SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] Quarterly Report Pursuant to Section 13 or 15(d)
Of the Securities Exchange Act of 1934
for the quarterly period ended March 31, 1997
---------------------------------------------
[ ] Transition report under Section 13 or 15(d) of
the Exchange Act for the transition period
from ___________ to ______________
Commission File Number 0-26440
Quantum Financial Holdings, Inc.
--------------------------------
Maryland 52-1919323
- ------------------------------- ----------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
4023 Annapolis Road
Baltimore, Maryland 21227
- ------------------------------- ---------------------
(Address of principal (Zip Code)
executive office)
Registrant's telephone number, including area code:(410) 789-6882
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- -----
Number of shares outstanding of common stock
as of: March 31, 1997
$0.01 per value common stock 106,924 shares
---------------------------- --------------
Class Outstanding
Transitional Small Business Disclosure Format: Yes No X
--- ----
QUANTUM FINANCIAL HOLDINGS, INC.
INDEX
-----
Part I - Financial Information
- ------------------------------
ITEM 1 - Consolidated Financial Statements:
Consolidated Balance Sheets as of March 31, 1997
(unaudited), and December 31, 1996
Consolidated Statements of Operations for the three
months ended March 31, 1997 and 1996 (unaudited)
Consolidated Statements of Cash Flows for the three
months ended March 31, 1997 and 1996 (unaudited)
Notes to Consolidated Financial Statements
(unaudited)
ITEM 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations
Part II - Other Information
- ---------------------------
ITEM 1 - Legal Proceedings
ITEM 2 - Changes in Securities
ITEM 3 - Defaults Upon Senior Securities
ITEM 4 - Submission of Matters to a Vote of Security Holders
ITEM 5 - Other Materially Important Events
ITEM 6 - Exhibits and Reports on Form 8-K
Part III - Signatures
- ---------------------
2
QUANTUM FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
-----------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
AS OF MARCH 31, 1997 AND DECEMBER 31, 1996
---------------------------------------------
(Unaudited)
March 31, December 31,
1997 1996
---------- ------------
ASSETS
------
CASH AND DUE FROM BANKS $ 724,951 $ 450,230
FEDERAL FUNDS SOLD 142,350 465,530
----------- -----------
Cash and cash equivalents 867,302 915,760
INVESTMENT SECURITIES HELD-TO-MATURITY 920,747 920,187
ACCRUED INTEREST RECEIVABLE 283,468 278,140
SECONDARY MARKET FUNDING RECEIVABLE 345,943 522,763
LOANS RECEIVABLE, net 20,308,415 20,473,502
RESIDENTIAL REAL ESTATE OWNED 1,631,989 1,603,395
COMMERCIAL REAL ESTATE OWNED 1,331,538 1,307,098
FEDERAL HOME LOAN BANK STOCK 169,100 169,100
PREMISES AND EQUIPMENT, net 419,036 426,125
OTHER ASSETS 703,168 725,435
----------- -----------
Total Assets $26,980,705 $27,341,505
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
DEPOSITS $24,479,561 $24,889,630
FEDERAL HOME LOAN BANK ADVANCES 450,000 450,000
ACCRUED EXPENSES 186,519 89,887
OTHER LIABILITIES 17,567 63,149
OTHER BORROWED MONEY 9,000 18,000
----------- -----------
Total Liabilities 25,142,647 25,510,666
=========== ===========
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, par value $0.01 per share;
5,000,000 shares authorized, 106,924
shares issued and outstanding 1,069 1,069
Additional Paid-in Capital 700,205 700,205
Retained earnings 1,147,566 1,147,565
----------- -----------
1,847,058 1,848,839
Deferred compensation (9,000) (18,000)
----------- -----------
Total Stockholders' Equity 1,838,058 1,830,839
----------- -----------
Total Liabilities and Stockholders' Equity $26,980,705 $27,341,505
=========== ===========
The accompanying notes are an integral part of these consolidated
balance sheets.
