ZACHARY BANCSHARES, INC. AND SUBSIDIARY
TABLE OF CONTENTS
President's
Message..................................................... 2
Independent Auditor's
Report...................................................... 3
Financial Statements:
Consolidated Balance Sheets
December 31, 1998 and 1997.............................. 4
Consolidated Statements of Income
for the years ended December 31, 1998 and 1997.......... 5
Consolidated Statements of Changes in Stockholders'
Equity for the years ended December 31, 1998
and 1997.......................................... 6
Consolidated Statements of Cash Flows for the
years ended December 31, 1998 and 1997.................. 7-8
Notes to Consolidated Financial Statements
December 31, 1998 and 1997.............................. 9-23
Condensed Consolidated Balance Sheets
December 31, 1998, 1997, 1996, 1995 and 1994............ 24
Condensed Consolidated Statements of Income
for the years ended December 31, 1998, 1997, 1996,
1995, and 1994..................................... 24
Average Balance Sheets and Interest Rate Analysis
for the years ended December 31, 1998 and 1997.......... 25
Interest Differential for the year ended December 31,
1998.................................................... 26
Condensed Consolidated Statements of Income
for the quarter periods in the year ended
December 31, 1998....................................... 26
Condensed Consolidated Statements of Income
for the quarter periods in the year ended
December 31, 1997....................................... 27
Management's Discussion and Analysis
and Results of Operation............................... 8-33
Officers.................................................... 34
Board of Directors.......................................... 34
Bank Locations.............................................. 34
1
ZACHARY BANCSHARES, INC.
March 9, 1999
Dear Shareholders:
Zachary Bancshares, Inc. had income of $1,047,660 in 1998 as
compared to $927,402 in 1997. Our Board of Directors paid a cash
dividend of $1.90 in 1998 as compared to $1.75 in 1997 and our
1998 return on average equity was 12.71%.
The Bank's total assets increased from $77,805,680 as of
December 31, 1997 to $83,787,719 as of December 31, 1998. Total
loans grew from $46,141,573 in 1997 to $52,372,002 in 1998.
The construction of our new main office is proceeding as
scheduled and we hope to move in by the end of April. The City
of Zachary has approved purchasing all of our existing land and
buildings at our main office location.
Zachary over the past few years has really grown as it has
become the primary trade area for East and West Feliciana
Parishes and the southern part of Mississippi. In 1998, the City
of Zachary issued 102 new residential building permits and a
total of 82 new business applications were filed. The Zachary
Chamber of Commerce reported 307 new residents in Zachary in
1998.
A total of five new subdivisions were opened in Zachary in
1998. In a short time, an investor may purchase a large tract of
land on Highway 64 to develop a golf course and country club with
residential and commercial properties.
Over the past year, many people have moved to our bank
because of our friendly customer service. With our move to our
new bank building, we feel our growth in new customers will only
increase.
This year's results would not have been possible without the
dedication of the directors, officers and employees. Thanks to
everyone for a team effort and a very good year for the Bank of
Zachary. Also, let me thank you, the shareholders, for your
continued support not only for this year but for the previous
years. We look forward to 1999 and the year 2000 with
anticipation and excitement as we face the challenges associated
with the new millenium.
Soon after you receive this annual statement, our new main
office should be finished. We invite you to come by and have a
cup of coffee and see the new facility. I remain,
Sincerely,
Harry S. Morris, Jr.
President
2
HANNIS T. BOURGEOIS, L.L.P.
CERTIFIED PUBLIC ACCOUNTANTS
2322 TREMONT DRIVE, SUITE 200
BATON ROUGE, LA 70809
January 08, 1999
To the Shareholders
and Board of Directors
Zachary Bancshares, Inc. and Subsidiary
Zachary, Louisiana
We have audited the accompanying Consolidated Balance Sheets of
Zachary Bancshares, Inc. and Subsidiary as of December 31, 1998
and 1997, and the related Consolidated Statements of Income,
Changes in Stockholders' Equity and Cash Flows for the years
then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used
and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial
position of Zachary Bancshares, Inc. and Subsidiary as of
December 31, 1998 and 1997, and the results of their
operations, changes in their stockholders' equity and their
cash flows for the years then ended, in conformity with gener
ally accepted accounting principles.
Respectfully submitted,
3
Zachary Bancshares, Inc. and Subsidiary
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
ASSETS
1998 1997
Cash and Due from Banks $ 2,815,507 $ 2,481,869
Interest Bearing Deposits in Other Institutions 1,701,873 95,046
Reserve Funds Sold 6,175,000 1,700,000
Securities Available for Sale (Amortized
Cost of $17,563,961 and $25,624,161) - 17,572,539 25,620,114
Loans 52,372,002 46,141,573
Less: Allowance for Loan Losses (858,856) (771,850)
51,513,146 45,369,723
Bank Premises and Equipment 3,067,869 1,693,887
Other Real Estate 191,592 217,401
Accrued Interest Receivable 518,258 558,501
Other Assets 231,935 69,139
Total Assets 83,787,719 77,805,680
LIABILITIES
Deposits
Noninterest Bearing 17,636,206 14,418,082
Interest Bearing 56,814,190 54,762,690
74,450,396 69,180,772
Accrued Interest Payable 231,360 188,188
Other Liabilities 203,202 221,985
Total Liabilities 74,884,958 69,590,945
STOCKHOLDERS' EQUITY
Common Stock - $10 par value;
authorized 2,000,000 shares;
issued 216,000 shares 2,160,000 2,160,000
Surplus 1,480,000 1,480,000
Retained Earnings 5,703,759 5,024,066
Accumulated Other Comprehensive Income 5,662 (2,671)
Treasury Stock - 22,333 Shares, at Cost (446,660) (446,660)
Total Stockholders' Equity 8,902,761 8,214,735
Total Liabilities and Stockholders'
Equity $83,787,719 $77,805,680
The accompanying notes are an integral part of these financial
statements
4
Zachary Bancshares, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF INCOME
for the years ended December 31, 1998 and 1997
1998 1997
Interest Income:
Interest and Fees on Loans $4,450,667 $3,601,644
Interest on Securities 1,352,543 1,758,344
Other Interest Income 288,461 112,694
Total Interest Income 6,091,671 5,472,682
Interest Expense:
Interest Expense on Deposits 2,324,265 2,148,247
Interest Expense on Borrowings 681 -
Total Interest Expense 2,324,946 2,148,247
Net Interest Income 3,766,725 3,324,435
Provision for Loan Losses 190,565 30,854
Net Interest Income after
Provision for Loan Losses 3,576,160 3,293,581
Other Income:
Service Charges on Deposit Accounts 497,413 505,552
Loss on Securities - (5,392)
Other Operating Income 167,651 158,308
Total Other Income 665,064 658,468
Income before Other Expenses 4,241,224 3,952,049
Other Expenses:
Salaries and Employee Benefits 1,485,386 1,462,089
Occupancy Expense 185,397 162,977
Net Other Real Estate Expense 12,366 5,648
Other Operating Expenses 973,973 924,521
Total Other Expenses 2,657,122 2,555,235
Income before Income Taxes 1,584,102 1,396,814
Applicable Income Tax 536,442 469,412
Net Income $1,047,660 $ 927,402
Per Share
Net Income
$ 5.41 $ 4.79
Cash Dividends
$ 1.90 $ 1.75
The accompanying notes are an integral part of these financial
statements.
