SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10 - QSB
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the Quarter ended September 30, 1998 Commission File Number 2-89559
Zachary Bancshares, Inc.
(Exact name of registrant as specified in its charter)
Louisiana 72-0981148
(State of or other jurisdiction (I.R.S. Employer incorporation
of organizaton) or Identification No.)
4700 Main Street
Post Office Box 497
Zachary, Louisiana 70791-0497
(Address of principal executive office) (Zipcode)
Registrant's telephone number, including area code 225 654 2701
None
(Former name, former address and former fiscal
year if changed since last report)
Indicate by check mark whether the registant (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
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock, $10 par value, 193,667 shares outstanding as of
September 30, 1998.
I N D E X
Financial Statements:
Consolidated Balance Sheets - September 30, 1998,
December 31, 1997 and September 30, 1997 2
Consolidated Statements of Income - for the three
and nine months ended September 30, 1998 and 1997 3
Consolidated Statements of Changes in Stockholders'
Equity - for the nine months ended September 30,
1998 and 1997 4
Consolidated Statements of Cash Flows -
for the nine months ended September 30, 1998 and 1997 5 - 6
Notes to Consolidated Financial Statements 7 - 11
Management's Discussion and Analysis of Financial
Condition and Results of Operations 12 - 14
Part II - Other Information 15
Signatures 16
Management's Responsibility for Financial Reporting 17 - 18
1
Zachary Bancshares, Inc. and Subsidiary
CONSOLIDATED BALANCE SHEETS
September 30, 1998, December 31, 1997 and September 30, 1997
ASSETS
(UNAUDITED) (UNAUDITED) (UNAUDITED)
September 30, DECEMBER 31, September 30,
1998 1997 1997
Cash and Due from Banks $ 2,694,650 $ 2,481,869 $ 3,756,635
Interest Bearing Deposits in
Other Institutions 1,685,233 95,046 93,716
Reserve Funds Sold 4,100,000 1,700,000 1,950,000
Securities Available for Sale
(Amortized Cost $20,545,751,
$25,624,161 and $26,078,695) 20,607,858 25,620,114 26,150,163
Loans 50,459,315 46,141,573 42,414,396
Less: Allowance for
Loan Losses (791,373) (771,850) (784,060)
49,667,942 45,369,723 41,630,336
Bank Premises and Equipment 2,517,947 1,693,887 1,525,351
Other Real Estate 194,805 217,401 241,595
Accrued Interest Receivable 563,422 558,501 517,274
Other Assets 226,193 69,139 82,419
Total Assets $82,258,050 $77,805,680 $75,947,489
LIABILITIES
Deposits:
Noninterest Bearing $16,101,756 $14,418,082 $13,535,456
Interest Bearing 56,664,086 54,762,690 53,666,229
72,765,842 69,180,772 67,201,685
Accrued Interest Payable 217,425 188,188 183,745
Other Liabilities 448,554 221,985 338,990
Total Liabilities $73,431,821 $69,590,945 $67,724,420
STOCKHOLDERS' EQUITY
Common Stock - $10 Par Value; Authorized
2,000,000 Shares; Issued 216,000
Shares, Respectively $ 2,160,000 $ 2,160,000 $ 2,160,000
Surplus 1,480,000 1,480,000 1,480,000
Retained Earnings 5,591,898 5,024,066 4,982,560
Unrealized Gain (Loss) on Securities
Available for Sale, Net 40,991 ( 2,671) 47,169
Treasury Stock (22,333 Shares
at Cost) (446,660) (446,660) (446,660)
Total Stockholders' Equity 8,826,229 8,214,735 8,223,069
Total Liabilities and
Stockholders' Equity $82,258,050 $77,805,680 $75,947,489
The accompanying notes are an integral part of these financial statements.