3
QUANTUM FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
-----------------------------------------------
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
-----------------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
--------------------------------------------------
1997 1996
---------- ------------
INTEREST INCOME:
Interest and fees on loans $ 497,959 $ 530,975
Interest on investment securities 24,232 37,539
Interest on federal funds sold 5,820 23,858
528,011 592,372
---------- ----------
INTEREST EXPENSE:
Interest on deposits 309,003 348,479
Other interest expense 6,352 10,434
---------- ----------
315,355 358,913
---------- ----------
Net interest income 212,656 233,459
PROVISION FOR LOAN LOSSES 1,032 1,710
---------- ----------
Net interest income after
provision for loan losses 211,624 231,749
---------- ----------
OTHER INCOME:
Fees on loans originated for others, net of
related commissions & payroll taxes 18,076 26,025
Other operating income, including subsidiary
net income 60,645 56,235
---------- ----------
78,721 82,260
---------- ----------
OTHER EXPENSES:
Salaries, benefits and payroll taxes 120,759 135,248
Other operating expenses 171,368 145,410
---------- ----------
292,127 280,658
---------- ----------
INCOME BEFORE INCOME TAX EXPENSE (1,781) 33,351
INCOME TAX EXPENSE 0 14,426
---------- ----------
NET INCOME $ (1,781) $ 18,925
========== ==========
EARNINGS PER SHARE $ (0.02) $ 0.18
========== ==========
Weighted average number of shares outstanding 106,924 106,924
========== ==========
The accompanying notes are an integral part of these consolidated
statements.
4
PAGE>
QUANTUM FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
-----------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
-------------------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
--------------------------------------------------
1997 1996
---------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ (1,781) $ 18,925
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Provision for loan losses 1,032 1,710
Loan fees deferred, net of costs 5,366 3,530
Amortization of deferred loan fees (19,563) (15,190)
Depreciation 7,089 13,894
Decrease (increase) in accrued
interest receivable (5,328) (3,930)
Origination of loans sold on the
secondary market (777,050) (1,030,450)
Proceeds from sale of loans on the
secondary market 953,870 1,211,346
Decrease (increase) in deferred income
tax asset 0 0
Decrease (increase) in other assets 22,267 61,078
(Decrease) increase in accrued expenses and
other liabilities 51,050 (88,666)
Amortization of deferred
compensation 9,000 9,000
--------- ----------
Net cash provided by (used in)
operating activities 245,952 181,247
--------- ----------
5
QUANTUM FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
-----------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
-------------------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
--------------------------------------------------
1997 1996
---------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Proceeds from maturing investment
securities $ 100,124 $ 266,080
Purchases of investment securities (100,684) (813)
Proceeds from sale of FHLB Stock 0 0
Purchase of FHLB Stock 0 (4,100)
Decrease (increase) in loans, net 178,252 861,934
Purchase of premises and equipment 0 (69,634)
Purchase of and investment in foreclosed
real estate, net (53,034) (76,455)
---------- -----------
Net cash (used in) provided by investing
activities 124,658 977,012
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) increase in deposits, net (410,069) 2,702,240
Repayment of FHLB Advances 0 (2,000,000)
Increase in short-term borrowings, net 0 0
Debt repayment (9,000) (9,000)
---------- -----------
Net cash provided by (used in)
financing activities (419,069) 693,240
---------- -----------
(DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (48,458) 1,851,499
CASH AND CASH EQUIVALENTS, beginning
of year 915,760 1,572,581
---------- -----------
CASH AND CASH EQUIVALENTS, end of quarter $ 867,302 $ 3,424,080
========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOWS INFORMATION:
Cash paid during the quarter for:
Interest $ 315,355 $ 358,913
Income taxes, net of refund 1,520 13,125
In-substance foreclosure on real estate 47,272 0
Foreclosure on real estate 0 62,929
The accompanying notes are an integral part of these consolidated
statements.
6
QUANTUM FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
-----------------------------------------------
Baltimore, Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1 - Basis of Presentation
---------------------
The accompanying unaudited consolidated financial statements have been
prepared in accordance with instructions to Form 10-QSB and, therefore, do not
include information or footnotes necessary for a fair presentation of
financial position, results of operations and cash flows in conformity with
generally accepted accounting principles. However, all adjustments which are,
in the opinion of management, necessary for a fair presentation have been
included. All such adjustments were of a normal recurring nature. The
results of operations for the three month period ended March 31, 1997 are not
necessarily indicative of the results which may be expected for the entire
fiscal year. The Notes to Consolidated Financial Statements for the year
ended December 31, 1996, included in the Savings Bank's Form 10-K, should be
read in conjunction with these statements.