5
Zachary Bancshares, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
for the years ended December 31, 1998 and 1997
ACCUMULATED
OTHER TOTAL
COMMON RETAINED COMPREHENSIVE TREASURY STOCKHOLDERS'
STOCK SURPLUS EARNINGS INCOME STOCK EQUITY
Balances,
January 1, 1997$2,160,000$1,480,000 $4,435,582 $(17,046) $(446,660)$7,611,876
Comprehensive Income:
Net Income 927,402 927,402
Change in Unrealized
Gain (Loss) on Securities
Available for Sale 8,983 8,983
Less: Reclassification
Adjustment 5,392 5,392
Total Comprehensive
Income 941,777
Cash Dividends (338,918) (338,918)
Balances,
December 31, 1997$2,160,000$1,480,000$5,024,066$ (2,671)$(446,660)$8,214,735
Comprehensive Income: 1,047,660 1,047,660
Net Income
Change in Unrealized
Gain (Loss) on Securities
Available for Sale 8,333 8,333
Less: Reclassification
Adjustment - -
Total Comprehensive
Income 1,055,996
Cash Dividends (367,967) (367,967)
Balances,
December 31, 1998$2,160,000$1,480,000$5,703,759$ 5,662 $(446,660)$8,902,761
The accompanying notes are an integral part of these financial
statements.
6
Zachary Bancshares, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 1998 and 1997
1998 1997
Cash Flows From Operating Activities:
Net Income $ 1,047,660 $ 927,402
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Provision for Loan Losses
190,565 30,854
Provision for Depreciation and Amortization
202,714 180,180
Stock Dividends - Federal Home Loan Bank Stock (17,500) (14,300)
Net Accretion Securities Discounts (2,335) (14,017)
Loss on Sale of Securities - 5,392
Gain on Sale of Other Real Estate - (11,685)
Decrease in Accrued Interest Receivable 40,243 54,067
(Increase) Decrease in Other Assets (162,796) 13,185
Increase in Accrued Interest Payable 43,172 2,900
Increase (Decrease) in Other Liabilities (23,056) 153,585
Net Cash Provided by Operating Activities 1,318,667 1,327,563
Cash Flows From Investing Activities:
Net Increase in Reserve Funds Sold (4,475,000) (850,000)
Purchases of Securities Available for Sale (885,998) (7,054,996)
Maturities or Calls of Securities Available for Sale5,500,000 4,000,000
Principal Paymentson Mortgage Backed Securities 3,466,034 1,078,682
Proceeds from Sales of Securities Available For Sale - 8,929,725
Net Increase in Loans (6,334,008) (8,960,751)
Purchases of Premises and Equipment (1,576,696) (534,628)
Proceeds from Sales of Other Real Estate 25,809 202,465
Net Cash Used in Investing Activities (4,279,859) (3,189,503)
(CONTINUED)
7
Zachary Bancshares, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
for the years ended December 31, 1998 and 1997
1998 1997
Cash Flows From Financing Activities:
Net Increase (Decrease) in Demand
Deposits, NOW Accounts and
Savings Accounts 4,394,721 (1,556,661)
Net Increase in Certificates of Deposit 874,903 2,568,164
Cash Dividends (367,967) (338,918)
Net Cash Provided by Financing Activities 4,901,657 672,585
Increase (Decrease) in Cash and Interest
Bearing Deposits 1,940,465 (1,189,355)
Cash and Interest Bearing
Deposits -Beginning of Year 2,576,915 3,766,270
Cash and Interest Bearing
Deposits-End of Year $ 4,517,380 $ 2,576,915
Supplemental Disclosures of Cash Flow Information:
Noncash Investing Activities:
Increase in Unrealized Gain
on Securities Available for Sale $ 12,626 $ 21,781
Change in Deferred Tax Effect on
Unrealized Gain on Securities
Available for Sale $ ( 4,293) $ (7,406)
Cash Payments for:
Interest Paid on Deposits $ 2,281,093 $ 2,145,347
Income Tax Payments $ 549,500 $ 475,000
The accompanying notes are an integral part of these financial
statements.
8
Zachary Bancshares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 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 conform
with generally accepted accounting principles and have been
applied on a consistent basis. The principles which
significantly affect the determination of financial position,
results of operations, changes in stockholders' equity and cash
flows are summarized below.
Principles of Consolidation
The consolidated financial statements include the accounts
of Zachary Bancshares, 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
requirements.
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 the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
The determination of the adequacy of the allowance for loan
losses is based on estimates that are particularly susceptible
to significant changes in the economic environment and market
conditions. In connection with the determination of the
estimated losses on loans, management obtains independent
appraisals for significant collateral.
The Bank's loans are generally secured by specific items of
collateral including real property, consumer assets, and
business assets. Although the Bank has a diversified loan
portfolio, a substantial portion of its debtors' ability to
honor their contracts is dependent on local economic
conditions.
While management uses available information to recognize
losses on loans, further reductions in the carrying amounts of
loans may be necessary based on changes in local economic
conditions. In addition, regulatory agencies, as an integral
part of their examination process, periodically review the
estimated losses on loans. Such agencies may require the Bank
to recognize additional losses based on their judgments about
information available to them at the time of their examination.
Because of these factors, it is reasonably possible that the
estimated losses on loans may change materially in the near
term. However, the amount of the change that is reasonably
possible cannot be estimated.
9
Securities
Securities classified as held to maturity are those debt
securities the Bank has both the intent and ability to hold to
maturity regardless of changes in market conditions, liquidity
needs or changes in general economic conditions. Securities
classified as trading are those securities held for resale in
anticipation of short-term market movements. The Bank had no
securities classified as held to maturity or trading at December
31, 1998 or 1997.
Securities classified as available for sale are those debt
securities that the Bank intends to hold for an indefinite period
of time but not necessarily to maturity. 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, liquidity 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
related deferred tax effect. Realized gains or losses,
determined on the basis of the cost of specific securities sold,
are included in earnings.
Loans
Loans are stated at principal amounts outstanding, less the
allowance for loan losses. Interest on commercial and individual
loans is accrued daily based on the principal outstanding.
Generally, the Bank discontinues the accrual of interest
income when a loan becomes 90 days past due as to principal or
interest. When a loan is placed on non-accrual status,
previously recognized but uncollected interest is reversed to
income or charged to the allowance for loan losses. Interest
income is subsequently recognized only to the extent cash
payments are received. The Bank classifies loans as impaired if,
based on current information and events, it is probable that the
Bank will be unable to collect the scheduled payments of
principal and interest when due according to the contractual
terms of the loan agreement. The measurement of impaired loans
is based on the present value of the expected future cash flows
discounted at the loan's effective interest rate or the loan's
observable market price or based on the fair value of the
collateral if the loan is collateral-dependent.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level which
in management's judgment is adequate to absorb credit losses
inherent 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 examinations by regulatory
agencies; an internal asset review process; expectations of
future economic conditions and their impact on particular borrow
ers; and other judgmental factors. Allowances for impaired loans
are generally determined based on collateral values or the
present value of estimated cash flows. Although management uses
available information to recognize losses on loans, because of
uncertainties associated with local economic conditions,
collateral values, and future cash flows on impaired loans, it is
reasonably possible that a material change could occur in the
allowance for loan losses in the near term. However, the amount
of the change that is reasonably possible cannot be estimated.
