FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
For Quarter Ended June 30, 1996
Commission file number 0-16706
Allegiance Banc Corporation
(Exact name of registrant as specified in its charter)
Delaware 52-1494123
(State or other jurisdiction of (IRS employer identification)
Incorporation or organization)
4719 Hampden Lane, Bethesda, MD 20814
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (301) 656-5300
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock:
Common Stock, $1.00 par value 1,748,813 shares
Class Outstanding at June 30, 1996
ALLEGIANCE BANC CORPORATION
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
June 30, 1996 and December 31, 1995
(Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Income
Three and six months ended June 30, 1996,
and 1995 (Unaudited) . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows
Six months ended June 30, 1996 and 1995
(Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . 5
Note to Financial Statements . . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations . . . . . . . . . . . . . 7
PART II. OTHER INFORMATION. . . . . . . . . . . . . . . . . . . 14
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
ALLEGIANCE BANC CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited) (In thousands)
June 30, December 31,
ASSETS 1996 1995
Cash and due from banks $ 6,572 $ 6,133
Federal funds sold and securities purchased
under agreements to resell 0 4,905
Investment securities:
Available for sale-at fair value 11,599 11,627
Held to maturity-at amortized cost
(fair value was $13,012 at 6/30/96
and $11,696 at 12/31/95) 13,423 12,054
Loans 99,198 93,313
Less: Allowance for credit losses ( 969) (1,041)
Loans, net 98,229 92,272
Premises and equipment, net 1,508 1,626
Foreclosed real estate, net 742 792
Accrued interest receivable and other assets 1,128 1,690
TOTAL ASSETS $133,201 $131,099
LIABILITIES
Deposits:
Noninterest bearing $ 21,833 $ 21,837
Interest bearing 94,962 86,022
Total deposits 116,795 107,859
Federal funds purchased and securities sold
under agreements to repurchase 3,507 9,006
Short-term borrowing 0 1,000
Long-term borrowing 0 1,000
Other liabilities 539 605
Total liabilities 120,841 119,469
SHAREHOLDERS' EQUITY
Common Stock-$1.00 par value 1,749 1,696
6-30-96 12-31-95
Authorized 10,000,000 10,000,000
Issued 1,748,813 1,695,863
Surplus 10,893 10,640
Retained earnings (deficit) 0 (590)
Net unrealized holding losses on
securities available for sale (282) (116)
Total shareholders' equity 12,360 11,630
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $133,201 $131,099
ALLEGIANCE BANC CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited) (In thousands, except per share data)
Three Months Six Months
ended June 30, ended June 30,
1996 1995 1996 1995
Interest Income
Interest and fees on loans $ 2,241 $ 1,919 $ 4,467 $ 3,569
Interest and dividends on investments 325 392 634 830
Interest on federal funds sold 46 34 78 63
Total interest income 2,612 2,345 5,179 4,462
Interest Expense
Interest on deposits 976 913 1,922 1,717
Interest on short-term borrowing 56 46 170 65
Interest on long-term borrowing 21 19 39 36
Total interest expense 1,053 978 2,131 1,818
Net Interest Income 1,559 1,367 3,048 2,644
(Benefit) Provision for credit losses 0 0 0 (100)
Net Interest Income After (Benefit)
Provision for Credit Losses 1,559 1,367 3,048 2,644
Other Operating Income
Service charges on deposit accounts 239 126 433 1,254
Gains on sales of securities 0 51 0 525
Other income 103 56 143 129
Total other operating income 342 233 576 731
Other Operating Expense
Salaries and employee benefits 649 613 1,262 1,254
Net occupancy and equipment expense 306 284 608 525
Foreclosed real estate expense 59 14 68 129
Other expense 449 335 820 731
Total other operating expense 1,463 1,246 2,758 2,639
Income Before Income Taxes 438 354 866 482
Applicable income tax expense 128 122 276 166
Net Income $ 310 $ 232 $ 590 $ 316
Per share information:
Net Income $ 0.18 $ 0.14 $ 0.34 $ 0.19
Dividends $ -0- $ -0- $ -0- $ -0-
ALLEGIANCE BANC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)(In thousands)
Six months ended June 30,
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 590 $ 316
Noncash items included in net income:
(Benefit) Provision for credit losses 0 (100)
Provision for possible losses on
foreclosed real estate 50 0
Depreciation and amortization 150 129
Gains on sales of securities 0 (51)
Decrease (increase) in accrued interest
receivable and other assets 563 (96)
Increase (decrease) in other liabilities (65) 188
Other-net 41 (160)
Net cash provided by operating activities 1,329 226
