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 September 30, 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: September 30, 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 September 30, 1997
(unaudited), and December 31, 1996
Consolidated Statements of Operations for the three
and nine months ended September 30, 1997 and 1996
(unaudited)
Consolidated Statements of Cash Flows for the nine
months ended June 30, 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 SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
-----------------------------------------------
(Unaudited)
SEPTEMBER 30, December 31,
1997 1996
---------- ------------
ASSETS
------
CASH AND DUE FROM BANKS $ 575,432 $ 450,230
FEDERAL FUNDS SOLD 364,232 465,530
----------- -----------
Cash and cash equivalents 939,664 915,760
INVESTMENT SECURITIES HELD-TO-MATURITY 1,162,697 920,187
ACCRUED INTEREST RECEIVABLE 211,671 278,140
SECONDARY MARKET FUNDING RECEIVABLE 858,525 522,763
LOANS RECEIVABLE, net 19,352,041 20,473,502
RESIDENTIAL REAL ESTATE OWNED 1,657,323 1,603,395
COMMERCIAL REAL ESTATE OWNED 1,343,714 1,307,098
FEDERAL HOME LOAN BANK STOCK 169,100 169,100
PREMISES AND EQUIPMENT, net 413,142 426,125
OTHER ASSETS 698,997 725,435
----------- -----------
Total Assets $26,806,874 $27,341,505
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
====================================
DEPOSITS $23,405,507 $24,889,630
FEDERAL HOME LOAN BANK ADVANCES 1,250,000 450,000
ACCRUED EXPENSES 63,411 89,887
OTHER LIABILITIES 210,823 63,149
OTHER BORROWED MONEY 9,000 18,000
----------- -----------
Total Liabilities 24,938,741 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
Current Earnings 46,653 --
Retained earnings 1,147,566 1,147,565
----------- -----------
1,895,493 1,848,839
Loan Receivable - ESOP (18,360) --
Deferred compensation (9,000) (18,000)
----------- -----------
Total Stockholders' Equity 1,868,133 1,830,839
----------- -----------
Total Liabilities and Stockholders'
Equity $26,806,874 $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)
-----------------------------------------------
Nine Months Ended Three Months Ended
September 30, September 30,
--------------------- ----------------------
1997 1996 1997 1996
--------- -------- -------- ---------
INTEREST INCOME:
Interest and fees on loans $1,415,408 $1,547,192 $ 461,304 $ 510,681
Interest on investment securities 78,558 84,635 30,015 21,239
Interest on federal funds sold 18,702 72,615 6,650 12,762
---------- ---------- ---------- ----------
1,512,668 1,704,442 497,969 544,682
---------- ---------- ---------- ----------
INTEREST EXPENSE:
Interest on deposits 915,546 1,056,241 303,372 339,416
Other interest expense 33,441 11,104 14,431 337
---------- ---------- ---------- ----------
948,987 1,067,345 317,803 339,753
---------- ---------- ---------- ----------
Net interest income 563,681 637,097 180,166 204,929
PROVISION FOR LOAN LOSSES (5,370) (11,614) (2,975) (1,592)
---------- ---------- ---------- ----------
Net interest income after
provision for loan losses 558,311 648,711 177,191 203,337
---------- ---------- ---------- ----------
OTHER INCOME:
Fees on loans originated for others,
net of related commissions &
payroll taxes 138,393 86,766 82,290 17,134
Other operating income, including
subsidiary net income 200,406 213,676 73,387 71,319
---------- ---------- ---------- ----------
338,799 300,442 155,677 88,453
---------- ---------- ---------- ----------
OTHER EXPENSES:
Salaries, benefits and payroll taxes 344,687 386,395 112,539 128,095
Other operating expenses 461,749 649,604 146,601 297,414
---------- ---------- ---------- ----------
806,436 1,035,999 259,140 425,509
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAX EXPENSE 90,674 (86,846) 73,728 (133,719)
INCOME TAX (BENEFIT) EXPENSE 44,022 0 32,946 (20,042)
---------- ---------- ---------- ----------
NET INCOME $ 46,652 $ (86,846) $ 40,782 $ (113,677)
========== ========== ========== ==========
EARNINGS PER SHARE $ 0.44 $ (0.81) $ 0.38 $ (1.06)
========== ========== ========== ==========
Weighted average number of shares
outstanding 106,924 106,924 106,924 106,924
========== ========== ========== ==========
The accompanying notes are an integral part of these
consolidated statements.