10
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
collectibility of the principal is unlikely. Recoveries are
credited to the allowance 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 accelerated methods
for income tax reporting.
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 incurred. 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, minus estimated
costs to sell. Loan losses arising from the acquisition of these
properties 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. Also certain items of
income and expenses are recognized in different time periods for
financial statement purposes than for income taxes purposes.
Thus provisions for deferred taxes are recorded in recognition of
such timing differences.
Deferred taxes are provided utilizing 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 corporation and its subsidiary file a consolidated fed
eral income tax return. In addition, state income tax returns
are filed individually by the Company in accordance with state
statutes.
11
Earnings per Common Share
In February 1997, Statement of Financial Accounting Standard
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 converted
into common stock or resulted in the issuance of common stock
that then shared in the earnings of the Company. At December 31,
1998, the Company 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
years ended December 31, 1998 and 1997, respectively.
Statements of Cash Flows
For purposes of reporting cash flows, cash and due from banks
includes cash on hand and amounts due from banks (including cash
items in process of clearing).
Comprehensive Income
The Financial Accounting Standards Board (FASB) issued
Statement No. 130 "Reporting Comprehensive Income." which became
effective for fiscal years beginning after December 15, 1997.
This statement established standards for the reporting and
display of comprehensive income and its components which are
revenues, expenses, gains, and losses that under GAAP are
included in comprehensive income but excluded from net income.
The Company adopted this statement in 1998. The components of
comprehensive income are disclosed in the Statements of Changes
in Stockholder's Equity for all periods presented.
Current Accounting Developments
In June 1997, the FASB issued SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information," which
establishes standards for the reporting of financial information
from operating segments in annual and interim financial
statements. SFAS No. 131 requires that financial information be
reported on the same basis that it is reported internally for
evaluating segment performance and allocating resources to
segments. The adoption of this statement had no effect on the
financial statements as of December 31, 1998.
In February 1998, the FASB issued Statement No. 132,
"Employers' Disclosures about Pensions and Other Postretirement
Benefits. FASB Statement No. 132 revises employers' disclosures
about pension and other postretirement benefit plans. It does
not change the measurement or recognition of those plans. It
standardizes the disclosure requirements for pensions and other
postretirement benefits. The adoption of this statement in 1998
had no material impact on the Company's financial position or
results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities". The provisions
of this statement will be effective for the Company's year end
December 31, 1999. Management does not believe that the impact
of adopting this statement will have a material impact on the
Company's financial position or results of operation.
12
In early 1998, the AICPA issued Statement of Position 98-5,
"Reporting on the Costs of Start-Up Activities" ("SOP"). The SOP
is effective for fiscal years beginning after December 15, 1998
and will require costs of start-up activities and organization
costs to be expenses as incurred. Any such unamortized costs on
the date of adoption of the new standard will be written off and
reflected as a cumulative effect of a change in accounting
principle. The adoption of this statement in 1999 should not
have a material impact on the financial statements of the
Company.
Note B - Cash and Due from Banks -
The Bank is required by federal law to maintain cash
reserve balances. The average cash balance required for
1998 and 1997 was $616,000 and $572,000, respectively.
Note C - Securities -
Amortized cost amounts and fair values of securities
available for sale at December 31, 1998 and 1997 are summarized
as follows:
1998
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
Securities of Other
U.S. Government
Agencies $ 9,011,142 $ 61,958 $ - $9,073,100
Mortgage-Backed
Securities 4,625,166 43,356 (2,931) 4,665,591
Collateralized Mortgage
Obligations 3,595,553 - (93,805) 3,501,748
Equity Securities 332,100 - - 332,100
Total $17,563,961 $ 105,314 $ (96,736) $17,572,539
13
1997
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
U.S. Treasury
Securities $ 1,980,063 $ 10,562 $ - $1,990,625
Securities of Other
U.S. Government
Agencies 12,519,211 59,201 (3,674) 12,574,738
Mortgage-Backed
Securities 5,694,931 50,409 (971) 5,744,369
Collaterized Mortgage
Obligations 5,166,656 - (119,574) 5,047,082
Equity Securities 263,300 - - 263,300
Total $25,624,161 $ 120,172 $(124,219) $25,620,114
The amortized cost and fair values of securities available
for sale as of December 31, 1998 by contractual maturity are
shown below. Maturities may differ from contractual
maturities in mortgage-backed securities and collateralized
mortgage obligations because the mortgages underlying the
securities may be called or repaid without any penalties.
Therefore, these securities are not included in the maturity
categories in the following maturity summary.
AMORTIZED FAIR
COST VALUE
Within One Year $5,995,225 $6,016,100
One to Five Years 1,002,888 1,009,000
Five to Ten Years 997,784 1,020,000
Ten to Fifteen Years 1,015,245 1,028,000
$9,011,142 $9,073,100
Securities available for sale with a fair value of
$15,462,474 and $20,360,176 at December 31, 1998 and 1997,
were pledged as collateral on public deposits and for other
purposes as required or permitted by law.
The Company has invested in Federal Home Loan Bank Stock
which is included in Equity Securities and is reflected at
the lower of cost or market in these financial statements.
The cost of these securities was $332,100 with no unrealized
gains or loss at December 31, 1998.
Gross realized gains and losses from the sale of
securities for the years ended December 31, 1998 and 1997
are as follows:
1998 1997
Realized Gains $ - $ 4,449
Realized Losses - (9,841)
$ - $ (5,392)
14
Note D - Loans -
An analysis of the loan portfolio at December 31, 1998 and 1997,
is as follows:
1998 % of 1997 %of
Balances Loans Balances Loans
Real Estate Loans - Construction $ 5,086,020 9.71% $ 4,464,490 9.68%
Real Estate Loans - Mortgage 26,824,063 51.22 28,568,164 61.91
Loans to Farmers 63,370 .12 81,779 .18
Commercial and Industrial Loans 17,142,525 32.73 10,138,068 21.97
Loans to Individuals 3,127,188 5.97 2,775,044 6.01
All Other Loans 128,836 .25 114,028 .25
Total Loans $52,372,002 100.00% $46,141,573 100.00%
The Bank had non-performing loans on a non-accrual basis
totaling $126,829 and $216,598 at December 31, 1998 and 1997, re
spectively. The Bank recognized $4,455 and $4,962 in interest in
come relating to these loans during the years ended December 31,
1998 and 1997. Had the loans been performing, approximately
$5,811 and $18,035 of additional interest income would have been
recognized for the years ended December 31, 1998 and 1997. Loans
contractually past due 90 days or more, in addition to loans on
non-accrual, were $26,631 and -0- at December 31, 1998 and 1997,
respectively. The Company has no impaired loans at December 31,
1998, in accordance with SFAS No. 114.