Note 2 - Holding Company Reorganization
------------------------------
On July 12, 1995, the Company completed the acquisition of Baltimore
American Savings Bank, FSB (the "Bank") pursuant to an Agreement and Plan of
Reorganization in which the Bank became a wholly-owned subsidiary of the
Company, a newly formed holding company incorporated by the Bank for that
purpose. Under the terms of the Agreement and Plan of Reorganization, each
outstanding share, other than shares as to which dissenters' rights were
properly exercised, of the common stock, $1.00 par value per share, of the
Bank (the "Bank's Common Stock") was converted into one share of the common
stock $.01 par value per share, of the Company (the "Common Stock") and the
former holders of the Bank's Common Stock became the holders of all the
outstanding Common Stock. For the periods prior to July 12, 1995, the
financial statements of the Company consist of the financial statements of the
Bank.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL PERSPECTIVE
- -------------------
Although the Company incurred a loss during the first quarter of 1997,
Management and the Board of Directors have made several changes in operations
since December 31, 1996 that Management believes have served to reduce
operating losses for the Company. Compensation costs have been reduced, other
operating expense has been contained, and interest expense has been reduced by
shrinking the deposit base. The primary problems facing the Company are the
lack of core earnings resulting from a high level of criticized assets and
real estate owned, the continued decrease in the volume of loans originated,
and the significant costs for professional fees associated with operating a
savings bank. It is Management and the Board's goal to resolve the level of
criticized assets and to dispose of the real estate owned; to increase the
volume of loans originated through the origination of nonconforming loans,
which is a new niche market for the Savings Bank in 1997; and to contain the
costs of professional fees.
FINANCIAL CONDITION
- -------------------
General Overview
- ----------------
Total assets decreased by $360,800 or 1.32% during the three months ended
March 31, 1997. The decrease in total assets was primarily due to a decrease
in federal funds sold, which was the result of the shrinkage of the deposit
base and a reduction in the secondary market funding receivable, which was the
direct result of the decrease in the volume of loans originated in the first
quarter. "Table 1. Utilization of Assets" exhibits for the periods indicated
certain consolidated balance sheet items related to the financial structure of
the Company.
_________________________________________________________________
TABLE 1
Utilization of Assets
- -----------------------------------------------------------------
March 31, December 31,
1997 1996 Difference
------- ----------- ------------------
Cash and due from banks $ 724,951 $ 450,230 $ 274,721 61.02%
Federal funds sold 142,350 465,530 (323,180) (69.42)
Investment securities
held-to-maturity 920,747 920,187 560 0.06
Loans receivable, Net 20,308,415 20,473,502 (165,087) (0.81)
Secondary market funding
receivable 345,943 522,763 (176,820) (33.82)
Residential Real Estate Owned 1,631,989 1,603,395 28,594 1.78
Commercial Real Estate Owned 1,331,538 1,307,098 24,440 1.87
All other assets 1,574,772 1,598,800 (24,028) (1.50)
----------- ----------- ---------- ------
$26,980,705 $27,341,505 $ (360,800) (1.32)%
=========== =========== ========== ======
- ------------------------------------------------------------------------------
8
Commercial real estate owned comprises commercial real
estate that was foreclosed upon by the Company. Of the
$1,331,538 in commercial real estate, $1,209,647 represents
Sheridan Station Shopping Center, which is 33,014 square feet and
is comprised of eleven (11) tenant spaces, with 127 parking
spaces available. The increase in commercial real estate owned
was the direct result of improvements made to Sheridan Station
Shopping Center.
As of March 31, 1997, the center is seventy-two percent
(72%) leased and generated operating income of $53,353 and
operating expenses of $23,249 for pretax income of $30,104, which
is included as other operating income in the accompanying
consolidated statement of operations for the quarter ended March
31, 1997.
Management is actively marketing this property for sale.
Management intends to sell the property as soon as a viable buyer
is identified. However, no assurance can be made that a sale
will be consummated or that losses on the sale or from operations
prior to the sale will not be realized. Management believes that
an adequate allowance for any potential losses on the ultimate
sale of the property has been provided as of March 31, 1997.
In addition, the Savings Bank's $1,209,647 investment in
Sheridan Station must be deducted from total capital beginning in
June 1998. If the Savings Bank were required to deduct Sheridan
Station from total capital, the Savings Bank would no longer be
in compliance with OTS risk-based capital requirements and would
become subject to significant restrictions on its operations.