2
Zachary Bancshares, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF INCOME
for the three and nine months ended September 30, 1998 and 1997
(UNAUDITED) (UNAUDITED)
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
Interest Income:
Interest and Fees on Loans $ 1,124,830 $ 958,249 $3,219,364 $2,612,869
Interest on Securities 328,454 427,272 1,062,324 1,356,009
Other Interest Income 81,580 24,917 209,789 83,145
Total Interest Income $ 1,534,864 $1,410,438 $4,491,477 $4,052,023
Interest Expense:
Interest Expense on
Deposits $ 592,846 $ 534,827 $1,748,353 $1,598,857
Interest Expense on Borrowings 80 - 521 -
Total Interest Expense $ 592,926 $ 534,827 $ 1,748,874 $1,598,857
Net Interest Income $ 941,938 $ 875,611 $ 2,742,603 $2,453,166
Provision for Loan Losses 52,134 8,245 127,486 23,459
Net Interest Income
After Provision for
Loan Losses 889,804 867,366 2,615,117 2,429,707
Other Income:
Service Charges on
Deposit Accounts 124,979 125,309 363,975 381,668
Loss on Securities - - - (5,391)
Other Operating Income 50,655 55,851 131,921 117,278
Total Other Income 175,634 181,160 495,896 493,555
Income before Other
Expenses $1,065,438 $1,048,526 $3,111,013 $2,923,262
Other Expenses:
Salaries and Employee
Benefits 381,257 376,543 1,125,121 1,062,930
Occupancy Expense 41,468 52,360 122,583 152,793
Net Other Real Estate Expense 756 (11,684) 6,435 (10,484)
Other Operating Expenses 271,010 236,895 737,847 677,833
Total Other Expenses 694,491 654,114 1,991,986 1,883,072
Income before Income
Taxes 370,947 394,412 1,119,027 1,040,190
Applicable Income Taxes 131,760 124,500 376,895 338,278
Net Income $ 239,187 $ 269,912 $ 742,132 $ 701,912
Per Share:
Net Income $ 1.23 $ 1.39 $ 3.83 $ 3.62
Cash Dividends $ - $ - $ .90 $ .80
The accompanying notes are an integral part of these financial statements.
3
Zachary Bancshares, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
for the nine months ended September 30, 1998 and 1997
(UNAUDITED)
September 30,
1998 1997
Common Stock:
Balance - Beginning and End of Period $2,160,000 $2,160,000
Surplus:
Balance - Beginning and End of Period $1,480,000 $1,480,000
Retained Earnings:
Balance - Beginning of Period $5,024,066 $4,435,582
Net Income 742,132 701,912
Cash Dividends (174,300) (154,934)
Balance - End of Period $5,591,898 $4,982,560
Net Unrealized Gain (Loss) on Securities
Available for Sale:
Balance - Beginning of Period $ ( 2,671) $ (17,046)
Net Change in Unrealized Gain
on Securities Available for Sale 43,662 64,215
Balance - End of Period $ 40,991 $ 47,169
Treasury Stock:
Balance - Beginning and End of Period $ (446,660) $ (446,660)
The accompanying notes are an integral part of these financial statements.