The Bank is permitted under the laws of the State of
Louisiana to make extensions of credit to its executive officers,
directors and their affiliates in the ordinary course of
business. The amount of such related party loans was $540,254
and $654,083 at December 31, 1998 and 1997, respectively. An
analysis of the aggregate of these loans for 1998, is as follows:
Balance - Beginning of Year $ 654,083
New Loans 143,049
Repayments (256,878)
Balance - End of Year $ 540,254
Note E - Allowance for Loan Losses -
Following is a summary of the activity in the allowance
for loan losses:
1998 1997
Balance - Beginning of Year $ 771,850 $ 820,227
Current Provision from Income 190,565 30,854
Recoveries of Amounts Previously
Charged Off 46,281 16,569
Amounts Charged Off (149,840) (95,800)
Balance - End of Year $ 858,856 $ 771,850
15
Ratio of Reserve for Possible Loan Losses to
Non-Performing Loans at End of Year 677.18% 356.35%
Ratio of Reserve for Possible Loan Losses to
Loans Outstanding at End of Year 1.64% 1.67%
Ratio of Net Loans Charged Off to Average
Loans Outstanding for the year .21% .19%
Note F - Bank Premises and Equipment -
Bank premises and equipment costs and the related
accumulated depreciation at December 31, 1998 and 1997,
are as follows:
ACCUMULATED
ASSET COST DEPRECIATION NET
December 31, 1998:
Land $ 450,908 $ - $ 450,908
Bank Premises 743,265 492,410 250,855
Furniture and Equipment 1,687,232 1,097,050 590,182
Construction in Progress 1,775,924 - 1,775,924
$4,657,329 $1,589,460 $3,067,869
December 31, 1997:
Land $ 450,908 $ - $ 450,908
Bank Premises 743,265 475,118 268,147
Furniture and Equipment 1,651,862 928,691 723,171
Construction in Progress 251,661 - 251,661
$3,097,696 $1,403,809 $1,693,887
The provision for depreciation charged to operating
expenses was $202,714 and $180,180, respectively, for the
years ended December 31, 1998 and 1997. The construction
in progress represents the cost to date of the new main
office facility as further discussed in Note O.
Note G - Deposits -
Following is a detail of deposits:
1998 1997
Demand Deposit Accounts $17,636,206 $14,418,082
NOW and Super NOW Accounts 11,489,734 10,341,151
Money Market Accounts 3,987,876 4,639,948
Savings Accounts 8,489,733 7,809,647
Certificates of Deposit Over $100,000 15,716,515 15,437,497
Certificates of Deposit 17,130,332 16,534,447
$74,450,396 $69,180,772
Interest expense on certificates of deposit over $100,000
for the years ended December 31, 1998 and 1997, amounted to
$904,665 and $610,768, respectively.
Public fund deposits at December 31, 1998 and 1997, were
$13,437,325 and $14,664,896, respectively.
16
Note H - Stockholders' Equity and Regulatory Matters -
Stockholders' Equity of the Company includes the
undistributed earnings of the Bank. Dividends are paid by the
Company from its assets which are provided primarily by dividends
from the Bank. Dividends are payable only out of retained
earnings and current earnings of the Company.
Certain restrictions exist regarding the ability of the Bank
to transfer funds to the Company in the form of cash dividends.
Louisiana statutes require approval to pay dividends in excess of
a state bank's earnings in the current year plus retained net
profits for the preceding year. As of January 1, 1999, the Bank
had retained earnings of $6,284,284 of which $1,246,825 was
available for distribution without prior regulatory approval.
The Company and the Bank are subject to various regulatory
capital requirements administered by federal and state banking
agencies. Failure to meet minimum regulatory capital
requirements can initiate certain mandatory, and possible
additional discretionary actions by regulators, that if
undertaken, could have a direct material affect on the Company's
financial statements. Under the capital adequacy guidelines and
the regulatory framework for prompt corrective action, the
Company and the Bank must meet specific capital guidelines
involving quantitative measures of assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory
accounting practices. The Company and the Bank's capital amounts
and classification under the prompt corrective action guidelines
are also subject to qualitative judgments by regulators about
components, risk weightings and other factors.
Quantitative measures established by regulation to ensure
capital adequacy require the Company to maintain minimum amounts
and ratios. As detailed below, as of December 31, 1998 and 1997,
the Company met all of the capital requirements to which it is
subject.
As of December 31, 1998 and 1997, the Company was categorized
as well capitalized under the regulatory framework for prompt
corrective action. There are no conditions or events since the
most recent notification that management believes have changed
the prompt corrective action category.
Following is a summary of capital levels at December 31, 1998
and 1997:
TO BE WELL
CAPITALIZED UNDER
ACTUAL REQUIRED FOR CAPITAL PROMPT CORRECTIVE
RATIOS ADEQUACY PURPOSES ACTION PROVISIONS
As of December 31,
1998:
Total Capital (to
Risk-Weighted
Assets) 18.12% 8.00% 10.00%
Tier I Capital(to
Risk-Weighted
Assets) 16.87% 4.00% 6.00%
Tier I Leveraged
Capital (to
Average Assets) 10.42% 4.00% 5.00%
17
TO BE WELL
CAPITALIZED UNDER
ACTUAL REQUIRED FOR CAPITAL PROMPT CORRECTIVE
RATIOS ADEQUACY PURPOSES ACTION PROVISIONS
As of December 31,
1997:
Total Capital(to
Risk-Weighted
Assets) 19.22% 8.00% 10.00%
Tier I Capital(to
Risk-Weighted
Assets) 18.14% 4.00% 6.00%
Tier I Leveraged
Capital(to
Average Assets) 10.38% 4.00% 5.00%
Under current regulations, the Bank is limited in the amount
it may loan to its Parent. Loans to the Parent may not exceed
10% of the Bank's capital and surplus. There were no loans
outstanding at December 31, 1998 and 1997.
Note I - Employee Benefit Plans -
The Bank of Zachary has a defined contribution Profit Sharing
Plan and Trust for its qualified employees. Each year the
Board of Directors of the Bank determines the Bank's contribu
tion. No contribution is required by qualified participants.
Contributions charged to expense for this plan were $55,260 and
$56,839 for the years ended December 31, 1998 and 1997.
In addition, the Bank has a 401(K) plan for those employees
who meet the necessary eligibility requirements. Covered
employees may voluntarily contribute 1% to 15% of gross pay to
the plan. The Bank matched one-half of the employee's contri
bution to a maximum of 7% of gross pay in 1998 and 1997.
Contributions charged to expense for this plan were $29,740 and
$28,161 for the years ended December 31, 1998 and 1997,
respectively.
Note J - Other Operating Expenses -
An analysis of Other Operating Expenses for the years ended
December 31, 1998 and 1997, is as follows:
1998 1997
Data Processing $ 33,496 $ 29,093
Computer and Office Expenses 310,841 320,221
Professional Fees 173,378 141,288
Other 456,258 433,919
$973,973 $924,521
18
Note K - Income Tax -
The total provision for income taxes charged to income
amounted to $536,442 and $469,412 for 1998 and 1997,
respectively. The provisions represent effective tax rates of
34% in 1998 and 1997.
Following is a reconciliation between income tax expense
based on the federal statutory tax rates and income taxes
reported in the statements of income.
1998 1997
Income Taxes Based on Statutory
Rate - 34% in 1998 and 1997 $ 538,595 $ 474,917
Other - Net (2,153) (5,505)
$ 536,442 $ 469,412
The components of consolidated income tax expense are:
Provision for Current Taxes $ 564,120 $ 477,610
Provision(Credit) for
Deferred Taxes (27,678) (8,198)
$ 536,442 $ 469,412
A deferred income tax liability of $36,817 is included in
other liabilities at December 31, 1998 and a deferred income
tax liability of $60,202 is included in other liabilities at
December 31, 1997.