Depending on the capital levels at that time, the Savings Bank
could become subject to more severe sanctions, including
conservatorship or receivership, which would generally result in
a complete loss of the Company's investment in the Savings Bank.
Although Management of the Savings Bank is working to dispose of
its foreclosed properties and to resolve its nonperforming
assets, stockholders should be aware that the future results of
operations of the Savings Bank, its compliance with regulatory
capital requirements, and its ability to continue as a going
concern are all subject to the satisfactory disposition of these
foreclosed properties and nonperforming assets.
In addition, commercial real estate owned includes a one
acre parcel of commercial property located in Anne Arundel County
on Ridge Road in the amount of $121,891. This asset is over five
years old and is now considered real estate held for investment.
As such, the balance at which the property is carried reduces the
risk-based capital of the Company by that amount. Although the
Company believes its interest in this property is currently
adequately secure, there is no assurance that the property will
be sold or that Baltimore American will recoup its investment.
Residential real estate owned comprises residential real
estate that was foreclosed upon by the Company. Of the
$1,631,989 in residential real estate, $1,541,502 represents
residential homes and $90,487 represents residential land owned
by the Company. Management is actively marketing these
properties and intends to sell these properties as soon as viable
buyers are identified. In the interim, and where possible, the
Company is rehabilitating these homes and renting them out to
low- and moderate-income families. The rental income is being
applied directly to the outstanding balance, reducing the
Company's exposure and enhancing the property's marketability.
It is worth noting that management was awarded citations by
Baltimore's Mayor Schmoke and by Mary Pat Clark, President of the
Baltimore City Council, in recognition of its commitment to
building strong communities. While management believes it will
be able to find buyers in the future, no assurance can be made
that buyers will be found or that losses on the sale will not be
realized. Management believes that an adequate allowance for any
potential losses on the ultimate sale of these properties has
been provided as of March 31, 1997.
Total liabilities decreased by $368,019 or 1.44% during the
three months ended March 31, 1997, directly as a result of the
decrease in deposits (see Table 2. Source of Funds).
The decrease in deposits is the result of individual
depositors opting for higher rates at other institutions. Other
borrowed money, representing the Employee Stock Ownership Plan
(ESOP), was reduced by $9,000, which is the principal amount of
the loan paid each year.
9
_________________________________________________________________
TABLE 2
Sources of Funds
- -----------------------------------------------------------------
March 31, December 31,
1997 1996 Difference
--------- ----------- -------------------
Deposits $24,479,561 $24,889,630 $(410,069) (1.65)%
Federal Home Loan Bank Advances 450,000 450,000 0 0.00
Accrued Expenses 186,519 89,887 96,632 107.50
Other Liabilities 17,567 63,149 (45,582) (72.18)
Other Borrowed Money 9,000 18,000 (9,000) (50.00)
----------- ----------- --------- ------
$25,142,647 $25,510,666 $(368,019) (1.44)%
=========== =========== ========= ======
Liquidity
Adequate liquidity must be maintained to fund deposit
withdrawals, to meet customers' borrowing needs, to take
advantage of investment opportunities, and to maintain the
required levels of reserves. On the asset side, the primary
sources of liquidity are cash and due from banks, investment
securities, federal funds, and scheduled repayments on
outstanding loans. On the liability side, the primary sources of
liquidity are deposit growth and the line of credit with the
Federal Home Loan Bank.
Management evaluates the Company's liquidity position daily
to maintain a level conducive to efficient operations and to
satisfy regulatory requirements. Attention is directed primarily
to assets and liabilities that mature or can be repriced within
one year. The Company matches the maturities, to the extent
possible, of its assets and liabilities to minimize variability
in net interest income; this practice helps to minimize interest
rate risk. Prudent risks are taken, however, by leaving certain
assets and liabilities unmatched in an effort to benefit from the
interest rate sensitivity inherent in the U.S. monetary system.
The minimum regulatory required level of long-term liquidity
is currently 5% of total deposits and borrowed money; the minimum
required short-term level is 1%. The liquidity level of
Baltimore American at March 31, 1997, as measured for regulatory
purposes, was approximately 6.30% for both long- and short-term
purposes. Management believes the Company can meet its
obligations of outstanding loan commitments and at the same time
maintain liquidity in excess of the minimum regulatory
requirement without having to borrow funds.
