposits."

                                       41
<PAGE>

     LIQUIDITY  REQUIREMENTS.  All savings associations are required to maintain
an average daily balance of liquid assets,  which include  specified  short-term
assets and certain long-term assets, equal to a certain percentage of the sum of
its average daily balance of net  withdrawable  deposit  accounts and borrowings
payable in one year or less.  The  liquidity  requirement  may vary from time to
time (between 4% and 10%) depending  upon economic  conditions and savings flows
of all savings  associations.  At the present  time,  the required  liquid asset
ratio is 4%.  Historically,  the Savings  Bank has operated in  compliance  with
these requirements.

     AFFILIATE  TRANSACTIONS.  Under  federal law and  regulation,  transactions
between a savings association and its affiliates are subject to quantitative and
qualitative  restrictions.  Affiliates of a savings association  include,  among
other  entities,  companies that control,  are controlled by or are under common
control with the savings association.  As a result, the Company and its non-bank
subsidiaries are affiliates of the Savings Bank.

     Savings  associations are restricted in their ability to engage in "covered
transactions" with their affiliates. In addition, covered transactions between a
savings association and an affiliate, as well as certain other transactions with
or  benefiting  an  affiliate,  must be on  terms  and  conditions  at  least as
favorable  to the  savings  association  as  those  prevailing  at the  time for
comparable transactions with non-affiliated companies.  Savings associations are
required to make and retain detailed records of transactions with affiliates.

     Notwithstanding  the foregoing,  a savings  association is not permitted to
make a loan or  extension  of credit to any  affiliate  unless the  affiliate is
engaged  only in  activities  the Federal  Reserve  Board has  determined  to be
permissible for bank holding companies. Savings associations also are prohibited
from  purchasing or investing in securities  issued by an affiliate,  other than
shares of a subsidiary of the savings association.

     Savings  associations are also subject to various limitations and reporting
requirements  on loans to  insiders.  These  limitations  require,  among  other
things, that all loans or extensions of credit to insiders (generally  executive
officers,  directors or 10%  stockholders of the  institution) or their "related
interest" be made on substantially the same terms (including  interest rates and
collateral)  as, and follow  credit  underwriting  procedures  that are not less
stringent than,  those prevailing for comparable  transactions  with the general
public and not involve more than the normal risk of  repayment or present  other
unfavorable features.

                                       42
<PAGE>

     COMMUNITY  INVESTMENT AND CONSUMER  PROTECTION LAWS. In connection with its
lending  activities,  the Savings  Bank is subject to the same federal and state
laws applicable to the Company generally, laws designed to protect borrowers and
promote lending to various  sectors of the economy and population.  In addition,
the Savings Bank is subject to the federal  Community  Reinvestment Act ("CRA").
The CRA requires each bank or savings association to identify the communities it
serves and the types of credit or other  financial  services the bank or savings
association  is prepared to extend to those  communities.  The CRA also requires
the OTS to assess a savings  association's  record of helping to meet the credit
needs  of its  community  and to take the  assessment  into  consideration  when
evaluating  applications for mergers,  applications and other transactions.  The
OTS may assign a rating of "outstanding," "satisfactory," "needs to improve," or
"substantial  noncompliance."  A less than  satisfactory  CRA  rating may be the
basis for denying such  applications.  The OTS has not conducted a CRA review of
the Savings Bank since the Company  acquired  the Savings Bank on September  11,
1996.  However,  management  believes the OTS will have a favorable  view of the
Savings Bank's recent CRA record.

     Under the CRA and implementing OTS regulations, a savings association has a
continuing and affirmative obligation to help meet the credit needs of its local
communities,  including low- and moderate-income neighborhoods,  consistent with
the safe and sound  operation of the  institution.  Until July 1, 1997,  the OTS
implementing  regulations  required  the  board  of  directors  of each  savings
association to adopt a CRA statement for each  delineated  local community that,
among other things,  describes its efforts to help meet  community  credit needs
and the  specific  types of credit  that the  institution  is willing to extend.
Under new  standards,  the OTS will assign a CRA rating based on a Lending Test,
Investment  Test and Service Test keyed to,  respectively,  the number of loans,
the  number of  investments,  and the level of  availability  of retail  banking
services in a savings  association's  assessment  area. The Lending Test will be
the primary component of the assigned composite rating. An "outstanding"  rating
on the  Lending  Test  automatically  will  result in at least a  "satisfactory"
rating in the composite,  but an institution  cannot receive a "satisfactory" or
better  rating  on  the  composite  if it  does  not  receive  at  least  a "low
satisfactory" rating on the Lending Test.  Alternatively,  a savings association
may elect to be assessed by complying with a strategic plan approved by the OTS.
Evaluation  under the new rules is  mandatory  after June 30, 1997;  however,  a
savings association could elect to be evaluated under the new rules beginning on
January  1,  1996,  although  the  Savings  Bank did not  elect  to do so.  Data
collection requirements became effective January 1, 1996.

     SAFETY AND SOUNDNESS.  Other regulations which were recently adopted or are
currently  proposed to be adopted pursuant to recent  legislation  include:  (i)
real estate lending standards for insured institutions, which provide guidelines
concerning  loan-to-value  ratios for various types of real estate  loans;  (ii)
revisions to the  risk-based  capital  rules to account for interest  rate risk,
concentration   of  credit  risk  and  the  risks   posed  by   "non-traditional
activities;"  (iii)  rules  requiring  depository  institutions  to develop  and
implement  internal  procedures  to evaluate and control  credit and  settlement
exposure to their correspondent banks; and (iv) rules addressing various "safety
and soundness" issues, including operations and managerial standards,  standards
for asset quality, earnings and stock valuations, and compensation standards for
the officers,  directors,  employees and principal  stockholders  of the insured
institution.

                                       43
<PAGE>

LEGISLATIVE RISK

     Members  of  Congress  and  government  officials  from  time to time  have
suggested the elimination of the mortgage interest  deduction for federal income
tax purposes, either entirely or in part, based on borrower income, type of loan
or principal  amount.  Because many of the Company's loans are made to borrowers
for the purpose of  consolidating  consumer  debt or  financing  other  consumer
needs, the competitive advantages of tax deductible interest, when compared with
alternative  sources of financing,  could be eliminated or seriously impaired by
such government action.  Accordingly,  the reduction or elimination of these tax
benefits  could  have a material  adverse  effect on the demand for loans of the
kind offered by the Company.

ENVIRONMENTAL FACTORS

     To date, the Company has not been required to perform any  investigation or
clean up activities,  nor has it been subject to any environmental claims. There
can be no assurance,  however,  that this will remain the case in the future. In
the ordinary course of its business, the Company from time to time forecloses on
properties  securing  loans.  Although the Company  primarily lends to owners of
residential  properties,  there is a risk that the Company  could be required to
investigate and clean up hazardous or toxic  substances or chemical  releases at
such properties after acquisition by the Company,  and could be held liable to a
governmental  entity or to third parties for property  damage,  personal injury,
and  investigation and cleanup costs incurred by such parties in connection with
the  contamination.  The costs of investigation,  remediation or removal of such
substances  may be  substantial,  and the  presence of such  substances,  or the
failure to properly  remediate such property,  may adversely  affect the owner's
ability  to sell or rent such  property  or to borrow  using  such  property  as
collateral.  Persons who arrange for the  disposal or  treatment of hazardous or
toxic  substances  also may be liable for the costs of removal or remediation of
such  substances  at the  disposal  or  treatment  facility,  whether or not the
facility is owned or operated by such person.  In addition,  the owner or former
owners of a  contaminated  site may be  subject  to common  law  claims by third
parties based on damages and costs  resulting from  environmental  contamination
emanating from such property.

     In the course of its  business,  the Company may  acquire  properties  as a
result of  foreclosure.  There is a risk that  hazardous or toxic waste could be
found on such  properties.  In such event, the Company could be held responsible
for the cost of cleaning up or removing  such waste,  and such cost could exceed
the value of the underlying properties.

                                       44
<PAGE>

DEPENDENCE ON KEY PERSONNEL

     The Company's  growth and  development to date have been largely  dependent
upon the services of Allen D. Wykle, Chairman of the Board,  President and Chief
Executive  Officer,  Neil W. Phelan,  Executive  Vice President in charge of the
broker  lending  division,  and Barry C.  Diggins,  a key  member of the  retail
lending  management team. The loss of Mr. Wykle's,  Mr. Phelan's or Mr. Diggins'
services  for any reason  could have a material  adverse  effect on the Company.
Certain of the Company's  principal credit agreements  contain a provision which
permit the lender to accelerate the Company's  obligations in the event that Mr.
Wykle  were to leave the  Company  for any reason  and not be  replaced  with an
executive acceptable to such lender.

CONTROL BY CERTAIN SHAREHOLDERS

     As of March 15, 1998, Allen D. Wykle, Chairman of the Board,  President and
Chief  Executive  Officer  and Leon H.  Perlin,  Director,  beneficially  own an
aggregate  of 50.1% of the  outstanding  shares of Common  Stock of the Company.
Accordingly,  such persons, if they were to act in concert,  would have majority
control  of the  Company,  with  the  ability  to  approve  certain  fundamental
corporate transactions and the election of the entire Board of Directors.

                                       45
<PAGE>

                               ITEM 2 - PROPERTIES

PROPERTIES

     The  Company's  executive  and  administrative  offices are located at 3420
Holland Road, Virginia Beach,  Virginia.  The building consists of approximately
15,000  square  feet and is owned by the  Company.  In June  1997,  the  Company
purchased a building  adjacent to its  headquarters  to  accommodate  its growth
plans.  The purchase  price of the building was  $1,060,000  and it was financed
with a mortgage loan of $800,000.  The second building consists of approximately
20,000 square feet.  The Company  occupies  approximately  17,000 square feet in
this  building,  and the  remainder is leased to  third-party  tenants.  The two
buildings  are subject to total  mortgage  debt of $1,216,000 as of December 31,
1997.

     As of December 31, 1997 the Company had leases for regional  broker lending
offices,  retail lending offices, and the Savings Bank's administrative  office.
These facilities aggregate approximately 57,000 square feet and are leased under
terms which vary as to duration.  In general,  the leases expire between January
1998 and October 2002, and provide rent  escalations tied to either increases in
the lessor's  operating  expenses or fluctuations in the consumer price index in
the relevant geographic area. Lease expense was $955,000,  $317,000 and $142,000
in 1997,  1996 and  1995,  respectively.  Total  minimum  lease  payments  under
noncancelable  operating leases with remaining terms in excess of one year as of
December 31, 1997 were as follows (in thousands):

        1998                                          $  1,173
        1999                                               856
        2000                                               433
        2001                                               211
        2002                                               113
        Thereafter                                          16
                                                      --------
                                                      $  2,802
                                                      ========

     The Company anticipates that in the normal course of business it will lease
additional office space as it opens new retail loan origination  locations.  The
Company is also considering relocating the Virginia Beach, Virginia headquarters
to a new facility, which would house all home office operations in one building.
Currently,  the  Company  has no  specific  plan to make this change in the home
office facility.

                                       46
<PAGE>

                           ITEM 3 - LEGAL PROCEEDINGS

     The Company is a party to various routine legal proceedings  arising out of
the ordinary  course of its  business.  Management  believes  that none of these
actions,  individually or in the aggregate,  will have a material adverse effect
on the results of operations or financial condition of the Company.


                    ITEM 4 - SUBMISSION OF MATTERS TO A VOTE
                               OF SECURITY HOLDERS

     None.

                                       47
<PAGE>

                                     PART II

                 ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY
                         AND RELATED STOCKHOLDER MATTERS

MARKET PRICE OF AND CASH DIVIDENDS ON THE COMPANY'S COMMON EQUITY

     The following table shows the quarterly high, low and closing prices of the
Company's common stock for 1997, 1996 and the second six months of 1995 and cash
dividends paid per share.  Stock prices for the first six months of 1995 are not
available.  All stock  price and  dividend  data has been  adjusted  to  reflect
two-for-one  stock  splits  which  occurred on August 30, 1996 and  December 16,
1996, and a 100% stock dividend which occurred on November 21, 1997.

                                         Stock Prices
                                 -----------------------------      Cash
                                  High        Low        Close    Dividends
                                 ------     -------     ------    ---------
     1997:                                                       
     Fourth Quarter              $17.00     $ 12.75     $14.75     $   --
     Third Quarter                17.00        8.00      15.00         --
     Second Quarter               10.00        6.00       8.25         --
     First Quarter                13.50        8.50       9.75         --
                                                                 
     1996:                                                       
     Fourth Quarter               11.50        8.00       8.50         .01
     Third Quarter                 9.13        3.75       9.00         .01
     Second Quarter                4.75        2.13       3.88         .01
     First Quarter                 2.25        2.06       2.19         .01
                                                                 
     1995:                                                       
     Fourth Quarter                2.14        1.84       2.14         .01
     Third Quarter                 1.78        1.46       1.71         .01
                                                                   

     The Company did not pay any cash dividends on its Common Stock in 1997. The
Company intends to retain all of its earnings to finance its operations and does
not anticipate  paying cash dividends for the foreseeable  future.  Any decision
made by the Board of Directors to declare dividends in the future will depend on
the Company's future earnings,  capital  requirements,  financial  condition and
other factors deemed relevant by the Board.

                                       48
<PAGE>

ABSENCE OF ACTIVE PUBLIC TRADING MARKET AND VOLATILITY OF STOCK PRICE

     The Company's Common Stock is traded on the National Quotation Bureau, Inc.
OTC  Bulletin  Board  under the symbol  "APFN."  Historically,  there has been a
limited market for the Company's Common Stock. As a result,  the prices reported
for the  Company's  Common Stock  reflect the relative lack of liquidity and may
not be reliable  indicators of market value.  There can be no assurance  that an
active public trading  market for the Company's  Common Stock will be created in
the future.

     The Company intends to file an application with the National Association of
Securities  Dealers  in  Washington,  D.C.  to  request a listing  on the NASDAQ
National Market.

     The market price of the Common Stock may experience  fluctuations  that are
unrelated to the operating performance of the Company. In particular,  the price
of the Common Stock may be affected by general market price movements as well as
developments  specifically  related to the residential mortgage lending industry
such as,  among other  things,  interest  rate  movements,  delinquencies,  loan
payment speeds, and loss trends.

TRANSFER AGENT AND REGISTRAR

     The Transfer  Agent for the Company's  Common Stock is First Union National
Bank, 230 South Tryon Street, 11th Floor, Charlotte, North Carolina 28288-1153.

RECENT SALES OF UNREGISTERED SECURITIES

     In  connection  with the  offering of 225,000 new shares of Common Stock in
the State of Virginia,  pursuant to Section  3(a)(11) of the  Securities  Act of
1933 and Rule 147 issued thereunder, the Company in 1992 also issued warrants to
its existing eleven shareholders, also in Virginia, to purchase 47,601 shares of
Common Stock for $7.50 per share.  The warrants were convertible for a five year
period  expiring April 20, 1997. Nine of the eleven  shareholders  exercised the
warrants prior to their expiration.  Taking into account all prior stock splits,
362,968  shares  were  issued at $0.935  per  share  for an  aggregate  price of
$339,375.

     Of the 362,968  shares  issued,  305,712 were  purchased by the two largest
shareholders  of the  Company:  Allen D. Wykle,  President  and Chief  Executive
Officer,  and Leon H. Perlin.  Both are directors.  Three other shareholders who
purchased shares upon the exercise of the warrants were also directors,  and one
shareholder was the spouse of a director.  Most were accredited investors at the
time of exercise.  The Company relied on a private  exemption from  registration
under Section 4(2) of the  Securities Act of 1933,  and the  regulations  issued
thereunder.   The  stock  bears  a   restrictive   legend,   is  subject  to  an
administrative stop, may not be resold without an opinion of the Company's legal
counsel, and is subject to the resale requirements of Rule 144.

                                       49
<PAGE>

     Since  December  1994,  the Company  had  conducted a portion of its retail
lending business through Armada Residential Mortgage,  LLC ("Armada LLC"), which
was owned 1% by the Company, 82% by ARMI and 17% by Armada LLC's senior officer.
In connection with terminating  Armada LLC, in September 1997 the Company agreed
to issue  106,146  shares of its Common Stock to purchase  the senior  officer's
ownership  interest in Armada LLC. The Company issued 2,000 shares to the senior
officer on October 10, 1997 and  104,146  shares on January 5, 1998.  The senior
officer  terminated  his  employment  with  Armada LLC and became an employee of
ARMI. He also became a Director of the Company. The Company also agreed to issue
6,780 shares to a key employee of Armada LLC. The Company issued 1,000 shares to
the key employee on October 10, 1997 and 13,560  shares on January 5, 1998.  The
key employee terminated his employment with Armada LLC and became an employee of
ARMI.  The stock bears a  restrictive  legend,  is subject to an  administrative
stop, may not be resold without an opinion of the Company's  legal counsel,  and
is  subject  to the  resale  requirements  of Rule 144.  No  broker  or  general
solicitation was involved.  The Company relied on an exemption from registration
under Section 4(2) of the  Securities Act of 1933,  and the  regulations  issued
thereunder,  and Rule 701.  The share  figures  have been  adjusted for the 100%
stock dividend, which occurred on November 21, 1997.

                                       50
<PAGE>

                        ITEM 6 - SELECTED FINANCIAL DATA

     The  historical  consolidated  financial  data  for the  five  years  ended
December 31, 1997 were derived from the consolidated financial statements of the
Company included  elsewhere herein. The historical  consolidated  financial data
are not  necessarily  indicative  of the  results of  operations  for any future
period.  This  information  should  be read in  conjunction  with  "Management's
Discussion and Analysis of Financial  Condition and Results of  Operations"  and
the historical  consolidated  financial  statements  and notes thereto  included
elsewhere  herein.  Unless  otherwise  indicated,  all  financial  data has been
adjusted to reflect  two-for-one  stock splits which occurred on August 30, 1996
and December 16, 1996,  and a 100% stock dividend which occurred on November 21,
1997.


                                       51
<PAGE>

APPROVED FINANCIAL CORP.
SELECTED FINANCIAL STATISTICS

<TABLE>
<CAPTION>
(In thousands, except share and per share data)
Years Ended
December 31                               1997          1996           1995           1994           1993
-----------                            ----------    ----------     ----------     ----------     ----------

Revenue:
<S>                                    <C>           <C>            <C>            <C>            <C>       
     Gain on sale of loans             $   33,501    $   17,955     $    7,298     $    2,184     $    2,641
     Interest income                       10,935         4,520          3,065          2,556          3,338
     Gain on sale of securities             2,796            --             --             --             --
     Other fees and income                  4,934         2,407          1,535            639            227
                                       ----------    ----------     ----------     ----------     ----------
        Total revenue                      52,166        24,882         11,898          5,379          6,206
                                       ----------    ----------     ----------     ----------     ----------
Expenses:
     Compensation (1)                      16,447         8,017          3,880          1,452          1,040
     General and administrative            14,188         6,853          3,050          1,337          1,122
     Interest expense                       6,157         3,121          2,194          1,700          1,781
     Provision for loan and
       foreclosed property losses           1,676         1,308            731            191            426
                                       ----------    ----------     ----------     ----------     ----------
        Total expenses                     38,468        19,299          9,855          4,680          4,369
                                       ----------    ----------     ----------     ----------     ----------

Income before income taxes                 13,698         5,583          2,043            699          1,837

Income taxes                                5,638         2,259            876            328            761
                                       ----------    ----------     ----------     ----------     ----------

Net income                             $    8,060    $    3,324     $    1,167     $      371     $    1,076
                                       ==========    ==========     ==========     ==========     ==========

Net income per share (diluted)(2)      $     1.51    $     0.63     $     0.23     $     0.07     $     0.21
                                       ==========    ==========     ==========     ==========     ==========

Cash dividends per share (2)           $       --    $     0.04     $     0.04     $     0.04     $     0.04
                                       ==========    ==========     ==========     ==========     ==========

Dividend payout ratio                          --          6.35%         17.39%         57.14%         19.05%
                                       ==========    ==========     ==========     ==========     ==========
Weighted average number
    of shares outstanding (diluted)     5,345,957     5,281,103      5,062,809      5,035,350      5,077,440
                                       ==========    ==========     ==========     ==========     ==========
</TABLE>

=============
(1) This document reclassifies "minority interests in consolidated subsidiaries"
    as "compensation."
(2) All  per-share  data has been adjusted to reflect  two-for-one  stock splits
    which  occurred on August 30, 1996 and December  16, 1996,  and a 100% stock
    dividend which occurred on November 21, 1997.

                                       52
<PAGE>

APPROVED FINANCIAL CORP.
SELECTED FINANCIAL STATISTICS

<TABLE>
<CAPTION>
(In thousands, except per share data)
Years Ended
December 31                      1997         1996         1995         1994         1993
-----------                    --------     --------     --------     --------     --------

SELECTED BALANCES AT YEAR END
<S>                            <C>          <C>          <C>          <C>          <C>     
Loans receivable, net          $ 80,696     $ 45,423     $ 28,430     $ 18,021     $ 16,216
Securities                       15,201       20,140           --           --           --
Total assets                    118,125       75,143       34,485       23,109       21,663
Revolving warehouse loans        52,488       32,030       19,566        7,727        5,790
FDIC-insured deposits            17,815        1,576           --           --           --
Subordinated debt                 9,080        9,183        6,905        8,546        9,561
Total liabilities (1)            93,070       53,934       28,250       17,465       16,291
Shareholders' equity             25,055       21,209        6,236        5,645        5,372

SELECTED LOAN DATA

Loans originated               $468,955     $258,833     $111,505     $ 43,079     $ 56,972
Loans sold                      420,498      228,918       83,328       34,409       56,909
Amount of loans serviced
     at year-end                 83,512       48,785       29,249       18,482       16,434
Loans delinquent 31 days or
    more as percent of
    loans at year-end              5.50%        6.61%        8.88%        7.03%       12.07%

SELECTED RATIOS

Return on average assets           7.68%        7.32%        4.06%        1.67%        4.61%
Return on average
    shareholders' equity          32.69%       36.44%       19.86%        6.80%       21.83%
Shareholders' equity
    to assets                     21.21%       28.22%       18.08%       24.43%       24.80%
Book value per share (2)       $   4.64     $   4.21     $   1.28     $   1.09     $   1.06
</TABLE>

=============
(1) Includes minority interests in subsidiaries.
(2) All  per-share  data has been adjusted to reflect  two-for-one  stock splits
    which  occurred on August 30, 1996 and December  16, 1996,  and a 100% stock
    dividend which occurred on November 21, 1997.

                                       53
<PAGE>

ITEM 7.  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 each year in the  three-year  period ended December 31, 1997 and
its  consolidated  financial  position at December 31, 1997,  1996 and 1995. The
discussion  includes some  forward-looking  statements  involving  estimates and
uncertainties.  The Company's actual results could differ  materially from those
anticipated  in the  forward-looking  statements as a result of certain  factors
such as reduced demand for loans,  competitive forces, limits on available funds
and market  forces  affecting  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 1997 audited financial statements.

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

     NET INCOME.  The Company's net income for 1997 was  $8,060,000  compared to
net income of  $3,324,000  in 1996 and  $1,167,000 in 1995. On a per share basis
(diluted),  income for 1997 was $1.51,  compared to $0.63 for 1996 and $0.23 for
1995.

     The  per-share  figures  have been  adjusted to reflect  two-for-one  stock
splits of the  Company's  common  stock,  which  occurred on August 30, 1996 and
December  16, 1996,  and a 100% stock  dividend  which  occurred on November 21,
1997.

