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SECURITIES AND EXCHANGE COMMISSION
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WASHINGTON, D.C. 20549
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FORM 10-Q
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Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended:
March 31, 1996 Commission File Number 0-18279
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Tri-County Financial Corporation
(Exact Name of Registrant as Specified in Charter)
Maryland 52-0692188
- - ------------------------------- --------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
3035 Leonardtown Road
Waldorf, Maryland 20601
(Address of Principal Executive Offices)
Registrant's Telephone Number: (301) 645-5601
Securities Registered Pursuant to Section 12(g) of Act:
Capital Stock Par Value $.01 per Share
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(Title of Class)
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
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Number of Shares of Capital Stock
Outstanding as of May 1, 1996 740,804
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TRI-COUNTY FINANCIAL CORPORATION
TABLE OF CONTENTS
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Index
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PAGE
<S> <C>
PART I - FINANCIAL INFORMATION:
Item 1 - Financial Statements
Consolidated Statements of Financial Condition at
March 31, 1996, and December 31, 1995 3
Consolidated Statements of Income for the Three-Month
Periods Ended March 31, 1996 and 1995 4-5
Consolidated Statements of Cash Flows for the Three-Month
Periods Ended March 31, 1996 and 1995 6-7
Notes to Consolidated Financial Statements 8-9
Item 2 - Management's Discussion and Analysis of Operations 10
PART II - OTHER INFORMATION 11
SIGNATURES 12
</TABLE>
<PAGE>
TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
MARCH 31, 1996, AND DECEMBER 31, 1995
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<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
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ASSETS
<S> <C> <C>
CASH AND CASH EQUIVALENTS:
Noninterest-bearing $ 1,260,329 $ 786,113
Interest-bearing 4,795,491 3,264,106
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Total cash and cash equivalents 6,055,820 4,050,219
Investment securities available for sale
at fair value 14,373,544 14,903,798
Investment securities held to maturity
at amortized cost 881,600 881,600
Mortgage-backed securities available
for sale
Mortgage-backed securities available
for sale at fair value 32,045,713 30,793,682
Mortgage-backed securities held to
maturity
Mortgage-backed securities held to
maturity at amortized cost 1,094,394 1,160,672
Loans receivable-net 106,565,296 107,340,325
Loans held for sale 640,905 476,750
Accrued interest receivable 1,228,649 1,093,113
Other assets 498,455 383,678
Net Premises and equipment 3,276,969 3,178,806
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TOTAL ASSETS $166,661,345 $164,262,643
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LIABILITIES AND STOCKHOLDER'S EQUITY
Deposits $131,947,067 $129,348,276
Advances from Federal Home Loan Bank 12,000,000 13,250,000
Notes payable and other borrowings 4,431,049 4,302,845
Advance payments by borrowers for
taxes and insurance 1,158,229 685,767
Accounts payable, accrued expenses,
and other liabilities 543,185 614,952
Current and deferred income taxes 284,846 89,655
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Total liabilities 150,364,376 148,291,495
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STOCKHOLDERS' EQUITY:
Common stock 7,057 6,851
Capital in excess of par 5,124,706 5,021,350
Stock dividend distributable 529,311 -
Net unrealized gain on investment securities
and mortgage-backed securities available
for sale 7,269 232,123
Retained earnings 10,628,626 10,710,824
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Total stockholders' equity 16,296,969 15,971,148
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $166,661,345 $164,262,643
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</TABLE>
See notes to consolidated financial statements.
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TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED STATMENTS OF INCOME
THREE-MONTH PERIODS ENDED MARCH 31, 1996 AND 1995
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<TABLE>
<CAPTION>
Three Months Ended
March 31,
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1996 1995
<S> <C> <C>
INTEREST INCOME:
Interest on loans $2,530,610 $2,426,293
Interest on mortgage-back securities 560,374 502,296
Interest and dividends on investment securities 255,997 273,853
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Total interest revenues 3,346,981 3,202,442
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INTEREST EXPENSES:
Deposits 1,352,739 1,194,294
Federal Home Loan Bank advances 181,713 116,441
Notes payable and other borrowings 82,605 127,551
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Total interest expenses 1,617,057 1,438,286
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NET INTEREST INCOME 1,729,924 1,764,156
LOAN LOSS PROVISION 60,000 36,000
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Net interest income after loan loss provision 1,669,924 1,728,156
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OTHER INCOME:
Loan service charges 67,756 59,310
Gain on sale of investments and mortgage-back
securities available for sale - 18,544
Gain on sale of loans held for sale 41,220 -
Service charges 73,874 76,383
Other 18,004 (16,597)
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Total other income 200,854 137,640
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</TABLE>
(Continued)
See notes to consolidated financial statements.