Capital Resources
The Company's Stockholders' Equity was $1,838,058 or 6.81%
of total assets on March 31, 1997 compared to $2,216,012 or 7.48%
on December 31, 1996. The Company exceeds all regulatory
requirements for capital. Management continually reviews and
identifies areas of growth opportunity. The various methods for
generating equity from internal and external sources are
constantly under review to ascertain the most effective approach
for the Company. Table 3. Regulatory Capital Requirements
represents the Company's position to its various minimum
regulatory capital requirements at March 31, 1997.
10
_________________________________________________________________
TABLE 3
Regulatory Capital Requirements
- -----------------------------------------------------------------
March 31, 1997 (unaudited)
-----------------------------
Percentage
Amount of Assets*
------ ----------
(In thousands)
Tangible Capital $1,776 6.57%
Tangible Capital Requirement 406 1.50%
------ -----
Excess $1,370 5.07%
====== =====
Core Capital $1,776 6.57%
Core Capital Requirement 811 3.00%
------ -----
Excess $ 965 3.57%
====== =====
Total Capital $1,791 9.93%
(Core and Supplementary Capital)
Risk-Based Capital Requirement 1,443 8.00%
------ -----
Excess $ 348 1.93%
====== =====
<FN>
__________________
*Based on adjusted total assets of $27,023,000 for purposes of
the tangible capital and core capital requirements, and risk-
weighted assets of $18,043,000 for purposes of the risk-based
capital requirements.
</FN>
RESULTS OF OPERATIONS
General Overview
For the three months ended March 31, 1997, the Company
posted a loss of $1,781, as compared to a profit of $18,925 for
the same period in 1996. The loss resulted from the lack of core
earnings resulting from a high level of criticized assets and
real estate owned, the continued decrease in the volume of loans
originated, and the significant costs for professional fees
associated with operating a savings bank. It is Management and
the Board's goal to resolve the level of criticized assets and to
dispose of the real estate owned; to increase the volume of loans
originated through the origination of nonconforming loans, which
is a new niche market for the Savings Bank in 1997; and to
contain the costs of professional fees.
11
Earnings per share of common stock were $(0.02) per share
for the three months ended March 31, 1997, as compared to $0.18
per share for the same period in 1997. Table 4. Operations
Items as of March 31, 1997 exhibits for the periods indicated
certain consolidated statement of operations items which
contributed to earnings.
_________________________________________________________________
TABLE 4
Operations Items as of March 31,
- -----------------------------------------------------------------
1997 1996 Difference
--------- ----------- -------------------
INTEREST INCOME:
Interest and fees on loans $497,959 $530,975 $(33,016) (6.22)%
Other interest income 30,052 61,397 (31,345) (51.05)
-------- -------- -------- ------
$528,011 $592,372 $(64,361) 12.53%
======== ======== ======== ======
INTEREST EXPENSE:
Interest on deposits $309,003 $348,479 $(39,476) (11.33)%
Other interest expense 6,352 10,434 (4,082) (39.12)
-------- -------- -------- ------
$315,355 $358,913 $(43,558) (12.14)%
======== ======== ======== ======
PROVISION FOR LOAN LOSSES $ 1,032 $ 1,710 $ (678) (39.65)%
======== ======== ======== ======
OTHER INCOME:
Fees on loans originated
for others $ 18,076 $ 26,025 $ (7,949) (30.54)%
Other operating income 60,645 56,235 4,410 7.84
-------- -------- -------- ------
$ 78,721 $ 82,260 $ (3,539) (4.30)%
======== ======== ======== ======
OTHER EXPENSES:
Salaries, benefits and payroll
taxes $120,759 $135,248 $(14,489) (10.71)%
Other operating expenses 171,368 145,410 25,958 17.85
-------- -------- -------- ------
$292,127 $280,658 $ 11,469 4.09%
======== ======== ======== ======
- --------------------------------------------------------------------------------
Net Interest Income
Net interest income is the foundation and core of Baltimore
American's earnings, representing the difference between total
interest and fees earned on all loans, investments and other
interest earning assets, and the total interest paid on deposits
and borrowings. For the three months ended March 31, 1997, net
interest income was $212,656, as compared with $233,459 for the
same period in 1996.
12
Net interest income decreased $20,803, or 8.91%, during the
first quarter 1997, as compared with the same period in 1996.