     The following table shows changes in net income per share (diluted):

                                             1997          1996          1995
                                         Versus 1996   Versus 1995   Versus 1994
                                         -----------   -----------   -----------
Net income per share for 1996,                                      
   1995 and 1994, respectively              $  .63        $  .23        $  .07
                                                                    
Increase (decrease) attributable to:                                
  Gains on sale of loans                      2.79          2.10          1.02
  Net interest income                          .62           .11            --
  Other income                                 .98           .18           .17
  Compensation expense                       (1.53)         (.81)         (.48)
  Other expenses                             (1.39)         (.86)         (.45)
  Income taxes                                (.62)         (.28)         (.10)
  Average shares outstanding                   .03          (.04)           --
                                            ------        ------        ------
                                                                    
    Net increase                               .88           .40           .16
                                            ------        ------        ------
                                                                    
Net income per share for 1997,                                      
   1996 and 1995, respectively              $ 1.51        $  .63        $  .23
                                            ======        ======        ======

                                       54
<PAGE>

     The return on average  assets was 7.68% in 1997,  compared to 7.32% in 1996
and 4.06% in 1995.  Return on average  shareholders'  equity was 32.69% in 1997,
compared to 36.44% in 1996 and 19.86% in 1995.

     ORIGINATION  OF  MORTGAGE  LOANS.   The  following  table  shows  the  loan
originations  in dollars and units for the Company's  broker and retail units in
1997, 1996 and 1995:

(Dollars in thousands)
Years Ended
December 31                                1997           1996           1995
-----------                             ----------     ----------     ----------

Dollar Volume of Loan Originations:
        Broker                          $  256,417     $  162,887     $   61,378
        Retail                             212,538         95,946         50,127
                                        ----------     ----------     ----------

        Total                           $  468,955     $  258,833     $  111,505
                                        ==========     ==========     ==========

Number of Loans Originated:
        Broker                               4,399          2,670          1,023
        Retail                               4,022          1,683            835
                                        ----------     ----------     ----------

        Total                                8,421          4,353          1,858
                                        ==========     ==========     ==========

The increases in the dollar volume of loan originations of 81.2% in 1997, 132.2%
in 1996 and  158.8% in 1995  reflect  strong  growth in both  broker  and retail
lending operations.

     The  Company's   broker  lending   division   originated   $256,417,000  of
residential  mortgage loans during 1997,  compared to  $162,887,000  in 1996 and
$61,378,000 in 1995. The 57.4% increase in originations in 1997 compared to 1996
and the 165.4%  increase in 1996 compared to 1995 were due to additional  broker
account  representatives,  and back-office  capabilities.  On a unit basis,  the
Company  originated  4,399 loans in its broker  operation  in 1997,  compared to
2,670 loans in 1996 and 1,023 in 1995.

     The  Company's   retail  lending   division   originated   $212,538,000  of
residential  mortgage  loans  in  1997,  compared  to  $95,946,000  in 1996  and
$50,127,000 in 1995. The 121.5%  increase in 1997 compared to 1996 and the 91.4%
increase  in 1996  compared  to 1995 is  attributed  to  additional  retail loan
offices and back-office  capabilities.  On a unit basis, the Company  originated
4,022 loans in its retail operation in 1997, compared to 1,683 loans in 1996 and
835 in 1995.

     In  addition  to  originating   residential  mortgage  loans,  the  Company
occasionally  purchases  loans to obtain  geographic  diversity  and  yields not
obtainable in the Company's  normal lending  areas.  However,  purchases  during
1997,  1996 and 1995 were minimal and the Company has no current plans to expand
the activity of purchasing pools of loans.

                                       55
<PAGE>

        The following tables summarize mortgage loan originations, by state, for
the years ended December 31, 1997, 1996 and 1995:

<TABLE>
<CAPTION>
(In thousands)
Years Ended
December 31                               1997                    1996                    1995
-----------                       -------------------     -------------------     -------------------
                                   Dollars    Percent      Dollars    Percent      Dollars    Percent
                                  --------    -------     --------    -------     --------    -------
Broker Division:
<S>                               <C>            <C>      <C>            <C>      <C>            <C> 
    Maryland                      $ 29,997       6.4%     $  9,609       3.7%     $ 10,626       9.5%
    North and South Carolina        33,420       7.1        33,568      13.0         1,477       1.3
    Georgia                         59,792      12.8        54,488      21.1        26,831      24.1
    Florida                         61,897      13.2        36,711      14.2        18,101      16.2
    Ohio                            32,578       6.9         3,314       1.3            --        --
    Virginia                         5,415       1.2         9,405       3.6         2,320       2.1
    Illinois                        12,781       2.7         8,631       3.3            --        --
    Indiana                          9,131       1.9         2,761       1.1         2,023       1.8
    Tennessee                        7,826       1.7           886       0.3            --        --
    Michigan                         3,680       0.8         3,514       1.4            --        --
                                  --------     -----      --------     -----      --------     -----
        Total Broker Division     $256,417      54.7%     $162,887      63.0%     $ 61,378      55.0%
                                  ========     =====      ========     =====      ========     =====
Retail Division:
    Maryland                      $ 66,954      14.4%     $ 45,089      17.3%     $ 30,444      27.4%
    North and South Carolina        57,618      12.3        12,353       4.8         2,020       1.8
    Georgia                         12,886       2.7        25,599       9.9        13,862      12.4
    Florida                          4,141       0.9            --        --            --        --
    Ohio                            12,666       2.7            61        --            --        --
    Virginia                        34,442       7.3        11,108       4.3         3,801       3.4
    Illinois                         4,877       1.0            --        --            --        --
    Delaware                        16,056       3.4         1,736       0.7            --        --
    Indiana                          2,813       0.6            --        --            --        --
    Kentucky                            85        --            --        --            --        --
                                  --------     -----      --------     -----      --------     -----
        Total Retail Division     $212,538      45.3%     $ 95,946      37.0%     $ 50,127      45.0%
                                  ========     =====      ========     =====      ========     =====
Total originations:
    Maryland                      $ 96,951      20.8%     $ 54,698      21.0%     $ 41,070      36.9%
    North and South Carolina        91,038      19.4        45,921      17.8         3,497       3.1
    Georgia                         72,678      15.5        80,087      31.0        40,693      36.5
    Florida                         66,038      14.1        36,711      14.2        18,101      16.2
    Ohio                            45,144       9.6         3,375       1.3            --        --
    Virginia                        39,857       8.5        20,513       7.9         6,121       5.5
    Illinois                        17,658       3.7         8,631       3.3            --        --
    Delaware                        16,056       3.4         1,736       0.7            --        --
    Indiana                         11,944       2.5         2,761       1.1         2,023       1.8
    Tennessee                        7,826       1.7           886       0.3            --        --
    Michigan                         3,680       0.8         3,514       1.4            --        --
    Kentucky                            85        --            --        --            --        --
                                  --------     -----      --------     -----      --------     -----
        Total originations        $468,955     100.0%     $258,833     100.0%     $111,505     100.0%
                                  ========     =====      ========     =====      ========     =====
</TABLE>

                                       56
<PAGE>

     GAIN ON SALE OF LOANS. The largest component of the Company's net income is
the gain from the sale of mortgage loans, which is the premium paid by investors
to purchase the loans and the  origination  fees and points received at the time
of  origination  on those loans.  There is an active  secondary  market for most
types of mortgage  loans  originated  by the Company.  The majority of the loans
originated by the Company are sold to other mortgage and finance companies.  The
loans are sold for cash as whole loans on a servicing-released basis. Consistent
with industry  practices,  the loans are sold with certain  representations  and
warranties.  By originating loans for subsequent sale in the secondary  mortgage
market,  the  Company is able to obtain  funds which may be used for lending and
investment purposes.

     Gains from the sale of mortgage  loans is comprised of several  components,
as follows:  (a) the  difference  between  the sales price and the net  carrying
value of the  loan;  plus (b) loan  origination  fee  income  collected  at loan
closing and deferred  until the loan is sold;  less (c)  recapture  premiums and
loan selling costs.

     The Company sold  $420,498,000  of mortgage loans during 1997,  compared to
$228,918,000 in 1996 and $83,328,000 in 1995. Sales volume increased by 83.7% in
1997,  by  174.7%  in  1996  and  by  142.2%  in  1995.  The  magnitudes  of the
period-to-period  changes  in loan sales are  consistent  with and  reflect  the
percentage changes in mortgage loan originations in those periods.

     For 1997,  gain on the sale of loans was  $33,501,000,  which compares with
$17,955,000  and  $7,298,000 in 1996 and 1995,  respectively.  The  year-to-year
increases  in the gain on loan sales were the direct  result of  increased  loan
originations,  which enabled the Company to sell more loans. Gain on the sale of
mortgage loans represented 64.2% of total revenue in 1997,  compared to 72.2% of
total revenue in 1996 and 61.3% in 1995.

     The  weighted-average  premium  realized  by the  Company on its loan sales
increased to 6.39% in 1997,  compared to 6.34% in 1996 and 6.15% in 1995.  These
premiums do not include loan fees collected by the Company at the time the loans
are closed and included in the computation of gain when the loans are sold.

     The Company  defers fees it receives in loan  origination,  commitment  and
purchase  transactions.  Loan  origination fees are deferred and recognized over
the lives of the related  loans as an  adjustment  of the loan's yield using the
level-yield  method.  Deferred income pertaining to loans held for sale is taken
into income at the time of sale of the loan. Origination fee income is primarily
derived from the  Company's  retail  lending  division.  Origination  fee income
included  in the  gain on sale of  loans in 1997  was  $8,198,000,  compared  to
$3,935,000 in 1996 and  $3,180,000 in 1995. The increases of 104.4% and 25.8% in
1997 and 1996,  respectively,  are the  result of the  Company  originating  and
selling  more loans  generated by the retail  lending  division.  The  Company's
retail originations increased by $116,592,000,  or 121.5%, in 1997 and increased
by  $45,819,000,  or 91.4%,  in 1996.  The  Company's  retail loan sales in 1997
comprised 48.5% of total loan sales, with an average loan origination fee income
earned of 4.2%.  For 1996,  the Company's  retail loan sales were 35.0% of total
loan sales  with an average  loan fee  income  earned of 4.9%.  Total  recapture
premium and fees  associated  with selling loans  represented  approximately  35
basis points of loans sold in 1997 compared with 30 basis points in 1996.

                                       57
<PAGE>

     A  substantial  portion of the Company's  loan sales during the  three-year
period ended  December 31, 1997 were to Industry  Mortgage  Company  ("IMC"),  a
non-conforming  residential  mortgage  lender.  The  Company  was the  owner  of
approximately  3.2% of the issued and  outstanding  stock of IMC at December 31,
1997. The Company sold IMC 3,791 loans totaling  $235,228,000 in 1997,  compared
to 1,536 loans totaling  $100,095,000 in 1996 and 504 loans totaling $37,993,000
in 1995. The loans sold to IMC represented  55.9%, 43.7% and 45.6% of the dollar
volume of the Company's  loan sales in 1997,  1996 and 1995,  respectively.  The
Company's Chairman and Chief Executive  Officer,  Allen D. Wykle, is a member of
IMC's Board of  Directors.  Also,  Jean S.  Schwindt,  a member of the Company's
Board of Directors and Executive Committee, is an officer of IMC.

     INTEREST  INCOME  AND  EXPENSE.  Interest  income in 1997 was  $10,935,000,
compared with  $4,520,000  and  $3,065,000 in 1996 and 1995,  respectively.  The
141.9% increase in interest income in 1997 was primarily due to a higher average
balance of loans held for sale resulting from the increase in loan originations.
The average  holding  period in 1997 for mortgage  loans in  inventory  remained
consistent with the average 1996 holding period.

     Interest  expense in 1997 was  $6,157,000,  compared  with  $3,121,000  and
$2,194,000 in 1996 and 1995 respectively. The year-to-year increases in interest
expense  were the direct  result of  increased  borrowings  under the  Company's
warehouse  lines  of  credit,  which  were  used to fund  the  increase  in loan
origination volume.

     The  Company's  net interest  income for 1997 was  $4,778,000,  compared to
$1,399,000  in 1996 and  $871,000 in 1995.  Net  interest  income  increased  by
$3,379,000  or 141.5% in 1997  compared to 1996,  and  increased  by $528,000 or
60.7% in 1996 compared to 1995.

     The  Company's  net earnings are highly  dependent  on the  difference,  or
"spread," between the income it receives from its loan and investment portfolios
and its  cost of  funds,  consisting  principally  of the  interest  paid on the
revolving  warehouse  loans and other  borrowings and the Savings Bank's deposit
accounts.

     The average yield  received on the Company's  loan portfolio may not change
at the same pace as the interest  rates it must pay on its  revolving  warehouse
loans and other borrowings and the Savings Bank's  FDIC-insured  deposits.  As a
result, in times of rising interest rates,  decreases in the difference  between
the  yield  received  on  loans  and  other  investments  and the  rate  paid on
borrowings and the Savings Bank's  deposits  usually  occur.  However,  interest
received on short-term  investments  and  adjustable  rate  mortgage  loans also
increase  as a result  of upward  trends in  short-term  interest  rates,  which
enables the Company to partially  compensate for increased borrowing and deposit
costs.

     The following  tables  reflect the average  yields earned and rates paid by
the Company during 1997 and 1996. 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.

                                       58
<PAGE>

(In thousands)
<TABLE>
<CAPTION>
                                                             1997                              1996
                                             ----------------------------------    ---------------------------
                                                                        Average                        Average
                                              Average                    Yield/    Average              Yield/
                                              Balance      Interest       Rate     Balance   Interest    Rate
                                             --------      --------      ------    -------    ------    ------
Interest-earning assets:
<S>                                          <C>           <C>           <C>       <C>        <C>       <C>   
    Loans receivable (1)                     $ 74,116      $ 10,662      14.39%    $36,519    $4,464    12.22%
    Cash and other interest-
      earning assets                            4,240           273       6.44       1,107        56     5.06
                                             --------      --------      -----     -------    ------    -----
                                               78,356        10,935      13.96      37,626     4,520    12.01
                                                           --------      -----                ------    -----
Non-interest-earning assets:
    Allowance for loan losses                  (1,231)                                (754)
    Investment in IMC                          17,376                                2,438
    Premises and equipment, net                 3,372                                1,671
    Other                                       7,112                                4,423
                                             --------                              -------

    Total assets                             $104,985                              $45,404
                                             ========                              =======

Interest-bearing liabilities:
    Revolving warehouse lines                $ 59,681         4,834       8.10     $25,810     2,373     9.19
    FDIC-insured deposits                       6,076           357       5.88         470        21     4.47
    Other interest-bearing
      liabilities                              10,307           966       9.37       8,690       727     8.37
                                             --------      --------      -----     -------    ------    -----
                                               76,064         6,157       8.09      34,970     3,121     8.92
                                                           --------      -----                ------    -----
Non-interest-bearing liabilities                4,264                                1,314
    Total liabilities                          80,328                               36,284
Shareholders' equity                           24,657                                9,120
                                             --------                              -------
    Total liabilities and equity             $104,985                              $45,404
                                             ========                              =======
Average dollar difference between
  interest-earning assets and interest-
  bearing liabilities                        $  2,292                              $ 2,656
                                             ========                              =======
Net interest income                                        $  4,778                           $1,399
                                                           ========                           ======
Interest rate spread (2)                                                  5.87%                          3.09%
                                                                         =====                          =====
Net annualized yield on average
  interest-earning assets                                                 6.10%                          3.72%
                                                                         =====                          =====
</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.

                                       59
<PAGE>

     The  Company's  net interest  income is affected by changes in both average
interest  rates  and  the  average  volumes  of   interest-earning   assets  and
interest-bearing  liabilities.  Total interest income increased by $6,415,000 in
1997 compared to 1996.  Total interest  expense  increased by $3,036,000 in 1997
compared  to 1996.  The 1997  increases  in both  interest  income and  interest
expense are due  primarily to increases in average  interest-earning  assets and
interest-bearing liabilities.

     The following table shows the amounts of the changes in interest income and
expense  which can be  attributed  to rate  (change  in rate  multiplied  by old
volume)  and volume  (change  in volume  multiplied  by old rate) for 1997.  The
changes in net  interest  income due to both volume and rate  changes  have been
allocated  to volume and rate in  proportion  to the  relationship  of  absolute
dollar amounts of the change of each. The table demonstrates that the $3,379,000
increase in net interest  income in 1997 was the net result of a growing balance
sheet positively affected by lower rates on borrowed funds.

                                              1997 Versus 1996
                                        Increase (Decrease) Due to
                                      -------------------------------
(in thousands)                         Volume       Rate       Total
                                      -------     -------     -------

Total interest-earning assets
      Loans receivable                $ 5,289     $   909     $ 6,198
      Cash and other
        interest-earning assets           198          19         217
                                      -------     -------     -------
                                        5,487         928       6,415
                                      -------     -------     -------

Total interest-bearing liabilities
      Revolving warehouse loans         2,706        (245)      2,461
      FDIC-insured deposits               327           9         336
      Other                               145          94         239
                                      -------     -------     -------
                                        3,178        (142)      3,036
                                      -------     -------     -------

Net interest income                   $ 2,309     $ 1,070     $ 3,379
                                      =======     =======     =======

                                       60
<PAGE>

     PROVISION FOR LOAN LOSSES.  The Company provided  $1,534,000 during 1997 as
additions to the allowance  for loan losses,  compared to $1,145,000 in 1996 and
$629,000 in 1995.

     The following  table  presents the activity in the Company's  allowance for
loan losses and selected loan loss data for 1997, 1996 and 1995:

<TABLE>
<CAPTION>
(In thousands)
Years Ended
December 31                                      1997          1996          1995
-----------                                    --------      --------      --------

<S>                                            <C>           <C>           <C>     
Balance at beginning of year                   $    924      $    594      $    567
Provision charged to expense                      1,534         1,145           629
Acquisition of the Savings Bank                      --            20            --
Loans charged off                                  (953)         (863)         (662)
Recoveries of loans previously charged off          182            28            60
                                               --------      --------      --------

Balance at end of year                         $  1,687      $    924      $    594
                                               ========      ========      ========
Loans receivable at year-end, gross
    of allowance for losses                    $ 82,383      $ 46,347      $ 29,024

Ratio of allowance for loan losses to gross
    loans receivable at year-end                   2.05%         1.99%         2.05%
</TABLE>

     The Company's  acquisition  of the Savings Bank in September  1996 included
$2,531,000 of mortgage loans subject to a $20,000 allowance for loan losses.

     All charge-offs and recoveries related to mortgage loans, and writedowns of
foreclosed  properties  to  appraised  value  at the time of  repossession,  are
recorded in the allowance for mortgage loan losses.

     The Company's management evaluates the allowance  requirements by examining
current  delinquencies,  the  characteristics of the accounts,  the value of the
underlying  collateral,  loan  covenants  and general  economic  conditions  and
trends.  While management believes that its present allowance for loan losses is
adequate, future adjustments may be necessary.

                                       61
<PAGE>

     PROVISION FOR FORECLOSED  PROPERTY LOSSES.  The Company  provided  $142,000
during 1997 as  additions  to the  allowance  for  foreclosed  property  losses,
compared to $163,000 in 1996 and $101,000 in 1995.

     Sales of real estate owned yielded net losses of $666,000 in 1997, $192,000
in 1996 and $129,000 in 1995.

     The following  table  presents the activity in the Company's  allowance for
foreclosed  property  losses and selected real estate owned data for 1997,  1996
and 1995:

<TABLE>
<CAPTION>
(In thousands)
Years Ended
December 31                                           1997       1996       1995
-----------                                          ------     ------     ------
<S>                                                  <C>        <C>        <C>   
Balance at beginning of year                         $  529     $  366     $  265
Provision charged to expense                            142        163        101
                                                     ------     ------     ------

Balance at end of year                               $  671     $  529     $  366
                                                     ======     ======     ======
Real estate owned at year-end, gross
    of allowance for losses                          $3,038     $2,606     $1,509

Ratio of allowance for foreclosed property losses
    to gross real estate owned at year-end            22.09%     20.30%     24.25%
</TABLE>

     While the  Company's  management  believes  that its present  allowance for
foreclosed property losses is adequate, future adjustments may be necessary.

                                       62
<PAGE>

     INCOME FROM THE IMC PARTNERSHIP AND IMC MORTGAGE  COMPANY.  The Company was
an  original  limited  partner in  Industry  Mortgage  Company,  L.P.  (the "IMC
Partnership"),  a  non-conforming  residential  mortgage company based in Tampa,
Florida.  The Company's initial  ownership  interest  represented  approximately
9.09% of the IMC  Partnership  and was  accounted for under the equity method of
accounting.   Therefore,   the  Company   recognized  the  portion  of  the  IMC
Partnership's  net  income  equal  to  its  ownership   percentage  in  the  IMC
Partnership.  In 1996,  the  Company  recognized  $480,000  of  income  from its
investment in the IMC Partnership, compared to $596,000 in 1995.

     The IMC  Partnership  converted  to a  corporation,  IMC  Mortgage  Company
("IMC"),  immediately  before its initial public  offering on June 24, 1996. The
limited  partners  received  common  stock  of IMC in  exchange  for  their  IMC
Partnership  interests  as of June 24,  1996.  The Company was issued  1,199,768
shares of IMC common  stock at that time.  Shares of IMC common stock are traded
on the NASDAQ National  Exchange under the trading symbol "IMCC."  However,  the
shares  received by the Company have not been registered with the Securities and
Exchange Commission ("SEC") under the Securities Act of 1933. Sales of IMC stock
by the Company are subject to SEC Rule 144 and a lock-up agreement.  The lock-up
agreement  limits  sales of IMC stock by the  Company  to  approximately  96,000
shares per month  between  August 1997 and August 1998.  The share figures above
reflect a two-for-one split of IMC shares on February 13, 1997.

     Following the  partnership's  conversion to corporate  form,  the Company's
investment in IMC is accounted for as an investment  security available for sale
under the provisions of Statement of Financial Accounting Standards ("SFAS") No.
115,  "Accounting for Certain  Investments in Debt and Equity  Securities." Such
securities are reported on a fair value basis,  with unrealized gains and losses
excluded  from  earnings but reported as a separate  component of  stockholders'
equity, net of any deferred tax provision.  As of December 31, 1997, the Company
owned 975,592  shares of IMC stock.  The Company's  stock  position  represented
approximately  3.2% of IMC's outstanding stock at that date. The market value of
the Company's investment in IMC was $11,585,000 and the unrealized holding gain,
net of deferred  income taxes,  was  $6,854,000.  During 1997,  the Company sold
233,241 shares of IMC stock for $3,729,000,  which resulted in a pre-tax gain of
$2,796,000.  The  Company  is likely to  experience  volatility  in its  capital
account  in  future  periods  because  of  market  price  fluctuations  of  this
investment security.

                                       63
<PAGE>

     OTHER INCOME.  In addition to interest on the loan portfolio and gains from
the sale of loans,  the  Company  derives  income  from  broker  fees,  document
preparation fees,  underwriting service fees, prepayment penalties,  late charge
fees for delinquent  loan payments and rental income on office space.  For 1997,
other income totaled $4,934,000,  compared to $1,927,000 in 1996 and $939,000 in
1995. The increases of $3,007,000, or 56.0%, in 1997 and $988,000, or 105.2%, in
1996 were due to several factors.

     Underwriting  service and document preparation fees increased by $2,000,000
in  1997  and by  $885,000  in  1996  as a  direct  result  of  additional  loan
origination  volume.  These fees are charged to a borrower at the time a loan is
closed.  The unit volume of loan  closings  increased by 4,034 loans to 8,421 in
1997, and increased by 2,529 loans to 4,387 in 1996.

     The  Company  brokers  to  various  lenders  loans that do not meet the its
underwriting guidelines.  Broker fee income increased by $543,000 to $992,000 in
1997 and increased by $320,000 to $449,000 in 1996.

     Increases in prepayment  penalty and late charge  income are  attributed to
the Company's larger loan portfolio.

     COMPENSATION  EXPENSES.  The largest  component of expenses is compensation
expense.  Compensation  expense in 1997 increased by $8,430,000 to  $16,447,000,
and 1996  compensation  expense  increased  by  $4,137,000  to  $8,017,000.  The
increases of 105.2% in 1997 and 106.6% in 1996 were directly attributable to the
addition of new employees. The Company had 552 full-time equivalent employees at
December 31, 1997 (443 full-time and 217 part-time  employees),  compared to 287
at December 31, 1996 and 84 at December 31, 1995. The Company's corporate office
staff  increased  by  122.3%  in 1997,  with a  corresponding  increase  in base
salaries of approximately $1,700,000. The broker division increased its staffing
by 63.6% and the increase in base salaries associated with the new employees was
approximately  $500,000.  The Company  opened twelve retail  lending  offices in
1997,  and the retail  lending  staff  increased by 100.7%,  resulting in a base
salary increase in the retail division of approximately  $3,000,000.  Commission
and bonus expense in 1997 increased by approximately $2,500,000 due to increased
production.  Finally,  additional  1997  costs  due to merit  and cost of living
increases were approximately $700,000.

     GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses in
1997 increased by $7,335,000 to $14,188,000, and 1996 general and administrative
expenses increased by $3,803,000 to $6,853,000.  The increases of 107.0% in 1997
and 124.7% in 1996 were  attributed  to the growth of the  Company.  The Company
opened nine retail  offices in 1997. In addition,  seven offices  opened in 1996
operated for a full year in 1997. The total general and administrative  expenses
associated  with the new retail offices was $1,800,000 in 1997. For offices open
for all of 1997 and 1996,  general  and  administrative  expenses  increased  by
$900,000 to $2,100,000 in 1997,  as a result of a 32.0% loan  production  volume
increase in those offices.  General and  administrative  expenses related to the
Company's  corporate office staff increased by $3,000,000 to $5,600,000 in 1997,
as the Company increased  corporate staff  expenditures to support the increased
loan volume.  These expenses included  increases in utilities,  postage,  office
supplies,  travel  &  entertainment,   depreciation  on  office  equipment,  and
professional fees.

     The broker  division  began  paying  fees to  brokers in 1997 for  services
rendered in the preparation of loan packages.  The total expense associated with
those fees was $1,426,000 in 1997.

                                       64
<PAGE>

     MINORITY   INTEREST  IN  NET  INCOME  OF   SUBSIDIARY.   Contained  in  the
consolidated  statements of income for 1996 and1995 were  minority  interests in
earnings of a  subsidiary.  This  portion of the  subsidiary's  earnings  was an
element of compensation paid to an officer of the Company.  In 1997, the Company
has recharacterized this item as compensation  expense. See the discussion under
Item 11, "Executive Compensation."

     INCOME TAXES.  Income tax expense for 1997 was $5,638,000,  resulting in an
effective tax rate of 41.2%.  By comparison,  the Company had income tax expense
of  $2,259,000  for an  effective  tax rate of 40.5% in 1996 and an  income  tax
expense of $876,000 for an effective tax rate of 42.9% in 1995.

     The  effective  tax  rates  differ  from the  statutory  federal  rates due
primarily to state income taxes and certain nondeductible expenses.

                                       65
<PAGE>

Financial Condition at December 31, 1997, 1996 and 1995

     ASSETS.  The total assets of the Company were  $118,125,000 at December 31,
1997,  compared  to  total  assets  of  $75,143,000  at  December  31,  1996 and
$34,485,000 at December 31, 1995.

     The  57.2%  increase  in assets in 1997 is  primarily  attributable  to the
increase  in loans  receivable.  The 117.9%  increase  in assets  during 1996 is
primarily attributable to the increase in loans receivable,  the increase in the
carrying  value of the  company's  ownership  interest in IMC, and the Company's
purchase  of the  Savings  Bank,  while the 49.2%  increase in assets in 1995 is
primarily attributable to the increase in loans receivable.

     The primary  uses of funds by the  Company is funding of loan  originations
and the expenses associated with loan production.  Net mortgage loans receivable
increased by  $35,273,000  to $80,696,000 at December 31, 1997, and increased by
$16,993,000  to $45,423,000 at December 31, 1996. The 77.7% increase in 1997 and
the 59.8%  increase in 1996  reflect the  Company's  growth  during the past two
years.  The Company  generally sells loans within sixty days after  origination.
The  Company's  loan  originations  in the final two  months of 1997 were  58.2%
higher than loan originations in the final two months of 1996, which resulted in
the higher  balance of loans on hand and  awaiting  sale at  December  31,  1997
compared to December 31, 1996.

     In  1994,  the  Company  adopted  SFAS No.  115,  "Accounting  for  Certain
Investments  in Debt and Equity  Securities."  The  adoption  of SFAS 115 had no
effect on the operations of the Company at that time. SFAS No. 115 addressed the
accounting and reporting of investments in equity  securities  that have readily
determinable fair values and for all investments in debt securities. Investments
in securities are classified under SFAS No. 115 as held to maturity,  trading or
available-for-sale.  Investments  in debt  securities  that the  Company has the
positive  intent and  ability to hold to  maturity  are  classified  as "held to
maturity"  securities and reported at amortized cost. Debt and equity securities
that are purchased and held  principally  for the purpose of selling them in the
near term are classified as trading  securities and reported at fair value, with
unrealized gains and losses included in earnings. Debt and equity securities not
classified as either held to maturity or trading  securities  are  classified as
available-for-sale  securities and reported at fair value, with unrealized gains
and losses  excluded  from  earnings  and  reported as a separate  component  of
shareholders'  equity.  Following  the  conversion  of the  IMC  Partnership  to
corporate  form,  the Company's  investment in IMC is accounted for as an equity
security under SFAS No. 115 and is carried at the market value of the stock. The
market value of this stock was  $11,585,000 at December 31, 1997 and $20,096,000
at December 31, 1996. At December 31, 1995, the Company's  investment in the IMC
Partnership was carried at a cost of $713,000.

     Cash and  cash  equivalents  increased  by  $8,429,000  to  $11,869,000  at
December 31, 1997,  and  increased by  $2,656,000  to $3,440,000 at December 31,
1996.  The  principal  reason for the 1997  increase was the receipt of proceeds
from loan sales in the final week of 1997.  These proceeds were used to fund new
loans in the first week of 1998.

     The purchase of the Savings Bank resulted in a $2,950,000  increase in cash
and a $1,724,000  increase in other  assets at December  31,  1996.  The Company
acquired  87.3% of the common stock of the Savings  Bank on September  11, 1996.
The  remaining  12.7% of the Savings  Bank's  stock was  acquired  in 1997.  The
Company paid a premium of $150,000 over the Savings Bank's book value.

                                       66
<PAGE>

     Premises and  equipment  increased by  $2,306,000 to $4,530,000 at December
31, 1997,  and  increased by $813,000 to  $2,224,000  at December 31, 1996.  The
primary reason for the 1997 increase was the purchase of a new office  building.
In  addition,  the  increases  in 1997 and 1996  were  due to  expansion  of the
Company's retail lending network, increases in the office support staff, and the
associated investments in technology, equipment and improvements.

     Real estate owned increased by $290,000 to $2,367,000 at December 31, 1997,
and increased by $935,000 to $2,077,000 at December 31, 1996. The 14.0% increase
in real estate  owned in 1997 and the 81.9%  increase in 1996 were the result of
higher average loans held for sale because of the increase in loan originations.

     Other assets  increased by  $1,623,000  to $3,462,000 at December 31, 1997,
and  increased by  $1,247,000  to  $1,839,000  at December  31,  1996.  The 1997
increase is  primarily  the result of $700,000 of goodwill  associated  with the
purchase of the 17% increase in Armada  Residential  Mortgage LLC. Also, prepaid
assets  increased  by  $800,000 in 1997 and by $15,000 in 1996.  Prepaid  assets
include  syndicated  bank  fees,  insurance,  taxes and rent.  Accrued  interest
receivable  increased by $200,000 in 1997 and by $100,000 in 1996. The increases
in accrued interest  receivable were the result of higher average loans held for
sale due to the increases in loan originations in those years.

     LIABILITIES.   Revolving   warehouse  loans  increased  by  $20,458,000  to
$52,488,000 at December 31, 1997, and increased by $12,464,000 to $32,030,000 at
December 31,  1996.  The 63.9%  increase in 1997 and the 63.7%  increase in 1996
were primarily attributable to the increases in loans receivable.

     The Company draws on its revolving  warehouse  lines of credit as needed to
fund loan  production.  As of  December  31,  1997,  the Company had issued loan
funding checks totaling  $6,364,000 which had not cleared the Company's checking
account and for which the Company had not drawn funds from its warehouse  lines.
These checks  cleared the Company's bank accounts in the first few business days
of January  1998 and most were  funded with cash on hand or new  warehouse  line
draws.

     The Savings  Bank's  deposits  totaled  $17,815,000  at December  31, 1997,
compared to $1,576,000 at December 31, 1996 and  $1,379,000 at the September 11,
1996 acquisition date. The Savings Bank substantially  increased its deposits in
1997 in order to fund  loans.  During  the period  from  September  11,  1996 to
December 31, 1996, the Savings Bank did not actively solicit new deposits, as it
was closing down its Annandale,  Virginia-based  loan production  operations and
was making its  transition  to  Virginia  Beach,  Virginia.  Of the  certificate
accounts as of December 31, 1997, a total of $13,268,000 was scheduled to mature
in the twelve-month period ending December 31, 1998.

                                       67
<PAGE>

     On December 16, 1997, the Savings Bank borrowed  $1,000,000  from the FHLB,
and this amount was  outstanding  at December  31,  1997.  The Savings Bank held
$50,000 of FHLB stock at December 31, 1997.  Management  expects to utilize FHLB
advances as the Savings Bank builds a portfolio of loans.

     Mortgage loans payable  increased by $738,000 to $1,126,000 at December 31,
1997,  and decreased by $46,000 to $478,000 at December 31, 1996.  The Company's
executive and administrative offices are located in Virginia Beach, Virginia. In
June 1997 the Company  purchased a second building  adjacent to its headquarters
to accommodate its growth plans.  The new building was purchased with a mortgage
debt of  $800,000.  The  Company  made total  principal  payments of $62,000 and
$46,000   on  its   mortgage   loans  in  1997  and  1996,   respectively.   The
weighted-average rate of the mortgage loans at December 31, 1997 was 8.40%.

     Promissory  notes and  certificates of indebtedness  totaled  $9,080,000 at
December 31, 1997, compared to $9,182,000 at December 31, 1996 and $6,905,000 at
December 31, 1995. The Company has utilized promissory notes and certificates of
indebtedness to help funds its operations.  These borrowings are subordinated to
the Company's  warehouse  lines of credit.  The promissory  notes are loans from
insiders  (shareholders,  directors  and  employees)  for periods of one to five
years and interest rates between 8.00% and 10.25%, with a weighted-average  rate
of 9.59% at December 31, 1997. The  certificates of  indebtedness  are uninsured
deposits  authorized  for  financial  institutions  like the Company  which have
Virginia industrial loan association charters.  The certificates of indebtedness
are loans from Virginia  residents for periods of one to five years and interest
rates  between  6.75%  and  10.00%,  with a  weighted-average  rate of  9.46% at
December 31, 1997. The Company is not currently  soliciting new promissory notes
or  certificates  of  indebtedness.  The  1996 net  increase  of  $2,277,000  is
primarily due to the issuance of a $1,500,000 promissory note issued to a single
investor.

     Accrued  and other  liabilities  increased  by $636,000  to  $2,837,000  at
December 31, 1997,  and  increased by $266,000 to $985,000 at December 31, 1996.
This category  includes accounts  payable,  accrued interest  payable,  deferred
income,  accrued bonuses, and other payables. The increases of 64.6% in 1997 and
37.0%  in  1996  were  associated  with  the  increases  in the  Company's  loan
origination volume.

     SHAREHOLDERS'  EQUITY.  Total shareholders' equity at December 31, 1997 was
$25,055,000 at December 31, 1997,  compared to $21,209,000 at December 31, 1996.
The  $3,846,000  increase in 1997 was  primarily due to net income of $8,060,000
and the  reduction of  $4,547,000  in the  unrealized  gain on  securities.  The
$14,973,000  increase in 1996 was primarily due to net income of $3,324,000  and
the unrealized gain on securities of $11,401,000.

     Also during  1997,  the Company  issued  176,836  split-adjusted  shares of
common stock upon the exercise of stock warrants for $332,000.  During 1996, the
Company paid cash dividends of $199,000,  sold 44,000 shares of common stock for
proceeds of  $440,000,  and issued 9,296  split-adjusted  shares of common stock
upon the exercise of stock warrants for $9,000.

                                       68
<PAGE>

     LIQUIDITY AND CAPITAL RESOURCES. The Company's operations require access to
short-and long-term sources of cash. The Company uses cash flow from the sale of
loans  through  whole  loan  sales,  loan  origination   fees,   processing  and
underwriting  fees,  net interest  income,  and  borrowings  under its warehouse
facilities  and other debt 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 operated, and expects to
continue to operate,  on a negative cash flow basis due to the increased  volume
of loan  originations.  For the years  ended  December  31,  1997 and 1996,  the
Company used cash from  operating  activities of  $31,212,000  and  $15,041,000,
respectively.  The net cash used from operating activities was primarily used to
fund mortgage loan originations.

     The Company  finances its operating  cash  requirements  primarily  through
warehouse and other credit  facilities,  and the issuance of other debt. For the
years ended December 31, 1997 and 1996, the Company received cash from financing
activities of $38,666,000 and $17,289,000, respectively.

     The Company's borrowings (revolving warehouse loans, FDIC-insured deposits,
mortgage loans on Company office buildings, FHLB advances, subordinated debt and
loan  proceeds  payable) at December  31, 1997 were 74.5%,  compared to 60.4% of
assets at December 31, 1996.

     WAREHOUSE AND OTHER CREDIT  FACILITIES.  On December 10, 1997,  the Company
obtained  a  $100,000,000  warehouse  line  of  credit  from a  commercial  bank
syndicate.  The syndicate's lead bank is Chase Bank of Texas. Other banks in the
syndicate are  BankBoston,  National City Bank,  Comerica Bank and Compass Bank.
The line is secured by loans  originated by the Company and bears  interest at a
rate of 1.5% over the one-month  LIBOR rate.  This line of credit replaced three
existing  lines of credit.  The line expires on December 31, 1999 and is subject
to renewal.  The Company may  receive  warehouse  credit  advances of 98% of the
original  principal  balances on pledged  mortgage loans for a maximum period of
180 days after origination. As of December 31, 1997, $46,734,000 was outstanding
under this facility.

     Also on December 10, 1997, the Company obtained a $25,000,000 seasoned loan
line of credit from the commercial bank syndicate. This line is secured by loans
originated by the Company.  The seasoned loan line of credit bears interest at a
rate of 2.5% over the one-month  LIBOR rate,  and the Company may receive credit
advances of 90% of the current principal  balances on pledged mortgage loans. As
of December 31, 1997, $5,754,000 was outstanding under this facility.

                                       69
<PAGE>

     WHOLE LOAN SALE PROGRAM.  The Company's most important capital resource for
generating  cash to fund new  loans and for  making  payments  on its  warehouse
facilities has been its ability to sell its loans in the secondary  market.  The
market  value of the  Company's  loans is  dependent  on a  number  of  factors,
including  general economic  conditions,  market interest rates and governmental
regulations.  Adverse  changes in these  conditions  may  affect  the  Company's
ability to sell loans in the secondary market for acceptable prices. The ability
to sell loans in the secondary  market is essential to the  continuation  of the
Company's loan origination operations.

     OTHER CAPITAL RESOURCES. The Savings Bank's deposits totaled $17,815,000 at
December 31, 1997, compared to $1,576,000 at December 31, 1996. The Savings Bank
substantially increased its deposits in 1997 in order to fund loans. The Savings
Bank  currently  utilizes  funds from the deposits and a line of credit with the
FHLB of Atlanta to fund first-lien and junior lien mortgage loans.

     The Company has utilized  promissory notes and certificates of indebtedness
to help funds its operations.  Promissory notes and certificates of indebtedness
totaled $9,080,000 at December 31, 1997,  compared to $9,182,000 at December 31,
1996.  These  borrowings are  subordinated  to the Company's  warehouse lines of
credit.  The  Company  is not  currently  soliciting  new  promissory  notes  or
certificates of indebtedness.

     The Company had cash and cash  equivalents  of  $11,869,000 at December 31,
1997.  The Company has  sufficient  cash  resources  to fund its  operations  at
current  levels through the end of 1998.  However,  loan  origination  volume is
expected to continue to grow in 1998,  and management  anticipates  that it will
need additional  capital to fund this growth and to continue its expansion.  New
debt  financing,  equity  financing,  and lines of credit will be evaluated with
consideration  for maximizing  shareholder  value.  Management  expects that the
Company  and  the  industry  will  be  challenged  by  competition   and  rising
delinquencies.

                                       70
<PAGE>

        SAVINGS  BANK  REGULATORY  LIQUIDITY.  Liquidity  is the ability to meet
present and future  financial  obligations,  either  through the  acquisition of
additional  liabilities  or from the sale or maturity of existing  assets,  with
minimal loss.  Regulations of the OTS require thrift associations and/or savings
banks to maintain  liquid  assets at certain  levels.  At present,  the required
ratio of liquid assets to withdrawable savings and borrowings due in one year or
less is 5.0%.  Penalties are assessed for  noncompliance.  In 1997 and 1996, the
Savings  Bank  maintained  liquidity  in  excess  of the  required  amount,  and
management anticipates that it will continue to do so.


        SAVINGS BANK  REGULATORY  CAPITAL.  At December  31,  1997,  the Savings
Bank's book value under generally accepted  accounting  principles  ("GAAP") was
$3,242,000.  OTS  Regulations  require  that savings  institutions  maintain the
following  capital  levels:  (1)  tangible  capital  of at  least  1.5% of total
adjusted  assets,  (2) core capital of 4.0% of total  adjusted  assets,  and (3)
overall risk-based capital of 8.0% of total risk-weighted assets. As of December
31, 1997, the Savings Bank satisfied all of the regulatory capital requirements,
as shown in the following  table  reconciling the Savings Bank's GAAP capital to
regulatory capital:

<TABLE>
<CAPTION>
                                                  Tangible       Core      Risk-Based
(In thousands)                                     Capital      Capital      Capital
                                                   -------      -------      -------
<S>                                                <C>          <C>          <C>    
    GAAP capital                                   $ 3,242      $ 3,242      $ 3,242
    Add: unrealized loss on securities                   2            2            2
    Nonallowable asset:  goodwill                     (132)        (132)        (132)
    Additional capital item:  general allowance         --           --           73
                                                   -------      -------      -------

    Regulatory capital - computed                    3,112        3,112        3,185
    Minimum capital requirement                        336          895        1,249
                                                   -------      -------      -------

    Excess regulatory capital                      $ 2,776      $ 2,217      $ 1,936
                                                   =======      =======      =======
    Ratios:
        Regulatory capital - computed                13.91%       13.91%       20.40%
        Minimum capital requirement                   1.50         4.00         8.00
                                                   -------      -------      -------

    Excess regulatory capital                        12.41%        9.91%       12.40%
                                                   =======      =======      =======
</TABLE>

     Management believes that the Savings Bank can remain in compliance with its
capital requirements.

                                       71
<PAGE>

     The Company is not aware of any other trends, events or uncertainties which
will have or that are likely to have a material  effect on the  Company's or the
Savings Bank's liquidity,  capital  resources or operations.  The Company is not
aware of any current  recommendations  by regulatory  authorities  which if they
were implemented would have such an effect.


NEW ACCOUNTING STANDARDS

     In October 1995, SFAS No. 123,  "Accounting for Stock Based  Compensation,"
was issued,  effective for fiscal years  beginning  after December 15, 1995. The
standard encourages,  but does not require,  companies to recognize compensation
expense for grants of stock,  stock  options,  and other equity  instruments  to
employees based on the new fair value accounting rules. The Company is currently
following  Accounting  Principles Board ("APB") Opinion No. 25,  "Accounting for
Stock  Issued to  Employees"  and  related  Interpretations  in  accounting  for
employee equity instruments.  Prospectively,  the Company has determined that it
will not adopt SFAS 123 for  expense  recognition  purposes.  The  Company  will
continue to follow the  provisions of APB 25 and make the pro forma  disclosures
as required  by SFAS 123.  Pro forma  disclosures  are not  required  for awards
issued prior to December 15, 1994. The statement did not have a material  impact
on results of operations or financial position.

     In June 1996,  SFAS No. 125,  "Accounting  for  Transfers  and Servicing of
Financial Assets and  Extinguishment of Liabilities" was issued.  This statement
supercedes SFAS No. 122, "Accounting for Mortgage Servicing Rights" and requires
that 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  Statement is effective for
transfers and servicing of financial assets and  extinguishments  of liabilities
occurring after December 31, 1996. The Company adopted this statement on January
1, 1997 and has determined that this statement did not have a material effect on
the results of operations or financial  position for the year ended December 31,
1997.

     Effective  December 31, 1997, the Company  adopted SFAS No. 128,  "Earnings
per Share," which  superseded APB Opinion No. 15, "Earnings per Share." This new
statement  requires  that  "basic  earnings  per share" be  computed by dividing
income available to common shareholders by the weighted-average number of common
shares  outstanding for the period.  "Diluted earnings per share," if different,
reflects  potential dilution if stock options or other contracts would result in
the issue or exercise of  additional  shares of common  stock that shared in the
earnings.  "Basic  earnings  per share" and  "diluted  earnings  per share" will
replace  "primary  earnings per share" and "fully  diluted  earnings per share,"
respectively, as described under APB Opinion No. 15, and must be reported on the
income statement. There was no material change in the earnings per share amounts
as a result of adopting this new standard.

     In June 1997, SFAS No. 130, "Reporting  Comprehensive  Income," was issued,
effective for fiscal years  beginning after December 15, 1997. The new statement
requires that an enterprise (a) classify items of other comprehensive  income by
their nature in a financial statement and (b) display the accumulated balance of
other  comprehensive  income  separately  from retained  earnings and additional
capital in the equity  section of the  statement  of  financial  condition.  The
Company is  currently  evaluating  the effect  this  statement  will have on the
financial statements.

                                       72
<PAGE>

     In June 1997,  SFAS No. 131,  "Disclosures  about Segments of an Enterprise
and Related Information," was issued, effective for fiscal years beginning after
December 15, 1997. The new statement requires that a public business  enterprise
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  resources  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 is
currently  evaluating  the  effect  this  statement  will have on the  financial
statements.

HEDGING ACTIVITIES

     The Company originates  mortgage loans for sale as whole loans. The Company
mitigates  its interest  rate exposure by selling most of the loans within sixty
days of origination. However, the Company may choose to hold certain loans for a
longer  period  prior to sale in order  to  increase  net  interest  income.  In
addition,  certain loans must be "seasoned"  for periods of six to twelve months
before they can be sold.  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
will enter into Treasury  security lock  contracts,  which  function  similar to
short  sales  of  U.S.  Treasury  securities.  Prior  to  entering  into a hedge
transaction,  the Company performs an analysis of its loans, taking into account
such factors as interest  rates and  maturities,  to determine the proportion of
contracts  to sell so that the risk value of the loans will be most  effectively
hedged.  The Company in 1997 used one of the commercial  banks in its syndicated
bank group to arrange hedge contracts.

     If the value of a hedge  decreases,  offsetting an increase in the value of
the hedged loans, the Company, upon settlement with its counter-party,  will pay
the hedge loss in cash and  realize the  corresponding  increase in the value of
the loans. Conversely, if the value of a hedge increases,  offsetting a decrease
in the value of the hedged  loans,  the Company  will  receive the hedge gain in
cash at settlement.

     The Company's  management  believes that its current hedging strategy using
Treasury rate lock contracts is an effective way to manage interest rate risk on
fixed rate loans prior to sale.

IMPACT OF INFLATION AND CHANGING PRICES

     The  consolidated  financial  statements and related data presented in this
document have been prepared in accordance  with  generally  accepted  accounting
principles,  which  require  the  measurement  of  the  financial  position  and
operating  results  of the  Company  in terms  of  historical  dollars,  without
considering  changes in the relative  purchasing power of money over time due to
inflation.

                                       73
<PAGE>

        Virtually all of the assets of the Company are monetary in nature.  As a
result,   interest  rates  have  a  more  significant   impact  on  a  financial
institution's  performance  than the  effects  of general  levels of  inflation.
Interest  rates do not  necessarily  move in the same direction or with the same
magnitude  as the prices of goods and  services.  Inflation  affects the Company
most  significantly in the area of loan  originations and can have a substantial
effect on interest  rates.  Interest rates normally  increase  during periods of
high inflation and decrease during periods of low inflation.