The deferred tax provision consists of the following timing
differences:
1998 1997
Accumulated Depreciation for Tax
Reporting in Excess of Amount
for Financial Reporting $ 24,228 $ 7,433
Provision for Loan Losses
for Financial Reporting in
Excess of Amount for Tax (43,745) (9,594)
Accretion Income for Tax Reporting
In Excess of Financial Reporting (6,045) (9,320)
Hospitalization Expense for Financial
Reporting in Excess of Amount for
Tax Reporting (2,116) -
Hospitalization Expense for Tax
Reporting in Excess of Amount
for Financial Reporting - 3,283
$(27,678) $ (8,198)
19
The net deferred tax liability consist of the following
components at December 31, 1998 and 1997:
1998 1997
Depreciation $(69,330) $(45,102)
Provision for Loan Losses 37,630 (6,115)
Accretion Income (20,300) (26,345)
Self-Insured Hospitalization Plan 18,100 15,984
Unrealized (Gain) Loss on Securities
Available for Sale (2,917) 1,376
Total Deferred Tax Liability $(36,817) $(60,202)
Note L - Off-Balance-Sheet Instruments -
The Company is a party to financial instruments with off-
balance-sheet risk in the normal course of business to meet the
financing needs of its customers. These financial instruments
include commitments to extend credit and letters of credit.
These instruments involve, to varying degrees, elements of
credit risk in excess of the amount recognized in the balance
sheets.
The Company's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for
commitments to extend credit and letters of credit is represented
by the contractual amount of those instruments. The Bank uses
the same credit policies in making commitments and conditional
obligations as they do for on-balance-sheet instruments.
In the normal course of business the Bank has made
commitments to extend credit of $8,519,300 and $6,343,932 as of
December 31, 1998 and 1997, respectively. Commitments as of
December 31, 1998 include unfunded loan commitments aggregating
$8,387,000 and letters of credit of $132,300. Commitments as of
December 31,1997 include unfunded loan commitments aggregating
$6,263,132 and letters of credit of $80,800.
The Bank has two lines of credit available to assist in the
management of short-term liquidity. One line is with another
financial institution and totals $2,000,000. The second is with
the Federal Home Loan Bank of Dallas and is for approximately
$6,738,000. Total available lines of credit as of December 31,
1997 were $8,844,000. No funds were drawn on any of these lines
at December 31, 1998 or 1997.
Note M - Fair Value of Financial Instruments -
The following methods and assumptions were used to estimate
the fair value of each class of financial instruments for which
it is practicable to estimate that value:
Cash and Short-Term Investments - For those short-term
instruments, the carrying amount is a reasonable estimate of
fair value.
Securities - Fair value of securities held to maturity and
available for sale is based on quoted market prices. If a quoted
market price is not available, fair value is estimated using
quoted market prices for similar securities.
20
Loans - The fair value for loans is estimated using
discounted cash flow analyses, with interest rates currently
being offered for similar loans to borrowers with similar credit
rates. Loans with similar classifications are aggregated for
purposes of the calculations. The allowance for loan loss which
was used to measure the credit risk, is subtracted from loans.
Deposits - The fair value of demand deposits, savings
account, and certain money market deposits is the amount payable
at the reporting date. The fair value of fixed-maturity
certificates of deposit is estimated using discounted cash flow
analyses, with interest rates currently offered for deposits of
similar remaining maturities.
Commitments to Extend Credit and Standby Letters of Credit -
The fair values of commitments to extend credit and standby
letters of credit do not differ significantly from the commitment
amount and are therefore omitted from this disclosure.
The estimated approximate fair values of the Bank's
financial instruments as of December 31, 1998 and 1997 are as
follows:
1998
CARRYING FAIR
AMOUNT VALUE
Financial Assets:
Cash and Short-Term Investments $10,692,380 $10,692,380
Securities 17,572,539 17,572,539
Loans-Net 51,513,146 51,366,000
$79,778,065 $79,630,919
Financial Liabilities:
Deposits $74,450,396 $72,889,000
1997
CARRYING FAIR
AMOUNT VALUE
Financial Assets:
Cash and Short-Term Investments $ 4,276,915 $ 4,276,915
Securities 25,620,114 25,620,114
Loans-Net 45,369,723 45,915,000
$75,266,752 $75,812,029
Financial Liabilities:
Deposits $69,180,772 $69,025,828
Note N - Concentrations of Credit -
The majority of the Bank's business activities are with
customers in the Bank's market area, which consists primarily of
East Baton Rouge and adjacent parishes. The majority of such
customers are depositors of the Bank. The concentrations of
credit by type of loan are shown in Note D. Most of the Bank's
credits are to individuals and small businesses secured by real
estate. The Bank, as a matter of policy, does not extend credit
to any single borrower or group of related borrowers in excess of
$1,000,000.
21
Note O - Commitments and Contingencies -
The Bank has entered into a contract for the construction
of a new main office facility to be located in Zachary,
Louisiana. The estimated construction cost of the facility per
the contract is $2,916,826. The project began in the first
quarter of 1998 with completion anticipated in the second quarter
of 1999. The project is expected to have an impact on the
results of operations primarily through increased depreciation
expense. Financing alternatives are currently being evaluated.
Payments related to this contract through December 31, 1998 total
$1,703,220.
In the normal course of business, the Company is involved
in various legal proceedings. In the opinion of management and
counsel, any liability resulting from such proceedings would not
have a material adverse effect on the Company's financial
statements.