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TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
THREE-MONTH PERIODS ENDED MARCH 31, 1996 AND 1995
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<TABLE>
<CAPTION>
Three Months Ended
March 31,
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1996 1995
<S> <C> <C>
OPERATIONS EXPENSES:
Employee compensation and benefits $ 536,576 $ 514,900
Occupancy expense 92,692 73,857
Federal insurance premium and surety bond premiums 87,054 85,076
Data processing expense 59,302 44,447
Other 291,533 227,066
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Total operating expenses 1,067,157 945,346
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INCOME BEFORE INCOME TAXES 803,621 920,450
INCOME TAXES 285,934 331,622
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NET INCOME $ 517,687 $ 588,828
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EARNINGS PER SHARE:
Primary $ 0.67 $ 0.80/(1)/
On a fully diluted basis 0.67 0.79
</TABLE>
(Concluded)
/(1)/ Restated to reflect 1996 stock dividends.
See notes to consolidated financial statements.
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<PAGE>
TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE-MONTH PERIODS ENDED MARCH 31, 1996 AND 1995
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<TABLE>
<CAPTION>
Three Months Ended
March 31
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1996 1995
<S> <C> <C>
INCREASE IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM FINANCING ACTIVITIES:
Net income $ 517,687 $ 588,828
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 60,000 36,000
Net loan charge-offs and recoveries (1,138) (20,763)
Provision for depreciation and amortization 64,413 69,796
Amortization of premium/discount on
mortgage-backed securities and investments (24,967) (15,143)
Capitalization of interest expense on notes payable - 19,074
Provision for deferred income tax (benefit) (10,863) 22,736
Increase in interest receivable (135,536) (86,363)
Decrease in deferred loan fees (58,173) (43,398)
Increase (decrease) in accounts payable, accrued
expenses, and other liabilities 177,130 (81,327)
(Increase) decrease in other assets (114,777) 179,195
Loss on sale of premises and equipment - 33,595
Originations of loans available for sale (2,700,155) (1,190,000)
Gain on sale of mortgage-backed and investment
securities available for sale - (18,544)
Proceeds from sales of loans available for sale 2,536,000 1,032,000
Proceeds from disposition of foreclosed real estate - 53,833
Federal home loan bank stock dividends - (10,200)
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Net cash provided by operating activities 309,621 569,319
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investment securities available for sale (2,174,968) (1,168,640)
Principal collected on loans 12,812,471 10,075,975
Principal collected on mortgage-backed securities 66,278 307,060
Loans originated or acquired (12,038,131) (13,752,977)
Purchase of mortgage-backed securities available for sale (1,995,000) -
Proceeds from sale or redemption of mortgaged-backed
securities available for sale 359,734 1,807,375
Proceeds from sale of investment securities
available for sale 2,775,152 801,297
Purchase of mortgage-backed securities held to maturity - (1,000,000)
Purchase of premises and equipment (149,983) (28,926)
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Net cash used in invested activities (344,447) (2,958,836)
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</TABLE>
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TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE-MONTH PERIODS ENDED MARCH 31, 1996 AND 1995
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<TABLE>
<CAPTION>
Three Months Ended
March 31
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1996 1995
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits 2,598,791 (251,975)
Proceeds from FHLB advances 20,500,000 2,000,000
Payments of maturing FHLB advances (21,750,000) -
Net increase in other short-term borrowings 254,732 501,695
Net increase in advance payments by borrowers
for taxes and insurance 472,462 374,549
Exercise of stock options 103,563 30,000
Payments on notes payable (139,121) (114,058)
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Net cash flows provided by financing
activities 2,040,427 2,540,211
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INCREASE IN CASH AND CASH
EQUIVALENTS 2,005,601 150,694
CASH AND CASH EQUIVALENTS-JANUARY 1, 4,050,219 3,471,953
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CASH AND CASH EQUIVALENTS-MARCH 31, $ 6,055,820 $ 3,622,647
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Accounting Policies:
Cash equivalents include short-term amounts
due from banks
Noncash transactions:
Cash paid during the three months for:
Interest $ 1,641,829 $ 1,416,824
Income taxes - -
</TABLE>
Tri-County Financial Corporation declared a 5% stock dividend payable April 15,
1996, and April 17, 1995, respectively, to shareholders of record on March 4,
1996, and March 3, 1995, respectively. The Corporation also declared a $.10 per
share cash dividend to shareholders of record on March 4, 1996, payable on April
15, 1996; and March 3, 1995, payable on April 17, 1995. Retained earnings in
the amount of $599,886 in 1996 and $777,018 in 1995 was transferred to stock
dividend distributable and accounts payable to reflect these dividends.