        Because  the  Company  sells  a  significant  portion  of the  loans  it
originates,  inflation  and  interest  rates  have a  diminished  effect  on the
Company's  results of  operations.  The Savings  Bank is expected to continue to
build its portfolio of loans held for  investment,  and this  portfolio  will be
more sensitive to the effects of inflation and changes in interest rates.

        Profitability  may be directly  affected by the level and fluctuation of
interest  rates,  which affect the  Company's  ability to earn a spread  between
interest   received  on  its  loans  and  the  costs  of  its  borrowings.   The
profitability  of the  Company  is likely to be  adversely  affected  during any
period of  unexpected  or rapid changes in interest  rates.  A  substantial  and
sustained  increase in interest rates could adversely  affect the ability of the
Company to originate  and purchase  loans and affect the mix of first and junior
lien mortgage loan  products.  Generally,  first mortgage  production  increases
relative to junior lien mortgage  production  in response to low interest  rates
and junior lien mortgage loan  production  increases  relative to first mortgage
loan production during periods of high interest rates. A significant  decline in
interest  rates could  decrease the size of the Company's  future loan servicing
portfolio by  increasing  the level of loan  prepayments.  Additionally,  to the
extent servicing rights and  interest-only  and residual classes of certificates
are   capitalized  on  the  Company's  books  from  future  loan  sales  through
securitization,  higher than  anticipated  rates of loan  prepayments  or losses
could require the Company to write down the value of such  servicing  rights and
interest-only  and  residual   certificates,   adversely   affecting   earnings.
Conversely,  lower than  anticipated  rates of loan  prepayments or lower losses
could allow the  Company to increase  the value of  interest-only  and  residual
certificates,  which could have a favorable  effect on the Company's  results of
operations and financial  condition.  Fluctuating interest rates may also affect
the net interest  income  earned by the Company  resulting  from the  difference
between the yield to the Company on loans held  pending  sales and the  interest
paid by the Company for funds borrowed under the Company's warehouse facilities.

                                       74
<PAGE>

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 Savings Bank
deposits and  borrowings.  Although such a strategy may increase  profits in the
short run, it increases  the risk of exposure to rising  interest  rates and can
result in funding costs rising faster than asset yields. The Company attempts to
limit its  interest  rate risk by selling a majority of the fixed rate  mortgage
loans that it originates.

     Contractual  principal  repayments of loans do not necessarily  reflect the
actual term of the Company's loan portfolio. The average lives of mortgage loans
are substantially  less than their contractual terms because of loan prepayments
and because of enforcement of due-on-sale  clauses,  which gives the Company the
right to declare a loan  immediately  due and payable in the event,  among other
things,  the borrower  sells the real  property  subject to the mortgage and the
loan is not repaid. In addition,  certain borrowers increase their equity in the
security property by making payments in excess of those required under the terms
of the mortgage.

     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
approximately  90% and 88% of the total loans originated  during the years ended
December 31,1996 and 1997, respectively, and expects to sell the majority of its
loan  originations  during the same twelve month period in which they are funded
by the  Company in future  periods.  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  December  31,  1997,  as  anticipated,  and is  expected to remain
negative in future  periods.  The Company has no  quantitative  target range for
past gap  positions,  nor any  anticipated  ranges for future periods due to the
fact that the  Company  sells the  majority of its loans  within a twelve  month
period  while  the gap  position  is a static  illustration  of the  contractual
repayment  schedule for loans. The Company's  one-year gap was a negative 50.51%
of total assets at December 31, 1997, as illustrated in the following table:

                                       75
<PAGE>

<TABLE>
<CAPTION>
(In thousands)
                                                                 One Year                      Three to      More Than
                                                    Total         or Less       Two Years     Four Years     Four Years
                                                  ---------      ---------      ---------     ----------     ----------
Interest-earning assets:
<S>                                               <C>            <C>            <C>           <C>            <C>      
    Loans receivable (1)                          $  82,383      $   1,656      $     970     $   2,307      $  77,399
    Cash and other interest-
      earning assets                                  7,565          7,565             --            --             --
                                                  ---------      ---------      ---------     ---------      ---------
                                                     89,948      $   9,221      $     970     $   2,307      $  77,399
                                                                 =========      =========     =========      =========
Non-interest-earning assets:
    Allowance for loan losses                        (1,687)
    Investment in IMC                                11,585
    Premises and equipment, net                       4,530
    Other                                            13,749
                                                  ---------
    Total assets                                  $ 118,125
                                                  =========
Interest-bearing liabilities:
    Revolving warehouse lines                     $  52,488      $  52,488      $      --     $      --      $      --
    FDIC-insured deposits                            17,815         13,268          4,349           198             --
    Other interest-
      bearing liabilities                            11,296          3,133          3,467         2,627          2,069
                                                  ---------      ---------      ---------     ---------      ---------
                                                     81,599      $  68,889      $   7,816     $   2,825      $   2,069
                                                                 =========      =========     =========      =========
Non-interest-bearing liabilities                     11,471
                                                  ---------
    Total liabilities                                93,070
Shareholders' equity                                 25,055
                                                  ---------
    Total liabilities and equity                  $ 118,125
                                                  =========
Maturity/repricing gap                                           $ (59,688)     $  (6,846)    $    (468)     $  75,330
                                                                 =========      =========     =========      =========
Cumulative gap                                                   $ (59,688)     $ (66,513)    $ (66,981)     $   8,349
                                                                 =========      =========     =========      =========
As percent of total assets                                         - 50.51%       - 56.31%      - 56.70%          7.07%
                                                                 =========      =========     =========      =========
As percent of total interest earning assets                        - 66.36%       - 73.95%      - 74.47%          9.28%
                                                                 =========      =========     =========      =========
Ratio of Cumulative Interest Earning Assets to
    Cumulative Interest Earning Liabilities                           .13x           .12x          .81x            37x
                                                                 =========      =========     =========      =========
</TABLE>

=============
(3) Loans shown gross of allowance for loan losses, net of premiums/discounts.

                                       76
<PAGE>

INTEREST RATE RISK

     The principal quantitative disclosure of the Company's market risks are the
gap table on page 30. The gap table shows that the Company's  one-year gap was a
negative  50.51% of total assets at December 31,  1997.  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 December  31, 1997,  86.0% 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, 84.4%
of which reprice within one year of December 31, 1997.  The Company  attempts to
limit its interest  rate risk by selling a majority of the fixed rate loans that
it  originates.  If the Company's  ability to sell such  fixed-rate,  fixed-term
mortgage  loans on a timely  basis  were to be  limited,  the  Company  could be
subject to substantial interest rate risk.

     Profitability may be directly affected by the levels of and fluctuations in
interest  rates,  which affect the  Company's  ability to earn a spread  between
interest received on its loans and the costs of borrowings. The profitability of
the Company is likely to be adversely  affected  during any period of unexpected
or rapid changes in interest  rates.  For example,  a  substantial  or sustained
increase in interest rates could adversely  affect the ability of the Company to
purchase and originate  loans and would reduce the value of loans held for sale.
A significant decline in interest rates could decrease the size of the Company's
loan  servicing   portfolio  by  increasing  the  level  of  loan   prepayments.
Additionally,  to the extent  mortgage loan  servicing  rights in future periods
have been capitalized on the books of the Company, higher than anticipated rates
of loan  prepayments or losses could require the Company to write down the value
of these assets, adversely affecting earnings.

     In an environment of stable interest rates, the Company's gains on the sale
of mortgage loans would  generally be limited to those gains  resulting from the
yield  differential  between  mortgage loan interest rates and rates required by
secondary  market  purchasers.  A loss  from  the  sale of a loan  may  occur if
interest rates increase  between the time the Company  establishes  the interest
rate on a loan and the time the loan is sold.  Fluctuating  interest  rates also
may affect the net interest  income  earned by the Company,  resulting  from the
difference  between the yield to the Company on loans held  pending sale and the
interest  paid by the  Company  for  funds  borrowed,  including  the  Company's
warehouse  facilities  and the Savings  Bank's FHLB  advances  and  FDIC-insured
customer deposits.  Because of the uncertainty of future loan origination volume
and the future  level of  interest  rates,  there can be no  assurance  that the
Company will realize gains on the sale of financial assets in future periods.

     The  Savings  Bank is  building  a  portfolio  of  loans to be held for net
interest  income.  The sale of fixed rate  product is  intended  to protect  the
Savings Bank from  precipitous  changes in the general level of interest  rates.
The valuation of adjustable rate mortgage loans is not as directly  dependent on
the level of interest  rates as is the value of fixed rate loans.  Decisions  to
hold or sell adjustable rate mortgage loans are based on the need for such loans
in the Savings  Bank's  portfolio,  which is  influenced  by the level of market
interest rates and the Savings Bank's  asset/liability  management strategy.  As
with other investments,  the Savings 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.

                                       77
<PAGE>

ASSET QUALITY

     The following  table  summarizes all of the Company's  delinquent  loans at
December 31, 1997, 1996 and 1995:

(in thousands)                                   1997        1996        1995
                                               --------    --------    --------

Delinquent 31 to 60 days                       $    866    $  1,519    $  1,039
Delinquent 61 to 90 days                          1,124         390         670
Delinquent 91 to 120 days                           970         363         245
Delinquent 121 days or more                       1,567         794         624
                                               --------    --------    --------

Total delinquent loans (1)                     $  4,527    $  3,066    $  2,578
                                               ========    ========    ========
Total loans receivable outstanding, gross of
  the allowance for loan losses (1)            $ 82,383    $ 46,347    $ 29,024
                                               ========    ========    ========
Delinquent loans as a percentage of
   total loans outstanding:
Delinquent 31 to 60 days                           1.05%       3.28%       3.58%
Delinquent 61 to 90 days                           1.36        0.84        2.31
Delinquent 91 to 120 days                          1.19        0.78        0.84
Delinquent 121 days or more                        1.90        1.71        2.15
                                               --------    --------    --------
Total delinquent loans as a percentage
  of total loans outstanding                       5.50%       6.61%       8.88%
                                               ========    ========    ========

=============
(1) Includes loans in foreclosure  proceedings and delinquent loans to borrowers
    in bankruptcy proceedings, but excludes real estate owned.

     Interest  on most loans is accrued  until they  become 31 days or more past
due.  Interest on loans held for investment by the Savings Bank is accrued until
the loans  become 90 days or more past due.  The amount of  additional  interest
that would have been recorded had the loans not been placed on nonaccrual status
was  approximately  $154,000,  $91,000,  and  $69,000  in 1997,  1996 and  1995,
respectively.

                                       78
<PAGE>

     Effective  January 1, 1995, the Company  adopted the provisions of SFAS No.
114,  "Accounting  by Creditors  for  Impairment  of a Loan." The  Statement was
issued in May 1993 and is effective for fiscal years  beginning  after  December
15, 1994. Statement 114 was amended in October 1994 by SFAS No. 118, "Accounting
by Creditors for  Impairment of a Loan - Income  Recognition  and  Disclosures."
Statement  114,  as  amended  by SFAS 118,  requires  that an  impaired  loan be
measured based on the present value of expected future cash flows  discounted at
the  effective  interest  rate of the loan,  or at the fair  value of the loan's
collateral for "collateral  dependent" loans. A loan is considered impaired when
it is  probable  that a creditor  will be unable to  collect  all  interest  and
principal payments as scheduled in the loan agreement.  A loan is not considered
impaired during a period of delay in payment if the ultimate  collectibility  of
all amounts due is  expected.  A valuation  allowance  is required to the extent
that the measure of the impaired loans is less than the recorded investment.

     SFAS 114 does not  apply to  larger  groups of  homogeneous  loans  such as
consumer  installment  and real estate mortgage  loans,  which are  collectively
evaluated for impairment. Impaired loans are therefore primarily business loans,
which include  commercial loans and income property and construction real estate
loans.  Most of the Company's loans are  collectively  evaluated for impairment.
The Company's impaired loans are nonaccrual loans, as generally loans are placed
on  nonaccrual  status on the  earlier of the date that  principal  or  interest
amounts  are 30 days or more  past due (90 days or more in the case of loan held
by the  Savings  Bank) or the date that  collection  of such  amounts  is judged
uncertain  based on an evaluation of the net realizable  value of the collateral
and the financial strength of the borrower.

     The adoption of SFAS 114 and 118 did not result in any additional provision
for credit  losses at  January  1, 1995.  At  December  31,  1997 and 1996,  the
recorded  investment  in loans  for  which  impairment  has been  determined  in
accordance with SFAS 114 totaled $2,500,000 and $1,200,000. The average recorded
investment in impaired  loans for the years ended December 31, 1997 and 1996 was
approximately $780,000 and $64,000, respectively.

     SFAS 118 allows a creditor to use existing methods for recognizing interest
income on an impaired loan.  Consistent with the Company's method for nonaccrual
loans, interest receipts for impaired loans are recognized as interest income or
are applied to  principal  when the ultimate  collectibility  of principal is in
doubt.  Interest  income  recognized  related to these  loans was  approximately
$47,000 and $13,000  during 1997 and 1996,  respectively.  Due to the homogenous
nature  and the  collateral  securing  these  loans,  there is no  corresponding
valuation allowance.

                                       79
<PAGE>

LIQUIDITY - NEGATIVE CASH FLOW

     The Company's  consolidated  statement of cash flows has three  components:
opertaing activities, investing activities and financing activities. As a result
of its increased  volume of loan  originations,  the Company has  operated,  and
expects to continue to operate, on a negative cash flow basis. During 1997, 1996
and 1995, the Company used $30,830,000, $15,040,000 and $9,502,000 respectively,
in its  operating  activities,  due  primarily to an increase in mortgage  loans
originated. While the sale of loans through whole loan sales generates immediate
cash  flows  on the  date of sale,  the  increases  in  originations  have  been
outpacing its sales.  Net cash of  $38,666,000,  $17,287,000  and $9,607,000 was
provided by financing  activities in 1997, 1996 and 1995,  respectively.  If the
available  capital  sources of the Company were to decrease  significantly,  the
rate of growth of the Company would be negatively affected.

                                       80
<PAGE>

ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


     Reference is made to the  financial  statements,  the report  thereon,  the
notes thereon and the supplementary  data commencing on page F-1 of this report,
which  financial  statements,   report,  notes  and  data  are  incorporated  by
reference.


ITEM 9 - CHANGES  IN  AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
         FINANCIAL DISCLOSURE

     None.

                                       81
<PAGE>

                                    PART III

                   ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS

DIRECTORS AND EXECUTIVE OFFICERS

     The directors and executive officers of the Company are as follows:

                                           Position(s) and Offices Presently
          Name                 Age               Held with the Company
     --------------------      ---     -----------------------------------------
     Allen D. Wykle             51     Chairman of the Board, President
                                       and Chief Executive  Officer,  and member
                                       of Executive and Compensation Committees
     Leon H. Perlin             69     Director,   member   of  the   Executive,
                                       Audit, Compensation and Option Committees
     Oscar S. Warner            80     Director,    member    of   the    Audit,
                                       Compensation and Option Committees
     Arthur Peregoff            78     Director
     Stanley W. Broaddus        48     Director,  Vice  President and Secretary,
                                       and member of the Executive Committee
     Robert M. Salter           49     Director,  member of the Compensation and
                                       Option Committees
     Jean S. Schwindt           42     Director,  member  of the  Executive  and
                                       Audit Committees
     Neil W. Phelan             40     Director, Executive Vice President
     Barry C. Diggins           34     Director,  President of a retail  lending
                                       division of ARMI
     Eric S. Yeakel             33     Treasurer and Chief Financial Officer
     Gregory W. Gleason         45     President, Approved Federal Savings Bank

     Except for Allen D. Wykle,  who is a director of IMC, none of the directors
of the Company hold other directorships in a company, or have any been nominated
to  become  a  director  in a  company,  with a class of  securities  registered
pursuant to Section 12 of the  Securities  Exchange Act of 1934, as amended (the
"Exchange Act"), or subject to the requirements of Section 15(d) of the Exchange
Act, or any company  registered  as an investment  company under the  Investment
Company Act of 1940.

                                       82
<PAGE>

     The  following  table sets forth the  principal  occupations  and  business
experience  for the directors and executive  officers.  The date shown for first
election as a director in the information below represents the year in which the
director was first  elected to the Board of  Directors  of the  Company.  Unless
otherwise indicated, the business experience and principal occupations shown for
each director or executive officer has extended for five or more years.

     ALLEN D. WYKLE, 51, has been a director since 1984. Mr. Wykle has served as
          Chairman of the Board,  President and Chief  Executive  Officer of the
          Company since September 1984.

     LEON H. PERLIN,  69, has been a director  since 1984. Mr. Perlin has served
          as President and Chief  Executive  Officer of Leon H. Perlin  Company,
          Inc., a commercial construction concern, for over 30 years.

     OSCAR S. WARNER, 80, has been a director  since 1984.  Mr.  Warner has been
          retired for the past five years. Previously, he was owner and operator
          of Oscar Warner Corporation, an import company.

     ARTHUR PEREGOFF,  78, has been a director  since  1985.  Mr.  Peregoff  has
          served as Chief Executive Officer of Globe Iron Construction  Company,
          Inc., a commercial construction company, for over 25 years.

     STANLEY W. BROADDUS,  48, has been a director since 1985. Mr.  Broaddus has
          served as  Secretary  and Vice  President  of the Company  since April
          1987.  Previous  experience  includes fourteen years as Regional Sales
          Manager with the building products unit of Atlantic Richfield Co.

     ROBERT M. SALTER, 49, has been a director since 1989. Mr. Salter has served
          as  President of Salter and Hall,  P.C.  since 1979.  Mr.  Salter is a
          Certified Public Accountant and a Certified Financial Planner.

                                       83
<PAGE>

     JEAN S. SCHWINDT, 42, has been a director since 1992. Ms. Schwindt has been
          Vice  President  and  Director of  Investor  Relations  and  Strategic
          Planning for IMC Mortgage Company since March 1996. From April 1989 to
          March 1996 she served as Senior Vice  President/Director and Secretary
          of  Anderson  and  Strudwick,  Inc.,  a member  of the New York  Stock
          Exchange.  Ms.  Schwindt  is a  Chartered  Financial  Analyst and is a
          Registered  Investment Advisor affiliated with the firm of Mills Value
          Adviser, Inc. since January 1995.

     NEIL W. PHELAN, 40, has been a director since 1997. Mr. Phelan is Executive
          Vice  President  and has been with the Company  since  April 1995.  He
          manages the Company's  wholesale  lending unit,  Approved  Residential
          Mortgage.  Immediately prior to joining the Company, Mr. Phelan served
          on the senior management team of ITT Financial Services for 17 years.

     BARRY C. DIGGINS, 34, has been a director since 1997. Mr. Diggins  oversees
          a  large  portion  of  the  Company's  retail  lending  unit,   Armada
          Residential  Mortgage.  Mr.  Diggins has been with the  Company  since
          October  1994.  He was Regional  Marketing  Director of ITT  Financial
          Services from September 1985 to October 1994.

     ERIC S. YEAKEL,  33, is Treasurer and Chief Financial  Officer.  Mr. Yeakel
          has been with the  Company  since  June 1994.  He served as  Assistant
          Controller  with Office  Warehouse,  Inc.  from October 1989 to August
          1992.  Mr.  Yeakel is a Certified  Public  Accountant  who worked with
          Ernst & Young from July 1987 to October 1989.

     GREGORY W. GLEASON,  45, is President of Approved Federal Savings Bank. Mr.
          Gleason joined the Company in November 1996 with more than 20 years of
          savings institution management.  Mr. Gleason was Senior Vice President
          with Virginia First Savings Bank from February 1984 through June 1996,
          and  was on the  management  team of  BankAtlantic  from  May  1977 to
          January 1984.

                                       84
<PAGE>

BOARD OF DIRECTORS

     The Company has nine  directors as of December 1, 1997.  The directors held
an  organizational  meeting  following  the  Annual  Meeting  of  the  Company's
Stockholders  on July 25,  1997.  At the  organizational  meeting,  the Board of
Directors ratified the Company's Amended and Restated Articles of Incorporation,
which  provides  that the Board of  Directors  shall  consist  of at least  five
directors. The Company's Amended and Restated Bylaws, also ratified by the Board
at its meeting of July 25, 1997,  provides that the number of Directors shall be
no less than five and not more than  fifteen,  as shall be fixed for the ensuing
year by the  shareholders at the annual  election.  The Directors are elected by
the  shareholders  at the  Annual  Meeting  for a term of one year and until his
successor is duly elected and qualified.  A Director may be removed at any time,
with or without  cause,  at a special  meeting of  shareholders  called for that
purpose, by a vote of a majority of the shares of stock represented and entitled
to vote at such meeting.  At any such meeting,  a successor to such Director may
be elected for his unexpired  term. In the event of any vacancy caused by death,
resignation, retirement,  disqualification or removal from office of a Director,
or by failure of the  shareholders  to elect a successor  to a Director  who has
been removed, or otherwise, the Board of Directors may fill such vacancy by vote
of a majority of all the  Directors  then in office,  though less than a quorum.
Directors so elected shall serve for the unexpired  term of their  predecessors,
and  until  their  successor  is  duly  elected  and  qualified,  unless  sooner
displaced.

     Meetings of the Board of Directors are held regularly, and there is also an
organizational  meeting  following  the  conclusion  of the  Annual  Meeting  of
Shareholders.  The  Board  of  Directors  held  nine  meetings  in 1996 and four
meetings in 1997. For 1996 and 1997,  none of the Company's  directors  attended
fewer than 75% of the  aggregate of the total number of meetings of the Board of
Directors and the total number of meetings of committees on which the respective
directors served.

     COMMITTEES  OF THE  BOARD OF  DIRECTORS.  The Board of  Directors  has four
committees:  the Executive  Committee,  the Audit  Committee,  the  Compensation
Committee and the Option Committee.

     The Executive Committee consists of Mr. Wykle, as Chairman, Mr. Perlin, Ms.
Schwindt and Mr. Broaddus.  The Executive  Committee acts for the Board when the
Board is not in session.

     The Audit Committee consists of Ms. Schwindt,  as Chairman,  Mr. Perlin and
Mr. Warner. The Audit Commitee makes recommendations  concerning the engagements
of  independent  public   accountants,   reviews  with  the  independent  public
accountants the plans and results of the audit engagement, approves professional
services   provided  by  the  independent   public   accountants,   reviews  the
independence of the independent public accountants, considers the range of audit
and non-audit fees and reviews the adequacy of the Company's internal accounting
controls.  It also reviews and accepts the reports of the  Company's  regulatory
examiners.

                                       85
<PAGE>

     The  Compensation  Committee,  which  determines  the  compensation  of the
Company's  senior  management,  and reviews and sets guidelines for compensation
for all employees,  consists of Mr. Warner,  Chairman, Mr. Wykle, Mr. Perlin and
Mr. Salter. Mr. Wykle abstains from voting on his own compensation.

     The Option  Committee,  which  administers the Company's stock option plans
and grants  options under those plans,  consists of Mr.  Warner,  Chairman,  Mr.
Perlin and Mr. Salter.

