Securities and Exchange Commission
                             Washington, D.C. 20549

                                    Form 10-K

                                  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(b) 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
                   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.......................................................15
Mortgage Loan Servicing.......................................................19
Marketing         ............................................................21
Company's Sources of Funds and Liquidity......................................22
Savings Bank's Sources of Funds...............................................23
Taxation          ............................................................26
Employees         ............................................................27
Service Marks     ............................................................27
Effect of Adverse Economic Conditions.........................................27
Reliance on IMC Mortgage Company..............................................28
Concentration of Operations in Seven States...................................28
Asset/Liability Management....................................................28
Interest Rate Risk............................................................29
Asset Quality     ............................................................30
Future Risks Associated with Loan Sales through Securitizations...............31
Liquidity - Negative Cash Flow................................................32
Year 2000 Issues  ............................................................32
Contingent Risks  ............................................................32
Competition       ............................................................33
Regulation        ............................................................34
OTS Regulation of the Company.................................................36
Regulation of the Savings Bank................................................38
Legislative Risk  ............................................................46
Environmental Factors.........................................................46
Dependence on Key Personnel...................................................47
Control by Certain Shareholders...............................................47

                                       2
<PAGE>

Item 2.  Properties.

Properties        ............................................................48


Item 3.  Legal Proceedings.

Legal Proceedings ............................................................48


Item 4.  Submission of Matters to a Vote of Security Holders.

Submission of Matters to a Vote of Security Holders...........................48


                                     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.................49
Absence of Active Public Trading Market and Volatility of Stock Price.........50
Transfer Agent and Registrar..................................................50
Recent Sales of Unregistered Securities.......................................50


Item 6.  Selected Financial Data.

Selected Financial Data.......................................................52


Item 7.  Management's Discussion and Analysis of
         Financial Condition and Results of Operations

General           ............................................................55
Results of Operations - Years Ended December 31, 1997, 1996 and 1995..........55
Financial Condition - December 31, 1997, 1996 and 1995........................67
New Accounting Standards......................................................73
Hedging Activities............................................................74
Impact of Inflation and Changing Prices.......................................74

                                       3
<PAGE>

Item 8.  Financial Statements and Supplementary Data.

Financial Statements and Supplementary Data...................................76


Item 9.  Changes in and Disagreements with Accountants
         on Accounting and Financial Disclosure.

Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure........................................76


                                    PART III

Item 10.  Directors and Executive Officers of the Registrant.

Directors and Executive Officers..............................................77
Board of Directors............................................................80


Item 11.  Executive Compensation.

Summary of Cash and Other Compensation........................................82
Stock Option/Stock Appreciation Right Grants in the Last Year.................83
Aggregate Option Exercises and Period-End Values..............................84
1996 Incentive Stock Option Plan..............................................84
401(k) Retirement Plan........................................................86
Employment Agreements.........................................................87
Directors' Compensation.......................................................89


Item 12.  Security Ownership of Certain Beneficial Owners and Management.

Security Ownership of Certain Beneficial Owners...............................90
Security Ownership of Directors and Executive Officers........................91

                                       4
<PAGE>

Item 13.  Certain Relationships and Related Transactions.

Agreement with IMC Mortgage Company...........................................92
Agreement with Mills Value Advisors, Inc......................................92
Termination of Armada Residential Mortgage, LLC...............................93
Indebtedness of Management....................................................93
Promissory Notes  ............................................................93


                                     PART IV

Item 14.  Exhibits, Financial Statement Schedules
          And Reports on Form 8-K.

Financial Statements and Exhibits.............................................94


Signatures        ............................................................97

                                       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.


         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. The
Armada LLC legal entity has since been folded into ARMI. Armada'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.


         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, a mortgage company
based in Atlanta, Georgia.

                                       14
<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.

                                       15
<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.

                                       16
<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.

                                       17
<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.

                                       18
<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.

                                       19
<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.

                                       20
<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.  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.  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.

                                       21
<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 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.  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.

         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.

                                       22
<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.  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
certain 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.


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.

                                       23
<PAGE>

         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,  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.

         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.

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

                                       24
<PAGE>

(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.

                                       25
<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.

                                       26
<PAGE>

         Alternative  Minimum Tax. In addition to the regular  corporate  income
tax, corporations,  including qualifying savings institutions, are 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.


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.

                                       27
<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.  These  loan sale
transactions  are  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  from 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.  Also, Jean S. Schwindt, a member of the Company's Board of Directors
and Executive Committee, is an officer of IMC.


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.


Asset/Liability Management

         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.

                                       28
<PAGE>

         In future  periods,  it is expected  that the Savings Bank will build a
portfolio of loans for  investment,  while the  majority of the loans  currently
being held by the Company are  expected to be sold  through the  Company's  loan
sale strategies.


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.

                                       29
<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.

                                       30
<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.


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.

                                       31
<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.