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities (3,125) 0
Proceeds from sales of securities 0 2,264
Proceeds from maturities and principal
payments of investment securities 1,502 256
Net (increase) decrease in loans (5,885) (17,297)
Proceeds from sale of foreclosed
real estate 0 335
Bank premises and equipment purchased (31) (193)
Net cash (used) provided by investing
activities (7,539) (14,635)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits 8,937 8,417
Net increase (decrease) in short-
term borrowing (6,499) 2,812
Net increase (decrease) in long-
term borrowing (1,000) 0
Sale of common stock 306 0
Net cash provided by financing activities 1,744 11,229
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (4,466) (3,180)
CASH AND CASH EQUIV. , BEG. OF PERIOD 11,038 8,339
CASH AND CASH EQUIV. , END OF PERIOD $ 6,572 $ 5,159
ALLEGIANCE BANC CORPORATION
NOTE TO FINANCIAL STATEMENTS
Note
1. In the opinion of management, the accompanying unaudited consolidated
financial statements for June 30, 1996, and December 31, 1995, contain
all adjustments (consisting of normal recurring adjustments) in conformity
with generally accepted accounting principles necessary to present fairly the
financial position as of June 30, 1996, and December 31, 1995, the results
of operations for the three and six month periods ended June 30, 1996 and
1995, and the cash flows for the six months ended June 30, 1996 and 1995.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The accompanying consolidated financial statements present the
financial condition of Allegiance Banc Corporation (the Company) and its
wholly owned subsidiary, Allegiance Bank, N.A. (the Bank), as of June 30,
1996, and December 31, 1995, the results of operations for the three and
six month periods ended June 30, 1996 and 1995, and the cash flows for
the six months ended June 30, 1996 and 1995.
FINANCIAL CONDITION
During the first six months of 1996, total assets increased by 1.6 percent,
from $131.1 million to $133.2 million. Short term investments in federal
funds amounting to $4.9 million at December 31, 1995, were liquidated
while deposits increased by 8.3 percent, or $8.9 million; in addition, the
exercise of stock options and warrants raised additional capital of $0.3
million. The $14.1 million in funds raised from these sources was used to fund
$5.9 million or 6.3 percent in loan growth, to repay $5.1 million in short-term
and long-term borrowing, and to increase investment securities by $1.3 million.
As of June 30, 1996, outstanding loan balances were $99.2 million
compared to $93.3 million at December 31, 1995, which was an increase
of 6.3 percent or $5.9 million.
At June 30, 1996, investment securities amounted to $25.0 million,
a 5.5 percent increase compared to $23.7 million at December 31, 1995.
The investment portfolio increased by a net $1.3 million during the first
six months of 1996. This net increase includes the result of principal
repayments in mortgage backed securities, a reduction in the market
value of available for sale securities, and the purchase of additional
shares of stock in the Federal Home Loan Bank of Atlanta and the
Federal Reserve Bank of Richmond, as well as the purchase of
$3.1 million in US government agency and municipal securities and
the maturity of securities amounting to $1.3 million. There have been no
sales of investment securities during the first six months of 1996.
The change in the market value recorded for available for sale
securities amounted to approximately $281 thousand in the first six
months of 1996, while the unrealized loss in the held-to-maturity
portfolio stood at $415 thousand at June 30, 1996, compared to
$356 thousand at December 31, 1995. The net unrealized holding
losses represent a reduction in the market value of investment securities.
Investment securities continue to be primarily in U.S. Treasury and
U.S. Government Agency obligations which do not represent a credit
risk. As of June 30, 1996, held to maturity investment securities
included $1.1 million in bank qualified, tax-exempt municipal bonds.
Premises and equipment had a net decrease of $119 thousand in
the first six months of 1996, reflecting depreciation and amortization
of $150 thousand and net equipment purchases of $31 thousand.
Deposits increased by $8.9 million, or 8.3 percent, in the first
six months of 1996, and now stand at $116.8 million, up from
$107.9 million at year-end 1995. Certificates of deposit, money
market and NOW accounts increased by a combined $8.9 million
during the period. The Bank successfully introduced telephone
banking, a new sweep product, and computer banking in 1995.