Note P - Financial Information - Parent Company Only -
The financial statements for Zachary Bancshares, Inc. (Parent
Company) are presented below:
BALANCE SHEETS
December 31, 1998 and 1997
1998 1997
Assets:
Cash $ 412,816 $ 429,932
Investment in Subsidiary 8,489,945 7,811,482
Other Assets 27,678 -
Total Asset $8,930,439 $8,241,414
Liabilities:
Income Tax Payable $ 27,678 $ 6,059
Due to Subsidiary - 20,620
Total Liabilities $ 27,678 $ 26,679
Stockholders' Equity:
Common Stock $2,160,000 $2,160,000
Surplus 1,480,000 1,480,000
Retained Earnings 5,709,421 5,021,395
Treasury Stock (446,660) (446,660)
Total Stockholders' Equity $8,902,761 $8,214,735
Total Liabilities and Stockholders'
Equity $8,930,439 $8,241,414
22
STATEMENTS OF INCOME
for the years ended December 31, 1998 and 1997
1998 1997
Income:
Dividend from Subsidiary $ 384,300 $ 360,000
Expenses:
Operating Expenses 11,228 15,515
Income before Equity in Undistributed
Net Income of Subsidiary 373,072 344,485
Equity in Undistributed Net Income
of Subsidiary 670,130 576,695
Net Income before Income Taxes 1,043,202 921,180
Applicable Income Tax Expense (Benefit) (4,458) (6,222)
Net Income $1,047,660 $ 927,402
STATEMENTS OF CASH FLOWS
for the years ended December 31, 1998 and 1997
1998 1997
Cash Flows From Operating Activities:
Net Income $1,047,660 $ 927,402
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Equity in Undistributed Net Income
of Subsidiary (670,130) (576,695)
(Increase) Decrease in Other Assets (27,678) 37,577
Decrease in Due to Subsidiary (20,620) (8,832)
Increase in Income Tax Payable 21,619 6,059
Net Cash Provided by Operating Activities 350,851 385,511
Cash Flows From Financing Activities:
Dividends Paid (367,967) (338,918)
Net Cash Used in Financing Activities (367,967) (338,918)
Net Increase (Decrease) in Cash (17,116) 46,593
Cash - Beginning of Year 429,932 383,339
Cash - End of Year $ 412,816 $ 429,932
23
Zachary Bancshares, Inc. and Subsidiary
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, 1998, 1997, 1996, 1995 and 1994
ASSETS
1998 1997 1996 1995 1994
Cash and Due
from Banks $ 4,517,380 $ 2,576,915 $ 3,766,270 $ 2,413,042 $ 2,592,065
Securities 23,747,539 27,320,114 33,378,819 32,774,648 31,785,000
Loans 51,513,146 45,369,723 36,439,826 29,607,051 27,421,397
Other Assets 4,009,654 2,538,928 2,442,512 2,075,694 2,609,584
Total Assets $83,787,719 $77,805,680 $76,027,427 $66,870,435 $64,408,046
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $74,450,396 $69,180,772 $68,169,269 $59,356,525 $58,404,821
Other Liabilities 434,562 410,173 246,282 346,503 324,754
Stockholders'
Equity 8,902,761 8,214,735 7,611,876 7,167,407 5,678,471
Total Liabilities
and Stockholders'
Equity $83,787,719 $77,805,680 $76,027,427 $66,870,435 $64,408,046
Selected Ratios:
Loans to Assets 61.48% 58.31% 47.93% 44.27% 42.57%
Loans to Deposits 69.19% 65.58% 53.45% 49.88% 46.95%
Deposits to Assets 88.86% 88.91% 89.66% 88.76% 90.68%
Equity to Assets 10.63% 10.56% 10.01% 10.72% 8.82%
Return on Avg Assets 1.29% 1.23% 1.11% 1.14% 1.11%
Return on Avg Equity 12.71% 11.71% 11.50% 12.13% 12.19%
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
for the years ended December 31, 1998, 1997, 1996, 1995 and 1994
1998 1997 1996 1995 1994
Interest Income $ 6,091,671 $ 5,472,682 $ 5,119,871 $4,684,130 $ 4,188,994
Interest Expense 2,324,946 2,148,247 2,126,280 1,826,859 1,356,065
Net Interest Income 3,766,725 3,324,435 2,993,591 2,857,271 2,832,929
Provision (Credit)
for Loan Losses 190,565 30,854 - (77,374) (42,338)
Net Interest after
Provision for
Loan Losses 3,576,160 3,293,581 2,993,591 2,934,645 2,875,267
Other Income 665,064 658,468 600,993 542,664 445,561
Other Expenses 2,657,122 2,555,235 2,362,389 2,326,014 2,218,122
Income before
Income Taxes 1,584,102 1,396,814 1,232,195 1,151,295 1,102,706
Applicable Income
Tax Expense 536,442 469,412 412,869 385,512 377,470
Net Income $ 1,047,660 $ 927,402 $ 819,326 $ 765,783 $ 725,236
Per Share:
Net Income $ 5.41 $ 4.79 $ 4.23 $ 3.95 $ 3.75
Cash Dividends $ 1.90 $ 1.75 $ 1.65 $ 1.50 $ 1.35
Book Value -
End of Year $ 45.97 $ 42.42 $ 39.30 $ 37.01 $ 29.32
24
Zachary Bancshares, Inc. and Subsidiary
AVERAGE BALANCE SHEETS AND INTEREST RATE ANALYSIS
for the years ended December 31, 1998 and 1997
1998 1997
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
ASSETS
Interest Earning Deposits
and Reserve Funds $ 5,474,365 $ 288,461 5.27% $ 2,079,000 $ 112,694 5.42%
Securities:
Taxable 22,013,923 1,352,543 6.14 28,156,000 1,758,344 6.25
Loans 48,987,560 4,450,667 9.09 40,690,000 3,601,644 8.85
Total Earning Assets 76,475,848 6,091,671 7.97% 70,925,000 5,472,682 7.72%
Allowance for Loan
Losses (795,754) (809,000)
Nonearning Assets 5,775,238 5,180,000
Total Assets $81,455,332 $75,296,000
LIABILITIES AND
STOCKHOLDERS' EQUITY
FHLB Borrowings $ 13,151 $ 681 5.18% $ - $ - - %
Savings/NOW Accounts 19,143,843 539,028 2.82% 19,809,000 589,931 2.98
Insured Money Market
Accounts 4,411,314 86,917 1.97 4,964,000 107,307 2.16
Certificates of
Deposit 32,627,785 1,698,320 5.21 28,770,000 1,451,009 5.04
Total Interest Bearing
Liabilities 56,196,093 2,324,946 4.14% 53,543,000 2,148,247 4.01%
Demand Deposits 16,355,885 13,269,000
Other Liabilities 657,854 562,000
Stockholders' Equity 8,245,500 7,922,000
Total Liabilities
and Stockholders'
Equity $81,455,332 $75,296,000
Net Interest Income $3,766,725 $3,324,435
Net Interest Income - Spread 3.83% 3.71%
Net Interest Income as a %
of Total Earning Assets 4.93% 4.69%
25
Zachary Bancshares, Inc. and Subsidiary
INTEREST DIFFERENTIAL
for the year ended December 31, 1998
1998 OVER 1997
CHANGE TOTAL
ATTRIBUTABLE TO INCREASE
VOLUME RATE (DECREASE)
Interest Earning Assets:
Reserve Funds Sold $ 181,457 $ (5,690) $ 175,767
Securities (380,762) (25,039) (405,801)
Loans 742,851 106,172 849,023
Total Interest Income 543,546 75,443 618,989
Interest Bearing Liabilities:
Bank Borrowings 341 340 681
Savings and NOW Accounts (19,515) (31,388) (50,903)
Insured Money Market Accounts (11,448) (8,942) (20,390)
Certificates of Deposit 197,856 49,455 247,311
Total Interest Expense 167,234 9,465 176,699
Increase in Interest
Differential $ 376,312 $ 65,978 $ 442,290
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
for the quarter periods in the year ended December 31, 1998
1998
4TH 3RD 2ND 1ST
QUARTER QUARTER QUARTER QUARTER
Interest Income $1,600,194 $1,534,864 $1,511,388 $1,445,225
Interest Expense 576,072 592,926 591,611 564,337
Net Interest Income 1,024,122 941,938 919,777 880,888
Provision for
Loan Losses 63,079 52,134 51,567 23,785
Net Interest Income
after Provision
for Loan Losses 961,043 889,804 868,210 857,103
Other Income 169,168 175,634 161,966 158,296
Other Expenses 665,135 694,491 651,506 645,990
Income before
Income Taxes 465,076 370,947 378,670 369,409
Applicable Income Tax
Expense 159,547 131,760 122,910 122,225
Net Income $ 305,529 $ 239,187 $ 255,760 $ 247,184
Per Share:
Net Income $ 1.57 $ 1.24 $ 1.32 $ 1.28
Cash Dividends $ 1.00 $ - $ .90 $ -
26
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
for the quarter periods in the year ended December 31, 1997
1997
4TH 3RD 2ND 1ST
QUARTER QUARTER QUARTER QUARTER
Interest Income $1,420,659 $1,410,438 $1,344,448 $1,297,137
Interest Expense 549,390 534,827 533,158 530,872
Net Interest Income 871,269 875,611 811,290 766,265
Provision for
Loan Losses 7,395 8,245 7,735 7,479
Net Interest Income
after Provision
for Loan Losses 863,874 867,366 803,555 758,786
Other Income 166,216 181,160 161,327 151,068
Other Expenses 673,466 654,114 618,991 609,967
Income before
Income Taxes 356,624 394,412 345,891 299,887
Applicable Income Tax
Expense 131,134 124,500 117,725 96,053
Net Income $ 225,490 $ 269,912 $ 228,166 $203,834
Per Share:
Net Income $ 1.17 $ 1.39 $ 1.18 $ 1.05
Cash Dividends $ . 95 $ - $ .80 $ -
27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company evaluates its financial strength through continual
review by management of asset quality, capital, earnings and li
quidity. The Company continuously addresses each area on an
individual and corporate basis. The following Management's
Discussion and Analysis relates to the Company's financial
position for the years 1998 and 1997. This information is a part
of and should be read in conjunction with the financial
statements and related notes. 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.