4
Zachary Bancshares, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the nine months ended September 30, 1998 and 1997
(UNAUDITED)
September,
1998 1997
Cash Flows From Operating Activities:
Net Income $ 742,132 $ 701,912
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating
Activities:
Provision for Loan Losses 127,486 23,459
Provision for Depreciation
and Amortization 152,988 128,220
Stock Dividends on Federal Home Loan
Bank Stock (12,600) (32,300)
Net (Accretion) Amortization of
Securities (Discounts) Premiums (2,107) (14,803)
(Gain) Loss on Sale of Securities - 5,391
(Gain) on Sale of Other Real Estate - (11,684)
(Increase) Decrease in Accrued
Interest Receivable (4,921) 95,294
(Increase) Decrease in Other Assets (157,054) (95)
Increase (Decrease) in Accrued
Interest Payable 29,237 (1,543)
Increase (Decrease) in Other Liabilities 204,077 244,915
Net Cash Provided by Operating
Activities 1,079,238 1,138,766
Cash Flows From Investing Activities:
Net (Increase) Decrease in Reserve
Funds Sold (2,400,000) (1,100,000)
Purchase of FHLB Stock (51,300) -
Purchases of Securities Available for Sale - (7,033,099)
Maturities or Calls of Securities Available
for Sale 2,500,000 4,000,000
Principal Payments on Mortgage-Backed
Securities 2,644,417 605,612
Proceeds from Sales of Securities Available
for Sale - 8,945,151
Net (Increase) Decrease in Loans (4,425,705) (5,213,969)
Purchases of Premises and Equipment (977,048) (314,132)
Proceeds from Sales of Other
Real Estate 22,596 178,270
Net Cash Provided by
Investing Activities (2,687,040) 67,833
(CONTINUED)
5
(UNAUDITED)
September 30,
1998 1997
Cash Flows From Financing Activities:
Net Increase (Decrease) in Demand
Deposits, NOW Accounts and
Savings Accounts 2,904,206 38,091
Net Increase (Decrease) in Certificates
of Deposit 680,864 (1,005,675)
Cash Dividends (174,300) (154,934)
Net Cash Provided by (Used in)
Financing Activities 3,410,770 (1,122,518)
Increase (Decrease) in Cash and Interest
Bearing Deposits 1,802,968 84,081
Cash and Interest Bearing Deposits -
Beginning of Period 2,576,915 3,766,270
Cash and Interest Bearing Deposits -
End of Period $ 4,379,883 $ 3,850,351
Supplemental Disclosures of Cash Flow
Information:
Noncash Investing Activities:
Change in Unrealized Gain (Loss)
on Securities Available
for Sale $ 66,154 $ 97,296
Change in Deferred Tax Effect
on Unrealized Gain on Securities
Available for Sale $ 22,492 $ (33,081)
Cash Payments For:
Interest Paid on Deposits $ 1,719,116 $ 536,370
Income Tax Payments $ 374,500 $ 333,000
The accompanying notes are an integral part of these financial statements.
6
Zachary Bancshares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
September 30, 1998 and 1997
Note A - Summary of Significant Accounting Policies -
The accounting principles followed by Zachary Bancshares, Inc. and its wholly-
owned Subsidiary, Bank of Zachary, are those which are generally practiced
within the banking industry. The methods of applying those principles con
form with generally accepted accounting principles and have been applied on
a consistent basis. The principles which significantly affect the determina
tion of financial position, results of operations, changes in stockholders'
equity and cash flows are summarized below.
Presentation
The accompanying unaudited consolidated interim financial statements do not
include all of the information and footnotes required by generally accepted
accounting principles. Management is of the opinion that the unaudited interim
financial statements reflect all normal, recurring accrual adjustments neces
sary to provide a fair statement of the results for the interim periods pre
sented. It is noted that the results for the first nine months ended Septem
ber 30, 1998 are no indication of the expected results for the annual period
which ends December 31, 1998. Additional information concerning the audited
financial statements and notes can be obtained from Zachary Bancshares,
Inc.'s annual report and Form 10-KSB filed for the period ended December 31,
1997.
Principles of Consolidation
The consolidated financial statements include the accounts of Zachary Banc
shares, Inc. (the Company), and its wholly-owned subsidiary, Bank of
Zachary (the Bank). All material intercompany accounts and transactions
have been eliminated. Certain reclassifications to previously published
financial statements have been made to comply with current reporting require
ments.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires 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
reported amounts of revenues and expenses during the period. Actual results
could differ from those estimates. Material estimates that are particularly
susceptible to change in the near term relate to the determination of the
allowance for loan losses and the valuation of real estate acquired in con
nection with foreclosures. The Bank obtains independent appraisals for sig
nificant properties.
Securities
Management determines the appropriate classification of debt securities (Held
to Maturity, Available for Sale, or Trading) at the time of purchase and re-
evaluates this classification periodically.