This was the direct result of the decrease in interest income on
loans and investments. In particular, the decrease in interest
income from loans has resulted from the deteriorated mortgage
market. The volume of conforming paper with strong credit is
almost completely diminished in the Baltimore area. Competition
for the small market prohibits Baltimore American from
originating residential mortgage loans for the portfolio. Other
areas of loan origination are considered too risky for the
Savings Bank and therefore are not feasible. Baltimore
American's new niche of nonperforming paper is also considered
too risky for the portfolio. Baltimore American will try to
offset the loss of interest income on loans by increasing the
volume of investments in securities as well as by the continued
increase in fees earned on nonconforming loans originated for
others.
In recognition of the nonperforming loans and the inherent
risk in lending, Management has established a provision for loan
losses. The provision for loan losses is a reserve of funds
established to absorb potential loan losses after evaluating the
asset portfolio (current economic conditions, changes in the
nature and volume of lending, and past loan loss experience, as
well as other factors). Upon evaluation of the future trends of
general economic conditions in this country and in particular
Baltimore American's market area, Management and the Board of
Directors decided to continue to reserve additional funds in
regard to the future economic trends that might have an effect on
the portfolio of loans. The provision for loan losses for the
three months ended March 31, 1997 was $1,032, as compared to
$1,710 for the same period in 1996. As of March 31, 1997, the
provision for loan losses declined in proportion to the volume of
loans originated for the Company's portfolio.
For the three months ended March 31, 1997, net interest
income after provision for loan loss was $211,624 as compared
with $231,749 for the same period in 1996.
Other Income
There are two significant components of non-interest income
for the three months ended March 31, 1997. (1) Fees on loans
originated for others was $7,949 or 30.54% less during the three
months ended March 31, 1997 as compared with the same period in
1996. This is the direct result of the continued decline in loan
originations of conforming paper with strong credit. However,
originations of nonconforming paper continue to grow and should
begin to offset the decrease in conforming paper in the second
quarter. (2) Other operating income was $4,410 or 7.84% greater
during the three months ended March 31, 1997 as compared with the
same period in 1996. This is the result of the increase in
revenues generated by retail banking service fees.
Other Expense
Non-interest expense increased by $11,469 or 4.09% during
the three months ending March 31, 1997 as compared to the same
period in 1996. The largest component, employee compensation,
decreased by $14,489 or 10.71%. However, all other operating
expenses increased by $25,958 or 17.85% as a result of an
increase in professional fees.
Provision For Taxes
The Company's effective tax rate varies with changes in the
proportion of tax exempt income, changes in corporate tax rates,
and certain local tax credits. Provision for income taxes for
the three months ended March 31, 1997 was $0, compared to $14,426
during the first quarter of 1996.
13
IMPACT OF INFLATION AND CHANGING PRICES
The impact of inflation on the Company is reflected
primarily in the increased cost of operations. A portion of
these increased costs are generally passed on to customers in the
form of increased service fees. Because the Company's assets and
liabilities are virtually all monetary in nature, reinvestment
and prepayment rate fluctuations more significantly impact the
Company's performance than the effects of inflation. Volatile
interest rate environments require management to maintain
acceptable levels of liquidity and to maintain proper maturity
structure of the Company's assets and liability.
In structuring fees, negotiating loan margins, and
developing customer relationships, Management concentrates its
efforts on maximizing earnings, while attempting to contain
increases in operating expenses. Management and the Board of
Directors continually review the feasibility of new and
additional fee-generating services to offset the effects of
inflation and changing prices. Management and the Board of
Directors perform this function with the objective of increased
earnings.
14
PART II
ITEM 1. Legal Proceedings
-----------------
Not applicable.
ITEM 2. Changes in Securities
---------------------
Not applicable.
ITEM 3. Defaults Upon Senior Securities
-------------------------------
Not applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Not applicable.
ITEM 5. Other Materially Important Events
---------------------------------
None.
ITEM 6. Exhibits and Reports
--------------------
Exhibit 27: Financial Data Schedule Worksheet for EDGAR
Reporting (Article 9 of Regulation S-X)
15
PART III
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
Date: May 31, 1997 By: /s/ Richard W. Kraus
---------------------------
Richard W. Kraus
PRESIDENT, CHIEF EXECUTIVE
OFFICER & CHIEF FINANCIAL
OFFICER
16