4
Page 1 of 2
QUANTUM FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
-----------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
-------------------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
-----------------------------------------------------
1997 1996
---------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 46,652 $ (86,846)
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Provision for loan losses 5,370 (11,614)
Loan fees deferred, net of costs 25,701 17,398
Amortization of deferred loan fees (53,880) (48,368)
Depreciation 21,741 45,048
Decrease (increase) in accrued
interest receivable 66,469 (13,039)
Origination of loans sold on the
secondary market (2,248,867) (3,569,179)
Proceeds from sale of loans on the
secondary market 1,913,105 4,025,982
Decrease (increase) in deferred
income tax asset 0 0
Decrease (increase) in other assets 26,438 (70,532)
(Decrease) increase in accrued
expenses and other liabilities 121,198 121,501
Amortization of deferred
compensation 9,000 9,000
----------- -----------
Net cash provided by (used in)
operating activities (67,073) 419,351
----------- -----------
5
Page 2 of 2
QUANTUM FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
-----------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
-------------------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
-----------------------------------------------------
1997 1996
---------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturing investment securities $ 199,374 $ 364,344
Purchases of investment securities (441,882) (262,116)
Proceeds from sale of FHLB Stock 0 0
Purchase of FHLB Stock 0 (4,100)
Decrease (increase) in loans, net 1,144,270 616,096
Purchase of premises and equipment (8,758) (71,993)
Purchase of and investment in foreclosed
real estate, net (90,544) (91,026)
----------- -----------
Net cash (used in) provided by
investing activities 802,460 551,205
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) increase in deposits, net (1,484,123) 1,064,285
Repayment of FHLB Advances 0 (2,000,000)
Increase in short-term borrowings, net 800,000 0
Debt repayment (9,000) (9,000)
Purchase stock for ESOP (18,360) (18,360)
----------- -----------
Net cash provided by (used in)
financing activities (711,483) (944,715)
----------- -----------
(DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS 23,904 25,841
CASH AND CASH EQUIVALENTS, beginning
of year 915,760 1,572,581
----------- -----------
CASH AND CASH EQUIVALENTS, end of quarter $ 939,664 $ 1,598,422
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOWS INFORMATION:
Cash paid during the quarter for:
Interest $ 317,803 $ 339,753
Income taxes, net of refund 2,000 0
In-substance foreclosure on real estate 0 0
Foreclosure on real estate 0 0
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. The results of
operations for the three and nine month period ended September
30, 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
Since December 31, 1996, Management and the Board of
Directors have made several changes in operations that
have contributed to the reduction in 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 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 $534,631 or 1.96% during the nine
months ended September 30, 1997. The decrease in total assets
was primarily due to a decrease in loans receivable, net, which
was the direct result of early loan payoffs. In addition, the
Company has not replenished the loan portfolio with new loan
originations as a direct result of the disparity in the margin
between market loan rates and market deposit rates, which are
negligible in this highly competitive market. "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
- -------------------------------------------------------------------------------
Sept 30, December 31,
1997 1996 Difference
------- ----------- ----------------------
Cash and due from banks $ 575,432 $ 450,230 $ 125,202 27.81 %
Federal funds sold 364,232 465,530 (101,298) (21.80)
Investment securities
held-to-maturity 1,162,697 920,187 242,510 26.35
Loans receivable, Net 19,352,041 20,473,502 (1,121,461) (4.48)
Secondary market funding
receivable 858,525 522,763 335,762 64.23
Residential Real Estate
Owned 1,657,323 1,603,395 53,928 33.63
Commercial Real Estate Owned 1,343,714 1,307,098 36,616 2.80
All other assets 1,492,910 1,598,800 (105,890) (6.62)
----------- ----------- ----------- ------
$26,806,874 $27,341,505 $ (534,631) (1.96)%
=========== =========== =========== ======
_______________________________________________________________________________
8
Commercial real estate owned comprises commercial real
estate that was foreclosed upon by the Company. Of the
$1,343,714 in commercial real estate, $1,221,823 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 September 30, 1997, the center is eighty percent (80%)
leased and generated operating income of $183,608 and operating
expenses of $73,073 for pretax income of $110,535, which is
included as other operating income in the accompanying
consolidated statement of operations for the quarter ended
September 30, 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
September 30, 1997.
In addition, the Savings Bank's $1,221,823 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
$1,657,323 in residential real estate, $1,566,836 represents
residential homes and $90,487 represents residential land
owned by the Company. This land 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. Management
is actively marketing these residential 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 September 30, 1997.
9
Total liabilities decreased by $571,925 or 2.24% during the
nine months ended September 30, 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. The
Company has increased advances from the Federal Home
Loan Bank by $800,000 for the purpose of funding secondary
market loan production. 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.