Liquidity - Negative Cash Flow

         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  operated on a negative cash flow basis,
using $30,830,000,  $15,040,000 and $9,502,000 respectively,  more in operations
than was generated,  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.  If the  available  capital  sources  of the  Company  were  to  decrease
significantly, the rate of growth of the Company would be negatively affected.


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  estimated  cost of  compliance  is not
considered material to the Company's financial condition.


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.

                                       32
<PAGE>

         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.


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.

                                       33
<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.

                                       34
<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.

                                       35
<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."

                                       36
<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."

                                       37
<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.

                                       38
<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.

                                       39
<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.

                                       40
<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.

                                       41
<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."

                                       42
<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."

                                       43
<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.

                                       44
<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.

                                       45
<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.

                                       46
<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.

                                       47
<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 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.

         The Company  anticipates that it may need to obtain additional space to
accommodate its growth plans for 1998.



                           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.


                                       48
<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.

                                       49
<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.

                                       50
<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.

                                       51
<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.


                                       52
<PAGE>

APPROVED FINANCIAL CORP.
SELECTED FINANCIAL STATISTICS

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

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.

                                       53
<PAGE>

APPROVED FINANCIAL CORP.
SELECTED FINANCIAL STATISTICS

(In thousands, except per share data)
<TABLE>
<CAPTION>
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.

                                       54
<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
                                            =====         =====         =====

                                       55
<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 also
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.

                                       56
<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
                                    --------     -------      --------     -------      --------    -------
<S>                                 <C>           <C>         <C>           <C>       <C>             <C> 
Broker Division:
     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>

                                       57
<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.

         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.

                                       58
<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.

                                       59
<PAGE>

<TABLE>
<CAPTION>
(In thousands)
                                                     1997                                 1996
                                        -----------------------------        -----------------------------
                                                              Average                              Average
                                        Average               Yield/         Average               Yield/
                                        Balance    Interest    Rate          Balance    Interest    Rate
                                        -------    --------   -------        -------    --------   ------
<S>                                    <C>          <C>        <C>          <C>          <C>       <C>   
Interest-earning assets:
     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
                                       --------     -------    -----        --------     -------   -----
                                         73,356      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          39,970       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.

                                       60
<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
                                             =======       =======       =======
                                                                           
                                       61                                 
<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.

                                       62
<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.

                                       63
<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.

                                       64
<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.

                                       65
<PAGE>

         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.


         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.

                                       66
<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.

                                       67
<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.

                                       68
<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.

                                       69
<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 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 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. As of December 31, 1997, $5,754,000 was outstanding under this facility.

                                       70
<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.

                                       71
<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.

                                       72
<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.

                                       73
<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.

                                       74
<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.

                                       75
<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.


                                       76
<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.

                                       77
<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.

                                       78
<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.

                                       79
<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.

                                       80
<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.

                                       81
<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.

                                       82
<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.

                                       83
<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.

<TABLE>
<CAPTION>
                                           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
     --------------------              -----------    -------------        -----------   -------------
<S>                                         <C>            <C>                  <C>            <C>
     Allen D. Wykle                         -              1,000                -              -
     Neil W. Phelan                         -              1,000                -              -
     Stanley W. Broaddus                    -              1,000                -              -
</TABLE>

-----------------------
     (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 126,000
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.

                                       84
<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.

                                       85
<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.

                                       86
<PAGE>

Employment Agreements

         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.

                                       87
<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.

                                       88
<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.

                                       89
<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.

                                       90
<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.

                                       91
<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").  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.  These loan sale transactions are 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  from 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.
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.  Also,  Jean S.  Schwindt,  a member of the Company's
Board of Directors and Executive Committee, is an officer of IMC.


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.

                                       92
<PAGE>

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

                                       93
<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 - 34


                                       94
<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)

                                       95
<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)

 21      Subsidiaries of the Company (Appendix N)

 27      Financial Data Schedule


                                       96
<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 Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized.

                                 APPROVED FINANCIAL CORP.
                                 (Registrant)


Date: March 27, 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

                                       97
<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

                                       98
<PAGE>

                            APPROVED FINANCIAL CORP.
                        CONSOLIDATED FINANCIAL STATEMENTS

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


                                                                      Pages
                                                                      -----

Report of Independent Accountants................................     F - 2

Consolidated Financial Statements:

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

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

   Consolidated Statements of Shareholders' Equity for the years
      ended December 31, 1997, 1996 and 1995..................... F - 5 - F - 6

   Consolidated Statements of Cash Flows for the years ended
      December 31, 1997, 1996 and 1995........................... F - 7 - F - 8

   Notes to Consolidated Financial Statements.................... F - 9 - F - 34


                                     F - 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.


/s/ Coopers & Lybrand, L.L.P.

Virginia Beach, Virginia
February 20, 1998


                                     F - 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.

                                     F - 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.