Securities that management has both the intent and ability to hold to maturity
regardless of changes in market conditions, liquidity needs or changes in
general economic conditions are classified as securities held to maturity.
Securities classified as trading are those securities held for resale in an
ticipation of short-term market movements. The Bank holds no securities
classified as held to maturity or trading.
Securities that may be sold prior to maturity are classified as securities avail
able for sale. Any decision to sell a security classified as available for sale
would be based on various factors, including significant movements in interest
rates, changes in the maturity mix of the Bank's assets and liabilities, li-
quidity needs, regulatory capital considerations, and other similar factors.
Securities available for sale are carried at fair value. Unrealized gains or
losses are reported as increases or decreases in stockholders' equity, net of
the reported deferred tax effect. Realized gains or losses, determined on
the basis of the costs of specific securities sold, are included in earnings.
Loans
Loans are stated at principal amounts outstanding, less unearned income and
allowance for loan losses. Interest on commercial loans is accrued daily
based on the principal outstanding. Interest on installment loans is recog
nized and included in interest income using the sum of the digits method,
which does not differ materially from the interest method.
The Bank discontinues the accrual of interest income when a loan becomes 90
days past due as to principal or interest. Interest on impaired loans is dis
continued when, in management's opinion the borrower may be unable to meet
payments as they become due. When a loan is placed on non-accrual status,
previously recognized but uncollected interest is reversed to income or char
ged to the allowance for loan losses. Interest income is subsequently recog
nized only to the extent cash payments are received.
Allowance for Loan Losses
The allowance for loan losses is an amount which in management's judgment is
adequate to absorb potential losses in the loan portfolio. The allowance
for loan losses is based upon management's review and evaluation of the loan
portfolio. Factors considered in the establishment of the allowance for
loan losses include management's evaluation of specific loans; the level and
composition of classified loans; historical loss experience; results of exami
nations by regulatory agencies; an internal asset review process; expecta
tions of future economic conditions and their impact on particular borrowers;
and other judgmental factors.
The allowance for loan losses is based on estimates of potential future
losses, and ultimate losses may vary from the current estimates. These
estimates are reviewed periodically and as adjustments become necessary, the
effect of the change in estimate is charged to operating expenses in the
period incurred. All losses are charged to the allowance for loan losses
when the loss actually occurs or when management believes that the collec
tibility of the principal is unlikely. Recoveries are credited to the allow
ance at the time of recovery.
Bank Premises and Equipment
Bank premises and equipment are stated at cost less accumulated depreciation.
Depreciation is provided at rates based upon estimated useful service lives
using the straight-line method for financial reporting purposes and acceler
ated methods for income tax purposes.
The cost of assets retired or otherwise disposed of and the related accumulated
depreciation are eliminated from the accounts in the year of disposal and the
resulting gains or losses are included in current operations.
Expenditures for maintenance and repairs are charged to operations as incur
red. Cost of major additions and improvements are capitalized.
Other Real Estate
Other real estate is comprised of properties acquired through foreclosure or
negotiated settlement. The carrying value of these properties is lower of
cost or fair value. Loan losses arising from the acquisition of these pro
perties are charged against the allowance for loan losses. Any subsequent
market reductions required are charged to Net Other Real Estate Expense.
Revenues and expenses associated with maintaining or disposing of foreclosed
properties are recorded during the period in which they are incurred.
Income Taxes
The provision for income taxes is based on income as reported in the financial
statements after interest income from state and municipal securities is ex
cluded. Also certain items of income and expenses are recognized in diffe
rent time periods for financial statement purposes than for income tax pur
poses. Thus provisions for deferred taxes are recorded in recognition of
such timing differences.
Deferred taxes are provided on a liability method whereby deferred tax assets
are recognized for deductible temporary differences and operating loss
and tax credit carryforwards and deferred tax liabilities are recognized
for taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the opinion
of management, it is more likely than not that some portion or all of the
deferred tax assets will not be realized. Deferred tax assets and liabilities
are adjusted for the effects of changes in tax laws and rates on the date of
enactment.