These new products and the opening of the Bank's seventh branch
in Silver Spring, Maryland, are contributing to further deposit
growth and providing business and association customers with
more sophisticated tools to manage their businesses. The ability
to provide these products is a result of the Bank's conversion to
a new computer system which was completed in early 1995.
As noted above, short-term borrowing and long-term borrowing
aggregating $5.1 million at December 31, 1995, were repaid during
the first six months of 1996. The additional deposits which replaced
the relatively more expensive borrowed funds will have a positive
impact on earnings by reducing the cost of funds and increasing
the net interest margin.
Shareholders' Equity increased in the first six months of 1996
by $730 thousand, as a result of $590 thousand in net earnings,
a $166 thousand decrease in the market value of investment
securities available-for-sale, and proceeds of $306 thousand from
common stock issued to employees and directors exercising
stock options and warrants, respectively.
RESULTS OF OPERATIONS
The Company recorded net income of $590 thousand, or
$.34 per share, for the six months ended June 30, 1996, including
$310 thousand, or $0.18 per share, in the second quarter of 1996.
These results compare to net income of $316 thousand, or
$0.19 per share for the six months ended June 30, 1995, and
$232 thousand, or $0.14 per share, in the second quarter of 1995.
In 1995, pre-tax earnings were held down by non-recurring expenses
associated with a conversion to a new computer system. There
were no securities gains or losses recorded in the first quarter of
1996 or 1995; however, a $51 thousand securities gain was earned
in the second quarter of 1995, while none was recorded in the
second quarter of 1996.
There was no provision for credit losses recorded in the first half
of 1996 or 1995. In the first quarter of 1995, however, the Company
recorded a $100 thousand credit to the provision for credit losses,
and a established a $100 thousand valuation allowance for foreclosed
real estate. In the second quarter of 1996, an additional provision of
$50 thousand was recorded for possible losses on foreclosed real estate.
NET INTEREST INCOME
Net interest income for the first quarter of 1996 was $1.559 million, an
increase of 14.0 percent over the $1.367 million earned in the second quarter
of 1995. Net interest income for the first six months was $3.048 million
in 1996 compared to $2.644 million in 1995; a 15.3 percent increase over
1995. Interest income for the first six months of 1996 included $11 thousand
of interest collected that had been charged-off in prior years.
The Bank's net interest rate spread during the first six months of 1996
increased to 4.49 percent compared to 4.43 percent in 1995. The net interest
margin, or net interest income as a percent of average earning assets, was
5.39 percent in the first six months of 1996, compared to 5.29 percent in
1995. The increase in the net interest margin in 1996 was due to the lower
cost of funds in 1996 for deposits and the repayment of short-term and
long-term borrowing during the first half of 1996. The cost of funds has
been dropping, and will continue to drop, as certificates of deposit are
renewed or replaced at lower rates. The percentage of average earning
assets in loans in the first quarter increased to 78.7 percent in 1996 from
75.9 percent in 1995 providing a positive impact on the net interest margin.
Overall, during the first half of 1996, the gross yield on earning assets was
a flat 8.93 percent in 1996 compared to 8.92 percent in 1995, while the
rate paid on interest bearing liabilities decreased by 6 basis points
to 4.43 percent in 1996 from 4.49 percent in 1995.
PROVISION FOR CREDIT LOSSES
The Bank maintains a valuation allowance for credit losses to absorb losses
which could occur in the loan portfolio. The provision for credit losses is a
charge to earnings to maintain the valuation allowance at an adequate level.
On a quarterly basis, management conducts a review of the loan portfolio,
evaluating factors such as historical loss experience, historical delinquency,
portfolio trends in composition, collateral and industry concentrations,
peer bank loss and delinquency experience, credit commitments, economic
trends, effectiveness of loan policies and procedures, and an individual
analysis of loans classified as Substandard and Doubtful to determine
probability of loss based on collateral, restructuring and alternative
repayment sources. Between reviews, events may occur which would
dictate immediate adjustments to the valuation allowance, and these events
are addressed as required. No provision for possible credit losses was
recorded in the first half of 1996 or 1995.