                                     F - 4
<PAGE>

APPROVED FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
for the years ended December 31, 1997, 1996 and 1995
(Dollars in thousands)

                                        Preferred Stock
                                            Series A            Common Stock
                                         --------------     -------------------
                                         Shares  Amount     Shares       Amount
                                         ------  ------     ------       ------

Balance at December 31, 1994                90   $    1      631,680    $   632

Net income                                  --       --           --         --
Repurchase of common stock                  --       --      (25,000)       (25)
Transfer                                    --       --           --         --
Dividends on common stock                   --       --           --         --
                                          ----   ------   ----------    -------

Balance at December 31, 1995                90        1      606,680        607

Net income                                  --       --           --         --
Reissuance of common stock                  --       --       22,000         22
2:1 stock split                             --       --      628,680         --
2:1 stock split                             --       --    1,257,360         --
Exercise of warrants                        --       --        4,648          1
Change in net unrealized gain on
     securities available for sale
     (net of tax of $7,601,000)             --       --           --         --
Dividends on common stock                   --       --           --         --
                                          ----   ------   ----------    -------

Balance at December 31, 1996                90        1    2,519,368        630

Net income                                  --       --           --         --
Issuance of common stock                    --       --        1,500          1
Exercise of warrants                        --       --      176,836         44
Change in par value of stock                --       --           --      2,022
Stock dividend                              --       --    2,697,704      2,698
Change in net unrealized gain on
     securities available for sale
     (net of tax of $3,033,000)             --       --           --         --
                                          ----   ------   ----------    -------

Balance at December 31, 1997                90   $    1    5,395,408    $ 5,395
                                          ====   ======   ==========    =======


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

                                     F - 5
<PAGE>

APPROVED FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY, CONTINUED
for the years ended December 31, 1997, 1996 and 1995
(Dollars in thousands)

<TABLE>
<CAPTION>
                                                 Unrealized
                                                   Gain on
                                                 Securities
                                     Additional   Available    Retained
                                      Capital     for Sale     Earnings       Total
                                      -------     --------     --------       -----
<S>                                   <C>         <C>          <C>          <C>     
Balance at December 31, 1994          $   598     $     --     $  4,284     $  5,515

Net income                                 --           --        1,167        1,167
Repurchase of common stock               (131)          --          (94)        (250)
Transfer                                  675           --         (675)          --
Dividends on common stock                  --           --         (196)        (196)
                                      -------     --------     --------     --------

Balance at December 31, 1995            1,142           --        4,486        6,236

Net income                                 --           --        3,324        3,324
Reissuance of common stock                336           --           82          440
2:1 stock split                            --           --           --           --
2:1 stock split                            --           --           --           --
Exercise of warrants                        7           --           --            8
Change in net unrealized gain on
     securities available for sale
     (net of tax of $7,601,000)            --       11,401           --       11,401
Dividends on common stock                  --           --         (200)        (200)
                                      -------     --------     --------     --------

Balance at December 31, 1996            1,485       11,401        7,692       21,209

Net income                                 --           --        8,060        8,060
Issuance of common stock                   --           --           --            1
Exercise of warrants                      288           --           --          332
Change in par value of stock           (1,773)          --         (249)          --
Stock dividend                             --           --       (2,698)          --
Change in net unrealized gain on
     securities available for sale
     (net of tax of $3,033,000)            --       (4,547)          --       (4,547)
                                      -------     --------     --------     --------

Balance at December 31, 1997          $    --     $  6,854     $ 12,805     $ 25,055
                                      =======     ========     ========     ========
</TABLE>

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

                                     F - 6
<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>

                                     F - 7
<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.

                                     F - 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:

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.

                                     F - 9
<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.

                                     F - 10
<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.

                                     F - 11
<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):

                                               1997                  1996
                                        ------------------    ------------------
                                         Cost       Fair       Cost       Fair
                                         Basis      Value      Basis      Value
                                        -------    -------    -------    -------
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
                                        =======    =======    =======    =======

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.

                                     F - 12
<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.

                                     F - 13
<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
                                    ======      ======      ======

                                     F - 14
<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
                                           =======

                                     F - 15
<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.

                                     F - 16
<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.

(In thousands)
<TABLE>
<CAPTION>
                         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.

                                     F - 17
<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
                                   ======
 
                                     F - 18
<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.

                                     F - 19
<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.

                                     F - 20
<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.

                                     F - 21
<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.


                                     F - 22
<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:

                                                          Weighted
                                                       Average Shares
                                       Net Income        Outstanding    Earnings
                                       (Numerator)      (Denominator)  Per Share
                                       -----------      -------------  ---------

For the Year Ended December 31, 1997
------------------------------------

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
                                        ==========        =========       =====


                                     F - 23
<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):

                                                     1997       1996       1995
                                                    ------     ------     ------

   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
                                                    ======     ======     ======

                                     F - 24
<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:

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

   Deferred tax assets:
       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)
                                                        =======      =======


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.


                                     F - 25
<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.


                                     F - 26
<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.


                                     F - 27
<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>

                                     F - 28
<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.

                                     F - 29
<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.


                                     F - 30
<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.


                                     F - 31
<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.

                                     F - 32
<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
                                ======      ======      ======      =======

                                     F - 33
<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.

                                     F - 34