See notes to consolidated financial statements. (Concluded)
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TRI-COUNTY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
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1. BASIS OF PRESENTATION
General - The consolidated financial statements of Tri-County Financial
Corporation (the Company) and its wholly owned subsidiary, Tri-County
Federal Savings Bank (the Bank) included herein are unaudited; however,
they reflect all adjustments consisting only of normal recurring accruals
that, in the opinion of Management, are necessary to present fairly the
results for the periods presented. Certain information and note
disclosures normally included in financial statements prepared in
accordance with Generally Accepted Accounting Principles have been
condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission and the Office of Thrift Supervision.
The Company believes that the disclosures are adequate to make the
information presented not misleading. The results of operations for the
three months ended March 31, 1996, are not necessarily indicative of the
results of operations to be expected for the remainder of the year.
It is suggested that these consolidated financial statements be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report for the year ended December 31,
1995.
2. EARNINGS PER SHARE
Primary and fully diluted earnings per share, giving effect to the stock
dividend, have been computed based on weighted-average common and common
equivalent shares outstanding as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
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1996 1995
<S> <C> <C>
Primary 769,958 733,354
Fully diluted 769,958 742,202
</TABLE>
3. NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1996, the Company adopted SFAS No. 122, "Accounting
for Mortgage Servicing Rights," which amended certain provisions of SFAS
No. 65 to eliminate the accounting distinction between rights to service
mortgage loans for others that are acquired through loan origination
activities and those acquired through purchase transactions. When the
Company purchases or originates mortgage loans, the cost of acquiring
those loans includes the cost of the related mortgage servicing rights
(MSRs). If the Company sells or securitizes the loans and retains the
MSRs, the Company allocates the total cost of the mortgage loans between
the MSRs and the loans (without MSRs) based on their relative fair values,
if practicable. Any cost allocated to the MSRs is recognized as a
separate asset. MSRs are amortized in proportion to and over the period
of estimated net servicing income and are evaluated for impairment based
on their fair value. During 1996 and 1995, the Company did not sell or
securitize loans and retain the MSRs.
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Effective January 1, 1996, the Company adopted SFAS 123, "Accounting for
Stock-Based Compensation." This Statement gives the Company the option of
either (1) continuing to account for stock options and other forms of
stock compensation under the accounting rules defined in APB No. 25,
"Accounting for Stock Issued to Employees," while providing the
disclosures required under SFAS 123 or (2) adopting SFAS 123 accounting
for all stock compensation arrangements. The Company continues to account
for stock options under the accounting rules stated in APB No. 25, and
will provide the additional disclosures required under SFAS 123.
Regulatory Issues - The Federal Deposit Insurance Corporation administers
two separate deposit insurance funds, the BIF and SAIF. Congress is
considering legislation that would recapitalize the SAIF fund through a
special assessment on FDIC-insured institutions with SAIF deposits. While
the specifics of the legislation have not been finalized, the impact of
this deposit assessment could result in a future after-tax expense to the
Company in an amount in excess of $700,000. This amount would be recorded
as an expense if and when the legislation is enacted.
* * * * * *
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<PAGE>
MANAGEMENT DISCUSSION AND ANALYSIS
Results of operations:
Net income for the three months ended March 31, 1996, decreased $71,141, or 12%,
over the comparable period in 1995. This decrease in net income is a direct
result of the prolonged flat yield curve wherein the cost of funds remained high
while the yield on longer term loan products declined. The effect of the curve
reduced the marginal spread available to cover the cost of operations.
Correspondingly, some of the assets in the investment portfolio began to
experience early payoff as the issuer obtained better rates by calling the
investment prior to its maturity and reissuing it at the more attractive long-
term rates currently available. During the quarter, $1 million of such
investments were called by issuers, contributing to the decline in investment
income of 6.5% or $17,856 in the current quarter as compared to the comparable
quarter in the previous year. The Bank has received notification that several
of its other investments will be called in the second quarter of 1996. The
proceeds of the redeemed investments will be used to curtail short-term debt
until other appropriate investment opportunities become available.