_______________________________________________________________________________
TABLE 2
Source of Funds
- -------------------------------------------------------------------------------
Sept 30, December 31,
1997 1996 Difference
------- ----------- ----------------------
Deposits $23,405,507 $24,889,630 $ (1,484,123) (5.96)%
Federal Home Loan Bank
Advances 1,250,000 450,000 800,000 177.78
Accrued Expenses 63,411 89,887 (26,476) (29.45)
Other Liabilities 210,823 63,149 147,674 233.85
Other Borrowed Money 9,000 18,000 (9,000) (50.00)
----------- ----------- ------------ ------
$24,938,741 $25,510,666 $ (571,925) (2.24)%
=========== =========== ============ ======
_______________________________________________________________________________
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 September 30, 1997,
as measured for regulatory purposes, was approximately 6.01% 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.
10
Capital Resources
The Company's Stockholders' Equity was $1,868,133 or 6.97%
of total assets on September 30, 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 June 30, 1997.
________________________________________________________________
TABLE 3
Regulatory Capital Requirements
- ----------------------------------------------------------------
Sept 30, 1997 (unaudited)
---------------------------
Percentage
Amount of Assets*
------ ----------
(In thousands)
Tangible Capital. . . . . . . . . $1,835 6.79%
Tangible Capital Requirement. . . 405 1.50%
------ ----
Excess. . . . . . . . . . . . . . $1,430 5.29%
====== ====
Core Capital. . . . . . . . . . . $1,835 6.79%
Core Capital Requirement. . . . . 811 3.00%
------ ----
Excess. . . . . . . . . . . . . . $1,024 3.79%
====== ====
Total Capital . . . . . . . . . . $1,860 10.32%
(Core and Supplementary Capital)
Risk-Based Capital Requirement. . 1,507 8.00%
------ ----
Excess. . . . . . . . . . . . . . $ 353 1.87%
====== ====
__________
* Based on adjusted total assets of $27,021,000 for purposes of
the tangible capital and core capital requirements, and
risk-weighted assets of $18,837,000 for purposes of the risk-
based capital requirements.
________________________________________________________________
11
RESULTS OF OPERATIONS
General Overview
For the nine months ended September 30, 1997, the Company
posted a $46,652 profit, as compared to a loss of $86,846 for
the same period in 1996. For the three months ended September
30, 1997, the Company posted a $40,782 profit, as compared to a
loss of $113,719 for the same period in 1996. The positive
earnings achieved for the nine months ending September 30, 1997,
is the result of the increase in secondary market production and
reductions in total interest expense and operating expenses. 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.
Earnings per share of common stock were $0.44 per share for
the nine months ended September 30, 1997, as compared to $(0.81)
per share for the same period in 1996. Earnings per share of
common stock were $0.38 per share for the three months ended
September 30, 1997, as compared to $(1.06) per share for the
same period in 1996. Table 4. Operations Items as of September
30, 1997 exhibits for the periods indicated certain consolidated
statement of operations items which contributed to earnings.
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 nine months ended September 30, 1997,
net interest income was $563,681, as compared with $637,097 for
the same period in 1996. For the three months ended September
30, 1997, net interest income was $180,166 as compared with
$204,929 for the same period in 1996.
Net interest income decreased $73,416, or 11.53%, during the
first nine months of 1997, as compared with the same period in
1996. This was the direct result of the decrease in interest
income on loans, investments and federal funds sold. 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
nonconforming paper is also considered too risky for the
portfolio. However, the sale of these type loans into the
secondary market is increasing noninterest income.
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 nine months ended September
30, 1997 was $5,370, as compared to $11,614 for the same period
in 1996. The provision for loan losses for the three months
ended September 30, 1997 was $2,975, as compared to $1,592 for
the same period in 1996 As of September 30, 1997, the provision
for loan losses declined in proportion to the volume of loans
originated for the Company's portfolio.