The Company and the Bank file a consolidated federal income tax return. In
addition, state income tax returns are filed individually by the Company in
accordance with state statutes.
Comprehensive Income
The Financial Accounting Standards Board issued Statement No. 130 "Reporting
Comprehensive Income" , which has become effective for years beginning after
December 15, 1997. This statement establishes standards for reporting and dis
play of comprehensive income and its components which are revenues, expenses,
gains, and losses that under GAAP are included in comprehensive income but ex
cluded from net income. The Bank adopted this statement in 1998. The only
component of comprehensive income included in the financial statements was
the unrealized gain (loss) on securities available for sale, which was
immaterial at September 30,1998 and 1997.
10
Earnings per Common Share
In February 1997, Statement of Financial Accounting Standards No. 128 "Earnings
Per Share" (SFAS No. 128) was issued which establishes standards for computing
and presenting earnings per share (EPS). Under SFAS No. 128, primary EPS is
replaced with Basic EPS. Basic EPS is computed by dividing income applicable to
common shares by the weighted average shares outstanding; no dilution for any
potentially convertible shares is included in the calculation. Fully diluted
EPS now called diluted EPS reflects the potential dilution that could occur
if securities or other contracts to issue common stock were exercised or con
verted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the Company. At September 30, 1998 the Com
pany had no convertible shares or other contracts to issue common stock.
The weighted average number of shares of common stock used to calculate Basic
EPS was 193,667 for the third quarter of 1998 and 1997.
Statements of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents includes cash
on hand and amounts due from banks (including cash items in process of clear
ing).
11
Zachary Bancshares, Inc. and Subsidiary
MANAGEMENT'S DISCUSSION
September 30, 1998
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is management's discussion and analysis of the
significant changes in income and expenses in relation to the
changes in financial position for the nine months ended September
30, 1998 and 1997. This information should be read in conjunction
with the financial statements and notes relating thereto. The
Company is unaware of any trends, uncertainties or events which
would or could have a material impact on future operating results,
liquidity, or capital.
FINANCIAL CONDITION ANALYSIS
Loans
Total loans were $50,459,315 at September 30, 1998 compared to
$42,414,396 at September 30, 1997. This represents an increase of
$8,044,919 or 19%. Loan growth was funded from reallocation of
investment securities as they matured and from deposit growth.
Investment Securities
Investment securities decreased 21% to $20,607,858 at September
30, 1998 compared to $26,150,163 at September 30, 1997. This
decrease was due to the reallocation of these funds to the loan
portfolio as the securities matured.
Bank Premises and Equipment
Total bank premises and equipment were $2,517,947 at September 30,
1998 compared to $1,525,351 at September 30, 1997. The contract
for $2,876,000 for the construction of a new Company headquarters
is about 48% complete as of September 30, 1998. As work continues
on the project, the bank premises and equipment totals will increase to
reflect the construction in progress. Completion of the project is
anticipated to be in the first quarter of 1999.
12
Deposits
Total deposits increased 8% to $72,765,842 at September 30, 1998
compared to $67,201,685 at September 30, 1997.
RESULTS OF OPERATION
For the Nine Month Period Ended September 30, 1998 over 1997
Net Income
Net Income was $742,132 for the nine month period ended September
30, 1998 compared to $701,912 in the same period in 1997, an increase of
6%. This increase is primarily a result of the shifting of investment assets
to the higher yielding loan portfolio as well as an overall increase in Bank
assets.
Interest Income
Interest Income for the nine month period ended September 30, 1998
was $4,491,477 or an 11% increase over the same period in 1997.
The interest income increase resulted from the Company's continued
asset mix reallocation from lower yielding securities into higher
yielding loans. The Bank's loan portfolio increased 19% to
$50,459,315 while its investment portfolio decreased 21% to
$20,607,858 in the time period under consideration.
