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 June 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 504 6542701
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 June
30, 1998.
I N D E X
Financial Statements:
Consolidated Balance Sheets - June 30, 1998,
December 31, 1997 and June 30, 1997 2
Consolidated Statements of Income - for the three
and six months ended June 30, 1998 and 1997 3
Consolidated Statements of Changes in Stockholders'
Equity - for the six months ended June 30,
1998 and 1997 4
Consolidated Statements of Cash Flows -
for the six months ended June 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
June 30, 1998, December 31, 1997 and June 30, 1997
ASSETS
(UNAUDITED) (UNAUDITED) (UNAUDITED)
JUNE 30, DECEMBER 31, JUNE 30,
1998 1997 1997
Cash and Due from Banks $ 3,874,104 $2,481,869 $3,003,080
Interest Bearing Deposits in
Other Institutions 1,662,292 95,046 92,395
Reserve Funds Sold 3,175,000 1,700,000 1,200,000
Securities Available for Sale
(Amortized Cost $22,553,745,
$25,624,161 and $28,467,639) 22,615,974 25,620,114 28,411,277
Loans 48,919,894 46,141,573 40,514,930
Less: Allowance for Loan Losses (792,803) (771,850) (819,781)
48,127,091 45,369,723 39,695,149
Bank Premises and Equipment 1,893,170 1,693,887 1,480,581
Other Real Estate 206,153 217,401 363,003
Accrued Interest Receivable 564,159 558,501 586,025
Other Assets 171,234 69,139 52,795
Total Assets $82,289,177 $77,805,680 $74,884,305
LIABILITIES
Deposits:
Noninterest Bearing $16,088,072 $14,418,082 $13,734,835
Interest Bearing 57,062,222 54,762,690 52,908,408
73,150,294 69,180,772 66,643,243
Accrued Interest Payable 216,868 188,188 187,432
Other Liabilities 334,893 221,985 184,841
Total Liabilities $73,702,055 $69,590,945 $67,015,516
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 5,352,711 5,024,066 4,712,648
Unrealized Gain (Loss) on Securities
Available for Sale, Net 41,071 ( 2,671) (37,199)
Treasury Stock (22,333 Shares
at Cost) (446,660) (446,660) (446,660)
Total Stockholders' Equity 8,587,122 8,214,735 7,868,789
Total Liabilities and
Stockholders' Equity $82,289,177 $77,805,680 $74,884,305
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 six months ended June 30, 1998 and 1997
(UNAUDITED) (UNAUDITED)
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
Interest Income:
Interest and Fees on Loans $ 1,077,033 $ 855,659 $2,094,534 $1,654,620
Interest on Securities 355,243 455,110 733,870 928,737
Other Interest Income 79,112 33,679 128,209 58,228
Total Interest Income $ 1,511,388 $1,344,448 $2,956,613 $2,641,585
Interest Expense:
Interest Expense on Deposits $ 591,170 $ 533,158 $1,155,507 $1,064,030
Interest Expense on Borrowings 441 - 441 -
Total Interest Expense $ 591,611 $ 533,158 $1,155,948 $1,064,030
Net Interest Income $ 919,777 $ 811,290 $1,800,665 $1,577,555
Provision for Loan Losses 51,567 7,735 75,352 15,214
Net Interest Income After
Provision for Loan Losses 868,210 803,555 1, 725,313 1,562,341
Other Income:
Service Charges on
Deposit Accounts 120,830 131,872 238,996 256,359
Loss on Securities - (4,478) - (5,391)
Other Operating Income 41,136 33,933 81,266 61 ,427
Total Other Income 161,966 161,327 320,262 312,395
Income before Other Expenses $1,030,176 $ 964,882 $2,045,575 $1,874,736
Other Expenses:
Salaries and Employee Benefits 378,875 354,121 743,864 686,387
Occupancy Expense 39,693 51,075 81,115 100,433
Net Other Real Estate Expense 757 - 5,679 1,200
Other Operating Expenses 232,181 213,795 466,837 440,938
Total Other Expenses 651,506 618,991 1,297,495 1,228,958
Income before Income Taxes 378,670 345,891 748,080 645,778
Applicable Income Taxes 122,910 117,725 245,135 213,778