                                       86
<PAGE>

                        ITEM 11 - EXECUTIVE COMPENSATION

SUMMARY OF CASH AND OTHER COMPENSATION

     The following table sets forth the compensation paid to the Company's Chief
Executive Officer and the three most highly-compensated Executive Officers other
than the Chief  Executive  Officer  whose 1997  compensation  exceeded  $100,000
(collectively,  the "Named  Executive  Officers")  during the three  years ended
December 31, 1997:

                           SUMMARY COMPENSATION TABLE

                                    Annual Compensation (1)
                                 ----------------------------      All Other
Name and Principal Position      Year     Salary       Bonus    Compensation (2)
---------------------------      ----    --------    --------   ----------------
                                                                
Allen D. Wykle                   1997    $421,218    $575,000       $ 4,750
President and Chief              1996     300,000     400,000         4,750
Executive Officer                1995     200,000          --        49,062
                                                                
Barry C. Diggins (3)             1997     132,638     209,564         6,821
Retail Lending                   1996      75,000     175,092            --
                                 1995      75,000      64,415            --
                                                                
Neil W. Phelan                   1997     110,000      75,000         3,383
Executive Vice President,        1996     100,000      75,000         1,500
Marketing and Broker Lending     1995      75,000          --        10,000
                                                                
Stanley W. Broaddus              1997      85,000     100,000         2,437
Secretary and                    1996      85,000      45,000         2,100
Vice President                   1995      58,000          --         6,072

-----------------------                                       
(1) All benefits that might be  considered  of a personal  nature did not exceed
    the  lesser  of  $50,000  or 10% of total  annual  salary  and bonus for the
    officer named in the table.
(2) Amounts  reflect  the  Company's  matching  contribution  under  its  401(k)
    retirement  plan.  The table also  includes  contributions  to the Company's
    non-qualified retirement plan of $47,000 in 1995 for Mr. Wykle and $5,000 in
    1995 for Mr. Broaddus. The table also reflects $10,000 paid to reimburse Mr.
    Phelan in 1995 for moving expenses.
(3) Mr. Diggins was paid an annualized  base salary of $75,000 in 1996 and 1995.
    In addition,  Mr. Diggins was paid an incentive based on the earnings of the
    retail  lending  division.  His  incentive  amounts  were  $209,564 in 1997,
    $175,092 in 1996 and $64,415 in 1995.

                                       87
<PAGE>

STOCK OPTION/STOCK APPRECIATION RIGHT GRANTS IN THE LAST YEAR

     The Company did not grant any stock options or stock appreciation rights in
1996,  other than the stock  appreciation  rights  issued to Ms.  Schwindt.  See
"Board of Directors - Directors' Compensation."

     On January  27,  1997,  the  Company  issued  options to key  employees  to
purchase up to 9,200 shares of the Company's  common stock. The employees have a
ten-year period to exercise the options at an exercise price of $9.75 per share.
The number of shares and exercise price for these options have been adjusted for
the 100% stock dividend on November 21, 1997.

     The following table contains information  regarding options to purchase the
Company's  common stock granted to three Named Executive  Officers.  Mr. Diggins
did not receive an option grant.  No stock  appreciation  rights were granted to
Named Executive Officers during 1997 or 1996.

<TABLE>
<CAPTION>
                                Individual Grant                              Potential Realizable
                     ------------------------------------                       Value at Assumed
                      Number of    Percent of                                 Annual Rates of Stock
                     Securities  Total Options                                Price Appreciation for
                     Underlying   Granted to    Per Share                         Option Term (2)
                       Options     Employees    Exercise     Expiration     ---------------------------
       Name            Granted      in Year     Price (1)       Date          0%       5%         10%
-------------------  ----------  -------------  ---------    ----------     -----    ------     -------
<S>                     <C>          <C>          <C>        <C>            <C>      <C>        <C>    
Allen D. Wykle          1,000        10.9%        $9.75      1-27-2007      $ --     $6,132     $15,538
Neil W. Phelan          1,000        10.9%        $9.75      1-27-2007        --      6,132      15,538
Stanley W. Broaddus     1,000        10.9%        $9.75      1-27-2007        --      6,132      15,538
</TABLE>
-------------------
(1) These  shares  are  based on $9.75,  the  closing  price of Common  Stock on
    January 26, 1997 (as  adjusted  for the 100% stock  dividend on November 21,
    1997).  The  exercise  price may be paid in cash,  in shares of Common Stock
    valued  at fair  market  value  on the date of  exercise  or  pursuant  to a
    cash-less exercise involving the same-day sale of the purchased shares.

(2) The 5% and 10% assumed annual rates of compounded  stock price  appreciation
    are permitted by rules of the Securities and Exchange Commission.  There can
    be no assurance provided to any executive officer or any other holder of the
    Company's  securities  that the actual  stock  price  appreciation  over the
    10-year option term will be at the assumed 5% and 10% levels or at any other
    defined level.  Unless the market price of the Common Stock appreciates over
    the  option  term,  no value  will be  realized  from the  option  grants to
    executive officers.

                                       88
<PAGE>

AGGREGATE OPTION EXERCISES AND PERIOD-END VALUES

     The  following  table  sets  forth  information  concerning  the  value  of
unexercised  options held by three of the Company's Named Executive  Officers at
March 1, 1998. No options of stock  appreciation  rights were  exercised  during
1996 or 1997, and no stock appreciation  rights were outstanding at December 31,
1997.


                          Number of Securities          Value of Unexercised
                         Underlying Unexercised             In-the-Money
                               Options at                    Options at
                             Fiscal Year End             Fiscal Year End (1)
                       --------------------------    ---------------------------
      Name             Exercisable  Unexercisable    Exercisable   Unexercisable
-------------------    -----------  -------------    -----------   -------------
Allen D. Wykle              --          1,000             --             --
Neil W. Phelan              --          1,000             --             --
Stanley W. Broaddus         --          1,000             --             --

-------------------
(1) Based on the  closing  price of $14.75  per share,  for the Common  Stock on
    December 29, 1997.

1996 INCENTIVE STOCK OPTION PLAN

     On June 28, 1996, the Company  adopted the 1996 Incentive Stock Option Plan
(the  "Incentive  Plan"),  pursuant  to which key  employees  of the Company are
eligible for awards of stock options.  The following  sections summarize some of
the principle features of the Incentive Plan.

     PURPOSE.   The  Board  of  Directors  believes  that  long-term   incentive
compensation  is one of the  fundamental  components  of  compensation  for  the
Company's key  employees  and that stock  options under the Incentive  Plan will
play an important  role in  encouraging  employees  to have a greater  financial
investment  in the Company.  The Board of Directors  believes that the Incentive
Plan will help promote  long-term  growth and  profitability by further aligning
stockholder and employee interests.

     The  purpose of the  Incentive  Plan is to  promote  the  interests  of the
Company and its shareholders by affording participants an opportunity to acquire
a  proprietary  interest  in the  Company  and by  providing  participants  with
long-term financial incentives for outstanding  performance.  Under the terms of
the Incentive Plan, the Option  Committee has a great deal of flexibility in the
types  and  amounts  of awards  that can be made and the  terms  and  conditions
applicable to those awards.

     DESCRIPTION OF THE INCENTIVE PLAN. The aggregate number of shares of Common
Stock that are available for grants under the Incentive Plan is 252,000  shares,
as adjusted  for the  two-for-one  stock split on December 16, 1996 and the 100%
stock  dividend on November 21, 1997.  All shares  allocated to awards under the
Incentive  Plan that are cancelled or forfeited  are  available  for  subsequent
awards.

                                       89
<PAGE>

     ADMINISTRATION. The Incentive Plan is administered by the Option Committee.
The members of the Option Committee are not eligible to receive awards under the
Incentive  Plan.  The Option  Committee has the full power to: (a) designate the
key employees to receive  awards from time to time;  (b) determine the sizes and
types of awards;  (c) determine  the terms and  provisions of awards as it deems
appropriate;  (d) construe and interpret the Incentive Plan and establish, amend
or waive rules and regulations  relating to the  administration of the Incentive
Plan; (e) amend the terms and provisions of any outstanding  award to the extent
such terms and provisions are within the discretion of the Option Committee; and
(f) make all other decisions and  determinations  necessary or advisable for the
administration of the Incentive Plan. All  determinations  and decisions made by
the Option  Committee  pursuant to the Incentive Plan are final,  conclusive and
binding.

     ELIGIBLE  PARTICIPANTS.  Only  "key  employees"  of  the  Company  and  its
subsidiaries  are eligible to participate in the Incentive Plan. An employee who
is a  director  is  eligible  for an award  unless  he or she is a member of the
Option  Committee.  The  selection of the key  employees is entirely  within the
discretion of the Option Committee. The concept of a "key employee" is, however,
somewhat  flexible  and it is  anticipated  that such  factors as the duties and
responsibilities  of employees,  the value of their services,  their present and
potential contributions to the success of the Company and other relevant factors
will be  considered.  Accordingly,  the number of persons who  ultimately may be
eligible to participate in the Incentive Plan cannot presently be determined.

     OPTION PRICE OF STOCK. The Incentive Plan provides for the grant of options
to purchase  shares of Common  Stock at option  prices to be  determined  by the
Option  Committee as of the date of grant. The option price may not be less than
the fair market value (or in the case of a 10% stockholder not less than 110% of
the fair market  value) of the shares of Common Stock on the date of grant.  For
such purpose  "fair  market  value" means the average of the bid and asked price
per share of the Common  Stock as reported by the NASDAQ Stock Market or the OTC
Bulletin  Board,  whichever is  applicable at the time, on the date on which the
fair  market  value is  determined  or,  if Common  Stock is not  traded on such
exchange or system on such date, then on the immediately preceding date on which
Common Stock was traded on such exchange or system.  Each grant of options is to
be evidenced by an option  agreement  which is to specify the option price,  the
term of the  option,  the number of shares  subject to the option and such other
provisions as the Committee may determine.

     EXERCISE OF OPTIONS.  The shares  subject to an option may be  purchased as
follows: none in the first year after the grant of option;  one-third in each of
the second,  third and fourth years.  Options  granted under the Incentive  Plan
will  expire  not more than ten years (or in the case of a 10%  stockholder  not
more than five years) from the date of grant.

     AWARDS OF OPTIONS.  Awards of options  under the  Incentive  Plan are to be
determined  by the  Option  Committee  at its  discretion.  Notwithstanding  the
foregoing,  the Option Committee may not grant options to any participant  that,
in the  aggregate,  are first  exercisable  during any one calendar  year to the
extent  that the  aggregate  fair  market  value of the  shares  subject to such
options, at the time of grant, exceeds $100,000.

                                       90
<PAGE>

     Payments  for shares  issued  pursuant to the exercise of any option may be
made either in cash or by tendering shares of Common Stock of the Company with a
fair  market  value at the date of the  exercise  equal  to the  portion  of the
exercise price which is not paid in cash.

     NO  RIGHTS AS  STOCKHOLDER.  A  participant  granted  an  option  under the
Incentive  Plan will have no rights as a stockholder of the Company with respect
to the shares  subject to such option  except to the extent  shares are actually
issued.

     NON-TRANSFERABILITY.  Options  may not be  sold,  transferred,  pledged  or
assigned,  except as otherwise  provided by law or in an option  agreement.  The
Option  Committee  may impose  restrictions  on the transfer of shares  acquired
pursuant to the exercise of options as it may deem advisable.

     TERMINATION  OF  EMPLOYMENT.  Except for  termination  for cause,  death or
disability, options terminate three months after the employment terminates or on
such earlier date as the participant's option agreement specifies.  In the event
of termination for cause as defined in the Incentive Plan, the option terminates
upon termination  (subject to the Option  Committee's  right to reinstate for 30
days). In the event of death,  the option will terminate six months after death,
and in the event of  disability  one year after  disability  (unless  the option
period in the participant's option agreement expires earlier).

     AMENDMENT AND TERMINATION OF THE INCENTIVE PLAN. The Board of Directors may
alter, amend,  discontinue,  suspend or terminate the Incentive Plan at any time
in whole or in part.  Notwithstanding  the  foregoing,  stockholder  approval is
required  for any  change to the  material  terms of the  Incentive  Plan and no
amendment or  modification  of the Incentive  Plan may  materially and adversely
affect any award previously granted without the consent of the participant.

401(K) RETIREMENT PLAN

     On January 1, 1995, the Company  implemented a 401(k)  Retirement Plan (the
"401(k)  Plan").  The 401(k) Plan is a defined  contribution  plan  covering all
employees  who have  completed at least one year of service.  The 401(k) Plan is
subject to the  provisions  of the Employee  Retirement  Income  Security Act of
1974. The Company contributes an amount equal to 50% of a participant's  payroll
savings  contribution  up to  6% of a  participant's  annual  compensation.  The
Company's  contributions  to the 401(k) Plan in 1997 and 1996 were  $115,000 and
$33,000, respectively.

                                       91
<PAGE>

EMPLOYMENT AGREEMENTS

     The Company has no employment  agreement  with Allen D. Wykle.  Mr. Wykle's
salary and bonus are determined by the Compensation Committee.

     The Company has employment agreements with three executive officers.

     NEIL W. PHELAN. The Employment  Agreement which commenced April 1, 1995 was
for a two year initial term and will automatically renew for additional one-year
terms  absent six months  written  notice by either  party prior to the end of a
term of  nonrenewal.  He currently  receives an annual  salary of  $110,000.  It
provides  for a bonus of up to 75% of base  compensation  depending on specified
pre-tax net profit goals. He also is entitled to all group employee benefits and
a car allowance.

     The Employment Agreement provides for termination "for cause" as defined in
the Agreement.  Under the Employment Agreement he has agreed not to compete with
the  Company  for a period of two years after  termination  within a  prescribed
geographic  area and not to solicit or employ  Company  employees  for two years
after  termination.  These  restrictive  covenants apply upon termination by Mr.
Phelan or termination for cause by the Company.

     STANLEY W. BROADDUS.  The Employment  Agreement which commenced  January 1,
1997 was for a one year initial term and will automatically renew for additional
one-year terms absent ninety day written notice by either party prior to the end
of a term of  nonrenewal.  It provides  for an annual  salary of $85,000 with an
annual 6% increase  during the initial term. He is entitled to a Company car and
all group employee benefits. He is entitled to a quarterly bonus based on 1 1/2%
of net profits  after taxes not to exceed  $100,000.  He is also entitled to one
year's  annual  salary in the event  that  following  a change in control of the
Company  (i.e.  Mr. Wykle and Mr.  Perlin own less than 51% of the voting stock)
Allen D. Wykle is no longer  employed  and the  Company  terminates  him without
cause.

     The Employment Agreement provides for termination "for cause" as defined in
the Agreement with notice and for termination  upon 90 days prior written notice
without cause.

     Under the  Employment  Agreement  he has  agreed  not to  compete  with the
company  for a period  of one (1) year  after  termination  within a  prescribed
geographic area and not to solicit or employ Company employees for two (2) years
after termination.  These restrictive covenants apply upon termination by either
party, with or without cause and upon expiration of the Agreement.

                                       92
<PAGE>

     BARRY C. DIGGINS.  The Employment  Agreement which commenced  September 15,
1997 was for a two year initial term and will automatically renew for additional
one-year  terms absent 90 day written notice by either party prior to the end of
a term of  nonrenewal.  It provides  for an annual  salary of  $130,000  with an
annual 6% increase  during the initial  term.  It provides  for a bonus of up to
100% of annual  salary if he makes a specified  "Profit  Target"  (net after tax
profits)  for  offices  under his  supervision.  If he meets at least 75% of the
Profit Target,  he earns a bonus  computed by multiplying  the percentage of the
Profit  Target  reached  times 100% of salary.  In  addition  he is  entitled to
incentive  compensation of 5% of annual after tax net profit attributable to the
offices supervised by him. Any such incentive compensation in excess of $150,000
per year may within the  discretion of the Company be converted to  nonstatutory
stock  options.  He is also  entitled  to 5% of  gross  written  life  insurance
premiums as well as the group benefits of other employees.

     The Employment Agreement provides for termination "for cause" as defined in
the Agreement.  If he terminates his employment or it is terminated for cause as
defined in the  Agreement  or either party elects not to renew at the end of any
term with the required notice, the contract ceases, and no further  compensation
or benefits are paid. If the  Employment  Agreement is terminated by the Company
without  cause  during the initial  term,  then in lieu of any other  damages or
compensation  is  entitled  to  severance  pay in the amount  equal to  $300,000
multiplied by a percentage  equal to the number of days left at  termination  in
the initial term divided by 730. If terminated  without cause in a renewal term,
the severance pay shall be equal to the base  compensation for that renewal term
multiplied by a percentage  equal to the number of days remaining in the renewal
term at termination divided by 365.

     Under the  Employment  Agreement  he has  agreed  not to  compete  with the
company  for a  period  of  one  year  after  termination  within  a  prescribed
geographic  area and not to solicit or employ  Company  employees  for two years
after termination.  These restrictive covenants apply upon termination by either
party, with or without cause and upon expiration of the Agreement.

                                       93
<PAGE>

DIRECTORS' COMPENSATION.

     Directors  who are  compensated  as  employees  of the  Company  receive no
additional compensation for service as directors.

     Each  director  who is not an employee  of the  Company  receives an annual
retainer of $9,000,  payable in cash in quarterly  installments  of $2,250.  All
directors receive reimbursement of reasonable out-of-pocket expenses incurred in
connection  with  meetings  of the Board of  Directors.  For 1997,  the  outside
directors were paid an additional $5,000 for their services.

     During  1996,   the  Board  of  Directors   approved  the  grant  of  stock
appreciation rights ("SARs") to Ms. Schwindt. The SARs are for a period of three
years and entitle the holder to the appreciated value of 16,000 shares of common
stock,  which  represents  the  difference  between the grant price and the fair
market  value of the shares at the time of  exercise.  The grant price is $2.63.
The compensation  expense associated with issuance of the SARs was approximately
$94,000 during 1996.

     COMPENSATION   COMMITTEE   INTERLOCKS   AND   INSIDER   PARTICIPATION.   No
interlocking  relationships  exist between the  Company's  Board of Directors or
officers  responsible for  compensation  decisions and the board of directors or
compensation   committee  of  any  company,   nor  has  any  such   interlocking
relationship existed in the past.

                                       94
<PAGE>

            ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
                                 AND MANAGEMENT

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

     Persons  who  were  beneficial  owners  of 5% or  more  of the  issued  and
outstanding  Common  Stock of the  Company as of March 15, 1998 are shown in the
following table.  Beneficial ownership includes shares, if any, held in the name
of the spouse,  minor children or other  relatives of the nominee living in such
person's  home, as well as shares,  if any,  held in the name of another  person
under an arrangement whereby the director or executive officer can vest title in
himself at once or at some future time.

          Name and Address             Amount and Nature          Percent of
         of Beneficial Owner          Beneficial Ownership       Common Stock
         -------------------          --------------------       ------------

         Allen D. Wykle   (1)(2)           1,822,357                 33.06%
         1062 Normandy Trace Road
         Tampa, Florida 33602

         Leon H. Perlin   (3)                938,256                 17.02
         3360 South Ocean Boulevard
         Apartment 5H2
         Palm Beach, Florida 33480

         JAM Partners, L.P.   (4)
         One Fifth Avenue
         New York, New York 10003            290,800                  5.28

---------------------
(1) Mr. Wykle's shares exclude 4,000 shares registered to his adult children and
    his  grandchildren,  as to which Mr. Wykle disclaims  beneficial  ownership.
    Also includes beneficial  ownership of 333 shares issuable upon the exercise
    of stock options  exercisable within 60 days of March 15, 1998, and excludes
    667 shares subject to stock options that cannot be exercised  within 60 days
    of March 15, 1998.
(2) Mr. Wykle and Mr.  Stanley W.  Broaddus  are  Co-Trustees  of the  Company's
    Profit-Sharing  Plan, which owns 39,680 of the Company's Common Stock.  They
    share voting power.  Mr. Wykle's  ownership  interest is 65%. Mr.  Broaddus'
    share is 15%. All of the 39,680 shares owned by the Profit-Sharing  Plan are
    included  under Mr.  Wykle's  shares for the  purposes  of this  disclosure,
    except for the 15% owned by Mr.  Broaddus.  Mr. Wykle  disclaims  beneficial
    ownership of all but the 65% he owns in the Profit-Sharing Plan.
(3) Mr. Perlin's shares include 594,000 shares owned by his wife.
(4) JAM Partners,  L.P. is a Delaware limited  partnership.  It is an investment
    partnership  managed by Jacobs Asset  Management LLC. The General Partner is
    JAM Managers,  LLC. The capital of JAM Partners, L.P. at January 1, 1998 was
    approximately  $35,500,000.  JAM Partners,  L.P.'s shares include 260,000 it
    owns  directly.  Also included are 20,000 shares owned directly by Sy Jacobs
    and 10,800 shares owned  directly by Bernard Sucher and his wife. Mr. Jacobs
    and Mr. Sucher are general partners in JAM Managers LLC.

                                       95
<PAGE>

SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS

     The following  table sets forth  information as of March 15, 1998 regarding
the number of shares of Common Stock  beneficially  owned by all  directors  and
executive officers:

                                          Common Stock            Percentage of
        Name                           Beneficially Owned             Class
        ----                           ------------------         -------------
Directors:
    Allen D. Wykle (1)(2)(6)               1,822,357                  33.06%
    Leon H. Perlin (3)                       938,256                  17.02
    Oscar S. Warner (4)                       64,000                   1.16
    Arthur Peregoff (5)                       81,800                   1.48
    Stanley W. Broaddus (1)(6)               133,805                   2.31
    Robert M. Salter                           4,464                    *
    Jean S. Schwindt  (7)                     62,400                   1.13
    Neil W. Phelan (1)                        10,453                    *
    Barry C. Diggins                         111,034                   2.01

Executive officers who are
    not directors:
    Eric S. Yeakel (1)                           333                    *
    Gregory W. Gleason                         1,000                    *

All present executive
    officers and directors
    as a group (11 persons) (1)            3,229,902                  55.58%

---------------------
  * Owns less than 1% of class.
(1) Includes  beneficial  ownership of 333 shares  issuable upon the exercise of
    stock options exercisable within 60 days of March 15, 1998, and excludes 667
    shares  subject to stock options that cannot be exercised  within 60 days of
    March 15, 1998.
(2) Mr.  Wykle's shares  excludes 4,000 shares  registered to his adult children
    and his grandchildren, as to which Mr. Wykle disclaims beneficial ownership.
(3) Mr. Perlin's shares include 594,000 shares owned by his wife.
(4) Mr.  Warner's  shares  include 4,000 shares owned by his wife,  and excludes
    30,000 shares registered to his adult children and his grandchildren,  as to
    which Mr. Warner disclaims beneficial ownership.
(5) Mr.  Peregoff's  shares are held jointly with his wife.  The shares  exclude
    4,648  shares   registered  to  Mr.   Pergoff's   adult   children  and  his
    grandchildren, as to which Mr. Peregoff disclaims beneficial ownership.
(6) Mr. Wykle and Mr. Broaddus are  Co-Trustees of the Company's  Profit-Sharing
    Plan,  which owns 39,680 of the Company's  Common  Stock.  They share voting
    power.  Mr. Wykle's  ownership  interest is 65%. Mr. Broaddus' share is 15%.
    All of the 39,680 shares owned by the Profit-Sharing Plan are included under
    Mr. Wykle's shares for the purposes of this disclosure, except for the 5,952
    shares owned by Mr. Broaddus.  Mr. Wykle disclaims  beneficial  ownership of
    all but the 65% he owns in the Profit-Sharing Plan
(7) Ms. Schwindt also has stock appreciation  rights on 16,000 shares.  Excluded
    are  8,000  shares  owned by her  parents  to which Ms.  Schwindt  disclaims
    beneficial ownership.
(8) Mr. Diggins' shares include 4,888 shares owned jointly with his wife.

                                       96
<PAGE>

ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The Company has maintained  business  relationships  and engaged in certain
transactions with affiliated companies and the parties as described below. It is
the policy of the Company to engage in transactions with related parties only on
terms that, in the opinion of the Company,  are no less favorable to the Company
than could be  obtained  from  unrelated  parties  and each of the  transactions
described below conforms to that policy.