CAPITAL
The Company's capital continues to exceed regulatory
requirements and peer group averages. Regulatory Risk Based Capi
tal requirements for 1998 and 1997 was 8.0%. Regulatory Leverage
Ratio requirements was 4% for the same time period. The
Company's Equity to Assets Ratio includes the effect of the
unrealized gain or loss on securities discussed in Note C. The
Company's ratios as of December 31 are as follow:
1998 1997
Risk Based Capital Ratio 16.87% 18.14%
Leverage Ratio 10.42% 10.38%
Equity to Assets Ratio 10.13% 10.04%
Earnings will continue to be the Company's main source of
capital growth. Management is committed to capital growth through
earnings retention. An earnings retention ratio is the
percentage of current earnings retained within the capital struc
ture. The Company's earnings retention ratios at December 31 are
as follows:
Shareholder Retention
Net Income Dividends Ratio
1998 $1,047,660 $367,967 65%
1997 $ 927,402 $338,918 63%
The Company distributed to shareholders, cash dividends of
$1.90 and $1.75 per share in 1998 and 1997, respectively.
LIQUIDITY
Liquidity management is the process of ensuring that the Ba
nk's assets and liabilities are appropriately structured. The
Company's short-term and long-term liquidity is provided by two
sources: core deposits and an adequate level of assets readily
convertible to cash. Management continually monitors the balance
sheet to ensure its ability to meet current and future depositor
requirements and loan funding commitments. The Company does not
anticipate difficulties in meeting funding obligations.
28
RESULTS OF OPERATIONS
Overview
Zachary Bancshares, Inc.'s (ZBI) net income for 1998 was
$1,047,660 compared to $927,402 for 1997 or a 13% increase.
ZBI's income stream is from core banking products and services.
ZBI continues to benefit from strong regional and local economies
and expects continued growth. The following table indicates ZBI's
equity position and balance sheet trends. The effect of the
unrealized gain or loss on securities discussed in Note C is
included in the Stockholders' Equity data.
Growth Trends
(year to year in $ and %)
98 to 97 97 to 96
Stockholders' Equity $ 688,026 or 8.4% $ 602,859 or 7.9%
Average Assets $6,159,332 or 8.2% $1,740,000 or 2.4%
Earnings Analysis
The Company's 1998 Net Interest Income increased 13.3%. Net
Interest Income in 1998 was $3,766,725 compared to $3,324,435 for
1997.
Average earning assets were $76,475,848 in 1998 compared to
$70,925,000 in 1997. The following table depicts the Company's
average earning assets components in thousands of dollars and the
respective percentage relationship.
1998 1997
Reserve & FHLB Funds $ 5,474 7% $ 2,079 3%
Securities 22,014 29% 28,156 40%
Loans 48,988 64% 40,690 57%
Average Earning Assets $76,476 100% $70,925 100%
The previous table indicates growth in average earning assets.
Management actively pursued increases in the Company's loan
portfolio in 1998 and 1997. The majority of the Company's loans
are secured by local, single family dwellings, with a fixed rate
and 5 year balloon repricing terms.
Average deposit liabilities were $72,551,978 in 1998 compared
to $66,812,000 in 1997. The following table depicts ZBI's
average deposit liabilities components and the respective
percentage relationship, dollars in thousands.
1998 1997
Other Borrowings $ 13 0% $ - 0%
Demand Deposits 16,356 23% 13,269 20%
Savings & NOW 19,144 26% 19,809 30%
Money Market 4,411 6% 4,964 7%
Certificates 32,628 45% 28,770 43%
Average Depositor Liability $72,552 100% $66,812 100%
29
Marketing emphasis has been on checking products that fit the
people's needs in the local community while emphasizing the
Company's community bank orientation. Free checking for
depositors 50 years or older and student checking accounts are
two examples of how the Company has adjusted its product mix to
increase the checking customer base. The Company plans to offer
an internet banking solution in 1999 while still maintaining its
community flexibility and local control.
The Company's net interest spread and margin are shown below.
Net interest spread is the difference between the yield on
earning assets and the cost of funding. Net interest margin is
net interest income as a percent of average earning assets.
1998 1997
Net Interest Spread 3.83% 3.71%
Net Interest Margin 4.93% 4.69%
The Company's interest rate sensitivity is measured monthly
and considered by the board and management. Interest rate
sensitivity results from the timing differences at which assets
and liabilities may be repriced as market rates change. The
Company utilizes various measurement techniques to analyze and
predict interest rate sensitivity. The Company's cumulative GAP
(Interest Rate Sensitive Assets/Interest Rate Sensitive
Liabilities) on December 31, 1998 was 128.5% at the one year time
horizon and 110.00% at the 24 month time horizon. The 12 month
GAP indicates $8,519,000 more assets will reprice than
liabilities. The 24 month horizon will reprice $4,010,000 more
assets than liabilities.
The Company uses computer simulation to predict the net
interest margin change at various interest rate shifts. The
December, 1998 simulation indicates the Company's net interest
margin will change by less than 5.6% if interest rates move up or
down 3% at the 12 month horizon.
The Company sold no securities in 1998 while sales in 1997
resulted in a $5,392 cumulative loss. In 1997, the Company was
repositioning the securities portfolio to either effect future
earnings, sell less marketable items or effect the Bank's asset
and liability position.
Bank Premises and Equipment
Bank Premises and Equipment increased $1,373,982 to $3,067,869
at December 31, 1998 from $1,693,887 at December 31, 1997. The
Company entered into a contract totaling $2,916,826 for the
construction of a new main office facility to be located in
Zachary, Louisiana. Construction began in March, 1998 and will be
completed during the second quarter of 1999. Under the terms of
the contract, disbursements totaling $1,703,220 have been made as
of December 31, 1998.