Net Income $ 255,760 $ 228,166 $ 502,945 $ 432,000
Per Share:
Net Income $ 1.32 $ 1.18 $ 2.60 $ 2.23
Cash Dividends $ .90 $ .80 $ .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 six months ended June 30, 1998 and 1997
(UNAUDITED)
JUNE 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 502,945 432,000
Cash Dividends (174,300) (154,934)
Balance - End of Period $5,352,711 $4,712,648
Net Unrealized Gain (Loss) on Securities
Available for Sale:
Balance - Beginning of Period $ (2,671) $ (17,046)
Net Change in Unrealized Gain (Loss)
on Securities Available for Sale 43,742 (20,153)
Balance - End of Period $ 41,071 $ (37,199)
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 six months ended June 30, 1998 and 1997
(UNAUDITED)
JUNE,
1998 1997
Cash Flows From Operating Activities:
Net Income $ 502,945 $ 432,000
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating
Activities:
Provision for Loan Losses 75,352 15,214
Provision for Depreciation and Amortization
102,6378 1,639
Stock Dividends on Federal Home Loan
Bank Stock (7,800) -
Net (Accretion) Amortization of
Securities (Discounts) Premiums 1,632 (13,369)
(Gain) Loss on Sale of Securities - 5,391
(Increase) Decrease in Accrued
Interest Receivable (5,658) 26,543
(Increase) Decrease in Other Assets (102,095) 39,910
Increase (Decrease) in Accrued
Interest Payable 28,680 2,144
Increase (Decrease) in Other Liabilities 90,374 123,847
Net Cash Provided by Operating
Activities 686,067 713,319
Cash Flows From Investing Activities:
Net (Increase) Decrease in Reserve
Funds Sold (1,475,000) (350,000)
Purchase of FHLB Stock (51,300) -
Purchases of Securities Available for Sale
- -
(6,066,015)
Maturities or Calls of Securities Available
for Sale 1,500,000 1,000,000
Principal Payments on Mortgage-Backed
Securities 1,627,884 218,084
Proceeds from Sales of Securities Available
for Sale - 8,942,917
Net (Increase) Decrease in Loans (2,832,720) (3,270,537)
Purchases of Premises and Equipment (301,920) (222,781)
Proceeds from Sales of Other
Real Estate 11,248 45,178
Net Cash Provided by
Investing Activities (1,521,808) 296,846
(CONTINUED)
5
(UNAUDITED)
JUNE 30,
1998 1997
Cash Flows From Financing Activities:
Net Increase (Decrease) in Demand
Deposits, NOW Accounts and
Savings Accounts 2,921,392 (327,668)
Net Increase (Decrease) in Certificates
of Deposit 1,048,130 (1,198,358)
Cash Dividends (174,300) (154,934)
Net Cash Provided by (Used in)
Financing Activities 3,795,222 (1,680,960)
Increase (Decrease) in Cash and Due
from Banks 2,959,481 (670,795)
Cash and Due from Banks - Beginning of
Period 2,576,915 3,766,270
Cash and Due from Banks - End of Period $ 5,536,396 $ 3,095,475
Supplemental Disclosures of Cash Flow
Information:
Noncash Investing Activities:
Change in Unrealized Gain (Loss)
on Securities Available
for Sale $ 66,277 $ (30,534)
Change in Deferred Tax Effect
on Unrealized Gain on Securities
Available for Sale $ 22,534 $ 10,381
Cash Payments For:
Interest Paid on Deposits $ 1,127,268 $ 1,061,886
Income Tax Payments $ 248,500 $ 212,000
The accompanying notes are an integral part of these financial statements.
6
Zachary Bancshares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
June 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 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.
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 necessary to provide a fair
statement of the results for the interim periods presented. It is
noted that the results for the first six months ended June 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 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
7
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 connection with foreclosures.