AGREEMENT WITH IMC MORTGAGE COMPANY

     The Company has an agreement for the sale of mortgage loans to IMC Mortgage
Company ("IMC").  The terms of the mortgage loan sale agreement are set forth in
the Pre-IPO  Agreement  between the  Company and IMC dated March 30,  1996.  The
Company's  contract  with IMC  requires  the  Company  to sell a minimum of $2.0
million of loans to IMC each month subject to prevailing  secondary market terms
for pools of non-conforming  mortgage loans for a five year period commencing on
June 25,  1996 (the date of IMC's  Initial  Public  Offering).  In the event the
Company fails to sell $2.0 million of loans at prevailing secondary market terms
to IMC in any month,  IMC could sue the Company for breech of  contract.  During
1997 and 1996, the Company sold 55.9% and 43.7%,  respectively,  of its loans to
IMC. These transactions have resulted in the payment of a cash premium by IMC to
the Company.  From time to time, various other purchasers purchase more than 10%
of the Company's loan production. While there are several other major purchasers
of  non-conforming  mortgage  loans as large or  larger  than IMC,  the  Company
maintains a good working relationship with IMC. Historically, IMC has offered to
buy a wide range of the Company's loan products at competitive prices.  However,
there can be no assurance that IMC will be in a position to continue to purchase
the Company's loan production at margins  favorable to the Company.  The Company
owned  approximately 3.2% of the outstanding common stock of IMC at December 31,
1997.  The Company has had since  January  1996 a warehouse  financing  facility
under which IMC agreed to lend the Company  $8,000,000  secured by the Company's
mortgage loans.  Borrowings  under the facility bore interest at a rate of LIBOR
plus 1.75%. There was no outstanding  balance on this line at December 31, 1997.
The line was due to expire on  January  29,  1998 and was  subject  to  renewal.
However,  the Company  terminated  this  credit line and  replaced it with a new
credit line  agreement  with another  party,  effective  December 10, 1997.  The
Company's Chairman and Chief Executive  Officer,  Allen D. Wykle, is a member of
IMC's Board of Directors. Mr. Wykle beneficially owns approximately 0.07% of IMC
common stock, including 12,992 issuable upon the exerise of stock options. Also,
Jean S.  Schwindt,  a member of the  Company's  Board of Directors and Executive
Committee,  is an officer  of IMC and owns  18,020  shares of IMC  common  stock
issuable upon the exercise of vested stock options.

                                       97
<PAGE>

The  following  table  shows the  monthly  volume of loans sold to IMC  Mortgage
Company for the years 1996 and 1997:

(Dollars in Thousands)

                                               AMOUNT OF LOANS SOLD
                                         -------------------------------
             MONTH                         1996                   1997
        --------------                   --------               --------

        January                          $  3,491               $ 11,798
        February                            4,858                 11,465
        March                              10,862                 34,676
        April                              11,208                  9,728
        May                                 5,310                 19,813
        June                                5.780                 34,594
        July                                3,927                 18,459
        August                              6,386                 17,229
        September                           6,304                 20,032
        October                            11,246                 13,325
        November                           19,011                 21,385
        December                           11,712                 22,724
                                         --------               --------

        Total                            $100,095               $235,228

                                       98
<PAGE>

AGREEMENT WITH MILLS VALUE ADVISER, INC.

     The Company  entered into an investment  management  agreement on March 28,
1996, with Mills Value Adviser,  Inc. ("MVAI"), a registered investment advisor.
Under the  agreement,  MVAI  manages a portion  of the  Company's  non-qualified
Profit-Sharing  Plan.  The Plan's  trustees  retain all proxy voting  rights for
securities  managed by MVAI.  During  1997,  the Company paid $3,436 in advisory
fees to MVAI. Jean S. Schwindt, a member of the Company's Board of Directors and
Executive Committee, is a portfolio manager for MVAI.

TERMINATION OF ARMADA RESIDENTIAL MORTGAGE, LLC

     Since  December  1994,  the Company  had  conducted a portion of its retail
lending business through Armada Residential Mortgage,  LLC ("Armada LLC"), which
was owned 1% by the Company, 82% by ARMI and 17% by Armada LLC's senior officer.
In connection with terminating  Armada LLC in September 1997, the Company agreed
to issue  106,146  shares of its Common Stock to purchase  the senior  officer's
ownership  interest in Armada LLC. The senior officer  terminated his employment
with  Armada  LLC and became an  employee  of ARMI.  He also a  Director  of the
Company.  The shares have been adjusted for the 100% stock  dividend on November
21, 1997.

INDEBTEDNESS OF MANAGEMENT

     The Company and the Savings Bank have no  outstanding  extensions of credit
to members of the Board of Directors or management at December 31, 1997. On June
30,  1994,  the Company  made a loan to Director  Leon H.  Perlin.  The original
principal balance on the loan was $300,000 and the loan bore an interest rate of
9.50% . Mr. Perlin paid the loan off in full on September 2, 1997.  During 1997,
the Company made a loan to Stanley W. Broaddus  consisting  of three  promissory
notes totaling $165,000. These notes bore interest rates ranging from 9% to 12%.
All notes were paid off in full on August 29, 1997.

PROMISSORY NOTES

     The Company has, from time to time,  issued  promissory  notes to assist in
cash flow.  The notes are  callable on 30 days notice from the holder and may be
prepaid by the Company.  The notes are usually issued to Directors,  officers or
shareholders.  As of December 31, 1997,  the  following  Directors and Executive
Officers  were holders of  promissory  notes in the amounts and  interest  rates
specified below:


        Allen D. Wykle                      $539,220           10.00%
        Stanley W. Broaddus                  231,830            9.00
        Stanley W. Broaddus                   75,378            8.25
        Leon H. Perlin                       257,891            9.00
        Oscar S. Warner                       54,124            8.00
        Arthur Peregoff                      397,236            9.00

                                       99
<PAGE>

                                     PART IV


               ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
                             AND REPORTS ON FORM 8-K


AUDITED FINANCIAL STATEMENTS

     The following 1997 Consolidated  Financial Statements of Approved Financial
Corp. and Subsidiaries are included:

     - Report of Independent Public Accountants...................F - 2
     - Consolidated Balance Sheets................................F - 3
     - Consolidated Statements of Income..........................F - 4
     - Consolidated Statements of Shareholders' Equity........F - 5 - F - 6
     - Consolidated Statements of Cash Flows..................F - 7 - F - 8
     - Notes to Consolidated Financial Statements.............F - 9 - F - 35

                                      100
<PAGE>

EXHIBIT INDEX

Exhibit
Number                                  Description
------                                  -----------

   3.1       Amended  and  Restated  Articles  of  Incorporation  of the Company
             (Incorporated   by   Reference   to  Appendix  A  of  the  Form  10
             Registration Statement Filed February 11, 1998)

   3.2       Bylaws of the Company  (Incorporated  by Reference to Appendix B of
             the Form 10 Registration Statement Filed February 11, 1998)

   10.1      Approved Financial Corp.  Incentive Stock Option Plan (Incorporated
             by  Reference to Appendix C of the Form 10  Registration  Statement
             Filed February 11, 1998)

   10.2      Employment  Agreement  between  the  Company  and  Neil  W.  Phelan
             (Incorporated   by   Reference   to  Appendix  D  of  the  Form  10
             Registration Statement Filed February 11, 1998)

   10.3      Employment  Agreement  between the Company and Stanley W.  Broaddus
             (Incorporated   by   Reference   to  Appendix  E  of  the  Form  10
             Registration Statement Filed February 11, 1998)

   10.4      Employment  Agreement  between  the  Company  and Barry C.  Diggins
             (Incorporated   by   Reference   to  Appendix  F  of  the  Form  10
             Registration Statement Filed February 11, 1998)

   10.5      Purchase   Agreement  of  Barry  C.  Diggins'  Interest  in  Armada
             Residential  Mortgage,  LLC, and related  Nonqualified Stock Option
             Agreement  (Incorporated  by Reference to Appendix G of the Form 10
             Registration Statement Filed February 11, 1998)

   10.6      Employment  Agreement  between  the  Company  and  Eric  S.  Yeakel
             (Incorporated   by   Reference   to  Appendix  H  of  the  Form  10
             Registration Statement Filed February 11, 1998)

   10.7      Mills Value Adviser, Inc, Investment Management  Agreement/Contract
             with the Company  (Incorporated  by  Reference to Appendix I of the
             Form 10 Registration Statement Filed February 11, 1998)

   10.8      Share Purchase  Agreement for Purchase of  Controlling  Interest in
             Approved  Federal  Savings Bank (Formerly  First  Security  Federal
             Savings Bank, Inc.) (Incorporated by Reference to Appendix J of the
             Form 10 Registration Statement Filed February 11, 1998)

                                      101
<PAGE>

Exhibit
Number                                  Description
------                                  -----------

   10.9      Stock   Appreciation   Rights   Agreement  with  Jean  S.  Schwindt
             (Incorporated   by   Reference   to  Appendix  K  of  the  Form  10
             Registration Statement Filed February 11, 1998)

   10.10     Asset  Purchase  Agreement  with  Funding  Center of Georgia,  Inc.
             (Incorporated   by   Reference   to  Appendix  L  of  the  Form  10
             Registration Statement Filed February 11, 1998)

   10.11     Gregory J. Witherspoon  Registration Rights Agreement (Incorporated
             by  Reference to Appendix M of the Form 10  Registration  Statement
             Filed February 11, 1998)

   10.12     Pre-IPO   Agreement  between  the  Company  and  Industry  Mortgage
             Company,  L.P., dated March 30, 1996  (Incorporated by Reference to
             Appendix N of the Form 10 Registration Statement Filed February 11,
             1998)

   21        Subsidiaries of the Company (Appendix N)

   27        Financial Data Schedule

                                      102
<PAGE>

                                   SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934,  the  Registrant has duly caused this Amendment No. - 1 on
Form  10-K/A to be  signed on its  behalf  by the  undersigned,  thereunto  duly
authorized.

                                        APPROVED FINANCIAL CORP.
                                        (Registrant)


Date: April 28, 1998                    By: /s/ Eric S. Yeakel
                                           ------------------------
                                           Eric S. Yeakel
                                           Treasurer and
                                           Chief Financial Officer

     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
Registrant and in the capacities and on the dates indicated.

Date: March 27, 1998                    By: /s/ Allen D. Wykle
                                           ------------------------
                                           Allen D. Wykle
                                           Chairman of the Board of Directors
                                           President, and Chief Executive
                                           Officer

Date: March 27, 1998                    By: /s/ Eric S. Yeakel
                                           ------------------------
                                           Eric S. Yeakel
                                           Treasurer and
                                           Chief Financial Officer

Date: March 27, 1998                    By: /s/ Leon H. Perlin
                                           ------------------------
                                           Leon H. Perlin
                                           Director

Date: March 27, 1998                    By: /s/ Oscar S. Warner
                                           -------------------------
                                           Oscar S. Warner
                                           Director

Date: March 27, 1998                    By: /s/ Arthur Peregoff
                                           -------------------------
                                           Arthur Peregoff
                                           Director

Date: March 27, 1998                    By: /s/ Stanley W. Broaddus
                                           -----------------------------
                                           Stanley W. Broaddus
                                           Director, Vice President
                                           and Secretary

                                      103
<PAGE>

Date: March 27, 1998                    By: /s/ Robert M. Salter
                                           --------------------------
                                           Robert M. Slater
                                           Director

Date: March 27, 1998                    By: /s/ Jean S. Schwindt
                                           --------------------------
                                           Jean S. Schwindt
                                           Director

Date: March 27, 1998                    By: /s/ Neil W. Phelan
                                           ------------------------
                                           Neil W. Phelan
                                           Director, Executive Vice President

Date: March 27, 1998                    By: /s/ Barry C. Diggins
                                           --------------------------
                                           Barry C. Diggins
                                           Director, President of a retail
                                           lending division of ARMI

Date: March 27, 1998                    By: /s/ Gregory W. Gleason
                                           ----------------------------
                                           Gregory W. Gleason
                                           President, Approved Federal
                                           Savings Bank

                                      104
<PAGE>

                            APPROVED FINANCIAL CORP.
                        CONSOLIDATED FINANCIAL STATEMENTS

              FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

<PAGE>

CONTENTS
                                                                           Pages
                                                                           -----

Report of Independent Accountants.........................................     2

Consolidated Financial Statements:

       Consolidated Balance Sheets as of December 31, 1997 and 1996.......     3

       Consolidated Statements of Income for the years ended
            December 31, 1997, 1996 and 1995..............................     4

       Consolidated Statements of Shareholders' Equity for the years
            ended December 31, 1997, 1996 and 1995........................     5

       Consolidated Statements of Cash Flows for the years ended
            December 31, 1997, 1996 and 1995..............................6 -  7

       Notes to Consolidated Financial Statements.........................8 - 33

                                       1
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

Board of Directors
Approved Financial Corp.

We have  audited  the  accompanying  consolidated  balance  sheets  of  Approved
Financial  Corp.  and  Subsidiaries,  as of December 31, 1997 and 1996,  and the
related consolidated statements of income,  shareholders' equity, and cash flows
for each of the  three  years in the  period  ended  December  31,  1997.  These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects, the consolidated financial position of Approved Financial
Corp.  and  Subsidiaries  at December  31, 1997 and 1996,  and the  consolidated
results of their  operations and their cash flows for each of the three years in
the period  ended  December  31,  1997 in  conformity  with  generally  accepted
accounting principles.



Virginia Beach, Virginia
February 20, 1998

                                       2
<PAGE>

APPROVED FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
(Dollars in thousands, except per share amounts)

<TABLE>
<CAPTION>
                   ASSETS                                                    1997         1996
                                                                          ---------    ---------

<S>                                                                       <C>          <C>      
Cash                                                                      $  11,869    $   3,440
Mortgage loans, net                                                          80,696       45,423
Real estate owned, net                                                        2,367        2,077
Securities, available for sale                                               15,201       20,140
Premises and equipment, net                                                   4,530        2,224
Other assets                                                                  3,462        1,839
                                                                          ---------    ---------
         Total assets                                                     $ 118,125    $  75,143
                                                                          =========    =========
         LIABILITIES AND EQUITY

Liabilities:
     Revolving warehouse loans                                            $  52,488    $  32,030
     Certificates of deposit                                                 17,815        1,576
     Federal Home Loan Bank advance                                           1,000           --
     Mortgage loans payable                                                   1,216          478
     Notes payable - related parties                                          6,684        6,839
     Certificates of indebtedness                                             2,396        2,343
     Loan proceeds payable                                                    6,364        2,147
     Accrued and other liabilities                                            2,837        2,201
     Income taxes payable                                                     1,161          985
     Deferred income tax liability                                            1,109        5,335
                                                                          ---------    ---------
         Total liabilities                                                   93,070       53,934
                                                                          ---------    ---------
Shareholders' equity:
     Preferred stock - Series A, $10 par value; noncumulative, voting:
         Authorized 100 shares, 90 shares issued and outstanding                  1            1
     Preferred stock - Series B, $10 par value; noncumulative, voting:
         Authorized 50,000 shares, none issued and outstanding                   --           --
     Common stock, par value - $1.00 in 1997 and $.25 in 1996:
         Authorized 40,000,000 shares,
         Issued and outstanding 5,395,408 shares in 1997
               and 5,038,736 in 1996                                          5,395          630
     Unrealized gain on securities available for sale,
          net of deferred income taxes                                        6,854       11,401
     Additional capital                                                          --        1,485
     Retained earnings                                                       12,805        7,692
                                                                          ---------    ---------
         Total equity                                                        25,055       21,209
                                                                          ---------    ---------

         Total liabilities and equity                                     $ 118,125    $  75,143
                                                                          =========    =========
</TABLE>

The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.

                                       3
<PAGE>

APPROVED FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
for the years ended December 31, 1997, 1996 and 1995
(Dollars in thousands, except share and per share amounts)

<TABLE>
<CAPTION>
                                                            1997        1996        1995
                                                          --------    --------    --------
Revenue:
<S>                                                       <C>         <C>         <C>     
     Gain on sale of loans                                $ 33,501    $ 17,955    $  7,298
     Interest income                                        10,935       4,520       3,065
     Income from limited partnership                            --         480         596
     Gain on sale of securities                              2,796          --          --
     Other fees and income                                   4,934       1,927         939
                                                          --------    --------    --------
                                                            52,166      24,882      11,898
                                                          --------    --------    --------
Expenses:
     Compensation and related                               16,447       8,017       3,880
     General and administrative                             14,188       6,853       3,050
     Interest expense                                        6,157       3,121       2,194
     Provision for loan and foreclosed property losses       1,676       1,308         731
                                                          --------    --------    --------
                                                            38,468      19,299       9,855
                                                          --------    --------    --------

         Income before income taxes                         13,698       5,583       2,043

Provision for income taxes                                   5,638       2,259         876
                                                          --------    --------    --------

         Net income                                       $  8,060    $  3,324    $  1,167
                                                          ========    ========    ========
Net income per share:
         Basic                                            $   1.52    $   0.67    $   0.24
                                                          ========    ========    ========
         Diluted                                          $   1.51    $   0.63    $   0.23
                                                          ========    ========    ========
</TABLE>

The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.

                                       4
<PAGE>

APPROVED FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 1997, 1996 and 1995
(In thousands)

<TABLE>
<CAPTION>
                                                              1997          1996          1995
                                                           ---------     ---------     ---------
Operating activities:
<S>                                                        <C>           <C>           <C>      
     Net income                                            $   8,060     $   3,324     $   1,167
     Adjustments to reconcile net income to net
              cash used in operating activities:
         Depreciation and amortization                           609           133           131
         Provision for loan losses                             1,534         1,145           629
         Provision for losses on real estate owned               142           163           101
         Loss on sale of real estate owned                       654           192           129
         Income from limited partnership                          --          (480)         (596)
         Gain on sale of securities                           (2,796)           --            --
         Gain on sale of loans                               (32,696)      (17,954)       (7,298)
         Proceeds from sales and prepayments of loans        479,499       258,363        97,229
         Loan originations                                  (490,579)     (258,826)     (100,613)
         Changes in operating assets and liabilities:
              Other assets                                    (1,012)         (581)       (1,113)
              Accrued and other liabilities                    6,773          (110)          400
              Income taxes payable                               177           443           332
              Deferred income taxes                           (1,195)         (852)           --
                                                           ---------     ---------     ---------

              Net cash used in operating activities          (30,830)      (15,040)       (9,502)

Investing activities:
     Purchases of securities                                  (4,304)       (1,000)           --
     Sales of securities                                       4,458            --           428
     Distributions from limited partnership                       --         1,098            --
     Proceeds from sales of real estate owned                  3,735         1,501           352
     Purchases of premises and equipment                      (3,113)         (946)         (506)
     Sales of premises and equipment                             199            --            --
     Net cash paid for acquisition of Savings Bank              (382)         (244)           --
                                                           ---------     ---------     ---------

              Net cash provided by investing activities          593           409           274
</TABLE>

                                       5
<PAGE>

APPROVED FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
for the years ended December 31, 1997, 1996 and 1995
(In thousands)

<TABLE>
<CAPTION>
                                                              1997          1996          1995
                                                           ---------     ---------     ---------
Financing activities:
<S>                                                        <C>           <C>           <C>      
     Proceeds from revolving warehouse loans               $ 471,717     $ 262,854     $ 109,270
     Principal payments on revolving warehouse loans        (451,259)     (248,243)      (97,431)
     Net increase in certificates of deposit                  16,238           197            --
     Proceeds from FHLB advances                               1,000            --            --
     Proceeds from mortgage loans payable                        800            --            --
     Principal payments on mortgage loans payable                (62)          (46)         (145)
     Net increase (decrease) in:
         Notes payable - related parties                        (155)        1,966        (1,369)
         Certificates of indebtedness                             53           311          (272)
     Issuance of common stock                                      2           440            --
     Exercise of common stock warrants                           332             8            --
     Repurchase of common stock                                   --            --          (250)
     Cash dividends paid                                          --          (200)         (196)
                                                           ---------     ---------     ---------

              Net cash provided by financing activities       38,666        17,287         9,607
                                                           ---------     ---------     ---------

Net increase in cash                                           8,429         2,656           379

Cash at beginning of year                                      3,440           784           405
                                                           ---------     ---------     ---------

Cash at end of year                                        $  11,869     $   3,440     $     784
                                                           =========     =========     =========

Supplemental cash flow information:
     Cash paid for interest                                $   5,991     $   3,070     $   2,143
     Cash paid for income taxes                                5,461         2,880         1,264

Supplemental non-cash information:
     Loan balances transferred to real estate owned        $   4,641     $   3,245     $  (1,771)
     Conversion of and recognition of unrealized gains
         of partnership interest to common stock                  --        19,001            --
</TABLE>

The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.

                                       6
<PAGE>

APPROVED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1997, 1996 and 1995

NOTE 1.  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

ORGANIZATION: Approved Financial Corp., a Virginia corporation ("Approved"), and
its subsidiaries  (collectively,  the "Company")  engage in the consumer finance
business of  originating,  servicing  and  selling  home  equity  loans  secured
primarily  by  first  and  second  liens  on  one-to-four   family   residential
properties.  Approved has two wholly-owned  subsidiaries.  Approved  Residential
Mortgage,  Inc.  ("ARMI") had broker  operations  in eleven states and 22 retail
offices in ten states at the end of 1997.  Approved  Federal  Savings  Bank (the
"Savings Bank") is a federally  chartered thrift  institution.  The Savings Bank
has a wholly-owned subsidiary operating as a title insurance agency.

PRINCIPLES  OF  ACCOUNTING  AND   CONSOLIDATION:   The  consolidated   financial
statements of the Company include the accounts of Approved and its  wholly-owned
subsidiaries.  All significant  intercompany accounts and transactions have been
eliminated.

USE OF ESTIMATES:  The  preparation of financial  statements in conformity  with
generally  accepted  accounting  principles require management to make estimates
and assumptions  that affect the reported  amounts of assets and liabilities and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements  and the  reported  amounts  of  revenues  and  expenses  during  the
reporting period. Actual results could differ from those estimates.

CASH AND CASH EQUIVALENTS:  Cash and cash equivalents consist of cash on deposit
at financial  institutions  and short-term  investments that are considered cash
equivalents if they were purchased with an original  maturity of three months or
less.

LOANS  HELD FOR SALE:  Loans,  which are all held for sale,  are  carried at the
lower of aggregate  cost or market value.  Market value is determined by current
investor yield requirements.

ALLOWANCE  FOR LOAN LOSSES:  The  allowance  for loan losses is  maintained at a
level  believed  adequate by management to absorb  potential  losses in the loan
portfolio.  Management's determination of the adequacy of the allowance is based
on an evaluation  of current  economic  conditions,  volume,  growth,  and other
relevant  factors.  The  allowance is increased  by  provisions  for loan losses
charged  against  income.  Loan losses are charged  against the  allowance  when
management believes collectibility is unlikely.

ORIGINATION  FEES: The Company  accounts for origination  fees on mortgage loans
held for sale in conformity  with  Statement of Financial  Accounting  Standards
("SFAS") No. 91,  "Nonrefundable  Fees and Costs  Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases." The statement requires that
net origination fees be recognized over the life of the loan or upon the sale of
the loan, if earlier.

HEDGING: To offset the effects of interest rate fluctuations on the value of its
fixed rate mortgage loans held for sale, the Company in certain cases will enter
into Treasury security lock contracts,  which function similar to short sales of
U.S. Treasury securities.  Gains or losses from these contracts are deferred and
recognized as an adjustment to gains on sale of loans when the loans are sold or
when the related hedge position is closed.

                                       7
<PAGE>

APPROVED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1997, 1996 and 1995


NOTE 1.  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

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.

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.

SECURITIES:  All investment securities are classified as available-for-sale  and
reported at fair value,  with unrealized gains and losses excluded from earnings
and reported as a separate component of shareholders' equity.

Realized gains and losses on sales of securities are computed using the specific
identification method.

The Company's  investment in the stock of the Federal Home Loan Bank ("FHLB") of
Atlanta is stated at cost.

INCOME  RECOGNITION:  Gains  on the  sale of  mortgage  loans  representing  the
difference  between the sales price and the net  carrying  value of the loan are
recognized when mortgage loans are sold and delivered to investors.

Interest  on loans is  credited  to  income  based  upon  the  principal  amount
outstanding. Interest is accrued on loans until they become 31 days or more past
due.

ADVERTISING COSTS:  Advertising costs are expensed when incurred.

INCOME TAXES:  Taxes are provided on substantially  all income and expense items
included  in  earnings,  regardless  of the  period  in  which  such  items  are
recognized  for tax purposes.  The Company uses an asset and liability  approach
that requires the  recognition  of deferred tax assets and  liabilities  for the
estimated  future tax  consequences  of events that have been  recognized in the
Company's  financial  statements  or  tax  returns.  In  estimating  future  tax
consequences,  the Company generally  considers all expected future events other
than enactments of changes in the tax laws or rates.