30
Allowance and Provision for Loan Losses
The Allowance for Loan Losses is the amount Management
determines necessary to reduce loans to their estimated
collectible amounts and to provide for future losses in certain
loans which are currently unidentified.
The provision for loan losses is the amount charged to current
earnings which are contributed to the allowance, hereby
maintaining the allowance's integrity. The following table
reflects year end Allowance and Provision totals:
1998 1997
Allowance for Losses $858,856 $771,850
Provision for Losses $190,565 $ 30,854
Management utilizes diversification by loan type, borrower,
purpose and industry in combination with individual credit
standards to balance the Company's credit risks. Loans are
reviewed to facilitate identification and monitoring of
potentially deteriorating credits. Management considers the
current allowance adequate to absorb potential losses.
Non-Performing Assets
Non-performing assets include non-accrual loans, restructured
loans and foreclosed assets. Loans are placed on non-accrual
when a borrower's financial position has weakened or the ability
to comply with contractual agreements becomes reasonably
doubtful. Restructured loans have had original contractual
agreements renegotiated because of the borrower's apparent
inability to fulfill the contract. Other Real Estate, by State
Law, is carried at the lower of cost or current market value for
any asset appraised in excess of $40,000.
The following table represents non-performing and renegotiated
assets at year end:
1998 1997
Non-Accrual Loans $126,829 $216,598
Restructured Loans - -
Other Real Estate 191,592 217,401
Total $318,421 $433,999
The Company maintains an internal watch list for management
purposes for loans (both performing and non-performing) that have
been identified as requiring special monitoring. The watch list
consists of accruing, non-accruing and restructured loans. These
loans have characteristics resulting in management's concern of
the borrower's current ability to meet the loan contract. Watch
list totals at December 31 are:
1998 1997
$1,474,000 $1,316,800
31
In 1998, the Company realized a $299 gain on the sale of other
real estate, similar 1997 sales resulted in a $11,684 gain.
Other Income
Total other income increased 1% to $665,064 at December 31,
1998 from $658,468 at December 31, 1997. Of these totals,
service charges on deposit accounts was $497,413 during 1998 and
$505,552 in 1997. Other operating income increased to $167,651
at December 31, 1998 from $158,308 at December 31, 1997. Other
operating income includes fee income from investment sales which
the Company received under the terms of a contract with a third
party which offers discount brokerage service at the Company's
facility.
Other Expense
Salaries and employee benefits increased 1.6% to $1,485,386
compared to $1,462,089 in 1997. Occupancy expense increased 13.8%
to $185,397 from $162,977 in 1997. Other operating expenses
increased 5.4% as a whole year of expenses related to the
Company's inhouse computer system is reflected in the 1998
figures compared to the 1997 when the Company converted in the
middle of February to the new system. Year 2000 (Y2K) expenses
accounted for $15,000 of the increase in other operating expense.
Income Tax
The Company's income was fully taxable in both 1998 and 1997
and expects to remain so in 1999.
Year 2000 Issues
Management does not feel that the issues related to Y2K are
reasonably likely to have or will have a material effect on the
Company's liquidity, capital resources, or results of operation.
The following information is given regarding this determination.
The Bank purchased in February, 1997, an IBM AS400 V4R2
computer running Peerless 21 software as its core application
processor. Both of these mission critical systems have been
successfully tested for the Y2K issues during the week of October
19, 1998. One hundred thirty other financial institutions using
this same software/hardware configuration have also successfully
tested the Peerless 21/IBM AS400 setup. The other mission
critical system successfully tested was the interface for ACH,
fed cash letters, etc. with the Federal Reserve System through
our correspondent, First National Bankers Bank. All third party
vendors have been contacted and their products have been tested
and replaced, if necessary.
The Bank has had two FDIC Y2K readiness exams during the last
six months and received satisfactory results on both.
32
Approximately $15,000 was expensed during 1998 for software
upgrades and testing. For 1999, $60,000 has been budgeted for
these types of expenses, known and unknown.
The Board of Directors of the Bank have been given monthly
updates on the status of our Y2K readiness and have approved the
following policies: (a) Policy for responding to Customer
Inquiries Regarding Y2K; (b) Bank of Zachary 2000 Test Plan; (c)
Bank of Zachary Emergency Operating Procedures and Y2K Business
Resumption Plan. The Bank is presently performing a risk
assessment of its larger customers and preliminarily these do not
represent any material financial effect on the Bank.
This discussion entitled "Year 2000 Issues" includes certain
"forward looking statements" within the meaning of the Private
Securities Litigation Act of 1995(PSLA). This statement is
included for the purpose of availing the Company of the
protections of the safe harbor provisions of the PSLA.
Management's ability to predict the results or the effects of
Year 2000 issues is inherently uncertain and subject to factors
that may cause actual results to materially differ from those
anticipated. Factors that could affect actual results include
the possibility that contingency plans and remediation efforts
will not operate as intended, the Bank's failure to timely or
completely identify all software and hardware applications that
require remediation, unexpected costs, and the general
uncertainty associated with the impact of Year 2000 issues on the
banking industry, the Bank's customers, vendors, and others with
whom it conducts business. Readers are cautioned not to place
undue reliance on these forward looking statements.
33
ZACHARY BANCHARES, INC. ZACHARY BANCSHARES, INC. BANK LOCATIONS
OFFICERS AND BANK OF ZACHARY
DIRECTORS MAIN OFFICE
4700 Main Street
Harry S. Morris, Jr. Russell Bankston Zachary, LA
President & C.E.O. Chairman of the Board
PLAZA BRANCH
Winston E. Canning Rodney S. Johnson 2210 HWY 64
Secretary Vice Chairman Zachary, LA
J. Larry Bellard Hardee M. Brian CENTRAL BRANCH
Treasurer Winston E. Canning 13444 Hooper Road
Howard L. Martin, M.D. Baton Rouge, LA
BANK OF ZACHARY Albert C. Mills, III, PhD.
OFFICERS Harry S. Morris, Jr.
Harry S. Morris, Jr. Director Emeritus INFORMATION
President & C.E.O.
A. C. Mills, Jr. Request for additional
Winston E. Canning Leonard F. Aguillard information or copies
Executive Vice President of Form 10KSB filed
with the Securities
J. Larry Bellard and Exchange Commission
Vice President in Washington, D.C.
& Cashier should be directed
to:
STOCK INFORMATION
Gerard R. "Bubba" Beatty Chief Financial Officer
Vice President The Company's stock is not Zachary Bancshares, Inc.
listed on any security Post Office Box 497
Warren Couvillion exchange. Therefore, Zachary,LA 70791-0497
Vice President Zachary Bancshares, Inc.
does not have exchange
Kathleen Parker data that provides high
Vice President and low stock prices. TRANSFER AGENT
& REGISTRAR
Judy W. Andrews Cash dividends paid
Assistant Vice President were $1.90 per share in
1998 and $1.75 in 1997. Bank of Zachary
Post Office Box 497
Ethel M. Womack Zachary, LA 70791-0497
Assistant Vice President
Laura Steen
Operations Officer
INDEPENDENT ACCOUNTANTS
Melinda White Hannis T. Bourgeois, L.L.P.
Note Supervisor Certified Public Accountants
& Compliance Office 2322 Tremont Dr., Suite 200
Baton Rouge, LA 70809
Sandra Worthy
Operations Officer
34