However, during the first quarter of 1995, management reduced the Allowance
for Credit Losses by $100 thousand. At the same time, there was a transaction
to establish a reserve for the Bank's Foreclosed Real Estate. When appropriate,
Bank accounting rules recommend the establishment of a specific reserve
for possible losses on Foreclosed Real Estate. The reduction of the allowance
for credit losses was possible because internal and external analysis
indicated that the Bank had sufficient reserves for the loan portfolio. The
Bank had $13 thousand of net recoveries added to the Allowance for Credit
Losses during the first half of 1995, while there were net chargeoffs of
$73 thousand in the first half of 1996.
Foreclosed Real Estate was $792 thousand at December 31, 1995, and
$742 thousand at June 30, 1996, reflecting a $50 thousand addition to
the reserve for possible losses on foreclosed real estate.
At June 30, 1996, the Allowance for Credit Losses was $969 thousand,
or 0.98 percent of loans, compared to $1.041 million, or 1.12 percent of
loans, at December 31, 1995.
Credit quality continues to improve at the Bank, as reflected in a decline
in past-due credits. There were no loans past-due 90 days or more at June 30,
1996, or at December 31, 1995. Non-accrual loans totaled $327 thousand
at the end of 1995, $267 thousand at March 31, 1996, and $631 thousand at
June 30, 1996. Subsequent to June 30, 1996, a $455 thousand non-accrual was
repaid, and approximately $20 thousand of previous expenses and charge-offs
were recovered, thereby reducing non-accrual loans to $176 thousand.
NON-INTEREST INCOME
Non-interest income for the first six months of 1996 was $576 thousand,
compared to $377 thousand in the first half of 1995. There were no securities
gains in the first half of 1996, however there were securities gains of
$51 thousand in the second quarter of 1995. Service charges on deposit
accounts increased by $187 thousand or 76 percent to $433 thousand in
the first half of 1996 compared to $246 thousand in the corresponding
period of 1995. During the second quarter of 1996, premiums of
$56 thousand were earned on the sale of Small Business Administration
(SBA) guaranteed loans. There was a second SBA loan sale during the
second quarter, and a lesser amount of premiums on that sale will be
recognized during the third quarter of 1996.
NON-INTEREST EXPENSE
Non-interest expense for the first six months of 1996 was $2.758 million,
up 4.5 percent, compared to $2.639 million in the first six months of 1995.
Although the Bank has added lending officers and branch staff, and opened
a new branch in June 1995, salaries and employee benefits expenses during
the first half of 1996 were only $8 thousand higher than the corresponding
period of 1995. In the first quarter of 1995, there were approximately
$30 thousand of non-recurring expenses due to severance payments
when staff reductions were made to coincide with the completion of the
conversion to a new computer system.
Occupancy and equipment expenses rose 16 percent from $525 thousand
for the first six months in 1995 to $608 in 1996. These increases were due
to opening a new branch office in Silver Spring, and communication and
computer equipment purchased for the Bank's conversion to a new computer
system.
Other expenses increased by a net $28 thousand during the first half of
1996 reflecting non-recurring expenses incurred in the first quarter of 1995
relating to consulting and data processing expenses incurred as a result of
the computer conversion. Otherwise, increases in legal, consulting services
and data processing expenses were largely offset by decreases in insurance
expense and the FDIC insurance rate reduction.
INCOME TAXES
In the first six months of 1996 the Company recorded tax expense of $276
thousand compared to $166 thousand in 1995. The effective tax rate was
approximately 31.9 percent in 1996 and 34.4 percent in 1995, compared to
a statutory rate of 38.62 percent in each period. Certain loans and investment
securities are exempt, in whole or in part, from federal and state income
taxes,thereby reducing the Company's effective tax rate. The Company has been
acquiring additional tax advantaged loans and investments during 1996 to
further manage and reduce the effective tax rate.
CAPITAL REQUIREMENTS
Risk based capital requirements require banks and bank holding
companies to maintain minimum ratios of capital to risk-weighted assets
and off-balance sheet credit arrangements. Total capital is classified into
two tiers, referred to as Tier 1 and Tier 2. The Bank's Tier 1 capital is
composed of common stockholders' equity, while Tier 2 capital includes
the allowance for credit losses. For bank holding companies with assets
of less than $150 million, the risk-based capital guidelines generally are
applied on a bank-only basis.