The Bank obtains independent appraisals for significant 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 anticipation 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 available 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, 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 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
recognized 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 discontinued 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 charged to the allowance for loan losses. Interest income is
subsequently recognized 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 examinations by regulatory agencies; an inter
nal asset review process; expectations 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 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 deprecia
tion. 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 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
incurred. Cost of major additions and improvements are capitalized.
Other Real Estate
Other real estate is comprised of properties acquired through fore
closure or negotiated settlement. The carrying value of these prop
erties is lower of cost or fair value. 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 after interest income from state and municipal
securities is excluded. Also certain items of income and expenses are
recognized in different time periods for financial statement purposes
than for income tax purposes. 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 liabili
ties are recognized for taxable temporary differences. Temporary dif
ferences 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 Com
pany 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 display of comprehensive income and its com
ponents which are revenues, expenses, gains, and losses that under GAAP
are included in comprehensive income but excluded 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 June 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 converted into common
stock or resulted in the issuance of common stock that then shared in
the earnings of the Company. At June 30, 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 second quarter of 1998 and 1997.
Statements of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents in
cludes cash on hand and amounts due from banks (including cash items in
process of clearing).
11
Zachary Bancshares, Inc. and Subsidiary
MANAGEMENT'S DISCUSSION
June 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 six months ended June 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 $48,919,894 at June 30, 1998 compared to
$40,514,930 at June 30, 1997. This represents an increase of
$8,404,964 or 21%. Loan growth was funded from reallocation of
investment securities as they matured and from deposit growth.
Investment Securities
Investment securities decreased 20% to $22,615,974 at June 30,
1998 compared to $28,411,277 at June 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 $1,893,170 at June 30, 1998
compared to $1,480,581 at June 30, 1997. A contract for
$2,876,000 for the construction of a new Company headquarters was
signed on December 31, 1997. As work continues on the project,
the building 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 10% to $73,150,294 at June 30, 1998
compared to $66,643,243 at June 30, 1997.
RESULTS OF OPERATION
For the Six Month Period Ended June 30, 1998 over 1997
Net Income
Net Income was $502,945 for the six month period ended June 30,
1998 compared to $432,000 in the same period in 1997, an increase
of 16%. This change was primarily due to a 14% increase in net
interest income.
Interest Income
Interest Income for the six month period ended June 30, 1998 was
$2,956,613 or a 12% 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 21% to
$48,919,894 while its investment portfolio decreased 20% to
$22,615,974 in the time period under consideration.
Interest Expense
Interest Expense for the six months ended June 30, 1998 was
$1,155,948 or a 9% increase over the same period in 1997 at
$1,064,030. Interest bearing deposits increased 8% to
$57,062,222 from $52,908,408 at June 30, 1997. Both volume and
rate increases contributed to the net interest expense change.
Provision for Loan Losses
The Company included $75,352 for provision for loan losses during
the six month period ended June 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 $7,867 or 3%. Service charges on Deposit Accounts
decreased $17,363 or 7% as the Company offered new products
during the latter part of 1997 which included reduced monthly
service fees. Other income increased $19,839 or 32% 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 service at the Company's facility.
Total Other Expense
Total other expenses increased 6% or $68,537 to $1,297,495 at June
30, 1998 from $1,228,958 at June 30, 1997. Employee salaries and
benefits increased 8% for the six month period under
consideration. Occupancy expense decreased 19% for the 1998 six
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 June 30th was $2.60 a 17%
increase or $.37 per share over the previous year.
Dividends
The Company's cash dividend increased $.10 at June 30, 1998 to
$.90 per share or 12.5% 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: August 12, 1998
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 autho
rized and recorded in accordance with established policies
and procedures. The concept of reasonable assurance 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 ac
counting controls, Zachary Bancshares, Inc. has a pro
fessional 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 ac
cess to the Audit Committee with or without management
present.
17
The financial statements as of December 31, 1997 were
examined by Hannis T. Bourgeois, L.L.P., independent public
accountants, who rendered an independent professional opinion
on the financial statements prepared by management. The
financial statements as of June 30, 1998 have not been
reviewed by Hannis T. Bourgeois, L.L.P.
Larry Bellard, Treasurer
18
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