At the conclusion of the quarter, the yield at the long end of the yield curve
began to increase. Long-term rates increased by over 50 basis points and, as a
result, the higher rate environment discouraged many consumers from initiating
the purchase of their first or a larger home, as well as refinancing existing
loans for a lower rate. Our volume of originations was 12% less than the
comparable period in 1995.
Total interest revenues increased by 4.5% or $144,539 over the comparable
quarter in 1995. Total interest expense increased 12.4% or $178,771 during that
same quarter, reflecting a continued squeeze of margins in the quarter. The
resulting net interest income decreased by 1.9% compared to the first quarter of
1995.
As the Bank makes more consumer lending products available, management feels it
is prudent to establish slightly higher loss reserves to match the increased
risk. The loan loss provision for the first quarter of 1996 was, therefore,
increased to $60,000 from the $36,000 level provided in 1995. Nonperforming
loans continue to be well managed, with a balance of $819,000, or 0.77% of the
net loan portfolio at March 31, 1996.
Other income in 1996 was $18,004, composed primarily of rental income from
excess office space in the building housing the main office. This compares to a
loss of $16,597 in 1995 generated by the disposal of certain obsolete fixed
assets that offset the rental income.
While continued cost containment measures are being taken, operating expenses
during the quarter increased by 12.9%. Facility renovations were considered
prudent to improve security at various branches. Substantial training has
occurred and systems were obtained or upgraded to allow staff to service the
increasingly complex array of services offered by the Bank. Advertising costs
have increased in response to competition in our market.
Assets increased only 1.5% since December 31, 1995, with virtually no
significant change in the composition of the balance sheet.
Changes in the stockholders' equity section of the balance sheet were caused by
a $224,854 reduction in the market valuation allowance from the December 31,
1995 level. Since the adoption of SFAS 115, the portfolio of investments has
been "marked to market" with any changes in current market value flowing through
stockholders' equity. During the quarter, the increased slope of the yield
curve has caused intermediate-term and long-term investments held by the Bank to
decline in market value. This fluctuation in valuation will persist until the
market detects some stability or visible change in direction in the interest
rate scenario.
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TRI-COUNTY FINANCIAL CORPORATION
PART II - OTHER INFORMATION
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Item 1 - LEGAL PROCEEDINGS
Not Applicable.
Item 2 - CHANGES IN SECURITIES
Not Applicable.
Item 3 - DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
Item 5 - OTHER INFORMATION
None.
Item 6 - EXHIBITS AND REPORTS ON FORM 8-K
None.
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<PAGE>
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.
Tri-County Financial Corporation
Date: May 14, 1996 By: /s/ Michael L. Middleton
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Michael L. Middleton, President
and Chairman of the Board
Date: May 14, 1996 By: /s/ Henry A. Shorter, Jr.
------------------ --------------------------------
Henry A. Shorter, Jr., Secretary
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 6,055,820
<INT-BEARING-DEPOSITS> 4,795,491
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 46,419,257
<INVESTMENTS-CARRYING> 1,975,994
<INVESTMENTS-MARKET> 2,015,024
<LOANS> 107,206,201
<ALLOWANCE> 792,434
<TOTAL-ASSETS> 166,661,345
<DEPOSITS> 131,947,067
<SHORT-TERM> 15,772,104
<LIABILITIES-OTHER> 1,986,260
<LONG-TERM> 658,945
0
0
<COMMON> 7,057
<OTHER-SE> 16,289,912
<TOTAL-LIABILITIES-AND-EQUITY> 166,661,345
<INTEREST-LOAN> 2,530,610
<INTEREST-INVEST> 255,997
<INTEREST-OTHER> 560,374
<INTEREST-TOTAL> 3,346,981
<INTEREST-DEPOSIT> 1,352,739
<INTEREST-EXPENSE> 1,617,057
<INTEREST-INCOME-NET> 1,729,924
<LOAN-LOSSES> 60,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,067,157
<INCOME-PRETAX> 803,621
<INCOME-PRE-EXTRAORDINARY> 803,621
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 517,687
<EPS-PRIMARY> .67
<EPS-DILUTED> .67
<YIELD-ACTUAL> 4.3
<LOANS-NON> 16,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 733,573
<CHARGE-OFFS> 2,139
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 792,434
<ALLOWANCE-DOMESTIC> 792,434
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