                                       8
<PAGE>

APPROVED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1997, 1996 and 1995


NOTE 1.  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

EARNINGS PER SHARE:  Effective  December 31, 1997, the Company  adopted SFAS No.
128, "Earnings Per Share," which supersedes  Accounting Principles Board ("APB")
Opinion No. 15,  "Earnings  per Share." The new  statement  requires that "basic
earnings  per  share"  be  computed  by  dividing  income  available  to  common
shareholders by the weighted-average number of common shares outstanding for the
period.  "Diluted  earnings  per share"  reflects  potential  dilution  if stock
options  would  result in the issue or exercise of  additional  shares of common
stock that  shared in the  earnings.  "Basic  earnings  per share" and  "diluted
earnings per share"  replaced  "primary  earnings per share" and "fully  diluted
earnings per share,"  respectively,  as described  under APB Opinion No. 15, and
are reported on the income statement.

The  Company  declared  two-for-one  stock  splits  effective  August 30,  1996,
December 16, 1996 and November 21, 1997. The share and per share figures in this
report have been adjusted to reflect these splits.

NEW  ACCOUNTING   PRONOUNCEMENTS:   In  June  1997,  SFAS  No.  130,  "Reporting
Comprehensive  Income," was issued,  effective for fiscal years  beginning after
December 15, 1997.  The new statement  requires that an enterprise  (a) classify
items of other comprehensive income by their nature in a financial statement and
(b) display the accumulated  balance of other  comprehensive  income  separately
from  retained  earnings  and  additional  capital in the equity  section of the
statement of financial condition. The Company is currently evaluating the effect
this statement will have on the financial statements.

In June 1997,  SFAS No. 131,  "Disclosures  about  Segments of an Enterprise and
Related  Information,"  was issued,  effective for fiscal years  beginning after
December 15, 1997. The new statement requires that a public business  enterprise
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  resources  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 is
currently  evaluating  the  effect  this  statement  will have on the  financial
statements.

RECLASSIFICATIONS:   Certain   reclassifications   have  been  made  to  amounts
previously reported in 1996 and 1995 to conform with the 1997 presentation.

                                       9
<PAGE>

APPROVED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1997, 1996 and 1995

NOTE 2.  SECURITIES:

The cost basis and fair value of the  Company's  securities at December 31, 1997
and 1996 are as follows (in thousands):

<TABLE>
<CAPTION>
                                                1997                    1996
                                        --------------------    --------------------
                                          Cost        Fair        Cost        Fair
                                         Basis       Value       Basis       Value
                                        --------    --------    --------    --------
<S>                                     <C>         <C>         <C>         <C>     
IMC Mortgage Company common stock       $    162    $ 11,585    $  1,095    $ 20,096
Adjustable rate mortgage mutual fund       3,569       3,566          --          --
FHLB stock                                    50          50          44          44
                                        --------    --------    --------    --------
                                        $  3,781    $ 15,201    $  1,139    $ 20,140
                                        ========    ========    ========    ========
</TABLE>

The Company's  investment in IMC Mortgage Company ("IMC") common stock had gross
unrealized  gains of $11,423,000  and $19,001,000 at December 31, 1997 and 1996,
respectively.  The Company's  investment in the adjustable  rate mortgage mutual
fund had an unrealized loss of $2,000 at December 31, 1997.

The Company was an original limited partner in Industry Mortgage  Company,  L.P.
(the "IMC Partnership"),  a non-conforming residential mortgage company based in
Tampa,   Florida.   The  Company's   initial  ownership   interest   represented
approximately  9.09% of the IMC  Partnership  and was  accounted  for  under the
equity method of accounting.  Therefore,  the Company  recognized the portion of
the IMC  Partnership's  net income equal to its ownership  percentage in the IMC
Partnership.  In 1996 and 1995,  the Company  recognized  income of $480,000 and
$596,000, respectively, from the IMC Partnership.

The IMC  Partnership  converted to a corporation,  IMC,  immediately  before its
initial public offering on June 24, 1996. The limited  partners  received common
stock of IMC in  exchange  for their IMC  Partnership  interests  as of June 24,
1996. The Company was issued  1,199,768 shares of IMC common stock at that time.
Following  the  partnership's   conversion  to  corporate  form,  the  Company's
investment in IMC is accounted for as an investment  security available for sale
under SFAS No. 115. As of December 31, 1997, the Company owned 975,592 shares of
IMC stock. The Company's stock position represented  approximately 3.2% of IMC's
outstanding  stock at that date. During 1997, the Company sold 233,241 shares of
IMC stock for  $3,729,000,  which resulted in a pre-tax gain of $2,796,000.  The
Company also  received  9,065  shares of IMC common stock as an incentive  award
relating  to the  volume of loans sold by the  Company to IMC.  All of the share
figures above reflect a two-for-one split of IMC shares on February 13, 1997.

Shares of IMC common stock are traded on the NASDAQ National  Exchange under the
trading symbol "IMCC." However, the shares received by the Company have not been
registered  with the  Securities  and  Exchange  Commission  ("SEC")  under  the
Securities  Act of 1933.  Sales of IMC stock by the  Company  are subject to SEC
Rule 144 and a lock-up  agreement.  The lock-up  agreement  limits  sales of IMC
stock by the Company to  approximately  96,000 shares per month  between  August
1997 and August 1998.

                                       10
<PAGE>

APPROVED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1997, 1996 and 1995

NOTE 3.   MORTGAGE LOANS HELD FOR SALE:

The Company holds first- and  second-lien  mortgage  loans for future sale.  The
loans are carried at the lower of cost or market. These mortgage loans have been
pledged as collateral  for the warehouse  financing.  Loans at December 31, 1997
and 1996 were as follows (in thousands):

                                                            1997         1996
                                                          --------     --------
    Mortgage loans held for sale                          $ 83,512     $ 47,217 
    Net deferred origination fees and hedging costs         (1,129)        (870)
    Allowance for loan losses                               (1,687)        (924)
                                                          --------     --------
    
        Total mortgage loans, net                         $ 80,696     $ 45,423
                                                          ========     ========

As of December 31, 1997,  the Company had one open interest rate hedge  position
of  $15,000,000  under a contract  expiring on March 2, 1998.  The Company had a
deferred loss of $91,000 at December 31, 1997 related to this hedge position.

The Company  sold to  Industry  Mortgage  Company  3,791,  1,536,  and 504 loans
totaling $235,228,000, $100,095,000, and $37,993,000 and recognized gains on the
sale of these loans of $16,153,000,  $6,648,000, and $2,372,000 during the years
ended December 31, 1997, 1996 and 1995, respectively.

Included  in loans at  December  31,  1996  were  $456,000  of loans to  related
parties. Such loans included three demand loans to a shareholder  collateralized
by certain  notes payable to related  parties of the Company,  and a demand note
collateralized  by Company stock.  These related party loans bore interest at or
above market rates when the loans were originated and were made on substantially
the same terms as loans to other  borrowers.  The loans were paid in full before
December 31, 1997.  Interest income on related party loans was $36,000,  $36,000
and $38,000 in 1997, 1996 and 1995, respectively.

At  December  31,  1997 and 1996,  the  recorded  investment  in loans for which
impairment  has  been  determined  in  accordance  with  SFAS  No.  114  totaled
$2,500,000 and  $1,200,000,  respectively.  The average  recorded  investment in
impaired  loans for the years ended  December 31, 1997 and 1996 was $780,000 and
$64,000,  respectively.  Interest income  recognized  related to these loans was
$94,000 and $13,000 during 1997 and 1996,  respectively.  Due to the homogeneous
nature and  collateral  for these  loans,  there is no  corresponding  valuation
allowance.

Nonaccrual  loans were  $4,511,000 and $3,042,000 at December 31, 1997 and 1996,
respectively.  The amount of  additional  interest that would have been recorded
had these loans not been placed on nonaccrual status was approximately $154,000,
$91,000, and $69,000 in 1997, 1996 and 1995, respectively.

                                       11
<PAGE>

APPROVED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1997, 1996 and 1995

NOTE 3.   MORTGAGE LOANS HELD FOR SALE, CONTINUED:

Changes in the allowance for loan losses for the years ended  December 31, 1997,
1996 and 1995 were (in thousands):

                                       1997         1996         1995
                                     --------     --------     --------
     Balance at beginning of year    $    924     $    594     $    567
     Acquisition of Savings Bank           --           20           --
     Charge-offs                         (953)        (863)        (662)
     Recoveries                           182           28           60
     Provision                          1,534        1,145          629
                                     --------     --------     --------

         Balance at end of year      $  1,687     $    924     $    594
                                     ========     ========     ========

NOTE 4.   REAL ESTATE OWNED:

Real estate  owned is valued at the lower of cost or fair market  value,  net of
estimated disposal costs.

Changes  in the real  estate  owned  valuation  allowance  for the  years  ended
December 31, 1997, 1996 and 1995 were (in thousands):

                                       1997         1996         1995
                                     --------     --------     --------
     Balance at beginning of year    $    529     $    366     $    265
     Provision                            142          163          101
                                     --------     --------     --------
                                                             
         Balance at end of year      $    671     $    529     $    366
                                     ========     ========     ========
                                                            
                                       12
<PAGE>

APPROVED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1997, 1996 and 1995

NOTE 5.   PREMISES AND EQUIPMENT:

Premises and equipment at December 31, 1997 and 1996 were  summarized as follows
(in thousands):

                                                         1997       1996
                                                       -------    -------
     Land                                              $   240    $   240
     Buildings and improvements                          2,101        734
     Furniture, fixtures and equipment                   1,465        843
     Computer software and equipment                     1,613        778
     Vehicles                                              225        222
                                                       -------    -------

                                                         5,644      2,817
     Less accumulated depreciation and amortization      1,114        593
                                                       -------    -------

         Premises and equipment, net                   $ 4,530    $ 2,224
                                                       =======    =======

Depreciation  and  amortization   expense  on  premises  and  equipment  totaled
$609,000, $133,000 and $131,000 in 1997, 1996 and 1995, respectively.

NOTE 6.   LEASES:

The Company leases some of its office  facilities and equipment  under operating
leases which expire at various times  through 2003.  Lease expense was $955,000,
$317,000 and $142,000 in 1997, 1996 and 1995, respectively.  Total minimum lease
payments under noncancelable  operating leases with remaining terms in excess of
one year as of December 31, 1997 were as follows (in thousands):

         1998                           $ 1,173
         1999                               856
         2000                               433
         2001                               211
         2002                               113
         Thereafter                          16
                                        -------
                                        $ 2,802
                                        =======

                                       13
<PAGE>

APPROVED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1997, 1996 and 1995

NOTE 7.   REVOLVING WAREHOUSE FACILITIES:

Amounts  outstanding under revolving  warehouse  facilities at December 31, 1997
and 1996 were as follows (in thousands):

<TABLE>
<CAPTION>
                                                                      1997        1996
                                                                    --------    --------
<S>                                                                 <C>         <C>
     Syndicated warehouse facility with commercial bank
          collateralized by mortgages/deeds of trust; expires
          December 31, 1999, with interest at 1.50% over
          applicable LIBOR rate (5.71875% at December 31, 1997);
          total credit available $100,000,000                       $ 46,734    $     --

     Syndicated seasoned loan line of credit with commercial
          banks collateralized by mortgages/deeds of trust,
          expires December 31, 1999, with interest at 2.50% over
          applicable LIBOR rate (5.71875% at December 31, 1997);
          total credit available $25,000,000                           5,754          --

     Warehouse facility with commercial bank collateralized by
          mortgages/deeds of trust; expired December 10, 1997             --      14,999

     Warehouse facility with commercial bank collateralized by
          assets of the Company; expired March 3, 1997                    --      13,516

     Warehouse facility with investor collateralized by
          mortgages/deeds of trust; expired December 10, 1997             --       3,515
                                                                    --------    --------
                                                                    $ 52,488    $ 32,030
                                                                    ========    ========
</TABLE>

On December 10, 1997,  the Company  obtained a  $100,000,000  warehouse  line of
credit from a commercial bank  syndicate.  The line is  collateralized  by loans
originated  by the  Company  and  bears  interest  at a rate  of 1.5%  over  the
one-month  LIBOR rate.  This line of credit  replaced  three  existing  lines of
credit.  The line  expires on December  31, 1999 and is subject to renewal.  The
Company may receive  warehouse credit advances of 98% of the original  principal
balances  on  pledged  mortgage  loans  for a maximum  period of 180 days  after
origination.  Also on December  10,  1997,  the Company  obtained a  $25,000,000
seasoned  loan line of credit from a  commercial  bank  syndicate.  This line is
secured by loans  originated  by the Company.  The seasoned  loan line of credit
bears interest at a rate of 2.5% over the one-month  LIBOR rate, and the Company
may receive credit advances of 90% of the current principal  balances on pledged
mortgage loans.

                                       14
<PAGE>

APPROVED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1997, 1996 and 1995

NOTE 8.   DEPOSITS:

The  following  table  sets  forth  various  interest  rate  categories  for the
FDIC-insured certificates of deposit of the Savings Bank as of December 31, 1997
and 1996:

(In thousands)
                                 1997                        1996
                        ---------------------       ---------------------
                        Weighted                    Weighted
                        Average                     Average
                          Rate         Amount         Rate         Amount
                        -------       -------       -------       -------
     5.24% or less           --       $    --          5.18%      $   396
     5.25 - 5.49%          5.30%          198          5.34           495
     5.50 - 5.74           5.56           300          5.65           288
     5.75 - 5.99           5.91         8,318          5.93           397
     6.00 - 6.24           6.11         8,010            --            --
     6.25 - 6.49           6.32           989            --            --
                        -------       -------       -------       -------
                           6.01%      $17,815          5.50%      $ 1,576
                        =======       =======       =======       =======

The following table sets forth the amount and maturities of the  certificates of
deposit of the Savings Bank at December 31, 1997.

<TABLE>
<CAPTION>
(In thousands)
                           Six     Over Six Months    Over One         Over
                          Months    and Less than   Year and Less       Two
                         Or Less       One Year    Than Two Years      Years          Total
                        --------       --------       --------       --------       --------
<S>                     <C>            <C>            <C>            <C>            <C>     
     5.25 - 5.49%       $     99       $     99       $     --       $     --       $    198
     5.50 - 5.74             300             --             --             --            300
     5.75 - 5.99           5,945          2,373             --             --          8,318
     6.00 - 6.24              99          4,353          3,558             --          8,010
     6.25 - 6.49              --             --            791            198            989
                        --------       --------       --------       --------       --------
                        $  6,443       $  6,825       $  4,349       $    198       $ 17,815
                        ========       ========       ========       ========       ========
</TABLE>

At December 31, 1997,  twenty four  certificates of deposit totaling  $2,400,000
were in amounts of $100,000.

                                       15
<PAGE>

APPROVED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1997, 1996 and 1995

NOTE 9.   FEDERAL HOME LOAN BANK ADVANCES:

Advances  from the Federal  Home Loan Bank  ("FHLB")  of Atlanta are  summarized
below by maturity date (in thousands):

                                                 1997           1996
                                               --------       --------

     Due in 1998                               $  1,000       $     --
                                               ========       ========

At December 31, 1997, the Savings Bank has pledged its FHLB stock and qualifying
residential mortgage loans with an aggregate balance of $1,670,000 as collateral
for such FHLB  advances  under a  specific  collateral  agreement.  Interest  is
computed  based on the lender's  cost of overnight  funds.  The interest rate on
December 31, 1997 was 6.50%. Interest expense on FHLB advances totaled $3,000 in
1997; the Savings Bank did not borrow from the FHLB in 1996.

NOTE 10.   NOTES PAYABLE - RELATED PARTIES:

Notes payable - related  parties are amounts due to  shareholders,  officers and
others related to the Company. These notes are subordinate to the line of credit
and all other  collateralized  indebtedness of the Company.  Interest expense on
notes  payable - related  parties was  $666,000,  $547,000 and $530,000 in 1997,
1996 and 1995, respectively. The interest rates on the notes range from 8.00% to
10.25% and the notes mature as follows (in thousands):

     1998                          $  1,527
     1999                             3,287
     2000                               742
     2001                               429
     2002                               699
                                   --------
                                   $  6,684
                                   ========

                                       16
<PAGE>

APPROVED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1997, 1996 and 1995

NOTE 11.   CERTIFICATES OF INDEBTEDNESS:

Certificates of  indebtedness  are uninsured  deposits  authorized for financial
institutions such as the Company which have Virginia industrial loan association
charters.  The certificates are loans from Virginia residents for periods of one
to five years and interest rates between 6.75% and 10.00%.  Interest  expense on
the  certificates  was $225,000,  $139,000 and $258,000 in 1997,  1996 and 1995,
respectively.

Certificates of indebtedness  maturities were as follows as of December 31, 1997
(in thousands):

     1998                          $    523
     1999                                90
     2000                               709
     2001                               545
     2002                               529
                                   --------
                                   $  2,396
                                   ========

NOTE 12.   MORTGAGE LOANS PAYABLE:

The Company has two mortgage  loans payable to a commercial  bank. The loans are
collateralized  by two office  buildings  used by the Company for its  corporate
headquarters.  Payments  on the  loans  are made in  monthly  installments.  The
mortgage loans are summarized as follows (in thousands):

<TABLE>
<CAPTION>
                                                                          1997          1996
                                                                        -------       -------
<S>                                                                     <C>           <C>
     Mortgage loan with commercial bank collateralized by office
          building; original amount of $590,000; monthly payments
          of $7,186; matures May 2004; with interest at 7.99%           $   428       $   478

     Mortgage loan with commercial bank collateralized by office
          building; original amount $800,000; monthly payments of
          $7,953; matures June 2012; with interest at 8.625%                788            --
                                                                        -------       -------
                                                                        $ 1,216       $   478
                                                                        =======       =======
</TABLE>

Interest  expense on mortgage loans payable was $73,000,  $40,000 and $44,000 in
1997, 1996 and 1995, respectively.

                                       17
<PAGE>

APPROVED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1997, 1996 and 1995

NOTE 12.   MORTGAGE LOANS PAYABLE, CONTINUED:

Aggregate  maturities  for mortgage  loans payable are as follows as of December
31, 1997 (in thousands):

     1998                          $     83
     1999                                90
     2000                                97
     2001                               105
     2002                               114
     Thereafter                         727
                                   --------
                                   $  1,216
                                   ========

NOTE 13.   SHAREHOLDERS' EQUITY:

Prior to its stock  offering in 1992,  the Company  issued  warrants to purchase
190,404  shares  of  common  stock at  $1.87  per  share  to its  then  existing
shareholders.  During 1997 and 1996,  176,836 and 4,648  warrants were exercised
for $332,000 and $8,000,  respectively.  The remaining 8,920 warrants expired on
April 20, 1997.

The Company has 50,000 shares of Series B Preferred Stock  authorized for future
issuance.   The  stock  has  a  stated  par  value  of  $10  per  share  and  is
noncumulative, nonvoting. There were no shares issued or outstanding at December
31, 1997 or 1996.

In 1995, the Company's  Board of Directors  approved a transfer of $675,000 from
retained earnings to additional capital.  After the transfer, the Company cannot
make loans in excess of $350,000 under existing regulations.

During  1996,  the Board of Directors  approved the grant of stock  appreciation
rights  ("SARs")  to one board  member.  The SARs expire in three years and upon
expiration of the 16,000  shares of common stock,  the holder shall receive cash
in an amount  equivalent to the difference  between the grant price and the fair
market value of the shares at the time of expiration.  The grant price is $2.63.
The compensation  expense  associated with issuance of the SARs was $100,000 and
$94,000 during 1997 and 1996, respectively.

On July 16, 1996, the Company declared a two-for-one  split of its common stock,
payable  August  15,  1996 to  shareholders  of record on August  29,  1996.  On
November 11, 1996, the Company declared a two-for-one split of its common stock,
payable December 2, 1996 to shareholders of record on December 16, 1996.

In August  1997,  the  Company  changed  the par value of its stock to $1.00 per
share from $.25 per share.

On October 27, 1997, the Company declared a 100% stock dividend on its common
stock, payable November 14, 1997 to shareholders of record on November 7, 1997.

                                       18
<PAGE>

APPROVED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1997, 1996 and 1995

NOTE 14.   STOCK OPTIONS:

On June 28, 1996, the Company  adopted the 1996 Incentive Stock Option Plan. The
Company's stock option plan provides  primarily for the granting of nonqualified
stock options to certain key employees. Generally, options are granted at prices
equal to the market value of the Company's stock on the date of grant, vest over
a three-year period, and expire ten years from the date of the award.

The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" and related interpretations in accounting for its
stock option plans. SFAS No. 123, "Accounting for Stock-Based Compensation," was
issued in 1995 and, if fully adopted, changes the method of recognition of cost
on plans similar to those of the Company. The Company has adopted the
alternative disclosure established by SFAS No. 123. Therefore, pro forma
disclosures as if the Company adopted the cost recognition requirements under
SFAS No. 123 are presented below.

A summary of the Company's stock options as of December 31, 1997 and the changes
during the year is presented below:

                                                        Weighted
                                                        Average
                                         Options        Exercise
                                       Outstanding       Price
                                       -----------      --------
Balance, December 31, 1996                     --       $     --
Granted                                     9,200           9.75
                                         --------       --------

Balance, December 31, 1997                  9,200       $   9.75
                                         ========       ========


Options available for future grant        116,800
                                         ========

Weighted average fair value of
  options granted during year                           $   3.49
                                                        ========

The  weighted-average  remaining  contractual  life of  options  outstanding  at
December 31, 1997 was 9.0 years.

                                       19
<PAGE>

APPROVED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1997, 1996 and 1995

NOTE 14.   STOCK OPTIONS, CONTINUED:

The fair value of each option  granted  during 1997 is  estimated on the date of
grant  using  the   Black-Scholes   option-pricing   model  with  the  following
assumptions:  dividend yield of zero; expected  volatility of 34.12%;  risk-free
interest rate of 6.00%; and expected life of four years.

Had  compensation  cost for the 1997 grants for stock-based  compensation  plans
been  recorded by the Company,  the Company's pro forma net income and pro forma
net income per common share for 1997 would have been as follows:

(In thousands, except per share amounts)
                                                   Year Ended December 31, 1997
                                                 -------------------------------
                                                 As Reported           Pro Forma
                                                 -----------           ---------
Net income                                         $ 8,060              $ 8,041
Net income per common share - Basic                   1.52                 1.52
Net income per common share - Dilutive                1.51                 1.51

The  effects  of  applying  SFAS No.  123 in this pro forma  disclosure  are not
indicative of future amounts.  There were no awards prior to 1997 and additional
awards in future years are anticipated.