12
________________________________________________________________________
TABLE 4
Operations Items
- -------------------------------------------------------------------------
Nine Months Ended
September 30,
-----------------------
1997 1996 Difference
--------- ----------- -------------------
INTEREST INCOME:
Interest and fees on loans $1,415,408 $1,547,192 $ (131,784) (8.52)%
Other interest income 97,260 157,250 (59,990) (38.15)
---------- ---------- ---------- ------
$1,512,668 $1,704,442 $ (191,774) (11.25)%
========== ========== ========== ======
INTEREST EXPENSE:
Interest on deposits $ 915,546 $1,056,241 $ (140,695) (13.32)%
Other interest expense 33,441 11,104 22,337 201.16
---------- ---------- ---------- ------
$ 948,987 $1,067,345 $ (118,358) (11.09)%
========== ========== ========== ======
PROVISION FOR LOAN LOSSES $ 5,370 $ 11,614 $ (6,244) (53.76)%
========== ========== ========== ======
OTHER INCOME:
Fees on loans originated
for others (Net of sales $ 138,393 $ 86,766 $ 51,627 59.50%
commissions and related
payroll taxes)
Other operating income,
including subsidiary
net income 200,406 213,676 (13,270) (6.20)
---------- ---------- ---------- ------
$ 338,799 $ 300,442 $ 38,357 12.77%
========== ========== ========== ======
OTHER EXPENSES:
Salaries, benefits and
payroll taxes $ 344,687 $ 386,395 $ (41,708) (10.79)%
Other operating expenses 461,749 649,604 (187,855) (28.92)%
---------- ---------- ---------- ------
$ 806,436 $1,035,999 $ (229,563) (22.16)%
========== ========== ========== ======
Three Months Ended
September 30,
-----------------------
1997 1996 Difference
--------- ----------- -------------------
INTEREST INCOME:
Interest and fees on loans $ 461,304 $ 510,681 $ (49,377) (9.67)%
Other interest income 636,665 34,001 2,664 7.84
---------- ---------- ---------- ------
$ 497,969 $ 544,682 $ (46,713) (8.57)%
========== ========== ========== ======
INTEREST EXPENSE:
Interest on deposits $ 303,372 $ 339,416 $ (36,044) (10.62)%
Other interest expense 14,431 337 14,094 418.22
---------- ---------- ---------- ------
$ 317,803 $ 339,753 $ (21,950) 6.46%
========== ========== ========== ======
PROVISION FOR LOAN LOSSES $ 2,975 $ 1,592 $ 1,383 8.69%
========== ========== ========== ======
OTHER INCOME:
Fees on loans originated
for others (Net of sales $ 82,290 $ 17,134 $ 65,156 380.27%
commissions and related
payroll taxes)
Other operating income,
including subsidiary
net income 73,387 71,319 2,068 2.90
---------- ---------- ---------- ------
$ 155,677 $ 88,453 $ 67,224 76.00%
========== ========== ========== ======
OTHER EXPENSES:
Salaries, benefits and
payroll taxes $ 112,539 $ 128,095 $ (15,556) (12.14)%
Other operating expenses 146,601 297,414 (150,813) (50.71)%
---------- ---------- ---------- ------
$ 259,140 $ 425,509 $ (166,369) (39.10)%
========== ========== ========== ======
13
For the nine months ended September 30, 1997, net interest
income after provision for loan loss was $558,311 as compared
with $648,711 for the same period in 1996. For the three months
ended September 30, 1997, net interest income after provision
for loan loss was $177,191 as compared with $203,337 for the
same period in 1996.
Other Income
There are two significant components of non-interest income
for the nine months ended September 30, 1997. (1) Fees on loans
originated for others increased by $51,627 or 59.09% during the
nine months ended September 30, 1997 as compared with the same
period in 1996. Fees on loans originated for others increased
by $65,156 or 380.27% during the three months ended September
30, 1997 as compared with the same period in 1996. This is the
direct result of Management and the Board's plan to increase
loan originations through the niche of nonconforming.
Originations of nonconforming paper continue to grow and have
offset the decrease in conforming paper in the third quarter.
(2) Other operating income was $13,270 or 6.20% less during the
nine months ended September 30, 1997 as compared with
the same period in 1996. The decrease in operating income was
the result of no gain on the sale of real estate owned
property in 1997 as occurred during the same period in 1996.
Other operating income was $2,068 or 2.90% more during
the three months ended September 30, 1997 as compared with the
same period in 1996.
Other Expense
Total non-interest expense decreased by $229,563 or 22.16%
during the nine months ending September 30, 1997 as compared to
the same period in 1996. Total non-interest expense decreased
by $15,556 or 12.14% during the three months ending September
30, 1997 as compared to the same period in 1996. Employee
compensation decreased by $41,708 or 10.79% and other operating
expenses decreased by $187,855 or 28.92% during the nine months
ending September 30, 1997. Total non-interest expense decreased
as a result of the cost control measures implemented by
Management and the Board.
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 nine months ended September 30, 1997 was $44,022, compared
to $0 for the same period in 1996.
Year 2000 Planning
Like most financial institutions, the Company's principal
subsidiary relies extensively on computers in conducting
its business. It has been widely reported that many computer
programs currently in use were designed without adequately
considering the impact of the upcoming change in century on
their date codes. If these design flaws are not corrected,
these computer applications may malfunction in the year 2000.
The Bank generally relies on outside vendors for its most
critical data processing services. These vendors have advised
the Bank that they are actively addressing the year 2000 issue
and do not expect that any required solutions will require
material additional investments by the Bank.
14
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.
15
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)
16
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: November 14, 1997 By: /s/ Richard W. Kraus
---------------------------
Richard W. Kraus
PRESIDENT, CHIEF EXECUTIVE
OFFICER & CHIEF FINANCIAL
OFFICER
17