Interest Expense
Interest Expense for the nine months ended September 30, 1998 was
$1,748,874 or a 9% increase over the same period in 1997 at
$1,598,857. Interest bearing deposits increased 6% to $56,664,086
from $53,666,229 at September 30, 1997. Both volume and rate
increases contributed to the net interest expense change.
Provision for Loan Losses
The Company included $127,486 for provision for loan losses during
the nine month period ended September 30, 1998 due to continued
increases in the loan portfolio. The Company's Watch List volumes
were stable in the last half of 1997 and to date in 1998.
Management reviews the Watch List on a monthly basis and remains
committed to providing for losses in a timely manner.
13
Total Other Income
Total other income for the time period under consideration
increased $2,341. Service charges on Deposit Accounts decreased
$17,693 or 7% as the Company offered new products during the
latter part of 1997 which included reduced monthly service fees.
Other income increased $14,643 or 12% primarily from fee income on
investment sales which the Company received under the terms of a
contract with a third party which offers discount brokerage
services at the Company's facility.
Total Other Expense
Total other expenses increased 6% or $108,914 to $1,991,986 at
September 30, 1998 from $1,883,072 at September 30, 1997. Employee
salaries and benefits increased 6% for the nine month period under
consideration. Occupancy expense decreased 20% for the 1998 nine
month time period as 1997's period had one time expenses of
approximately $15,000 related to the Company's data processing
conversion in February 1997.
Income Tax
The Company is fully taxable at the maximum rate (34%) in both
1998 and 1997 and expects to remain taxable at the current rate
throughout 1998.
Earnings Per Share
The Company's 1998 earning per share at September 30,1998 was
$3.83 a 6% increase or $.21 per share over the previous year.
Dividends
The Company's cash dividend increased $.10 at June 30, 1998 to
$.90 per share or 13% over the previous year.
14
PART II
Item l. LEGAL PROCEEDINGS
During the normal course of business, the Company is
involved in various legal proceedings. In the opinion of manage-
ment and counsel, any liability resulting from such proceedings
would not have a material adverse effect on the Company's
financial statements.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a. None
15
SIGNATURES
Pursuant to the requirement 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.
ZACHARY BANCSHARES, INC.
Date:
Harry S. Morris, Jr.
President
Larry Bellard
Treasurer
16
Management's Responsibility for Financial Reporting
The management of Zachary Bancshares, Inc. is responsible for the preparation
of the financial statements, related financial data and other information in
this quarterly report. The financial statements are prepared in accordance
with generally accepted accounting principles and include some amounts that
are necessarily based on management's informed estimates and judgments, with
consideration given to materiality. All financial information contained in
this quarterly report is consistent with that in the financial statements.
Management fulfills its responsibility for the integrity, objectivity,
consistency and fair presentation of the financial statements and financial
information through an accounting system and related internal accounting
controls that are designed to provide reasonable assurance that assets are
safeguarded and that transactions are authorized and recorded in accordance
with established policies and procedures. The concept of reasonable assur
ance is based on the recognition that the cost of a system of internal
accounting controls should not exceed the related benefits. As an integral
part of the system of internal accounting controls, Zachary Bancshares, Inc.
has a professional staff who monitors compliance with and assesses the
effectiveness of the system of internal accounting controls and coordinates
audit coverage with the independent public accountants.
The Audit Committee of the Board of Directors, composed solely of outside
directors, meets periodically with management, and the independent public
accountants to review matters relating to financial reporting, internal
accounting control and the nature, extent and results of the audit effort.
The independent public accountants have direct access to the Audit Committee
with or without management present.
The financial statements as of December 31, 1997 were examined by Hannis T.
Bourgeois, L.L.P., independent public accountants, who rendered an indepen
dent professional opinion on the financial statements prepared by management.
The financial statements as of September 30, 1998 have not been reviewed by
Hannis T. Bourgeois, L.L.P.
Larry Bellard, Treasurer
18