The regulatory minimums for the Bank's Tier 1 risk-based capital ratio
and total risk-based capital ratios are 4.0 percent and 8.0 percent,
respectively. At June 30, 1996, the Bank was well in excess of regulatory
minimums with the Tier 1 ratio at 11.44 percent and the total risk-based
capital ratio at 12.39 percent. At December 31, 1995, the corresponding
capital ratios were 11.39 percent and 12.64 percent.
The Bank's leverage ratio, another regulatory capital measure, is Tier 1
capital divided by average total assets. The regulatory minimum for certain
institutions is 3.0 percent, with most institutions required to maintain a
ratio of at least 4.0 percent to 5.0 percent, depending upon risk profiles
and other factors. At June 30, 1996, the Bank's leverage ratio was
9.02 percent.
LIQUIDITY AND INTEREST RATE SENSITIVITY
Liquidity is a measure of the Bank's ability to generate and maintain
sufficient cash flows to fund operations and to meet financial obligations
to depositors and borrowers promptly and in a cost-effective manner.
The Bank's liquidity is provided by amortizing and maturing loans,
maturities and pay downs of investment securities, securities and
loans that can serve as collateral for borrowing, federal funds sold
and readily marketable investment securities. Deposit growth, lines of
credit, capital contributions and earnings can also contribute to the Bank's
liquidity. In the event necessary, the Company may also sell securities
from its available for sale portfolio to fund its own liquidity needs.
The Bank's liquidity sources and needs are measured on a monthly
basis and forecast six months. The analysis includes a review of current
and future loan demand, and anticipated deposit growth or contraction.
At June 30, 1996, the Bank's liquidity sources were 2.3 times anticipated
liquidity needs, which is well in excess of the established minimum
management guidelines of 1.5 times anticipated liquidity needs.
Because of the significant impact interest rate fluctuations may have
on the Bank's performance, management continually monitors the interest
rate sensitivity of its assets and liabilities. The common measurement
term is "gap," which refers to the relationship of earning assets to
interest-bearing liabilities within the time period in which they will
mature or reprice. A positive gap, wherein earning assets exceed
interest-bearing liabilities, positions the Bank to respond to rising interest
rates. A negative gap, wherein interest-bearing liabilities exceed earning
assets, positions the Bank to respond to declining interest rates.
Management strives to forecast far enough into the future so they can
fine-tune the earning assets and liabilities to respond to changes in rates.
As a guide, management tries to maintain a gap not greater than 15 percent,
either positive or negative, for the various periods measured.
At June 30, 1996, the Bank had a cumulative negative gap out to one
year of 15.37 percent of earning assets.
The following table presents the Bank's gap measurements as of
June 30, 1995, (in thousands of dollars).
0-3 3-6 6-12
MONTHS MONTHS MONTHS 1-5 YRS 5 YRS
RATE SENSITIVE
ASSETS
Investment Securities 7,159 3,249 500 10,524 3,144
Loans 58,818 1,703 640 29,030 8,923
Federal Funds Sold 0
--------- ------- ------- ------- ------
TOTAL 65,977 4,952 1,140 39,554 12,067
RATE SENSITIVE
LIABILITIES
NOW Accounts 14,440
Money Market 37,077
CDs 6,065 15,025 14,966 7,501 164
Other 3,057
-------- ------- ------- ------- ------
61,089 4,396 21,350 7,501 164
-------------------------------------------------------------------
Cumulative Gap 4,888 (5,185) (19,011) 13,042 24,945
==============================================
Ratio of cumulative gap
to earning assets 3.95% (4.19%) (15.37%) 10.54% 20.17%
PART II
OTHER INFORMATION
Items 1 through 6(b)
Management notes that no occurrences have taken place during
the reporting period which require disclosure under any of the
captioned headings.
On April 22, 1996, the Company announced that the Boards
of Directors of F&M National Corporation, Winchester, Virginia,
and Allegiance Banc Corporation had agreed to a definitive agreement
for the affiliation of the Company with F&M National Corporation.
A current report on FORM 8-K was filed with the Securities Exchange
Commission on April 30, 1996. The merger is expected to be
completed in the fourth quarter of 1996.
ALLEGIANCE BANC CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Allegiance Banc Corporation
(Registrant)
DATE: August 13, 1996 BY: s/b CHARLES V. JOYCE III
Charles V. Joyce III
Vice President and
Chief Financial Officer
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