                                       20
<PAGE>

APPROVED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1997, 1996 and 1995

NOTE 15.  EARNINGS PER SHARE:

The  Company's  earnings  per share have been  calculated  using  SFAS No.  128,
"Earnings Per Share." The statement  requires  calculations of basic and diluted
earnings per share.  These  calculations  are described in Note 1. The following
table shows the reconciling  components  between basic and diluted  earnings per
share:

<TABLE>
<CAPTION>
                                                              Weighted
                                                           Average Shares
                                            Net Income      Outstanding     Earnings
                                           (Numerator)     (Denominator)    Per Share
                                           -----------     -------------    ---------
For the Year Ended December 31, 1997
------------------------------------
<S>                                        <C>               <C>             <C>   
Basic earnings per share                   $8,060,000        5,310,263       $ 1.52

Effect of dilutive securities:
     Stock options                                 --            1,162           --
     Common stock issued January 5,
        1998 (See Note 25)                         --           34,532         (.01)
                                           ----------       ----------       ------

Diluted earnings per share                 $8,060,000        5,345,957       $ 1.51
                                           ==========       ==========       ======

For the Year Ended December 31, 1996
------------------------------------

Basic earnings per share                   $3,324,000        4,964,244       $ 0.67

Effect of dilutive securities:
     Warrants                                      --          316,859         (.04)
                                           ----------       ----------       ------

Diluted earnings per share                 $3,324,000        5,281,103       $ 0.63
                                           ==========       ==========       ======

For the Year Ended December 31, 1995
------------------------------------

Basic earnings per share                   $1,167,000        4,913,168       $ 0.24

Effect of dilutive securities:
     Warrants                                      --          149,641         (.01)
                                           ----------       ----------       ------

Diluted earnings per share                 $1,167,000        5,062,809       $ 0.23
                                           ==========       ==========       ======
</TABLE>

                                       21
<PAGE>

APPROVED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1997, 1996 and 1995

NOTE 16.   INCOME TAXES:

The components of income tax expense for the years ended December 31, 1997, 1996
and 1995 were as follows (in thousands):

                                  1997           1996           1995
                                -------        -------        -------
     Current                    $ 6,963        $ 3,147        $ 1,629
     Deferred                    (1,325)          (888)          (753)
                                -------        -------        -------
     
                                $ 5,638        $ 2,259        $   876
                                =======        =======        =======

The provision for income taxes for financial reporting purposes differs from the
amount  computed by applying  the  statutory  federal tax rate to income  before
taxes. The principal  reasons for these differences for the years ended December
31, 1997, 1996 and 1995 were (in thousands):

<TABLE>
<CAPTION>
                                                        1997          1996           1995
                                                      -------       -------        -------
<S>                                                   <C>           <C>            <C>    
     Provision for income taxes at
         statutory federal rate                       $ 4,731       $ 1,898        $   695
     State income taxes, net of federal benefit           827           332            121
     Nondeductible expenses                                79            30             28
     Other, net                                             1            (1)            32
                                                      -------       -------        -------
                                                      $ 5,638       $ 2,259        $   876
                                                      =======       =======        =======
</TABLE>

                                       22
<PAGE>

APPROVED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1997, 1996 and 1995

NOTE 16.   INCOME TAXES, CONTINUED:

Significant  components of the Company's  deferred tax assets and liabilities at
December 31, 1997 and 1996 were:

<TABLE>
<CAPTION>
                                                                 1997            1996
                                                               --------        --------
     Deferred tax assets:
<S>                                                            <C>             <C>     
         Allowance for loan and real estate owned losses       $    912        $    580
         Deferred loan fees                                         487             443
         Mark to market on mortgage loans held for sale           1,790             964
         Deferred income                                             52              68
         Other                                                      244             239
                                                               --------        --------

              Total deferred tax assets                           3,485           2,294

     Deferred tax liabilities:
         Market value of securities                               4,568           7,601
         Other                                                       26              28
                                                               --------        --------

              Total deferred tax liabilities                      4,594           7,629
                                                               --------        --------

                  Net deferred liability                       $ (1,109)       $ (5,335)
                                                               ========        ========
</TABLE>

The Company believes that a valuation  allowance with respect to the realization
of the gross total deferred tax assets is not necessary.  Based on the Company's
historical  earnings,  future  expectations  of taxable income and potential net
operating loss carrybacks,  management  believes it is more likely than not that
the Company will realize the gross deferred tax assets  existing at December 31,
1997. However, there can be no assurances that the Company will generate taxable
income in any future period.

NOTE 17.   RETIREMENT PLANS:

The  employees  of the  Company  participate  in a defined  contribution  profit
sharing plan administered by officers of the Company.  Company  contributions to
the plan are discretionary,  as authorized by the Compensation  Committee of the
Board of  Directors.  There  were no  contributions  for  1997,  1996 and  1995.
Participants  are also eligible to make voluntary  contributions to the plan, at
the discretion of the  administrator.  There were no voluntary  contributions to
the plan for the years ended December 31, 1997, 1996 and 1995.

                                       23
<PAGE>

APPROVED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1997, 1996 and 1995

NOTE 17.   RETIREMENT PLANS, CONTINUED:

The  Company  has a  nonqualified  retirement  plan for  several  key members of
management.  The plan allows participants to defer compensation from the current
year. Company contributions to the plan are discretionary,  as authorized by the
Compensation  Committee.  Contributions  for the years ended  December 31, 1997,
1996 and 1995 were $10,000, $0 and $56,000, respectively.

The  Company  sponsors  a  401(k)   Retirement  Plan.  The  Plan  is  a  defined
contribution plan covering all employees who have completed at least one year of
service. The Plan is subject to the provisions of the Employee Retirement Income
Security  Act of 1974.  The  Company  contributes  an  amount  equal to 50% of a
participant's  payroll savings  contribution up to 6% of a participant's  annual
compensation.  The Company's  contributions  to the plan in 1997,  1996 and 1995
were $115,000, $33,000 and $15,000, respectively.

NOTE 18.   EMPLOYMENT AGREEMENTS:

The Company has employment  agreements with various officers and employees.  The
agreements  expire at various times  throughout  1998.  Among other things,  the
agreements   provide  for  severance  benefits  payable  to  the  officers  upon
termination of employment following a change of control in the Company.

NOTE 19.   ACQUISITION:

Effective  September 11, 1996, the Company  purchased 87.3 percent of the common
stock  (11,300 of the total 12,941 total issued and  outstanding  shares) of the
Savings  Bank for  $2,776,000.  The Company  acquired  substantially  all of the
remaining  outstanding  shares of the  Savings  Bank's  stock in April  1997 for
$382,000.  The total purchase price of $3,158,000 represented the Savings Bank's
book value at the  acquisition  date plus  $150,000.  The Company also  incurred
$94,000 of capitalized legal and other costs in connection with the acquisition.
The  transaction  was accounted for under the purchase  method of accounting and
the  associated  intangible of $150,000 is being  amortized  over a period of 10
years by the Savings Bank.

Prior to the  acquisition,  the Savings  Bank was a privately  owned,  federally
chartered thrift institution located in Annandale,  Virginia operating under the
name First Security Federal Savings Bank, Incorporated.  At the acquisition date
the Savings Bank had assets of $5,490,000  consisting  primarily of cash,  loans
and other assets  totaling  $2,269,000,  $2,511,000 and $710,000,  respectively.
Total liabilities were $2,482,000 and consisted predominately of certificates of
deposits  totaling  $1,379,000.  The primary  focus of the Savings  Bank was the
origination of conforming  residential  mortgage loans in Maryland,  Washington,
D.C. and northern Virginia. The Savings Bank sold most of its loans to investors
without  retention of the servicing  rights.  The Savings Bank's primary funding
source was the issuance of certificates of deposit insured up to $100,000 by the
Federal Deposit Insurance Corporation.

                                       24
<PAGE>

APPROVED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1997, 1996 and 1995

NOTE 19.   ACQUISITION, CONTINUED:

The  Company   acquired  the  Savings  Bank  to  complement  its   nonconforming
residential  mortgage  business.  After the  acquisition,  the Company began the
process of winding down the Savings Bank's  operations.  The Company installed a
new management team at the Savings Bank, and has moved the institution to leased
space in  Virginia  Beach,  Virginia.  The  long-term  lease  for the  Annandale
operations  center expired in February 1997 and was not renewed.  As of November
1, 1996, the Savings Bank discontinued its mortgage banking  operations and most
of  the  mortgage  personnel  were  terminated.   Estimated  costs  and  related
expenditures  to move  the  operations  to  Virginia  Beach  were  approximately
$25,000. Mortgage loans in process but not closed as of that date were closed by
other  lenders.   The  Savings  Bank's  management  also  terminated  all  lease
agreements for space used in the mortgage banking  operations.  The Savings Bank
offers conforming loan products  elsewhere in Virginia and in other states.  The
Savings Bank's growth will be funded  primarily with insured  customer  deposits
and  advances  from the  Federal  Home Loan Bank of  Atlanta  collateralized  by
mortgage loans held by the Savings Bank.

At  December  31,  1996,  the  Savings  Bank had  total  assets  of  $4,874,000,
consisting  primarily of  $2,950,000 of cash and  $1,052,000  of mortgage  loans
receivable. The Savings Bank had $1,847,000 of liabilities, consisting primarily
of $1,576,000 in  FDIC-insured  customer  deposits.  The Savings Bank incurred a
loss of $61,000 for the period from the date of acquisition by Approved  through
December 31, 1996.  The  financial  condition  and results of  operations  since
acquisition  of the Savings  Bank are  reflected in the  consolidated  financial
statements.  On a pro forma basis, the net loss incurred by the Savings Bank for
the period January 1, 1996 through December 31, 1996 was approximately  $646,000
(unaudited).  As  previously  noted,  on  November  1, 1996,  the  Savings  Bank
terminated its mortgage banking operations in Northern  Virginia,  and relocated
its mortgage  banking  operations  to Virginia  Beach,  Virginia.  Subsequent to
December 31, 1996 and the  relocation of its mortgage  banking  operations,  the
Savings Bank's results of operations have become profitable again (unaudited).

On January 27, 1997, the Board of Directors of the Savings Bank changed the name
of the institution to Approved Federal Savings Bank.

At December 31, 1997, the Savings Bank had total assets of $22,589,000 and total
liabilities of $19,347,000,  and the Savings Bank had net income of $217,000 for
the year ended December 31, 1997.

                                       25
<PAGE>

APPROVED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1997, 1996 and 1995

NOTE 20.   REGULATORY CAPITAL:

Savings  institutions,  such as the Savings Bank, must maintain specific capital
standards that are no less stringent  than the capital  standards  applicable to
national  banks.  Regulations  of  the  OTS  currently  maintain  three  capital
standards:  a tangible capital requirement,  a core capital  requirement,  and a
risk-based capital requirement.

The tangible  capital  standard  requires the Savings Bank to maintain  tangible
capital  of not less than 1.5% of total  adjusted  assets.  As it applies to the
Savings Bank, "tangible capital" means core capital (as defined below).

The core capital  standard  requires the Savings Bank to maintain "core capital"
of not  less  than  4.0%.  Core  capital  includes  the  Savings  Bank's  common
shareholders' equity, adjusted for certain nonallowable assets.

The risk-based  standard  requires the Savings Bank to maintain capital equal to
8.0%  of  risk-weighted  assets.  The  rules  provide  that  the  capital  ratio
applicable  to an asset will be  adjusted  to reflect  the degree of credit risk
associated  with such asset,  and the asset base used for  computing the capital
requirement includes off-balance sheet assets.

At  December  31,  1997  and  1996,   the  Savings  Bank  was  classified  as  a
"well-capitalized"  institution (financial institutions that maintain total risk
based  capital  in excess of 10%) as  determined  by the OTS and  satisfied  all
regulatory capital requirements, as shown in the following table reconciling the
Bank's capital to regulatory capital (in thousands):

<TABLE>
<CAPTION>
                                                      Tangible          Core         Risk-Based
                                                       Capital         Capital         Capital
December 31, 1997                                      -------         -------         -------
-----------------
<S>                                                    <C>             <C>             <C>    
     GAAP capital                                      $ 3,242         $ 3,242         $ 3,242
     Add: unrealized loss on securities                      2               2               2
     Nonallowable asset:  goodwill                        (132)           (132)           (132)
     Additional capital item:  general allowance            --              --              73
                                                       -------         -------         -------

     Regulatory capital - computed                       3,112           3,112           3,185
     Minimum capital requirement                           336             895           1,249
                                                       -------         -------         -------

     Excess regulatory capital                         $ 2,776         $ 2,217         $ 1,936
                                                       =======         =======         =======
     Ratios:
         Regulatory capital - computed                   13.91%          13.91%          20.40%
         Minimum capital requirement                      1.50            4.00            8.00
                                                       -------         -------         -------

     Excess regulatory capital                           12.41%           9.91%          12.40%
                                                       =======         =======         =======
</TABLE>

                                       26
<PAGE>

APPROVED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1997, 1996 and 1995

NOTE 20.   REGULATORY CAPITAL, CONTINUED:

<TABLE>
<CAPTION>
                                                      Tangible          Core         Risk-Based
                                                       Capital         Capital         Capital
December 31, 1996                                      -------         -------         -------
-----------------
<S>                                                    <C>             <C>             <C>    
     GAAP capital                                      $ 3,027         $ 3,027         $ 3,027
     Nonallowable asset:  goodwill                        (146)           (146)           (146)
     Additional capital item:  general allowance            --              --              24
                                                       -------         -------         -------

     Regulatory capital - computed                       2,881           2,881           2,905
     Minimum capital requirement                            71             189             156
                                                       -------         -------         -------

     Excess regulatory capital                         $ 2,810         $ 2,692         $ 2,749
                                                       =======         =======         =======
     Ratios:
         Regulatory capital - computed                   60.93%          60.93%         148.64%
         Minimum capital requirement                      1.50            4.00            8.00
                                                       -------         -------         -------

     Excess regulatory capital                           59.43%          56.93%         140.64%
                                                       =======         =======         =======
</TABLE>

The payment of cash  dividends by the Savings Bank is subject to  regulation  by
the  OTS.   The  OTS   measures  an   institution's   ability  to  make  capital
distributions,  which  includes  the  payment  of  dividends,  according  to the
institution's capital position. For institutions, such as the Savings Bank, that
meet their fully phased-in capital  requirements,  the OTS has established "safe
harbor"  amounts  of  capital  distributions  that  institutions  can make after
providing  notice to the OTS, but without needing prior  approval.  Institutions
can  distribute  amounts in excess of the safe harbor  amount  without the prior
approval of the OTS. The Savings Bank did not pay cash  dividends to Approved in
1997 or 1996.

NOTE 21.   IMPACT OF DEPOSIT INSURANCE FUNDS ACT OF 1996:

The Savings Bank is a member of the Savings Association Insurance Fund ("SAIF").
On September 30, 1996,  President  Clinton signed into law the Deposit Insurance
Funds Act of 1996, which included  provisions  recapitalizing the SAIF, provides
for the eventual merger of the thrift fund with the Bank Insurance Fund ("BIF"),
and reallocates  payment of the annual Financing Corp. ("FICO") bond obligation.
As part of the package,  the Federal Deposit  Insurance Corp.  imposed a special
one-time   assessment   of  65.7  basis   points  to  be  applied   against  all
SAIF-assessable  deposits as of March 31, 1995,  which will bring the SAIF up to
the statutorily  prescribed 1.25 percent  designated  reserve ratio. The special
assessment,  which was paid in November  1996,  was included as a $23,000 pretax
charge to the Savings Bank's operations in September 1996.

                                       27
<PAGE>

APPROVED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1997, 1996 and 1995

NOTE 21.   IMPACT OF DEPOSIT INSURANCE FUNDS ACT OF 1996, CONTINUED:

Effective  January 1, 1997,  SAIF  members have the same  risk-based  assessment
schedule as BIF members. The Savings Bank will effectively pay no assessment for
deposit insurance coverage beginning on January 1, 1997.  However,  all SAIF and
BIF institutions  including the Savings Bank will be responsible for sharing the
cost of  interest  payments on the FICO  bonds.  The cost will be an  annualized
charge of 1.3 basis  points  for BIF  deposits  and 6.4  basis  points  for SAIF
deposits. The 1997 cost of insurance payments for the Savings Bank was $2,000.

As a result of the Deposit  Insurance  Funds Act of 1996,  the  Secretary of the
Treasury is to review  recommendations in 1997 for the establishment of a common
charter for banks and savings associations. Accordingly, the Savings Bank may be
required to convert its federal  savings bank charter to either a national  bank
charter, a state depository  institution  charter,  or a newly designed charter.
The Savings Bank may also become  regulated at the holding  company level by the
Board of Governors of the Federal Reserve System ("Federal Reserve") rather than
by the OTS.  Regulation by the Federal Reserve could subject the Savings Bank to
capital  requirements that are not currently applicable to the Savings Bank as a
holding company under OTS regulation and may result in statutory  limitations on
the type of  business  activities  in which the  Savings  Bank may engage at the
holding company level, which business  activities  currently are not restricted.
The Savings Bank is unable to predict  whether such  initiatives  will result in
enacted  legislation  requiring  a charter  change and if so whether the charter
change would significantly impact the Savings Bank's operations.

NOTE 22.   YEAR 2000 ISSUES:

The  Company's  management  is aware of the Year 2000  issues  and is  currently
assessing   how  these   issues  will   affect  the   Company.   The   Company's
"mission-critical"  applications  are supplied by outside vendors with which the
Company maintains current relationships.  Most of the Company's mission-critical
systems already  accommodate  four-digit year values. The most recent release of
the mortgage loan origination and processing system is being used by the Company
and has been certified by the vendor as Year 2000  compliant.  The Company is in
the process of  implementing a new accounting  system that has been certified by
the vendor as Year 2000  compliant.  The  Company  is  currently  reviewing  its
hardware  systems,  and will  upgrade  as needed for Year 2000  compliance.  The
estimated  cost  of  compliance  is not  considered  material  to the  Company's
financial condition.

                                       28
<PAGE>

APPROVED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1997, 1996 and 1995

NOTE 23.  DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:

SFAS No. 107,  "Disclosures About Fair Value of Financial  Instruments" requires
the Company to disclose  the  estimated  fair value for each class of  financial
instrument,  whether or not recognized in the financial statements, for which it
is practical to estimate that value. In cases where quoted market prices are not
available,  fair  values are based on  estimates  using  present  value or other
valuation  techniques.  Those  techniques  are  significantly  affected  by  the
assumptions  used,  including the discount  rate and the  estimated  future cash
flows. In that regard,  the derived fair value estimates cannot be substantiated
by comparison to independent  markets and, in many cases,  could not be realized
in  immediate  settlement  of the  instrument.  SFAS No.  107  excludes  certain
financial  instruments  and all  non-financial  instruments  from its disclosure
requirements. Accordingly, the aggregate fair value amounts do not represent the
underlying value of the Company.

The following  methods and  assumptions  were used to estimate the fair value of
the Company's financial instruments:

CASH AND CASH EQUIVALENTS: The carrying amount of cash on hand and on deposit at
financial institutions is considered to be fair value.

MORTGAGE  LOANS,  NET: The estimate of fair value is based on current pricing of
whole loan  transactions  that a purchaser  unrelated to the seller would demand
for a similar loan. The fair value of mortgage loans held for sale  approximated
$83,996,000 and $48,854,000 at December 31, 1997 and 1996, respectively.

SECURITIES:  Fair values are based on quoted market prices or dealer quotes.

REVOLVING  WAREHOUSE  LINES:  Collateralized  borrowings  consist  of  warehouse
finance  facilities  and  term  debt.  The  warehouse  finance  facilities  have
maturities  of less  than one  year  and bear  interest  at  market  rates  and,
therefore, the carrying value is a reasonable estimate of fair value.

CERTIFICATES  OF  DEPOSIT:  The fair  values for  certificates  of  deposit  are
estimated using a discounted cash flow  calculation  that applies interest rates
currently being offered on certificates to a schedule of aggregated  contractual
maturities on such time deposits.  The fair value of the certificates of deposit
approximated   $17,828,000  and  $1,573,000  at  December  31,  1997  and  1996,
respectively.

MORTGAGE LOANS PAYABLE: The fair value of mortgage loans payable is based on the
discounted  value of expected  cash  flows.  The  discount  rates used are those
currently  offered  for  mortgage  loans  with  similar  remaining   contractual
maturities and terms. The fair value of the mortgage loans payable  approximated
$1,190,000 and $440,000 at December 31, 1997 and 1996, respectively.

OTHER TERM DEBT: The carrying amount of outstanding term debt, which bear market
rates of interest, approximates its fair value.

                                       29
<PAGE>

APPROVED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1997, 1996 and 1995

NOTE 24.   MINORITY INTERESTS:

Minority  interests are included in other  liabilities  as of December 31, 1996.
They relate to a 17 percent  partnership  interest in the joint  venture  Armada
Residential  and the 12.7 percent  interest of shareholders in the Savings Bank.
The balances were as follows as of December 31, 1996 (in thousands):

     Armada Residential Mortgage, LLC                                   $   170
     Approved Federal Savings Bank                                          461
                                                                        -------

         Total minority interests included in other liabilities         $   631
                                                                        =======
NOTE 25.   TERMINATION OF ARMADA LLC:

Since  December  1994, the Company had conducted a portion of its retail lending
business  through Armada  Residential  Mortgage,  LLC ("Armada LLC"),  which was
owned 1% by Approved,  82% by ARMI and 17% by Armada LLC's  senior  officer.  In
connection with terminating  Armada LLC, in September 1997 the Company agreed to
issue 106,146  split-adjusted  shares of its Common Stock to purchase the senior
officer's  ownership  interest in Armada LLC. The Company issued 2,000 shares to
the senior  officer on October 10,  1997 and 104,146  shares on January 5, 1998.
The senior  officer  terminated  his  employment  with  Armada LLC and became an
employee of ARMI.  He also became a Director of the  Company.  The Company  also
agreed to issue  13,560  split-adjusted  shares to a key employee of Armada LLC.
The  Company  issued  1,000  shares to the key  employee on October 10, 1997 and
12,560 shares on January 5, 1998.  The key employee  terminated  his  employment
with Armada LLC and became an employee of ARMI. As of December 31, 1997,  Armada
LLC was liquidated and dissolved and no longer exists as a legal entity.

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<PAGE>

APPROVED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1997, 1996 and 1995

NOTE 26.   QUARTERLY FINANCIAL DATA (UNAUDITED):

The following is a summary of selected  quarterly  operating results for each of
the four quarters in 1997 and 1996:

(In thousands, except per share data)

                               March 31     June 30   September 30   December 31
                               --------     -------   ------------   -----------
1997:
Gain on sale of loans          $ 7,252      $ 8,133      $ 8,656       $ 9,460
Net interest income                613        1,426        1,520         1,219
Provision for losses               281          417          435           543
Other income                       788          772        4,366         1,815
Other expenses                   5,807        7,068        8,255         9,516
                               -------      -------      -------       -------
Income before income taxes       2,565        2,846        5,852         2,435
Provision for income taxes       1,026        1,171        2,416         1,025
                               -------      -------      -------       -------
Net income                     $ 1,539      $ 1,675      $ 3,436       $ 1,410
                               =======      =======      =======       =======
Basic net income per share     $  0.30      $  0.32      $  0.64       $  0.26
                               =======      =======      =======       =======

1996:
Gain on sale of loans          $ 2,477      $ 3,881      $ 4,819       $ 6,778
Net interest income                437          268          320           374
Provision for losses               375          381          585           (33)
Other income                       381          711          309         1,006
Other expenses                   2,407        2,918        3,537         6,008
                               -------      -------      -------       -------
Income before income taxes         513        1,561        1,326         2,183
Provision for income taxes         205          596          556           902
                               -------      -------      -------       -------
Net income                     $   308      $   965      $   770       $ 1,281
                               =======      =======      =======       =======
Basic net income per share     $  0.06      $  0.18      $  0.15       $  0.24
                               =======      =======      =======       =======

                                       31
<PAGE>

APPROVED FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1997, 1996 and 1995

NOTE 27.  SUBSEQUENT EVENT:

Effective  January 26, 1998, ARMI purchased  substantially  all of the assets of
Funding  Center  of  Georgia,  Inc.  ("FCGI"),  a Georgia  corporation.  FCGI is
originating  approximately  $4,500,000 in mortgage  loans per month.  All of the
employees  of FCGI have  become  employees  of ARMI,  and the  business  will be
conducted  under the assumed name of "Funding  Center of Georgia."  The purchase
price for FCGI's assets was $3,300,000.  ARMI paid $600,000 at closing, will pay
$100,000 in 1998,  $900,000 in 1999, $900,000 in 2000 and $800,000 in 2001, with
interest  at 6%.  Payment  amounts of $800,000  each in 1999,  2000 and 2001 are
subject  to  reduction  in the event of a failure  to meet  agreed-upon  pre-tax
profit  targets  each  year.  The two  principal  owners  of FCGI  entered  into
three-year  employment  agreements  with ARMI,  and they will manage the office.
This transaction was accounted for under the purchase method of accounting.  Net
assets of $7,000 were acquired with an associated  intangible  asset  (goodwill)
recorded in the amount of  $3,293,000.  This goodwill will be amortized  over 10
years.

                                       32